Research In Motion Ltd (BBRY) Q4 Preview Not All About Z10: BGC

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Research In Motion Ltd (BBRY) Q4 Preview Not All About Z10: BGC

BBRY reports results on Thursday pre-market. There is a wide divergence of opinion on the company, but nearly all agree that this quarter is crucial. Most analysts are still bearish on Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB). One of the bears, BGC Partners has a good analysis of the report (see note at the end of this post why we picked BGC).  The company has historically reported its results after the market close. The earnings call is at 8 am. BGC believes Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) change is likely driven by the fact that Friday is a U.S. holiday for equity markets.

Their estimate of $2.89B in revenue is a decline of 31% YoY and a growth of 6% sequentially and compares to consensus estimates of $2.83B. The EPS estimate of -$0.35 compares to $0.80 in the prior year and -$0.22 in the prior quarter. Consensus estimates are -$0.29.

BGC is above consensus on revenue driven by their above consensus estimate of 1.3 million units shipped of the Z10. They see the Z10 as having an initial degree of success from loyal blackberry users and channel inventory build. It is also possible that this initial degree of success propels the stock higher in the near-term.

BGC’s concern on Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) centers not on the launch quarters, but on the longer term demand profile for the 10 platform this summer and into next year. They expect that unit sales of the 7 platform continue to decline, and look to see if the rate of decline is accelerating above expectations. They also look to see if subscribers continue to decline. BGC estimates subscribers could drop by 1 to 2 million to 77-78 million.

Finally they look to see the degree of channel inventory build for the Z10, and any increases in account receivables or poor operating cash flow as a signal that units are marked as sold but cash is not collected.

Key Metrics Estimates from BGC

1) Estimate 6.5M phones (1.3M BBRY 10 at an ASP of $550 and 5.2M BBRY 7 at an ASP of $215) for a blended ASP of $257 and 225,000 playbook units at an ASP of $250 in the fourth quarter of Fiscal 2013.

2) Revenue from Handheld devices is estimated at $1.879B (-34.4% YoY, +17.5% QoQ) while revenue from Services division is estimated at $934M (-18.2% YoY, -4.1% QoQ).

3) Revenue breakdown for Handheld Devices estimated at: $715M from BBRY 10, $1,108M from BBRY 7 and $56M from Playbook.

4) Subscribers to decline by 1 to 2 million to 77/78 million.

BGC believes that there are flaws in how the company is positioning itself in the smart phone market. At a time when the high end of the market is showing signs of saturation and slowing growth, the company is investing the majority of its resources pursuing that segment.

They also see the company potentially losing its recent success in the mid-range segment of the market. The other major market participants are actively positioning for growth to shift to the mid and entry level segments of the market just as Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) is renewing its pursuit of the high end.

The pricing for the Z10 in the U.S. at $199 with a two year contract – parity pricing with the top brand name models –
seems a poor value proposition to a user who is being asked to take a risk with a new operating system. A $100 or even a $50 price point may have driven more sales albeit at a lower gross margin, but expect that the phone may reach those prices later this year. Finally, BGC questions the delay of the Q10 phone which may take another two months to reach U.S. market.

BGC views the physical keyboard is the defining feature for many Blackberry users, it is a lapse to let the Q10 trail the Z10 by such a meaningful amount of time. At best Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) becomes a niche player, and at worst its current focus on the higher end market causes it to lose traction in emerging markets. The question is, can the company structure itself to be a profitable entity selling 20 million units per year with a declining subscription revenue base? Balance Sheet, Stock and Rating.

BBRY has $2.9B in cash ($5.61 / share) and no long term debt as of December 1, 2012. The company had $958M cash from operations in Q313.  BGC maintains a SELL rating and price target of $7 on shares of BBRY.

We report the news, most of the analyst forecasts are awful (for many reasons) we are not here to editorialize  We present both sides, but since most analysts are bearish on BBRY we have more news from the bears. However, on occasion where we feel it is necessary we call out both bears and bulls for inconsistencies, conflicts of interest, hoard mentality etc. Don’t shoot the messenger.

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