Thorsten Heins

Tomorrow morning is the big day.  BlackBerry will announce its financial results for Q4.  Normally the call happens after market close, but the next day is Good Friday.  It’s bad practice to have a conference call on the afternoon before the end of the work week, so they moved the call to the morning.  That’s all there is to it. 

So what’s going to happen and how will the stock market react to it?  That’s what we’re talking about here. 

Since last quarter a lot has happened, and mostly good stuff.  BlackBerry 10 hit the market along with its first embodiment, the Z10, and the stock is up more than 20%.  Compare this to the market (both S&P 500 and Nasdaq) which are up about 10%, and Apple, which is down 10%. 

Given the stock price rally we’ve seen, it’s normal for analyst expectations to go up.  And up they have gone.  Just look at expectations for next quarter (Q1).  According to S&P Capital IQ, it analysts expect revenue of $3.26 billion.  Three month ago this estimate was $3.17 billion, and 6 months ago it was $2.66 billion.  That’s a huge resurgence in faith in only half a year.  I bring this up only to point out that BlackBerry isn’t getting any free passes from Wall Street.   The stock is higher, expectations are higher, and management comments will be evaluated against those expectations.  So don’t be surprised if something disappoints the market.  Something always does.

As for Q4 earnings, here’s what the Street expects: 

  • Revenue of $2.83 billion. Most of the revenue comes from hardware, and analysts think the company sold 7.1 million devices in the quarter.  BlackBerry 10 is expected to account for 1.0 million of this, although estimates range from 0.4 million (Pacific Crest) to 2.0 million (TD Securities and National Bank Financial, both out of Canada). 
  • Earnings per share of ($0.31).  That’s negative (hence the parentheses) for finance newbies.  Remember most people expect BlackBerry to lose money because 1) The Z10 came with marketing expenses (which will rise); 2) They are ramping up manufacturing on the platform, and there are usually expenses associated with smoothing out the manufacturing process; 3) Sales of BB7 devices is declining.
  • Average selling price of $247. This is a company average, including BB7 and BB10 hardware.  Specifically on BB10, analysts expect an ASP of $506.  That said, there is a wide range here.  Some guys are still expecting $400 while others are at $550.  I think anyone modeling $400 is asleep at the switch.
  • Guidance for Q1.  Next quarter is a potential biggie for BlackBerry, as they will have globally launched the Z10 and seen the benefit of a full quarter of availability in most markets (and 2 months of availability in the US).  Analysts are expecting the company to post $3.26 billion in revenue and ($0.11) in EPS, so any guidance that deviates much from there will effect the stock price.

My thinking

I think we can expect Thorsten to speak congruently about the strength of the Z10 launch in Canada, the UK, and other markets.  Most analysts - even the bears - agree that outside of the US things are going quite well.  He will probably talk about how many users are migrating from other platforms to BlackBerry, which is something they weren’t anticipating.  This stuff is undeniably positive. 

Will they talk about how many Z10s actually shipped?  I’m not sure.  There is no hard and fast rule here.  I think they SHOULD talk about it, but they may have reasons for not wanting to disclose things quite yet.  The fact of the matter is they’ll have to release hardware revenue and they always give shipment volume, so calculating ASP is just simple mathematics.  If they don’t break down Z10 shipments analysts will be forced to guess based on the ASP this quarter vs last quarter (pretty easy math to do, but not that accurate because it depends so much on knowing the actual Z10 ASP)

The stock is higher, expectations are higher and management comments will be evaluated against those expectations

Will they talk about the US launch?  Who knows.  Again, I think they need to strongly address the negative comments that have been floating around all week.  Why does it seem like AT&T was so poorly prepared to handle the launch (training, signage, demos, etc)?

Oh, and FYI, I’ve heard from a good source that the other major US operator will be conducting a very big TV ad campaign next month.  If that turns out to be true, it can only help.

What about service revenue?  I have been writing about the risks of significantly declining service revenue for a while now.  I stopped writing about it because it’s become obvious that this will indeed happen.  Some readers hated seeing me talk about this, often accusing me of going overboard.  Obviously I had real reasons for expecting this decline, and now it’s accepted as common knowledge.  So the question is ... just how quickly will the decline happen?

Analysts understand that we’re potentially trading service revenue for hardware revenue.  And on the income statement it looks much better to have the immediate (and larger) hardware revenue.  Especially since the Z10 looks like it has a great gross margin.  But service revenue is recurring.  It’s viewed as stable and safe.  All of this leads to a lot of potential stock price volatility.  BlackBerry may drive earnings up sharply on the transition to BlackBerry 10 hardware revenue.  But if the industry continues to apply steep pressure to device pricing (and margin), then this profitability will be short lived. 

At least that’s the scenario that analysts have to consider. 

Anyway, that’s my take.  We’ll be live blogging the call and I’ll write up my thoughts on the results afterwards.  If you have questions or want to disagree with me in the comments, feel free.  I’ll be reading them.