The Research In Motion Ltd (NASDAQ:BBRY) Z10 had barely hit store shelves in the U.S. when the launch was decried by analysts as “disappointing” and “lackluster,” apparently due to the lack of a glossy advertising campaign such as Microsoft Corporation (NASDAQ:MSFT) put on for Windows Phone 8. Then Research In Motion Ltd (BBRY) released its earnings report for its fiscal year, and, surprise! The obituaries for BlackBerry had been premature.
Surprising resilience
I’ll admit that I’ve long discounted BlackBerry as an early casualty of the smartphone wars. When BlackBerry 10 was unveiled last year, I didn’t buy into the hype of glowing previews and investor expectations of a turnaround. It all seemed too little, too late, especially compared to Windows Phone 8. Microsoft had publicly set its sights on being the “third mobile ecosystem” and that meant rolling over poor little Research In Motion Ltd (BBRY), the Poland of World War Mobile.
My attitude started to change when Gartner published its smartphone OS market share results in February for Q4 2012. Microsoft had actually not managed to overtake (then) Research In Motion Ltd (BBRY). Given that everyone in the universe knew that BlackBerry 10 OS devices were coming in early 2013, I expected RIM sales to utterly collapse. RIM edged out Microsoft by 7.3 million devices to 6.2 million. Not bad for a dead mobile OS.
BlackBerry’s fiscal year results continue to be encouraging. BlackBerry sold about 6 million smartphones, including 1 million BlackBerry Z10s, and I expect this to be better than total sales of Windows Phone 8 devices, which I expect to drop from the holiday season. Given that the Z10 had launched in February in only a few markets (Canada, U.K., U.A.E), a million units was a respectable showing.
Ecosystem strengths
I also continue to be encouraged by the strength of the Research In Motion Ltd (BBRY) ecosystem and the loyalty of BlackBerry subscribers. Despite shedding users, BlackBerry still has 76 million subscribers, a user base that Microsoft can only dream about. True, most of them aren’t BB10 users, but that will probably evolve rapidly now that BB10 devices are available.
If most of the existing subscribers can be transitioned to BB10, this solves a chicken/egg dilemma that Microsoft is currently struggling with: MS can’t attract users without a better WP8 app selection, and can’t attract app developers without a larger user base. Alexandra Chang belabored this in her recent Wired piece, which although a little over-the-top, made a valid point.
Device strength
Despite Adrian Covert calling the Z10 a noble failure, I regard the phone as being perfectly competitive with the current WP8 flagship, the Nokia Corporation (ADR) (NYSE:NOK) Lumia 920. Covert seems to be a little confused about the Z10 hardware, claiming that “its brains—a 1.5 GHz dual-core processor coupled with 2 GB RAM—is already a generation behind what’s been announced by rivals so far this year.” In fact both the Z10 and Lumia 920 use nearly identical QUALCOMM, Inc. (NASDAQ:QCOM) MSM8960 1.5 GHz Snapdragon S4Plus processors. There’s some tailoring that Qualcomm can do by way of graphics processing within the 8960 line, so I can’t tell if they’re exactly identical, but the Z10 offers 2 GB of RAM vs. the 1 GB of the Lumia 920. Clearly, the Z10 qualifies as a flagship smartphone.
On the OS side, BB10 is clearly competitive with WP8 and Android 4.2, and all three operating systems are starting to make iOS seem very dowdy. Like iOS and WP8, BB10 offers quick one gesture switching between apps, but the important OS advantage for BB10 is in BlackBerry Balance, a system that segregates work and personal apps and data. No other mobile OS offers this, and it should appeal to IT departments contemplating upgrading Research In Motion Ltd (BBRY) users to the Z10.
Cautionary notes
BlackBerry’s earnings report was a little deceptive in claiming GAAP income from continuing operations of $94 million for the final fiscal quarter (ending March 2). In fact, the company posted a GAAP operating loss for the quarter of -$12 million, and made up the difference in a tax refund of $112 million plus some other minor gains and losses.
For the full fiscal year, Research In Motion Ltd (BBRY) posted an operating loss of -$1.235 billion compared to an operating profit for the previous year of $1.497 billion. Revenue is also down by a whopping 40% to $11.07 billion for the year. Gross margin was also down for the year to 31% from 35.7%. However, gross margin turned up in the final quarter to 40.1%.
Clearly BlackBerry has an uphill struggle ahead of it and is the underdog in its battle with Microsoft for third place in worldwide mobile OS market share. Neither side is assured of victory.
Investors should keep an eye on reports from IDC and Gartner on smartphone market share for signs of which way the battle is going. Also watch for Nokia’s earnings report, since they report actual shipments of WP8 phones, unlike HTC. Since the IDC and Gartner reports typically come out after earnings season, Nokia’s earnings report will be the first data on the relative strength of Windows phone sales.
If WP8 sales come in at about 5 million, as I currently expect, (about 3 for Nokia, 2 for HTC), then I would say that Research In Motion Ltd (BBRY) has a fighting chance.
