BlackBerry Shares Plunge After Touch-Screen Model Flops
Even die-hard BlackBerry (BBRY) fans are beginning to waver after the Canadian smartphone maker disclosed disappointing demand for a touch-screen device viewed as critical to attracting younger users.
BlackBerry shares plunged 28 percent on June 28, the biggest decline since 2000, after the company reported profit and phone shipments that missed analysts’ estimates and revenue hurt in part by Venezuela’s currency controls. The culprit: a shortfall in sales of the flagship Z10 handset, a new model designed to go head-to-head against Apple Inc. (AAPL)’s iPhone and devices using Google Inc. (GOOG)’s Android.
The stumble risks undermining BlackBerry’s credibility with remaining supporters among consumers, analysts and corporate customers. Maynard Um of Wells Fargo Securities LLC, one of nine analysts left who had considered BlackBerry a buy, cut his rating to hold. The slump also raises the possibility more developers may avoid the platform, following the path of app-maker Ideomed Inc., whose marketing chief describes BlackBerry as sliding toward MySpace-style irrelevance.
“This is about as bad as it gets,” Brian Blair, an analyst at Wedge Partners LLC in New York, said in an interview with Emily Chang on “Bloomberg West.” “We got a really good look at the Z10 demand and it’s a dud by any metric.”
BlackBerry is faltering in its bid to expand beyond phones that feature a physical keyboard, still popular among business customers -- though not as sought-after as the iPhone or devices running Android.
BlackBerry’s worldwide subscriber base slipped to 72 million last quarter, from 76 million and 79 million in the preceding quarters, and the company last week said it will no longer even disclose a user tally.
“Turnarounds in technology are tough,” said Kevin Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 45,000 BlackBerry shares, down from 80,000 earlier this year. “The Z10 has not caught fire.”
The Z10 is central to BlackBerry’s attempt to branch out beyond phones boasting a physical qwerty keyboard. The Waterloo, Ontario-based company last quarter shipped 2.7 million BlackBerry 10 devices, primarily its flagship Z10, about 25 percent fewer than analysts were expecting.
“The question is can they stay relevant and remain one of the choices that is on the table,” said Charles Golvin, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. “So far the answer is unclear.”
While the new Q10 is expected to sell well with the BlackBerry faithful who crave its physical keyboard, it may be too little too late to appease impatient investors, said Blair, the Wedge Partners analyst, who doesn’t rate BlackBerry shares.
“I actually think they’re likely to sell a decent amount in this current quarter and then fade away,” Blair said. “But it’s hard to say investors will care at that point, because these first indicators of demand are so negative.”
BlackBerry’s loss last quarter was 13 cents a share, excluding some items. Even taking into account revenue losses in Latin America that the company blamed on Venezuela’s currency controls, it still missed analysts’ average estimate. Sales of $3.07 billion also fell short of the $3.37 billion predicted by analysts.
The sluggish sales growth heightens the risk of a spiral for BlackBerry in which software developers are more reluctant to build games and other apps for BlackBerry 10, which in turn turns off consumers, said Forrester’s Golvin.
“As sales look less promising, it’s more difficult for BlackBerry to convince developers to create unique and customized apps for the BlackBerry platform,” he said. “That is definitely a big risk for the company.”
“We specifically chose not to develop for BlackBerry because of the challenges that they were having,” said Brian Mack, Ideomed’s director of marketing. He compared BlackBerry to MySpace, the one-time high-flying social network that was relegated to irrelevance by Facebook Inc. (FB)
Instead, what BlackBerry may do is focus on its core base of business-app developers, who will stick to the platform because it’s more lucrative per app than Android or Apple’s iOS, said Morgan Reed, executive director of the Washington-based Association for Competitive Technology.
BlackBerry’s Z10 was introduced in the U.K. in late January before being rolled out in the following weeks in Europe and the U.S. The Q10, which has a physical keyboard, was introduced in April in some markets, though not in the U.S. until June.
BlackBerry Chief Executive Officer Thorsten Heins, speaking on a June 28 conference call, asked for patience.
“BlackBerry 10 is still in the early stages of its transition,” he said. “In fact, we are only five months in to what is the launch of an entirely new mobile computing platform.”
Last year, Heins began a review of BlackBerry’s strategic options. In the past, he hasn’t ruled out an acquisition of BlackBerry, while stressing that he’s more focused on striking a licensing deal or forging some other partnership. On the June 28 call, he did not give an update on the review in his prepared remarks.
Asked by an analyst about the review, Heins said he wouldn’t publicly discuss any board-level conversations the company may or may not be having.
Speculation about a possible takeover continues. The stock jumped in January after Lenovo Group Ltd. (992) Chief Financial Officer Wong Wai Ming told Bloomberg that the Chinese company was “looking at all opportunities,” including BlackBerry.
Anil Doradla, an analyst at William Blair & Co in Chicago., sees a bid for BlackBerry as unlikely given the questions surrounding BlackBerry 10 and the fact the company could have been bought more cheaply last year.
“Remember this was an $8 stock not too long ago, and no one bought it then.” he said. “If it was going to be bought off, it would’ve been bought off a year ago.”
BlackBerry closed at $10.46 on June 28, more than erasing this year’s gain of 22 percent through the prior day. Macquarie Securities USA Inc. lowered its rating on the stock from hold after the earnings report, pushing the number of sell recommendations to 23 out of 43 total.
Even Microsoft Corp., which has made little headway gaining share against Apple in smartphones, is outpacing BlackBerry. In the global smartphone market, BlackBerry’s share shrank to 2.9 percent last quarter from 6.4 percent a year earlier, according to research firm IDC. Apple and Android together held 92 percent of the market. Microsoft’s Windows Phone bumped BlackBerry into fourth place.
BlackBerry still has legions of fans, including executives who prefer its corporate security over smartphone systems geared for consumers.
John Sculley, who was the CEO at Apple from 1983 to 1993, has been a BlackBerry addict for years because he types “pages and pages” of messages and prefers the physical keyboard. He has a Q10 and considers its new operating system well-designed, even though he often prefers to take comfort in using his old BlackBerry.
While he’s optimistic about BlackBerry’s prospects, Sculley said the company needs to make a dramatic change in strategy. BlackBerry could position itself as a premium brand like BMW, he said.
“The clock is running on them,” said Sculley, who now invests in health-care technology and other startups. “They can come back if they drop hardware and focus on secure messaging.”
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