Did This Smartphone Maker Just Score an Earnings Win?

Last month, I wrote that there were three major things to watch for in BlackBerry's (NASDAQ: BBRY  ) Q4 earnings report:

  1. Z10 unit sales (anything below 500,000 would be bad; anything above 1 million would be great),
  2. the rate of "conquest" sales from other platforms (anything around 50% is good), and
  3. the balance sheet (a cash and cash equivalents total above $2 billion would be decent).

Now that BlackBerry has reported earnings, it's time to see how the company did.

Earnings beat expectations
BlackBerry reported adjusted EPS of $0.22 for Q4. To some extent, the company's results were inflated by tax benefits: before tax, BlackBerry lost $18 million, or $0.03 per share. Still, that handily beat the analyst consensus for a loss of $0.31. Nevertheless, Mr. Market did not seem very impressed: BlackBerry shares ended the day down approximately 1%.

While the bottom-line number was better than expected, and showed the effectiveness of BlackBerry's recent cost-cutting program, I do not think EPS is a very meaningful metric for BlackBerry at this time. The company is undergoing such a dramatic transition that significant quarter-to-quarter EPS swings are likely. The metrics that I laid out last month are a better indicator of BlackBerry's long-term viability.

A sweep
In each of the three areas I was watching, BlackBerry met or exceeded expectations. First, the company announced Z10 unit sales of approximately 1 million for the quarter. That was slightly better than the analyst consensus and represented just a month of sales in a few select markets. (Note: approximately two-thirds to three-quarters of Z10 sales went to end users during BlackBerry's Q4; the remainder were still in retailer inventories.) Obviously, Z10 sales pale in comparison to Apple's (NASDAQ: AAPL  ) iPhone sales figures, but Apple's market cap is more than 50 times that of BlackBerry! In other words, the bar for "success" is a lot lower for BlackBerry.

BlackBerry also reported that 55% of Z10 buyers were switching from other platforms (primarily Apple's iOS and Google's (NASDAQ: GOOGL  ) Android). The rate of conquest sales has thus held up very well in the first two months of sales, beating my expectations. In some ways, the high rate of conquest sales is not surprising: the upcoming Q10 smartphone, which features a physical keyboard, is more likely to appeal to the BlackBerry user base. By contrast, the all-touch Z10 competes directly with the iPhone and top-of-the-line Android phones like Samsung's Galaxy S series, while offering a differentiated user experience. BlackBerry has a long road to climb to regain any significant share in the high-end smartphone market, but this is still a great start.

Finally, BlackBerry was able to defy expectations by keeping its cash and cash equivalents balance roughly flat over the prior quarter at $2.9 billion. This easily exceeded the $2 billion target I had set, and gives me confidence that BlackBerry has enough cash to fund working capital and marketing investments over the next two to three quarters.

Foolish final thought
Not only did BlackBerry beat on the bottom line last week, it also delivered in three critical areas: Z10 unit sales, conquest sales, and balance sheet strength. While the stock is undoubtedly risky, I think BlackBerry is likely to continue surprising Mr. Market in a good way. (That said, you should also check out my Foolish colleague Anders Bylund's more bearish take on the news.) For risk-tolerant investors, BlackBerry might be a good stock to own this year.

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