ROUGH ROAD AHEAD FOR BLACKBERRY
Dismal Q1 report spooks investors
A cold dose of financial reality has snuffed out the warm afterglow that accompanied the initial phases of BlackBerry Ltd.’ s attempted comeback earlier this year.
BlackBerry got a stern reality check Friday when investors sent shares of the Waterloo, Ont.-based smartphone maker plunging after the former Research In Motion reported weaker than anticipated smartphone sales combined with financial results that fell short of Wall Street expectations, including an adjusted net loss of US$67-million.
After posting a surprising quarterly profit just three months ago on the strong initial rollout of a fresh line of smartphones powered by the new BlackBerry 10 operating system, BlackBerry swung to a loss for the first quarter — covering the three months ending June 1 — and forecast another loss for the current quarter, casting a shadow over the struggling company’s attempts to right itself. Shares of the BlackBerry maker plummeted, closing down 26% on the Toronto Stock Exchange and 28% on the Nasdaq.
On a conference call with investors Friday morning, BlackBerry chief executive Thorsten Heins appealed for patience, telling analysts that the company is far from finished rolling out BlackBerry 10 devices, and that its services business would continue to improve as more corporate clients upgraded to BlackBerry’s new enterprise offerings.
Mr. Heins added that he was unwilling to sacrifice the company’s long-term strategy in order to improve short-term financial metrics. “We don’t plan to run the company with a short-term, device-only strategy,” Mr. Heins said.
Friday’s earnings report was highly anticipated by BlackBerry observers, as it promised to offer the clearest picture yet of how the company’s new smartphones are performing as it seeks to counter potentially overwhelming competition from its rivals — namely Apple Inc.’s iPhone and devices running Google Inc.’s Android software.
BlackBerry’s first-quarter numbers included a full period of sales of the touchscreen Z10 device in the coveted United States market — where BlackBerry has struggled in recent years — as well as the first early sales figures relating to the Q10 smartphone, which features a physical QWERTY keyboard and went on sale in Canada and the United Kingdom during the quarter.
Though BlackBerry’s reported first-quarter revenue of US$3.1-billion was up 15% from the US$2.68-billion generated in the previous quarter, sales fell short of analyst expectations. Wall Street had looked for BlackBerry to report revenue of roughly US$3.4-billion, with earnings of about US8¢ per share, according to Bloomberg estimates.
BlackBerry said it sold 6.8 million BlackBerry smartphones during the quarter, which also fell short of estimates from analysts, who had anticipated sales of more than seven million units. Once again, the company’s global subscriber base fell; there are now roughly 72 million BlackBerry users, down from a peak of about 80 million.
Chief financial officer Brian Bidulka told investors that about 40% of BlackBerry sales in the quarter were BB10 devices. Despite selling 100,000 PlayBook tablet computers in the quarter, Mr. Heins said the company has scrapped plans to bring BlackBerry 10 software to the company’s tablet. While BlackBerry will continue to support the current tablet software, the decision casts a shroud of uncertainty over the future of the PlayBook.
“They’re not going to go out of business tomorrow,” said Colin Gillis, a financial analyst with BGC Partners in New York. “They have US$3-billion in cash, but the question of the viability of the company is still open. That’s the reality of the situation. They’re not knocked out of the game, but it sure looks like a rough road ahead.”
Last month, BlackBerry unveiled the first low-cost BlackBerry 10 device — the Q5 — which the company plans to roll out to international and developing smartphone markets where it continues to sell devices powered by its legacy BlackBerry OS software.
Mr. Heins also highlighted that the firm is still working to get its revamped corporate offerings, BlackBerry Enterprise Service 10, out to its enterprise customers. Mr. Heins said there’s a correlation between BlackBerry 10 device sales and the adoption of BES10.
BlackBerry said the adjusted loss for the quarter was US$67million, or US13¢ per diluted share, compared to a loss of US$510-million (US97¢) in the same quarter last year, and a profit of US$94-million in the March quarter.
However, BlackBerry said that sales in Europe, the Middle East and Africa — which account for roughly 40% of the company’s revenue — grew 9% in the quarter. At the same time, BlackBerry said revenue in North America rose 30%, while sales in the Asia-Pacific region grew 35%.
Still, it’s clear that with a full quarter of BlackBerry 10 sales, analysts were hoping for more from the Waterloo company.
“A full quarter of BB10 sell-in should have resulted in better results,” RBC financial analyst Mark Sue wrote to clients Friday. “BlackBerry could be discounting new and older products, which explains the decline in margins. We expect stock to head down to lower end of trading bracket of $11-$18.”
“At this point, the positive optionality on the BB10 launch has subsided,” wrote Macquarie Equities Research analyst Kevin Smithen in a note released Friday morning. “We are skeptical on BES opportunity, [and] therefore we think the likely end game for BBRY is a breakup or liquidation at a lower price.”
He downgraded his firm’s rating to underperform, and BlackBerry’s price target to $9.