Large 1 million handset order for BBRY won’t move the needle yet
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- With the ongoing launch of the company’s latest handset, Blackberry was rumored to have received a very large enterprise order of 1 million handsets this week. While a single order of this size is impressive, it has a very small earnings impact in isolation.
Blackberry (BBRY) continued its rollout of its latest handset during the week, the Blackberry Z10 (please refer to our article outlining the exact specifics of Blackberry’s product rollout schedule), with a rumored large enterprise order of 1 million handsets being received towards the end of the week. To scale investor’s expectations for the ongoing launch of BBRY’s latest handsets, First Call 1 expects 500,000 new BBRY handsets to be sold in the quarter which ended in February and 2.0 million new handsets to be sold for the quarter upcoming in May. Thus a 1 million handset order if actually booked and completed would be a substantial win for the company. However, because BBRY’s handset division is not profitable and the firm gains most of its operating profit from its Services division, it will take a bigger handset sell-through to generate earnings traction from these new handset launches.
Our research which assumes a normalized operating margin for the handset group from negative margins currently, projects that it will take 10 million new Blackberry handsets to create any earnings power. In our analysis, we assume 0.4% operating margins from the current -10.0% firm wide operating margin currently and tax rates of 30%. At 10 million handsets sold at an average selling price of $199, Blackberry would net $0.01 per share at this handset win rate. Thus while the single order of 1 million handsets is an impressive number this early in the product introduction, it will not markedly move the dial for a company that is expected to lose $1.18 per share this year or over $630 million.
According to analyst estimates, the new handset rollout from BBRY has been offered to roughly 35% of the company’s existing subscriber base of 77 million users or 27 million BBRY handset users. Thus if Wall Street estimates for the next two quarters are accurate, then the company is seeing a rough sell-through of 1 in 11 BBRY existing users buying new Blackberry Z10 handset (2.5 million handsets sold to 27 million users currently offered the product).
While Blackberry shares reacted favorably this week to the news of the single large order, what could be a bigger catalyst for shares is if the company sells the money losing handset business to another provider (rumored to be Lenovo) and then focuses solely on its services segment. In addition, we believe that the Blackberry Q10 (with the signature qwerty keyboard) launch in April could possibly generate interesting adoption numbers.
- An organization which aggregates Wall Street analyst estimates ↩