BlackBerry Earnings: All Eyes On Subscriber Growth
BlackBerry ( BBRY ) is expected to announce its Q4 FY2013 results on March 28. The company's shares have more than doubled in value over the past six months on growing optimism that the newly launched BB10 devices will set it on the road to recovery. However, with Samsung ( SSNLF ) releasing its flagship Galaxy S4 this summer and Apple ( AAPL ) looking to potentially launch a cheaper iPhone for the emerging markets, the road ahead is tricky and the outlook uncertain. To add to BlackBerry's list of worries, competition for the third mobile ecosystem has stepped up with Microsoft ( MSFT ) and Nokia ( NOK ) making a reinvigorated mobile play and the Lumia Windows Phones picking up momentum during the holiday season.
That said, BlackBerry CEO Thorsten Heins had some positive comments to make about BB10′s initial demand, and it will be interesting to see the kind of traction BB10 has gained in the initial launch markets. However, considering that BB10 was launched in a few select countries and was available for only a third of the quarter, the company's Q4 results are unlikely to be very positive. Moreover, the new BB10 devices had not yet made their way into the all-important U.S. market, so it will be tough to interpret much from the initial sales figure.
BB Subscriber Base Metric Is important
On the other hand, what will be the most important metric for BlackBerry is its total subscriber base at the end of the quarter. This is because despite BlackBerry's waning popularity in the developed markets, the company has managed to tap the international markets to add subscribers every single quarter in the past year, except the last one. In Q3, BlackBerry lost a million subscribers as demand in emerging markets dropped to the extent that it was unable to compensate for the sustained subscriber erosion in the U.S. and the U.K. It will be unfair to expect the BB10′s launch in a few developed markets to have turned the tide, but the extent of subscriber loss in Q4 will give investors a sense of what is happening in the emerging markets, where cheap Android smartphones are getting more popular and WhatsApp is fast emerging as an alternative to BBM. If the subscriber loss deepens, BlackBerry will need to push out cheaper BB10 models soon, in order to stabilize its business at the low-end, or risk a much larger collapse in market share.
Another important metric for BlackBerry that we will be closely following this earnings call is its cash balance. With its CORE program bringing about operating cost savings to the tune of $1 billion by the end of fiscal 2013, and through efficient working capital management, the company has managed to preserve most of its cash for the BB10 launch. However, while it is a good sign that the company managed to generate cash despite reporting operating losses in the last several quarters, we expect BlackBerry to have burned through some of these reserves as it built channel inventory and spent on marketing ahead of the BB10 launch last quarter. The cash burn could intensify in the coming quarters as the company launches cheaper BlackBerry models and goes for a wider global launch in order to better counter the threat from Apple, Samsung and Nokia.
Enterprise Strategy Needed
As important as retail is to BlackBerry, a lot more crucial will be its ability to latch on to its enterprise clients. By our estimates, the BlackBerry services division, which includes push e-mail fees and is reliant on continuous enterprise patronage, is the company's most valuable division currently, accounting for more than 35% of our price estimate for the stock. It is on this division's high-margin revenues that BlackBerry has managed to generate cash in the last few quarters despite seeing its handset revenues fall by nearly half in the past year.
But a carrier push to reduce fees as well as a loss of enterprise customers to rival platforms as the bring your own device (BYOD) movement becomes more popular could hinder BlackBerry's strategic move to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES), potentially making the BES 10 upgrade process costlier and complicated, further reducing BB10′s chances of pushing into the enterprise market. (see BES 10 Fragmentation Increases The Risk For RIM )
Making it tougher for BlackBerry is increasing competition from retail stalwarts Apple and Samsung that are upping the ante in the enterprise market. Samsung recently debuted its KNOX enterprise mobile solution, with which it expects to make its Android smartphones secure and take advantage of the ongoing BYOD trend to directly challenge BlackBerry in the enterprise sector. Apple, meanwhile, is touting the security of its closed iOS ecosystem and the iPad's popularity to sign on enterprise customers at BlackBerry's expense. As a result, BlackBerry's share in the enterprise smartphone market fell to only about 10% last year. Apple, on the other hand, accounted for almost 50% of the smartphones shipped to enterprises, followed by Samsung at 16%.
A lot depends on BB10′s reception in the market and BlackBerry faces an increasingly uphill battle against the well-entrenched mobile ecosystems of the iOS and Android that are steadily making their way into the enterprise market as well. BlackBerry's mobile market share has plummeted from over 3% in 2011 to an expected 1.8% in 2012. Although we do not expect BlackBerry to ever reach the heights it once commanded in the smartphone market, if it manages to take its market share back to over 3% by the end of our forecast period, there could be a 30% upside to our price estimate.