This Company Needs More Time to Bounce Back!

Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The launch of new handsets like Z10 and Q10 based on the new Blackberry 10 operating system led most of us to believe in the turnaround story of the Smartphone giant Blackberry (NASDAQ: BBRY). Company patrons marketed its revival across the globe on the basis of these new revolutionary products that would compete directly with giants like Apple (NASDAQ: AAPL), Google, Samsung and Microsoft. However, the company's latest quarterly results indicate that they might have jumped the gun in declaring a solid turnaround for the company.

Results do not indicate a turnaround

Blackberry's revenue was $3.1 billion for the first quarter of the 2014 fiscal year, approximately 9% more than same quarter last year. Service revenue declined 9% on a year-over-year basis and GAAP net loss was reported at $67 million after excluding one-time costs, as compared to earnings of $94 million in the fourth quarter of fiscal 2013. Blackberry’s share price slumped around 28% after the earnings call, as investors did not find any sign of it beginning a turnaround and were instead greeted with poor performance of its flagship products.

Stop the decline in subscriber number!

The major cause of worry is a decline of 4 million subscribers in the quarter as compared to the previous quarter. The company has failed to attract subscribers with its Z10 and Q10 devices, of which the Z10 handset was in the market for the entire quarter. A decline in subscriber base endangers service revenue as the subscriber embodies an asset that generates constant revenue during its lifetime. As mentioned above, service revenue had already taken a big hit in the quarter, and this was a segment that has been the company's savior during tough times. This loss is a big concern because fundamentally, service revenue almost wholly contributes to gross margins as the subscriber cost is incurred a single time.

Hardware revenue good but not great

While services revenue was a big miss this quarter, hardware displayed a relatively better performance. Revenue for this segment was up by 33% when compared to the fourth quarter of fiscal 2013. Blackberry’s market share has been constantly eroded by Apple’s iPhones, Samsung’s Galaxy phones and Nokia’s (NYSE: NOK) Lumia smartphones over a last few years. The company has failed miserably to revive the sale numbers for most of its famous widely-selling handsets because of a lack of apps, relatively higher prices and lower diversity in devices.

A few months back, Blackberry entered the smartphone market with its proprietary mobile OS Blackberry 10 on its new handsets, Z10 and Q10. However, the shipment number for the first quarter confirmed what investors feared the most: a dismal performance. The company shipped 6.8 million smartphones in the quarter, of which 2.7 million were BB10 devices, falling short of the market’s expectation of more than 3 million devices. While Apple shipped around 37 million iPhones in the quarter, it is not a data point that really bothers me because it is not a fair comparison as you must keep in mind that BB10 devices have only been around for five months.

Versus Nokia

Both Nokia and Blackberry are new entrants into the smartphone market and their overall shipments are neck-to-neck at this point in time. The cause to worry, however, is that Nokia has released more than 20 handsets in the market under its Lumia and Asha brands whereas Blackberry is still floating in the market with a couple of products.

Nokia is transitioning faster from Symbian to Windows Phone 8 as compared to Blackberry. Unless the company decides to act quickly, it will only be a matter of time before Nokia overtakes Blackberry in this race. Nokia’s Asha phones have been a hit in the emerging markets like Pakistan, Thailand and India because of their low price and the availability of all of the necessary features. In order to establish a foothold in the emerging markets, Blackberry has launched Q5, a less expensive keyboard device.

Other rivals

Apple has been keeping busy with its newest and most sophisticated OS till date, iOS 7, fixing the loopholes that are constantly being spotted by developers worldwide. According to a WSJ report, Apple might be manufacturing a video game console that would be powered by the iOS platform and will allow users to play iStore games on the big screen (though nothing is confirmed yet.) As for the smartphone market, I believe that Blackberry should not be focusing on Apple’s iOS 7 and rather formulate strategies for boosting sales of its BB10 devices which will be sharply hit after the launch of iOS7.

As this fool article shows, Android-based devices command a major share of the U.S. subscriber market and hold much more than Blackberry’s share. Google’s Android OS is free for hardware manufacturers and has become the most popular OS across the globe, mainly because of Samsung’s hi-tech smartphones. In Europe, Android-based devices expanded their market share to 70%, up from 61%, in the three months that ended in May, 2013. The success of Android has been riding on its intuitive and innovative design, stellar collection of killer apps and a significant range of prices because of various hardware manufacturers.

Why a negative outlook on Blackberry?

Blackberry has witnessed a steep downfall in the past decade because of the fierce competition in the mobile devices industry. BB10 was its big attempt to regain lost market share and initiate a robust turnaround. Though I have not yet given up on the company's OS or its devices, it is quite evident that Blackberry is trailing well behind the industry giants. The closest competitor that Blackberry needs to worry about as of now is Nokia, as both companies are undergoing big transitions. Once known as a phone maker for executives, Blackberry is now trying to rework its image to win over a younger and a diverse crowd.

The company has taken a big gamble by entering the smartphone market, which allows me to spare it for a poor performance in the first quarter. However, the constant decline in subscriber base and service revenue is an alarming sign. Blackberry is the only manufacturer that provides data service and this ensures a constant stream of revenue from subscribers. The fall in number of subscribers is unhealthy for the company’s financials in the future.

Blackberry is going through a tough transition that is also battering its lone savior during hard times. It’s not really a good time to make a position in the stock that has a bumpy road ahead.

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Mihir Mehta has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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