BlackBerry (NASDAQ:BBRY) delivered a surprise net profit in the final quarter of fiscal year 2013, banking on the higher-margin sales of its newly launched Z10 smartphone to almost reach operational break-even despite a slump in overall revenues. The handset maker saw sales of almost 6 million smartphones during the quarter, with BB10 accounting for almost 1 million of the shipments. While 1 million may not sound like a lot, it must be taken into account that only one model, the full-touch Z10, was available for only a third of the quarter in a few select countries which did not include the U.S. Also, many must be waiting on the sidelines awaiting the launch of Q10 next month considering that QWERTY models have traditionally been BlackBerry’s main strength. Considering all these factors, BB10 seems to be off to a good start but next quarter should provide a much better basis for judging the long-term viability of the new platform since it will be the first full quarter of availability and will see the BB10 launch in the all-important U.S. market as well.
On the other hand, what was disappointing was the steep loss of subscribers for the second consecutive quarter. The company lost as many as 3 million subscribers, thrice the subscriber loss in the previous quarter, to end Q4 with a subscriber base of 76 million. This was one of the most important metrics that we were looking for going into Q4 since a decline in subscriber base not only reduces the size of BB10’s addressable market but also has a direct impact on BlackBerry’s ability to draw high-margin recurring service fees in the future. The Push Email division, which includes these fees, has grown in importance due to a steep decline in handset revenues, and accounts for almost 30% of BlackBerry’s value currently.
We have a revised $13.50 price estimate for BlackBerry’s stock, about 7% below the current market price.
Subscriber Loss A Worrying Sign
The steep subscriber loss is also indicative of the rapidly dropping demand for BlackBerries in the emerging markets where the company had until recently been able to leverage its strong brand to find new subscribers and compensate for the sustained subscriber erosion in the developed regions. However, the sustained huge loss gives us a sense of the current trends in the emerging markets where cheap Android smartphones are getting more popular and WhatsApp is fast emerging as an alternative to BBM. In order to stabilize its business at the low-end, BlackBerry will need to push out cheaper BB10 models sooner or risk a much larger collapse in market share. The current strategy is to launch four other BB10 models in addition to the Z10 and Q10 this year, and a mid-range option is expected to launch by the mid-year.
Cash Reserves Will be Used For Broader Rollout
Perhaps more importantly, BlackBerry has managed to hold on to its cash reserves as it enters into a new fiscal year and prepares for a wider global launch of BB10 in key developed and emerging markets. Over the past year, the company has actually increased its cash balance by about $800 million despite incurring a huge operating loss for the full year. It has achieved this by executing well on its CORE program that has saved costs, making the organization leaner and more efficient while reducing working capital requirements. Going forward, however, the company is entering a cash burn phase as it builds its channel inventory for BB10’s broader rollout as well as spends on marketing to promote the new platform and better counter the threat from Apple, Samsung and Nokia. BlackBerry expects to spend almost 50% more on marketing next quarter.
The coming quarters are going to be some of the most important in BlackBerry’s history as it launches BB10 in the U.S. and the Q10 globally. A lot depends on BB10’s ability to attract customers from other platforms while retaining its own subscriber base. But it faces an increasingly uphill battle against the well-entrenched mobile ecosystems of the iOS and Android that are steadily making their way into the enterprise market as well. BlackBerry’s mobile market share has plummeted from over 3% in 2011 to less than 2% in 2012. Although we do not expect BlackBerry to ever reach the heights it once commanded in the smartphone market, if it manages to take its market share back to over 3% by the end of our forecast period, there could be 30% upside to our price estimate.