The largest change in our thought process on BBRY now versus 6 months ago is that we now believe the device business should be able to battle its way back to a cash flow breakeven over the next 4 quarters, therefore no longer being a perpetual drag on cash the way we had formerly modeled it. This change is based on a better understanding of the reason for the 11.8-point sequential drop in total company gross margin 3 quarters ago when we calculate device gross margin fell from +22% to -10%. We believe device gross margins have been negative for the last 3 quarters as Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) sold BB6 devices below cost to artificially maintain the company’s subscriber count.
For those who are bearish or just want to hedge BGC has a new report looking at an options strategy.
BGC notes that shares of Blackberry (formerly called Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB)) are up over 35% year-to-date on enthusiasm for its new operating system and Z10 phones. While the products appear encouraging, there is limited hard data on the sales performance of the new platform. The stock may be poised to retreat if demand for the new phones slackens and falls short of expectations. Given the sizeable Blackberry base of users that was last reported at 79 million, there is likely a degree of initial demand for the phones. However the initial demand may wane as competition in the high end smartphone space is fierce, and the major smartphone platforms are supported by companies much larger than Blackberry.
Finally, there is a concern that the value proposition of the new Blackberry smartphone may be misdirected as the phone is priced in the U.S. at the same level as the iPhone5 and the latest Android phones. The options structure is appealing as a substitute for a short BBRY equity position because it delivers outperformance to the downside, peaking at 10, with
breakeven to 27 on the upside.