BlackBerry Bombs, and Shares Tank

On Friday morning, struggling smartphone maker BlackBerry (NASDAQ: BBRY  ) released its much-anticipated results for the first quarter of FY14. The company reported revenue of $3.1 billion, up 15% sequentially, and a GAAP loss of $0.16 per share.

The company's EPS result was hit by a $0.03 charge for restructuring costs and a $0.10 impact because of Venezuelan foreign currency restrictions, which have prevented carriers there from paying subscriber fees owed to BlackBerry. Even excluding these negative impacts, the company would have posted a small loss, whereas analysts (on average) expected a modest profit for the quarter. Moreover, the company doesn't expect any immediate improvement, and therefore forecast an operating loss for the current quarter.

The weaker-than-expected results and the soft outlook caused BlackBerry shares to drop as much as 29% on Friday morning. Management admitted that it's difficult to predict future sales and profitability trends because of the tough competitive environment. Should BlackBerry investors throw in the towel?

BB10: Another problem child?
The main cause of BlackBerry's earnings miss was the relatively slow growth of BB10 phone shipments. The first smartphone running the new BB10 OS -- the Z10 -- was released in late January, and BlackBerry managed to ship roughly 1 million units in the first month. Last quarter, BlackBerry had a full quarter of Z10 shipments, and the company also launched Q10 in late April -- the first BB10 device with BlackBerry's traditional physical QWERTY keyboard.

The BlackBerry Q10 smartphone (courtesy of BlackBerry)

The Q10 launch seemed especially promising because most of the diehard BlackBerry fans who have stuck with the brand want a physical keyboard. However, despite having a full quarter of Z10 sales and more than a month of Q10 sales, BlackBerry still shipped just 2.7 million BB10 phones during the quarter.

The monthly shipment rate was thus slightly lower in Q1 than in the previous quarter (when the company shipped 1 million Z10 phones in one month). The BB10 sales figure missed expectations: Most analysts were expecting 3 million to 4 million BB10 shipments in the quarter.

Unfortunately, the company refused to quantify the breakdown in shipments between Z10 and Q10. There are thus two plausible scenarios that investors have to consider. First, it's possible that Z10 sales "fell off a cliff" after the initial 1 million units shipped in the prior quarter. If 50% or more of last quarter's shipments were Q10 phones, that would suggest that while Z10 demand is fading, Q10 is seeing good upgrade demand from current BlackBerry users.

Alternatively, it is possible that the slowdown in Z10 shipments was more modest and device sales missed estimates because of lower-than-expected Q10 shipments. That scenario would be more troubling, especially if it indicated weak Q10 demand rather than supply constraints. One of the biggest points in favor of a BlackBerry comeback is that the company has devoted fans, whom most analysts expect to be the initial market for BB10 devices (especially the Q10). If even those fans are hesitant to buy the new BB10 offerings, it would be devastating to the company.

Looking ahead
BlackBerry CEO Thorsten Heins said all the right things on the company's conference call on Friday morning. He talked about investing heavily this year to assure long-term success, rather than generating short-term profits at the expense of long-term growth. However, investors are understandably skeptical about the company's turnaround plans, given BlackBerry's turbulent past.

I still think the company can secure a niche for itself within the smartphone market, while also broadening its software and service offerings. The Q10 smartphone just launched this month in the U.S., one of BlackBerry's largest markets. Moreover, it could take a few months to see sales build, because -- unlike competitors -- BlackBerry relies heavily on bulk sales to government and enterprise clients. Corporate IT departments typically take several months to approve new devices, so investors should expect the fall to be make-or-break time for BB10 in the corporate and government market.

Fortunately, the company still has a very strong balance sheet, with more than $3 billion of cash and investments at the end of May. This gives BlackBerry plenty of breathing room to execute its business plan over the next several quarters and hopefully create some momentum around BB10. Investors betting on a quick turnaround were disappointed on Friday; the earnings report was definitely a setback.

Still, while BlackBerry's prospects have dimmed, the curtain has not yet fallen on this former smartphone giant. However, time is of the essence in rebuilding the BlackBerry brand to produce a return to growth.

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Read/Post Comments (6) | Recommend This Article (1)

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 June 29, 2013, at 9:51 AM, iphonerulez wrote:

    The analysts are idiots. The entire smartphone industry has gone soft due to the weakening economy and smartphone saturation. BlackBerry was fortunate to sell as many smartphones as it did.

  • Report this Comment On June 29, 2013, at 10:28 AM, Oril wrote:

    Even though Blackberry lost money this quarter they continue to operate with no debt and even added to their cash reserves. Not bad.

  • Report this Comment On June 29, 2013, at 10:47 AM, Oril wrote:

    The smartphone industry today is very similar to the automobile industry of the early twenties. The country was flooded with automobiles, everyone who could afford one had one but the infrastructure to operate them wasn't there.

    By the way I would love to have a new model BB10 smartphone but I am typing this on an old Iphone4.

    Why is that? It could be because I still have a year to go on a very expensive three year contract that my carrier sucked me into. I am not alone.

  • Report this Comment On June 29, 2013, at 11:33 AM, HelpIsHere wrote:

    Fair assessment here, BES10 is needed to sell large amounts of phones, the USA wasn't in the Q1 data either so we have a long ways to go before we count out BlackBerry. BlackBerry missed on breakeven due to Venezuela, analysts got everything else wrong as BB did not talk about unit sales or subs. The bears were looking for a chance to crush BB and they got it thus accounting for much of the drop here. BlackBerry still has to launch the Z10 in 35 more countries and that Q10 is barely out there, not to mention the Q5. Analysts set themselves up to be taken to the cleaners by the day traders, looking stupid again.

  • Report this Comment On June 29, 2013, at 11:57 AM, TimmyBee123 wrote:

    They were very close to breaking even without the Q10 being available in the US for very long or the Q5 being available anywhere very long.

    Did things go perfectly? No. Are they a lost cause? No.

    New revenue streams will come onboard and they will be profitable in the near future.

  • Report this Comment On June 30, 2013, at 6:49 PM, Chippy55 wrote:

    'What's all this lyin' around sh*t? It ain't over till we say it's over! Was it over when the German's bombed Pearl Harbor?" ~ Bluto in Animal House

    Folks, BBRY is on sale! And it ain't over til we say it's over.

    I don't understand that whole Venezuelan foreign currency restriction which caused 10 cents of the 16 cents per share loss, especially the part about "carriers there are prevented from paying subscriber fees". I have no clue what that means, why it's essentially a charge against EPS, and if the restrictions "expire" after say 6 months or a year at which time BBRY would be allowed to then add 10 cents per share to their EPS, but it sounds like it's an anti-business climate. And Wikipedia lists about 3 dozen countries which have these currency restrictions, maybe someone can explain this. That restriction alone was responsible for 62% of the 16 cent per share loss.

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