Ignore Market Trepidation, the Blackberry Redux Is Working

The artist formerly known as Research In Motion was able to provide a positive fourth-quarter earnings report, but investors maintained their healthy skepticism regardless. In most investors' and analysts' opinions, BlackBerry (NASDAQ: BBRY  ) has indeed improved over the past year, but its greatest challenge still remains.

The launch of two new phones in recent weeks has yet to show conclusive evidence that this company can navigate a major overhaul and again become a leading smartphone and software provider. If it can calm investors and remove some of its extreme volatility, BlackBerry may become a more appealing stock to the general market. Let's take a look at the recent earnings release to see if we can find signs of a stronger, more stable smartphone phoenix.

Solid, if unconvincing, earnings
When a company as polarizing as BlackBerry makes any kind of announcement, it has to be such a tremendous out-of-the-water, non-negotiable blowout headline that people can't argue with it. While the last quarter's earnings release showed strong evidence that  CEO Thorsten Heins is making progress in his restructuring effort, it was not enough to create an overwhelming sense of redemption. Still, for BlackBerry permabulls (such as this author), there was plenty to celebrate.

For the fourth quarter of fiscal 2013, the company hauled in $2.7 billion. This was down about 2% sequentially and 36% under the prior year's $4.2 billion. The U.S. business dropped, likely awaiting the launch of BB10 devices, while Canadian revenue bumped up 62%, sequentially. What I found most compelling, in terms of regional sales figures, was EMEA. Emerging markets are at the core of BlackBerry's growth strategy, and it looks to be playing out well. EMEA constituted 46% of revenue, up from 43% in the previous quarter. The company's Z10 device was rolled out in these regions a few months ahead of U.S. sales, which began in the last month.

On the bottom line, the company generated a GAAP net income of $0.18 per share, compared to a net loss in the year-ago quarter and up from $0.03 per share in quarter three.

One of the most encouraging reports was, despite tremendous restructuring costs, the company still generated substantial cash flow in the quarter -- $219 million in CFFO, with free cash flow at $131 million. BlackBerry's initial $1 billion cost-saving initiative was completed a quarter ahead of schedule, again aiding the income statement and balance sheet. The company ended the quarter and year with nearly $3 billion in cash and equivalents.

Overall, the results were encouraging to those who were looking for signs of a turnaround, but not convincing to others who believe BlackBerry remains the Bismarck of smartphone companies.

What lies ahead
There are a few important elements to BlackBerry's near-term performance that investors must pay attention to.

The obvious indicator will be the performance of the Z10 device here in the U.S. and abroad. This is BlackBerry's first formidable entry into the mainstream smartphone market, and its what many analysts and investors have decided is the "it" factor for the company's recovery. We heard earlier this year of a 1 million phone purchase, later determined to be from a Verizon distributor. While this is incredibly encouraging, given that it was the single largest order in company history, it is not enough to guarantee that the Z10 is a runaway success.

There is another phone on deck for release in the next couple of months, and I believe this is just as important, if not more so than the Z10. The QWERTY-keyboard equipped Q10 is a combination of the company's latest software efforts with its core, loyal user base preference. Even though the majority of smartphone makers are touchscreen-only, there are still consumers who need the tactile response of a physical keyboard. These users have been BlackBerry fans since the beginning, and are an incredibly important group to satisfy. The Q10 has the potential to be the market leader in the keyboard-lover demographic. This would be a major victory for BlackBerry -- regardless of how small that demographic is compared to the entire market.

The second metric to keep an eye on is marketing spend. Management expects a 50% increase for this quarter, directly from the launch of these new phones and the 100,000-strong app market. BlackBerry needs heavy marketing to give the phone a fighting chance against Apple and Samsung. But investors need to make sure this effort yields attractive returns. In the next earnings release, compare the increased marketing spend to sales figures. Even though net earnings will likely come in at breakeven, given the marketing expense, it will be a major success if this push yields big-time sales gains.

Valuation and the call
At nearly $14.50 per share, BlackBerry is twice what it was a year ago, when I first publicly expressed my bull call. That gives today's market cap of $7.55 billion. With nearly $3 billion in cash and equivalents (and zero long-term debt), that gives a value to the operating business of $4.5 billion --only 1.67 times fourth-quarter sales. Last quarter was a mix of new product cycles in some regions and the end in others. This coming quarter will show the first full result of the new products across all regions, which I believe will show big gains in subscribers and hardware sales.

The company isn't as cheap as it was 12 months ago, but there is plenty of upside potential here. The comeback is yet to be guaranteed, and there is a reasonable amount of downside risk, but this may be one of the last chances to buy at fundamentally cheap prices before the market at large determines BlackBerry to have returned to growth.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2013, at 10:15 AM, TimKnows wrote:

    So right, the bears, sell-side guys and the analysts targeting $ 7.00/shr didn't like the report.!!!! You missed the 55% of other consumer phone owners coming over to BlackBerry, that's a ton. You might add that margins were like Apple's too, and that's with BB7 in the mix. Finally, the Q10 launches in days, not months, you will be able to see it all over some good countries that don't bash as much as the US does. Nice.

    It is as cheap as it was at $ 7.00/shr, Misek, said," Are they sand bagging earnings for Q1?", why does he think they have so much power in their tank??? You will come around soon.

  • Report this Comment On March 30, 2013, at 12:03 PM, bugmenot wrote:

    It is beginning to look like the US news media assessment of the new Blackberry is all wrong. It looks like the news media was trying to destroy the Canadian company. I would hope that Tort Law is used by RIM to deal with this problem.

  • Report this Comment On March 30, 2013, at 4:27 PM, CZZZZZZ wrote:

    re: Ignore Market Trepidation

    The stock is up 100% in the last 6 months and consumers are buying into BB10....looks like the only people to ignore is the media and their outragous bearish reporting on blackberry

  • Report this Comment On March 30, 2013, at 6:01 PM, MrZ2357 wrote:

    @InfoThat????

    You are absolutely correct were it not for the fact that:

    - 1 million shipped Z10 phones, in one month to 1/4 of the intended service providers.

    - 1 million order from a partner.

    - Did not loose money as expected last Q

    - Positive free cash flow, increased cash and cash equivalents

    - New products are set to launch, Q10 and mid range phones later this year.

    - BES10 playing right into the BYOD trend.

    - 55% of purchases from new customers (Shocker!!!)

    Blackberry's demise has been greatly exaggerated.

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