Now that we’re one week beyond the latest BlackBerry earnings report, I thought I’d take a look at what some analysts are saying, and chime in with my own thoughts.
On the bullish front, we have Richard Tse from Cormark, who reflected on the earnings over the long weekend. Here is a summary on Tse’s comments from CanTech Letter.
It seems Tse believes that the quarterly results show BlackBerry management is up to the task of transitioning to its new platform successfully.“In our view, given the hyper competitive market and major internal product transition, we believe the results of the past two quarters have been nothing short of remarkable,” said Tse. “Operating improvements thus far under such extreme challenges give us reason to believe in BlackBerry’s ability to execute on BB10 as having better odds than we originally would have anticipated.”
This is a big part of the bull story on BlackBerry right now. They’ve launched a new OS, and new hardware that sells with attractive gross margin. The other part of the bull story, not discussed in the CanTech Letter article, and perhaps not discussed in Tse’s latest report, is the potential to grow the enterprise user base. Unfortunately it’s too early into the launch of BB10 to know if the company is on track to succeed here. But we all recognize the opportunity, and understand its value.
On the more bearish front, we have GMP Securities analyst Deepak Kaushal. I find his work to be well balanced and thoughtful rather than dismissive or flippant. I read through his whole report and thought he made a couple of good points.
He estimates Z10 gross margin at 20%, which is a lot lower than most analysts have been suggesting. The implication of this is BB7 margins showed a recovery in the quarter. Since that portfolio is dying, we’re more interested in seeing strong BB10 margins. And Kaushal seems to be arguing that we haven’t yet seen proof of solid Z10 margins. I know from experience that it often takes BlackBerry a couple of quarters to ramp up margins on new products.
If you’re wondering how he calculates / estimates this, then bear with me. It’s not that hard to do. We know hardware revenue. We know last quarter’s ASP, which was based only on older BlackBerry hardware and no Z10 volume. We know how many Z10s shipped (one million, approx). Yes, you have to make some assumptions on what happened to BB7 ASP during the quarter, but then you’re left with what should be a reasonable ballpark guess on BB10 ASP.
Gross margin split between BB7 and BB10 is harder to calculate, but I think what Kaushal is saying is that you’d have to assume absurdly low BB7 gross margin to get to the kind of BB10 gross margin that some analysts are estimating.
Kaushal also estimates BB10 ASP to be $371 over the entire fiscal year. I think a lot of people have been throwing around $500, which is fine. But we know BlackBerry is introducing lower-cost models, so it’s important to consider that the overall ASP won’t be $500. Just something to keep in mind if you’re doing some back of the napkin math, folks.
It’s important to look at both bull and bear arguments on stocks. Reading the bear arguments tell us what BlackBerry needs to do in order to inspire an upgrade from bearish analysts. In this case, we need to see the company stem the subscriber losses and sustain its 40% gross margin while experiencing fewer BB7 sales.
I’d also like to bring up another important point. Quite a few people have asked where BlackBerry gets its numbers from when claiming that 55% of Z10 buyers are coming over from other platforms. I’d like to know too. If the estimate is indeed reliable, it’s the kind of data that, if I were at BlackBerry, I’d want to flaunt every chance I had. And if I were in investor relations, I’d want to call up every single bearish analyst and walk them through the details, making sure they understand the significance of it. Because let’s face it ... if the majority of Z10s are being purchased by people new to (or coming back to) BlackBerry, it’s damn good news. And it will show up in the subscriber numbers rather quickly, I’d think.