Sorry, this Z10 gross margin analysis is totally out to lunch

BlackBerry Z10
By Chris Umiastowski on 22 Feb 2013 12:35 pm EST

Last night I came across an article about BlackBerry published on Seeking Alpha. In case you aren't familiar with the site, it's one of the leading sites where anyone can submit investing articles. Many of the articles are of excellent quality. But some are written by people who don't understand accounting, financials, technology or other critical aspects of the topic they are writing about. And if you take their "analysis" at face value you'll absorb information that is totally wrong.

And in this case, the writer of this article falls in to the camp of not understanding how to look at gross margins. Since every BlackBerry investor is thinking about hardware margins on the Z10 (and soon Q10), this stuff matters.

The writer begins his article by proclaiming BlackBerry will now have higher gross margins than Apple. His justification? Remember those reports talking about the cost of components to make a Z10? This list, often referred to as a "bill of materials" (BOM), came to a total of $154. Not knowing any better, this author has taken the typical $600 off-contract price of the Z10 and subtracted $154, arriving at a $446 gross profit number.

Sorry. This is not even close. It's so far from the truth in so many ways. BlackBerry is not earning a 74% gross margin on Z10 sales. This number is so far beyond any reasonable sanity test that I stopped reading. No value in going further.

Gross margin is the ratio of gross profit to revenue. It's expressed as a percentage. So if something costs $15 to make and sells for $30, then we say it has a 50% gross margin. The only two things you need to know are total cost to manufacture and total revenue.

In the case of smartphones, the cost to manufacture is significantly higher than the bill of materials (BOM). Sure, the pile of components to manufacture the Z10 might cost only $154. But those parts have to be assembled by a contract manufacturer. This is called "conversion cost" in the business, and it's obviously not free.

The biggest contract manufacturers (also called EMS companies, for Electronic Manufacturing Services) which include Hon Hai, Flextronics, Jabil, and Celestica, don't work for free. The most visible part of their work may be the component assembly. They've got complex "pick and place" equipment, surface mount reflow ovens (for soldering) and much more.

But even before manufacturing happens, these guys do all sorts of work helping vendors design for manufacturability. They help source components. They hold inventory on behalf of the vendor. They take certain inventory risks. Then after manufacturing is done they often to product testing, software loading and other fulfillment activities. None of this is free. It all goes on top of the $154 bag of parts, reducing gross profit.

And let's not forget the other material costs. Doesn't the Z10 come in a nice box? Doesn't it come with a micro fiber pouch? How about that charger and USB cable, or the headphones? All of those things cost money and they are not accounted for in the BOM analysis that you see.

Then you have shipping costs. Fedex (or whoever) don't move products around the world for BlackBerry out of the goodness of their hearts. Getting handsets from manufacturer to fulfillment center to retail costs money.

This is why we have seen BlackBerry lose money in recent quarters despite having an ASP (average selling price) of about $230. This says that the all-inclusive costs of building the average BlackBerry handset are slightly above $230. That's for older BlackBerry 7 hardware too, not the Z10.

Last but not least, we have to look at the revenue line. BlackBerry likely does not sell the Z10 to its partners for $600. That is the off-contract price we see as a consumer. Do you really believe carriers sell devices, off contract, at cost? Are they in the business of making no money? Of course not.

Most analysts assume that the ASP on the Z10 is closer to $500. So if you're paying $600 at the store, the retailer might be making $100. Obviously if you pay $199 on contract, the carrier is subsidizing it by about $300, but making that money back (plus a healthy return) based on the lifetime value of the data plan you take on that contract.

Bottom line: When you see something that looks crazy, it probably is. BlackBerry doesn't earn 75% gross margin on the Z10, and Apple doesn't earn that high of a margin on the iPhone 5. Nobody makes that kind of margin on smartphone hardware.

As much as professional analysts take a lot of heat from the general public, their estimates (when it comes to near term financials) are pretty reasonable. They are pretty smart people and it's a pretty competitive field.

Reader comments

Sorry, this Z10 gross margin analysis is totally out to lunch


yup, chris is pretty much always on the ball with the financials :)
also the `analyst` quotes (and mixes) £ and $ figures with very bad results lol

Great article. Thanks.
I have to confess I didn't read that article. I skipped it after I noticed it was on Seeking Apha. :-)

Seeking Alpha? lol, I am no longer able to post without a moderator looking at it. I don't know why they keep letting mindless and factless articles get published which affects the stock market.

Anyhow nice read Chris,

hey, my z10 didnt come with a micro fibre pouch \\[-_-]//, i upgraded from a bold 9700 on O2-UK? im going to ask questions at my local store

Did your Z10 come in that Black Box? Are you only missing the micro fibre pouch? Just to let you know I love at pouch, I also have one for my PlayBook and its great. Clean the screen and put it snug into the pouch. It also gives it protection.

i believe that only review devices came with the pouch. Much like the micro fiber cloath.

my wife and i didn't receive eithe of those in our Z10 Boxes

On that note, are you sure those FedEx courier/transportation expenses would really by included in COGS...

If they relate to moving product from manufacturer to, say, fulfillment center then yes.  If they relate to moving the product to the final point of sale, then I'm not 100% sure.  Probably a bit of wiggle room there depending on how they want to do their accounting.  

Has blackberry ever made a habit of releasing what margins there actually seeing during financial reports? You've got me curious now. 10-15% would be a viable company I'd say.

If you look at SEC filings you get annual gross margin for the "hardware and other" category.  Other = approx zero relative to hardware so what we do is assume that hardware & other category is pure hardware.  It isn't released quarterly.You just have to know where to look, which of course analysts know how to do.  Most amateur writers at SA don't know.

Rogers Z10 did not come with a Micro Fiber pouch either! Shame, BB always provided one before. Didn't even come with the little screen cleaner cloth!

Nice reports Chris. Always nice to read an informative article from you!

It's better. Next gen single layer vs. The double layer rqrd by gorilla glass = thinner and less weight.
My BB10 Z10 is a Ferrari!

Great article Chris,
I was wondering the same but unfortunately these people are influencing the market even though as we agree a portion of this lot has no clue about what they are talking about nor has any sound financial credentials behind them. Yet this site continues to publish their articles.
Motley Fool is no better, completely anti-BB, pro apple and have been bashing BB from day one yet again they get published on all the sites.
It scares me to hell if people are actually listening to these opinions and whatever happened to the law and protecting the small investor from the blatant manipulation by these analysts?

I just read a Motley Fool article yesterday that was very pro-BlackBerry.  But yeah, I know David and Tom love Apple (and I am a shareholder of Apple too).  I have been a Motley Fool reader since 1999 and I find they encourage independent thinking.  Any writer can have any opinion.  I like that.

No pouch for me either. And you also have to factor in the costs that bb10 cost to produce over 2+ years and marketing and loss of market share due to delays etc to get a real actual profit on each unit, it will take months if not years to get a real idea

Great article Chris, as always. Of course there are those things called "loss leaders" that bring no profit at all, but are strategic and fit with organizational mission.

ok, say the all-inclusive cost to Blackberry for each Z10 is $300, which included manufacturing, testing, boxing, delivery, etc. Accounting for the $100 or so cut that each carrier takes off the $600 or so retail value (no contract), that means BB is making $200 on each Z10. So a 33% profit margin.

In comparison, Apple earned gross margins of 49 to 58 percent on its U.S. iPhone sales between April 2010 and the end of March 2012.

It will be interesting to see how this all plays out, but I could see BB turning more into a software and services company and getting out of the hardware business within the next 2 years. There's no reason all the functionality of BB10 couldn't be integrated into Android and then sold on a per-license basis. BB could develop quite the custom ecosystem. What's better, serving hundreds of millions of Android users, or settling for a mere niche of tens of millions?

Chris, great article.

Would you be able to update us with some of the sell through numbers for the Z10 so far based on UK and Canada launches? I have seen alot of different articles mentioned here (i.e. Peter Misek, Seeking Alpha, etc.) that have adjusted sales figures down and I am not completely confident on their checks. I would appreciate any insight that you can provide.


No disrespect Chris, but what are your finance/business credentials/training? I'm no expert myself, but have you worked in these fields before? Just wondering....

It's so funny reading comments and articles from people that don't understand manufacturing in any way.

Great article Chris.

You're delusional. In fact, I'm sure you're on your own compared to everyone else who has read this article.

Let's not forget on top of that, comes the cost of paying the research and developpment team who worked hard to design, devellop and create this awesome device. That is without mentoning the work of the devellopment team that worked on the new OS BlackBerry 10, the new BlackBerry 10 applications.

All this has a cost and will be reflected in the price of the Z10

Good review!!

Nonocrack - R&D is a separate line item.  Gross margin is calculated before sales, admin, research & development, advertising and other non-manufacturing costs.  

That's the so called Analyst that's long Apple right? HAHAHAHA! Dude makes his portfolio out of day time soap opera's. Guy is really a loser!

I remember the breakdown of cost for the Torch 9810, it was actually more expensive than the Z10 (likely the slider cost).

I don't remember (nor did I look up) the BOM cost of the original slider, but one thing to keep in mind is that time distorts the analysis.  You'd have to compare the BOM cost of the 9810 to another high end smartphone of that era.  The costs to make these things drop every quarter.  So the 9810 today would cost significantly less than when it was first released.  

is this article even required in the first place since nobody is desputing the facts involving build, marketing and post sales expenses?..IMO there are bigger myths to be busted

Chris what is your analysis on their gross margin, about 10-20%? that would be my guess, maybe $100 profit on each Z10 sold

I'm hesitant to guess at this point because there are so many unknowns.  Thorsten has restructured their supply chain.  It may very well be more efficient now.

 But food for thought:  If the cost to build an "average" BlackBerry 7 phone was about $240 a couple of quarters ago, and let's say it rises even to $300 for the Z10, then at $500 ASP it should  have very respectable (40%) margin.  That's for the high end device with excellent manufacturing yields, etc.

 The Q10 will have lower margin (they've said they'll price it for volume) and we expect them to launch some mid-level produt as well.  So the blended margin isn't going to be 40%, that's for sure. 

you're right as far as the ASP and building costs of otehr devices i am not sure as back then i was not really concerned with how well BlackBerry did as i was nto an invester now i own 2500 shares so its soemthign to really ponder. is this soemthign they bring up at the earnings calls.

BlackBerry is also marketing the Z10 more then they ever did with their other flagship devices so i'm sure that may add a bit more to the over all cost of production

If you are so unsure about the unbeknownst, how do you know that all of those so-called experts are wrong? If you are now stating that current margins could be higher than you opine, how do you come to the conclusion that it will cost more than apple to produce?

I read the article in the link you provided, and aside from an obvious overstatement of margins, which seemed to be linked to a site here in the UK, the article is quite a good read.

You're really reaching here.  I said BBRY wouldn't have margins that exceed Apple.  I made absolutely no comments on the cost of manufacturing a Z10 relative to an iPhone.  And I gave you a pretty good framework to think about margins.  They ain't gonna be 74% and it doesn't take more than half a brain to see it.

Really look forward to articles by Chris, they are factual, informative and not blown up media hype. There really should be laws against some of the supposed technical and informative so called journalism we get to read.

Good write-up. The professional analyst can’t seem to nail down sales figure much less exacting gross margin figures.

Kudos Christ

Good read even though I just came out of a Managerial Accounting class fifteen minutes ago (brain fried) it was healthy to reinforce what I've learned with a product I love.


Carriers pay nearly full price for handsets. They get some bulk discounts, sure, but they pay more than people think. That is precisely why they off set this investment with long term contracts. Recently, in other sheep media, they were going off about carriers now trying to reduce these heavy subsidies. Basically, with all this greed, there are a large number of people who have to suffer while carriers and manufacturers continue to rape the world and charge her for it. I'm going off on a tangent now, but - i know first hand how carriers get their phones.

in the time of your life, live so that in that good time, there should be no ugliness or death for yourself or for any life that your life touches, seek goodness everywhere

Chris time for a Youtube 101 BBRY finance class 101,
I am also reading if BB has 25M unit sales it translates to $1.60 to $3 profit . Quite a big range . I guess somebody has margins at 74% and 30% !

If you get the support call where they're asking, "Why are my icons Bouncing." hang up immediately.

in the time of your life, live so that in that good time, there should be no ugliness or death for yourself or for any life that your life touches, seek goodness everywhere

A lot of "Analysts" are not smart, sorry bud.


in the time of your life, live so that in that good time, there should be no ugliness or death for yourself or for any life that your life touches, seek goodness everywhere

I agree. I am a writer on seeking alpha and asked about writing for them because of all the inaccuracies that I found, and the absolute bias exhibited by some of the writers.
Here is a link to an article I have written on there.
This one was done with a positive BBRY spin.

Chris, as always, very nice work.

I would add that there is probably slack in the BOM cost, I am sure BB doesn't publish those numbers. Further when the company I work for releases a new product (high tech, same type of components, cousin industry) our BOM's are higher at first. Once the product is stabilized and some idea of volume and order flow starts to fall out, we are able to go back and take some cost out. Sometimes we get smarter at making them, sometimes we get better pricing on components as longer term, large quantity deals are set. In some situations we can get another 5 to 6 pts., doesn't sound like much, but it is.


THIS IS HILLARIOUS!!!!! I could not stop laughing at his calculation.

Thanks for the blog. You did a great job at explaining it for the non-accountant.

If you get the box, and labour, and all the rest of the stuff done in China, it might cost you another $0.75CDN

You can ship a container from China to the heart of Canada for $925.00 - Door to Door, and we know how many beautiful Z10 you can fit in a container ....... don't we?

Whenever I see an article quoted from Seeking Alpha I always look to the upper left to see if the person speaking has a position. If they do, end of line for me. I never expect a person to speak against their own interests. I'll grant they took the position because they had an opinion on the stock.

There is no substitute for doing your own homework. If you are doing that, the guys at Seeking Alpha won't have much to tell you you don't already know.

Very good article, I can't balance my own checkbook & you wrote this in a way that even I can understand

Nice article, i love it i learned a lot....this is like fôod is cheap but it is expensive is you start counting details and the stuffs u need to buy to prepare it*

"When the phone hits the US markets later next month, it will have an anticipated subsidized price of $200 per phone. That is also a profit margin of over 30% after subsidies."

This must means in Canada, they're losing money if you sign for 3 years because BlackBerry wants carrier to succeed, no matter what! Yeah, I'm pretty sure BlackBerry is the one giving the discount if you sign a long-term contract...

It reminds me of people who actually believe restaurants make a 75% profit because food cost is only 25%.

QUOTE: "Doesn't it come with a micro fiber pouch?"

Micro fiber pouch!?!?!? Really!

I own a new Z10... where is my Micro fiber pouch? No micro-fiber pouch was included in my package....

I think you missed the point of the article Chris, the writer argues the the Z10 profit margin is higher than the iPhone's based on the BOM analysis. Obviously manufacturing the iphone has all the extra cost you mentioned so they cancel out. My argument will be that the iphone's profit margin is higher as apple has more control over it supply chain. That said the Z10's launch price was not competitive enough in my opinion and blackberry should be involved more in getting the handsets into the hands of the final customer. For the first week after launch, I couldn't get the Z10 to buy sim free or on payg from retailers, they all wanted me to sign lengthy contracts, they were using the launch buzz for their selfish benefits when blackberry wants to sell as many handsets as they can. Apple and Samsung have already shown you don't necessarily need network support to sell...

Sorry, no, I didn't miss the point of the article.  You missed the part of the gross margin calculation referred to as the demoninator, aka revenue :)

The iPhone5 has a significantly higher ASP to the carrier than a Z10.  Carriers aren't paying $600 to buy these things from BlackBerry.  The margins are good, but they sure aren't iPhone level.


Question for the financial whizzes on here - what is going to happen to the revenue that BlackBerry receives from the BIS (and perhaps BES) service once everyone moves/upgrades to the Z10. Is there not a huge number of customers generating millions and millions of dollars in incremental revenue per month for Blackberry that will simply disappear?

It will take years to disappear completely. And it's still a fraction of the revenue generated from a premium smart phone.

The reason it has represented such a large component of revenue in recent years is the reduced ASP for BB7 devices.

The lack of knowledge in that original article was laughable, but then so are the "BOM" costs they quote.

There is no way in the world they can know the actual costs of the BOM unless they're inside Apple or BlackBerry - and that seems very unlikely.

Component part contracts on the scale of even BB sales generally have complex negotiated deals, with scheduled call offs etc and prices that may range based on volume. So the precise costs are unlikely to be known (or even fixed for that matter).

Hard to imagine Apple pays the same price for a component than does BlackBerry when their order volumes are a magnitude of scale higher, and where they will exercise so much purchasing leverage over the manufacturer. Not a contract you'd want to lose. BlackBerry on the other hand - not so much.

One driver perhaps behind the widely reported BlackBerry drop of Celestica recently (or was it the other way round).

They've got complex "pick and place" equipment, surface mount reflow ovens (for soldering) and much more. - Umi

Pick and place is actually simple tech really, (baseplate,alum blocks,thompson shafting,air cyl's,prox sensors, end of arm grippers or suction,linear bearings,snap rings,hard stops etc) arms have cameras that home on every cycle, then P@P, simple PLC programming. Now if there were thermal expansion parameters then it might get a tad more complex but not much.

Shoot me enough $$$ Umi and I'll build you a whack of pick and place robots that will cook you breakfast,lol. ;)

@ Chris Umiastowski

After reading the article and sensing the feelings with which you typed every word of every letter, i'd like to say

Dude you can take all of us @crackberry into a battlefield ( bb v ios, android etc) and we will gladly follow you with eyes closed!

Strength and Honour


Chris for president!

LOL Chris. My reaction was similar to yours. While I was reading that seeking alpha article, I was like "Are you ****ing retarded?" If it was some random person commenting that's fine, BUT what annoyed me was the fact that it was a Seeking Alpha article. How the heck do people like this end up writing for Seeking Alpha. I mean, I'm only starting 3rd year in Accounting and Finance and I know this basic fact. I still read on Seeking Alpha though since there are still authors who are extremely knowedgeable.. this guy just happened to be the handful who weren't so knowledgeable.