Perhaps the most troubling aspect of BlackBerry's (NYSE:BB) disappointing earnings results was that it lost 4 million subscribers during the quarter, despite recently releasing two flagship BB10 devices. This indicates that BB10 is failing to impress, and that's a bit problematic, considering subscribers have been the company's lifeboat -- and quite frankly, the only reason it's still in business today.
Subscribers are so important because each subscriber generates a stream of recurring service revenue throughout the lifetime of the device. During fiscal 2013, BlackBerry's software and services revenue accounted for 37% of total revenue, but made up all of the device maker's gross profit. To make matters more challenging, BlackBerry has to add even more BB10 subscribers just to break even with BB7 service revenues. The company was forced to lower its services fees for BB10 devices due to "competitive" pressures.
The hope that BB10 would be such a smashing success that the company would make up for service fee cannibalization with volume isn't exactly playing out. Despite selling 6.8 million smartphones for the quarter, only 40% were of the BB10 variety, which breaks down to about 2.7 million devices. Perhaps the mix will change in favor of BB10 in the coming quarters as the company releases a swath of mid- to low-range devices, but even then, unit volume will have to be significant in order to drive higher services revenue.
BlackBerry bulls may find comfort in the fact that the company shipped 13% more devices this quarter on a sequential basis, but I would like to remind them that more subscribers are moving away from the BlackBerry ecosystem than there are devices being shipped. If that weren't the case, the company wouldn't have bled 4 million subscribers during the quarter. More than likely, the company has $3.1 billion in cash to keep it afloat, but just because you're treading water doesn't mean you're a good swimmer.
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