Scotia expects BBRY to beat the Street on Friday

By Chris Umiastowski on 24 Jun 2013 01:31 pm EDT
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As we work towards the BlackBerry earnings release this Friday I’ve been following the analyst preview comments and giving you the summary versions here on CrackBerry. This morning Gus Papageorgiou from Scotiabank published his thoughts.

I like reading Gus’ reports because he is not afraid to stand out from the crowd. But at the same time he puts good thought into the justification for his view from a financial modeling perspective. No analyst is right all the time, and getting a mix of thoughts from different analysts is useful.

Scotiabank expects a big beat from BBRY on Friday. Specifically, they expect $0.72 in earnings per share (EPS) compared to $0.03 according to what I see at S&P Capital IQ, who tracks analyst estimates. In dollars, this means Scotia sees net income being about $355 million higher than the average of other estimates.

As explained in their research note, “The difference is largely based on margin assumptions. We expect gross margins to head higher (from 40% last quarter to 44% this quarter) on the back of an increased mix of BB 10 devices (17% of volumes last quarter to between 40% and 45% this quarter). The street is looking for gross margins to decrease (to 38%) even with an increased mix of BB 10 devices. This makes no sense to us as the BB 10 devices, we believe, have higher ASPs and gross margins.”

I have to admit ... Papageourgiou makes a good point. BlackBerry 10 hardware sells at a higher gross margin. The mix of hardware is shifting heavily in favor of BB10 versus the older BBOS. Obviously margin should rise in the absence of any other changes.

So why is the rest of the analyst community convinced gross margin will actually decline to 38%?  Keep in mind what I’ve said before. Most (but not all) analysts are relatively honest, smart, hardworking people. They have reasons for putting out their estimates. And those who are modeling gross margin pressure this quarter are likely assuming that the Z10 prices have been slashed, and high margin service revenue is under pressure.

It’s early days here. It’s understandable and expected that different analysts will have differing opinions - even largely differing.

One interesting take away from the Scotia note is the idea that BlackBerry can still generate about $2.00 per month for pre paid customers. This is not something I have thought about. I’ve been under the impression that any former BIS customers who move to consumer-grade BB10 (no BES) will generate no service revenue for BlackBerry. I think that’s what most people have been assuming, but I could be wrong, and I recognize that BlackBerry has talked about future services that they plan to sell to customers in order to recoup lost service revenue. So the idea that pre-paid users can still generate  $2.00 per month (while post-paid customers generate nothing) is, to me, significant. If I was an institutional client I’d be picking up the phone to call the analyst and pick his brain on the subject.

Here’s one more interesting bit of opinion about the company’s strategic review, complements of Scotia. This makes a lot of sense.

“The company has been undertaking a strategic review for some time now with no real concrete announcements. BlackBerry’s CEO has not been shy about a potential licensing deal. We believe IF a licensing deal is announce dit would likely be with Sony. Sony-Ercisson’s former CEO now sits on BlackBerry’s board of directors, the Sony CEO has stated that the company will support a third mobile ecosystem (aside from Android and Windows 8) and BlackBerry has stated it will not sell BlackBerry 10 devices in Japan, Sony’s biggest market.”

So there you have it, CrackBerry Nation. We’re 4 days away from the earnings release. We’ll be live blogging it for you on Friday morning!

Topics: BBRY Editorial

108 comments

Smartie020

Good read. I´m excited.

luancuvi

Very interesting final part

JTon

In-fuckin-deed. That would be awesome.. I hope to see high end Sony devices

Posted via CB10

Poirots Progeny

Interesting indeed...

Posted via CB10 on my BlackBerry Q10

Upreti Saroj

I hope blackberry again makes an entry into Japan. We are a global company and world needs to see the new reinvented blackberry

Posted via CB10

sonbuster

re: BB and Sony...COOL! he must have read my crackberry thread post "BlackBerry 10 OS on Sony Phones? " http://forums.crackberry.com/blackberry-10-os-f269/blackberry-10-os-sony...

i also wrote about how BB could benefit from a Lenovo-NEC deal
"How a Lenovo-NEC deal is good for BlackBerry"
http://forums.crackberry.com/news-rumors-f40/how-lenovo-nec-deal-good-bl...

buylocal_getaBB

Never saw that thread. you deserve some kudos for putting all the pieces together way back when!

Posted via my Zed (not Zee) 10

sonbuster

Thank you, it was actually a collaboration of ideas from myself as well as my friends that i put together.

ferre_kun

I'm using Nokia but I like Sony better. However, until now I still can't imagine BlackBerry - Sony devices. I did see BlackBerry World on a Samsung grand display on a store here, but I just can't see a BlackBerry - other brand devices..

Posted via CB10

Chicago777Guy

Great...this is second time I have heard about Sony deal...there has been background on Sony in Internet of things

Posted via CB10

ianbordas

Interesting... BlackBerry + Sony = complete home integration!

Posted via CB10

raino

I like Bony better. It sounds like "boning" and who doesn't like that?

GooberNS

Is that a reference to the movie Crazy People? lol I love that movie.

Playbook007

Exactly right and Netflix is on ps3, so their may be a lot more pull for Blackberry. I was a big fan of Sony Home Theatre but recently switched to Panasonic. I also use to buy Sony laptops, but not sure if I would again. If they team up with BlackBerry, that could put them back on top at my place. I spend a lot on electronics.

Where's my FULL BRIDGE Mr. Heins? Please return it!

lorax1284

With all the security issues in Java coming to light... it's time to rebuild the Blu-Ray player OS on QNX: Blu-Ray 10!

th3h0ff

I actually think of something along the lines of

The Sony "Black" line of phones... all running BlackBerry QNX...

Posted via CB10

chrisstlaurent

Yeah I had thoughts of Sony, Lenevo doing a license deal, or even Panasonic jumping into the smartphone industry. I think it's pointing to Sony thou.....i might have to switch to the PlayStation!

Posted via CB10

GTiLeo

From what X box? The new xbox 1 is going to be less of a hit then the 360 was. You need an Internet connection for it and those without can't use it and Microsoft's response to that was we sell a great product called xbox360 and its not backwards compatible so I'll stick with play station and Nintendo wii u and just buy another 360 to replace the one that fried it's gpu once they dropped in price.

Posted via CB10

buylocal_getaBB

I think your right, the ps4 will clobber the xbox1 in sales due the Internet issue you noted and the superior hardware Sony is packing

Posted via my Zed (not Zee) 10

nick canada

Microsoft actually changed the Internet connection issue, used games and sharing games etc issues too.

The problem with both new systems is there are not really next gen at all there is nothing really new about either and no real reason to upgrade. Very disappointing stuff.

Microsoft big issue is spying. The connect being able to take pictures even in the dark and listen all the time freaks people out

Posted via CB10

Coraya

I'm very excited about this but I can't agree with his .72 share earning. I haven't see another Q10 other than my own in someone's hands. Same goes for the Z10 except my girlfriend has it. The Z10 has been out for months. I haven't seen anyone with these devices. Maybe it's my area. I'd love for blackberry to succeed believe me. Hopefully I'm wrong. Hopefully more people have these phones than I see around me.

Posted via CB10

fedakd

Just because you haven't seen it, doesn't mean they aren't selling. The hedge funds shorting TSLA didn't see Tesla cars driving around NYC so they were inclined to believe the cars were not selling. BlackBerry's case might be similar. We will find out soon.

mylrob

And you are, I am assuming, talking about the US. Keep in mind that the US sales will have a small input in the Q1 results.

mf1982

On Saturday there were 3 Q10's in a 12 foot radius at the grocery store I was shopping at. A white and two blacks. They are out there and growing.

I've seen a few lately, along with more Z10's.

Posted via CB10

gingoog66

I love my bold 9900 but here in switzerland only iphones and samsungs ....blackberry with android system and voila more people will buy it.....

Playbook007

It would hardly be a BlackBerry then.

Where's my FULL BRIDGE Mr. Heins? Please return it!

Coraya

Sorry. I know they're selling heavily in other countries. I generally meant in the USA. My Apologies.

Posted via CB10

AfterHoursWelds

I am in vancouver BC and just saw another Z10 other than my own for the first time last weekend. So you are not alone in that feeling. But I think that vancouver is a very yuppie apple crowd.

Posted via CB10

allsportsfan

Hey after weld don't give up hope. Me and some of my friends have a Z10 and I saw some RBC wealth managers carrying a q10.

I still see a lot of Bold 9900's surprisingly.

Posted via CB10

mungee

In Toronto I see the odd Z10/Q10, but I literally see dozens of 9900's everyday. There are a lot of people who haven't reached their upgrade period yet. When they do however, they will be moving to BB10. For this reason I totally buy the claim that a lot of Z10 sales, to date, are coming from other platforms.

BB_makes_it_happen

The company I work for is in the process of migrating mailboxes to support BB10.

We have over 10k employees - so there should be a (more than a) few Z10 and Q10 devices sold at my end of the world!

newcollector

Appreciate the perspective and the thoughts on a licensing deal. I am betting that the news will be strong for BlackBerry, so much so that the "shorts" will lose their shorts!

Posted via CB10 via my Z10

Whyareallthegoodnamestaken

A Sony BlackBerry partnership is a match made in heaven. I want I want I want.

Posted via CB10

Coraya

What could Sony bring to market? They've failed miserably in the phone market let alone "smart" phone market. Not being a dee eye see Kay or anything. Just asking for your elaboration.

Posted via CB10

buylocal_getaBB

Because of what heinz has mentioned. He knows that to maintain sub base he needs a lower cost phone and BlackBerry isn't a vertically integrated player like Samsung or Sony so they can't produce handsets on the low end for the same price. BlackBerry wants to be a premium brand, and Sony has the mass needed to manufacture on the cheap.

Besides, when Sony failed at the phone market it didn't have bb10

Posted via my Zed (not Zee) 10

SMCNI1968

His opinion is that some overseas markets will still rely on NOC to set up unlimited social media type plans etc. and thus continue to generate user fees

Posted via CB10

Chris Umiastowski

Yeah, I am assuming that is the case.  Technically these guys at BBRY still have the ability to run different services like toggle switches.  Stuff that runs through the Internet without going through the NOC does not apply though, and I haven't really stopped to analyze which apps work via public Internet and which require NOC on BB10.

Thunderbuck

Did Gus publish a share price target?

Thunderbuck

Ty :-)

Added another 100 shares to my position today.

RP Singh

I think BlackBerry will be outperforming expectations for a long time yet, in part because they are working smart and hard, and also in part because there has been such a concerted effort since just before the launch of the first Apple smartphone to discredit BlackBerry thus resulting in consistently lower than realistic / reasonable expectations.

Playbook007

Agree. The reporters and analysts feel out of place if they are not bashing BlackBerry. Also, the stores and carriers are paid to push iphone and Samsung. However, if BlackBerry could turn a profit while developing BB10 with all the criticism, then they should be able to turn a profit now.

Where's my FULL BRIDGE Mr. Heins? Please return it!

Chicago777Guy

If it's 0.70 EPS then we should see fireworks for sure.

Posted via CB10

Applevine

Good post as usual Umi. I will admit that the Sony angle is very interesting inded. Not a brand that would devalue the BB brand hardware wise. And it did seem strange that there would not even be an effort by BlackBerry to try enter the Japanese market. Interesting times for BB indeed.

fedakd

Thanks for the views Chris! I think Gus hit the nail on the head with this one. This quarter could be outstanding!

Himanshu Mehta

Put price target from cmp to $ 40-50 range in next 12 months, 4 more quarters and bbry will be A sweet berry against a rotting apple.
BBRY rocks.

Posted via CB10

md03wx

Could be a licensing deal with Sony (Japan + higher end), and Lenovo (China + lower end).

NickMcBride

Love to hear some positive and interesting news before the quarterly report! Gunna be wild but i think it will be a very happy day for both us shareholders and BlackBerry!!

Posted via CB10

BlueHeel

I couldn't agree more!

Posted via CB10

mathking606

Imagine if deal was made with sony. We might also have access to playstation/consoles.

gyubok

Man, I hope BlackBerry doesn't partner up with Ericsson. I loved their phone but that stopped in 2000. The company just doesn't innovate anymore.

jordandrews90

I really hope to see some tie in with Sony, Windows phone has the benefit of being related to xbox, and i'd love it if Blackberry could get some sort of Playstation exclusivity.

k3vtruj

This would be sweet. I'm also a playstation fan. This deal would combine my two favorite products.

Bobert_123

I never knew that thing about Sony being on BB's bored, very interesting.

Posted via CB10

G-bone

Thanks, Chris!
I remain optimistic for the long haul. The brain-trust at BlackBerry are much smarter than their critics...

#BB10Believe

bluetroll

thanks for your input, Chris. I always love reading your BB and BBRY posts.

jrohland

I have a Sony TV. It gets software updates regularly. I would be very happy if Sony made BB10 phones that also got regular updates.

undone

License deal with Sony and not doing a smart phone in Japan makes sense now. What would be even more interesting a different OS based on QNX, not unlike BB10, but not BB10.

dannyd86

I'll buy a Sony bb10 device if it's around the Z10 size with overwhelming specs. Because apparently blackberry is going up to 5"+

Cula

4 Mio BB10 devices
Net profit: 216
EPS: 0,41

Just my estimate, no investment advice! ;)

Dave Bourque

Does this mean? Sony tablet running BB10 while connecting to PS4? My god... that would be faptastic...

Alex Keb

Finally an interesting article from Chris. Much appreciated!

buylocal_getaBB

Chris normally has interesting articles. Unless your not interested in the business side of things, in which case I'm not sure why this one is interesting and the others are not.

Posted via my Zed (not Zee) 10

farmwersteve

I was wondering how long it would take for you to slag Chris .

You can't even give him a complement without kicking him in the nuts at the same time.

And by the way, I'm sure it means a lot to all of us that YOU think Chris has finally written an interesting article.

Posted via CB10

Alex Keb

Technically, he didn't write anything interesting other than summarizing or rather quoting what Scotia Analyst was saying. I am only appreciating the fact that he forwarded to the news to us.

Other than that, he added nothing.

Double-Zero

Is that guy related to Nick Papageorgiou from National Lampoon's Vegas Vacation?

Cheers from my Z10!! - 00

arfin

Haha

Posted via CB10

bbicons

hahahahaha I TOTALLY thought the same thing when I read that in the article. Papageorgiou was ballin

Geeoff

I'm a fan of a Sony/Blackberry partnership!!

One of the pieces of evidence for this potential partnership is the fact that Blackberry has pulled out of Japan. On a related note, I believe that Blackberry has also pulled out of South Korea. Perhaps Samsung might be trying a BB10 phone soon? Samsung seems to want to try everything. Hmmmmmm.

bbelux1

They will make it. They have to. But the pace should remain high, as they are late on many topics.

Posted via CB10

jojo beaconsfield

I don't see it.After the tsunami and the nuclear disaster that followed,Canada has a black eye in that market,most of their nuclear plants were Canadian designs,and supplied with CDN uranium,now Japan has decided to trash all their reactors.anybody in Japan care to comment?

johntaylor312

None of their reactors were Candu reactors. That's nonsense.

Posted via CB10

jojo beaconsfield

I believe you are right,but Canada does supply some of the uranium ,they did have 2 reactors there some time ago, and both have been shut down,sorry!

nick canada

Candu reactors are world know to be the best and safest, there kind of like BlackBerry that way. There is no connection I am sure of that.

Posted via CB10

buylocal_getaBB

Also, what does where you got your uranium from matter? Isn't how it's used that's important? I don't think this guy is being serious

If someone gets shot, do they blame the country that manufactured the bullet? Ridiculous

Posted via my Zed (not Zee) 10

pkt2

What is your avatar? A brown bunny? Can hardly make it out in that terrible grass.

Posted via CB10

johntaylor312

Yes. Yes it is a brown bunny. I'm having fun with my grass. Grubs. That was in the early spring before the grass was green. That's a very bad rabbit. Killed my trees.

Posted via CB10

Puz_zled

They were all American GE reactors baby!! Blowed up real good!

From my sweet BB10 Neutrino powered Z10 :D

elicash

Hi Chris,
Is Scotia still assuming $550 ASPs for BB10 units with 50% gross margins ($275 per device)? I think most of the street probably assumes roughly $100-$150 of gm contribution per bb10 device. Are his assumptions reasonable and/or sustainable? z10 being discounted...selling outright at ATT/Verizon for $499.

elicash

Speaking of Sony Ericsson, isn't that where Kristian Tear came from?

Asmooh

Let's wait

Sent from my BlackBerry 10 smartphone using CB10

HUNTZODIAC

Great article Chris love your insight man

Posted via CB10 on my Z10

BBNation

As I said my work replaced the hardware with Z10 so we are still paying BES fees to BB. My SIM is still on 3g and we are still paying $40/month for data. So some BB10 devices still pay fees to BB and it will take some time before it disappears.

mnc76

Saw two Z10's today... both white ones. Two of my buddies are rocking Q10s... my BBM friend list is starting to expand again... Wasn't sure if I'd ever see the day!

Here's hoping BlackBerry keeps up the pace of innovation and continues to refine and smooth out bb10 while delivering it all on compelling hardware.

If they do that, they're gonna be just fine.

Posted via CB10

a1s2d3f4g5

As much as i would love to see this happen I think gus is being too ambitious here. We already know that a portion of gross margin increase last Q was due to decreased amortization. True z10 margins were probably 30%. Since then prices have dropped. I do think BBRY will beat but I am guessing in the 30 cent range

Posted via CB10

Chris Umiastowski

Yup, he certainly might be too ambitious. Thats exactly why u discussed the logic behind other estimates. I'm as curious as everyone else to see the print on Friday.

Posted via CB10

digitalman101

My Sony bravia smart tv and PlayS running bb10... priceless

Posted via CB10

Superfly_FR

Thanks Chris, fair and fair, as usual :D

Posted via CB10

sisko2003

To put some water in the wine...try to remember any tech cooperation that really worked out well. Can't find a good example. Maybe different this time. On the long run shaking hands with Sony means no more bb hardware in the future. Otherwise it makes no sense. Is Thor on the way to transforming bb into a 100% software company?

JakeTheCat

What tech cooperation really worked out well? Hmmm... How about Microsoft, and Intel, and every PC manufacturer? Would that count? Or maybe Google/Android and every *formerly* second-tier smartphone manufacturer (i.e. excluding Nokia, Apple and BlackBerry). In the first case the biggest winner was the software company (Microsoft) although the PC era certainly helped make a lot of fortunes for a lot of PC companies. The second case has been a win-win as well but with a hardware manufacturer (Samsung), arguably, reaping the biggest rewards. I think a successful Sony/BlackBerry collaboration would be the opposite of "different this time". The two companies' assets compliment each other, they have obviously been deliberating the idea for a long time, and the way ahead is blue ocean for them if they can execute. Both have valuable brands, not dissimilar asthetic and aspirations, and I would imagine a fair amount of overlap in their ideal target customer.

sisko2003

Thanks. This is what I meant to say: sure there are hardware and software coops. But mostly it is real dependence like all the OEM shaking hands with Google,android. Or as you mentioned Microsoft and Intel. But they are not creating something together. They work together on the level that is needed.
I believe Sony BB are the right team.I even believe they are close when it comes to the culture of the enterprises. But going big is never solving any kind of existing problems. Sony is back with interesting hardware. But looking at all the small and little bb10 problems, especially rolling out new os versions,makes me think twice. If it works out they compete with apple and can install a complete eco system. But again. On the long run bb is developing QNX and needs all resources to do so.and Sony produces the hardware. Heins does what Leo apotheker tried to do with palm. But heins is doing a way better job. I would buy Sony product's with bb10 for sure. And the next question is : if so, why two companies?

Shanerredflag

Great read...thanks Chris. Oh, please let the Sony License deal be real.

Posted via CB10

howl078

Mind blown. Great write up Chris

Posted via CB10

THBW

Yes, BB's path is becoming more evident everyday. You can see the resurgence building. Thor and his crew should get the Order of Canada if they pull this off.

Loosenut2

72 cents EPS! Woot woot, that's 24 times the low estimate of 3 coins in the fountain. Heck, lets raise it up to 76 cents. And take that many trombones and have a big parade, starting at Blackberry's NEW Office in Manhattan.

finkmob

Great article and licensing speculation with Sony Ericsson is interesting BUT slow down a little everyone... if such a deal was ever announced, it would be a very long time(at least 18 months) before we saw a device and another 6 months before it was available... Who knows how long it would be before all the integration with other Sony products would be available? Major undertaking

Posted via BlackBerry 6230

nick canada

This could be huge, there is such an uproar about the new xbox being a spy tool and the other issues a ps4/bb deal would be great.

Posted via CB10

jic999

Chris do not quite understand pre paid and post paid customers. When I was on my Bold 9900 , I was paying a BIS, but now I am on the Z10 and a new contract I do not have a BIS fee correct ?

robin11

$.72 annualized is $2.88 EPS and at 15x is $43.20/share, about what Prem Watsa thinks its worth today......I wonder if Prem and Gus are pals?

kfh227

Anything over 50 cents would be shocking. It would make me happy, but still shocking non-the less.

If they can show that they are heading towards $4 EPS next year, this stock is going to shoot the moon.

NickMcBride

The samsung bit sounds interesting but i would be very disappointed to see blackberry move solely to a hardware business and i hope that's not where Thor's heading... they have an attention to detail that i dont feel another company can replicate in the same way! Go Blackberry!! We believe

Posted via CB10

joforg

not hardware only…heard a VP talk a few weeks ago, hardware barely got mentioned, it was all about convergence. what I'm trying to figure is how long the bump lasts when they beat the street. there will still be negative afterwards that will drag the stock back down because there is not enough info being released to bump it short term. that's not a criticism, they just seem to have a 2 year view as opposed to 3 months. I think it's going to jump short term on positive news, and retreat on negative sentiment from US media in-between

needforbbx

The Sony connection is with the board of directors and with the COO.

TDSWIM

Yeah when I proxy voted my shares it was interesting to see the Sony guy on the board. The link you made between that and blackberry not selling in Japan is intriguing.

Posted via CB10

MwineBBVet

Since bringing on board former Verizon and Sony executives and the decision to hold on entering Japan the logic of a Sony licensing deal seemed glaring as long as BB10 could be proven viable. We're either at that point or very close. Will be interesting to see.

Posted via CB10

Mr Raccoon

Yeah... well this guy is always overly optimist..
We saw that again today....

Posted via CB10