Research In Motion Ltd (BBRY) Z10 Future Sales Uncertain: Berenberg

Research In Motion Ltd (BBRY) Z10 Future Sales Uncertain: Berenberg
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Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)/Blackberry’s future is a topic of discussion which is almost as heated as politics in DC. The bulls are adamant that the company is strong the BB10 is a great product and the company has a bright future. Bears think the company is in trouble and see the BB10 in a less positive light. Berenberg Bank is out with a new report which leans towards the bearish side. They believe the critical question that investors need to ask about  is where are the sustainable profits originating from Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s services business has historically been the margin and cash flow engine on which investors can place a stake in the ground and say “This is the floor valuation on the stock”. This business has lost 4m subscribers in the last two quarters and if this trend continues, which is the worry, then it is difficult to put a floor value down. Berenberg analysts think this that is the reason why the stock has not increased by much on a massive gross margin beat versus street expectations.

Research In Motion Ltd (BBRY) Z10 Future Sales Uncertain: Berenberg

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)/Blackberry’s hardware margins have definitely improved sequentially, driven by higher ASPs (fewer discounts, the launch of the Z10) and cost savings. On Berbenberg calculations, with services gross margins in the 75-80% range and software margins at 90%, hardware margins are now in the 10-15% range versus around break-even last quarter – very commendable. Peeling back the onion, assuming 500 ASP on the Z10, and non-Z10 gross margins in the 5-10% range, Z10 gross margins are around 25-30%.

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These are obviously higher than Nokia’s smart devices’ margins at 20%, HTC’s at 21%, and Sony Corporation (NYSE:SNE)’s, ZTE’s and MMI’s (all in the teens range). They are also below Apple Inc. (NASDAQ:AAPL)’s and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s margins (in the 40-50% range). The issue here is, yes, the next two quarters could see further sell-in on Z10 (forexample, a 1m unit order deal with distributor Brightstar) and the Q10, which should further benefit the gross margin mix and development, but the question remains: how sustainable is this? Can Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)/Blackberry really compete on a hardware-versus-hardware basis consistently with its very innovative and fast product cycle peers? That’s the concern and something that they have been harping on about for over three years.

In our open letter to the previous management team nearly two years ago, they stated that BBRY (RIMM back then!) should close, sell, exit the hardware business and become a services-orientated company, and try to sell its platform wares to the Apple or Android ecosystem, on which a BlackBerry icon would appear as an app and BBRY would skim off a services ARPU. Yes, Apple and/or Google/Samsung could slice 30% of this ARPU, but at least that is a more sustainable business model.

Maybe ultimately Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)/Blackberry will go down that path, but time is ticking away as mobile device management companies (such as Airwatch and Good Technology) and Samsung (via its Knox platform) and others target this market opportunity. Herein lies the problem for BBRY today: many do not believe in the sustainability of the hardware margin profile, and the profitable part of the business is shrinking (losing subs). And remember this is all before the new BB10 pricing comes into play which  could put a downward bias on ARPU.

And finally, one considers the competitive environment in smartphones today, it is much more competitive compared with this point last year. Samsung’s portfolio is much stronger, HTC’s ONE is a great product as is LG’s Optimus G, the Sony Xperia, the Z10, the Nokia 920, the ZTE Grand S and Huawei’s Ascend P/D products. One could say Apple’s products are on a par versus 12 months ago. The point is that slower growth at the higher end with increased competitive intensity tends to smell of peak margins. That is not good for any of these names structurally. That is why the analysts rate Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)/Blackberry, Samsung, HTC, ZTE and Nokia as Sells.

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