BlackBerry Q10 on Wall Street

Last quarter, with only one month worth of Z10 shipments, BlackBerry shipped one million devices running the new BlackBerry 10 platform and posted better than expected results - particularly gross margin. 

Now that the Q10 has hit a few markets, could things get even better? Could BlackBerry return to a level of profitability worth of Wall Street respect in the next couple of quarters? I suspect so. 

On the CrackBerry tip line, recently, we received some information regarding the mix of Q10 vs. Z10 production.  It lines up with the expectations that many of us have been discussing over the past couple of months. The tipster’s best guess is that BlackBerry’s production mix is now 3:1 in favour of the Q10. Estimated production, based on the tip we received, is currently 2 million Q10 devices per month. 

We discussed the potential for the Q10 to be a cash cow for BlackBerry over the next few quarters. There are tens of millions of keyboard-loving BlackBerry subscribers toting around pretty ancient hardware. Logic tells us that if they wanted to leave the platform, many of them would have done so already (as did so many people in the US market). Remember, the BlackBerry subscriber base was actually still growing up until two quarters ago. We also know, from early reports of Z10 sales (made by BlackBerry executives), that a big chunk of buyers (about one third, according to Rick Costanzo) were people either new to the BlackBerry family, or returning home

How many of those folks, who left the family, might now be inclined to come back home because they miss their keyboard?  Clearly not all, and not even a majority. But I think a pretty good sized number of people will come back given the power of BlackBerry 10 combined with the keyboard that made the company famous.

When the Z10 launched, BlackBerry shipped one million in the first month. That was a launch month. Volume should be higher than average. So if the company is now making 2 million Q10s, with a 3:1 ratio of Q to Z, then it suggests they’re doing 666,000 Z10 per month, or 2 million per quarter. Q10 volume would be running at 6 million per quarter, implying total BlackBerry 10 shipments of 8 million per quarter.

Obviously the Q10 won’t drive the May quarter too much because availability will have been concentrated around quarter end, just as with the Z10 release. But I’d be surprised if they don’t sell well over a million devices in the quarter, along with a full quarter of Z10 shipments.

I’d be surprised if they don’t sell well over a million devices in the quarter

By the August quarter, things should be looking interesting. It will be the first full quarter of availability for the Z10 and Q10 in essentially all major markets around the world. If they’re running at 8 million BB10 devices quarterly the numbers get interesting.  Let’s say the ASP is about $450. Sure, the Z10 likely started higher. And the Q10 may move down, but it started higher too. Let’s assume the Q10 price drops. $450 x 8 million is $3.6 billion in hardware sales. If they can get the hardware margin to hold around 30% (very reasonable for that price point), then we’re talking about $1.08 billion in hardware gross profit.

Last quarter BlackBerry brought in only $2.7 billion in revenue, of which $1.65 billion came from hardware (all hardware, not just BB10). Older BB7 hardware made up the vast majority of this, and is sold at very low margin (if not slightly negative). If they can get hardware to contribute a billion per quarter to gross profit, and even keep half of it after ramping up marketing and losing some service revenue, it’s possible to see this company improving annual profitability by $2 billion.

So between now and August, if the volumes do actually ramp to 8 million units of BB10 per quarter, it seems this company could bring in an additional $2 billion of profit per year, which works out to $3.88 in EPS.

What does Wall Street think? According to estimates from S&P Capital IQ, the Street thinks fiscal 2014 (that’s the year BlackBerry just started) is going to be the peak earnings year... with a whopping $0.43 of EPS.

I can’t predict the future. But I do think the Q10 has pretty awesome demand

Listen - I don’t know what’s going to happen. I can’t predict the future. But I do think the Q10 has pretty awesome demand. I do hear people telling me how much they don’t want to give up a physical keyboard (hence are likely to buy a Q10. I do love my Z10 and I can understand why people who pick one up aren’t going to leave the BlackBerry family. I do think BlackBerry can sell these things at a respectable margin. And the math isn’t that complicated.

The obvious potential fly in the ointment here is the service revenue. They’ll keep dropping, and I’m very curious to see what kinds of new services the executive team unveils. That, and I’m anxious to see how the transition to BES 10 goes.