BlackBerry Bombs, and Shares Tank

On Friday morning, struggling smartphone maker BlackBerry released its much-anticipated results for the first quarter of FY14. The company reported revenue of $3.1 billion, up 15% sequentially, and a GAAP loss of $0.16 per share.

The company's EPS result was hit by a $0.03 charge for restructuring costs and a $0.10 impact because of Venezuelan foreign currency restrictions, which have prevented carriers there from paying subscriber fees owed to BlackBerry. Even excluding these negative impacts, the company would have posted a small loss, whereas analysts (on average) expected a modest profit for the quarter. Moreover, the company doesn't expect any immediate improvement, and therefore forecast an operating loss for the current quarter.

The weaker-than-expected results and the soft outlook caused BlackBerry shares to drop as much as 29% on Friday morning. Management admitted that it's difficult to predict future sales and profitability trends because of the tough competitive environment. Should BlackBerry investors throw in the towel?

BB10: Another problem child?
The main cause of BlackBerry's earnings miss was the relatively slow growth of BB10 phone shipments. The first smartphone running the new BB10 OS -- the Z10 -- was released in late January, and BlackBerry managed to ship roughly 1 million units in the first month. Last quarter, BlackBerry had a full quarter of Z10 shipments, and the company also launched Q10 in late April -- the first BB10 device with BlackBerry's traditional physical QWERTY keyboard.

The BlackBerry Q10 smartphone (courtesy of BlackBerry)

The Q10 launch seemed especially promising because most of the diehard BlackBerry fans who have stuck with the brand want a physical keyboard. However, despite having a full quarter of Z10 sales and more than a month of Q10 sales, BlackBerry still shipped just 2.7 million BB10 phones during the quarter.

The monthly shipment rate was thus slightly lower in Q1 than in the previous quarter (when the company shipped 1 million Z10 phones in one month). The BB10 sales figure missed expectations: Most analysts were expecting 3 million to 4 million BB10 shipments in the quarter.

Unfortunately, the company refused to quantify the breakdown in shipments between Z10 and Q10. There are thus two plausible scenarios that investors have to consider. First, it's possible that Z10 sales "fell off a cliff" after the initial 1 million units shipped in the prior quarter. If 50% or more of last quarter's shipments were Q10 phones, that would suggest that while Z10 demand is fading, Q10 is seeing good upgrade demand from current BlackBerry users.

Alternatively, it is possible that the slowdown in Z10 shipments was more modest and device sales missed estimates because of lower-than-expected Q10 shipments. That scenario would be more troubling, especially if it indicated weak Q10 demand rather than supply constraints. One of the biggest points in favor of a BlackBerry comeback is that the company has devoted fans, whom most analysts expect to be the initial market for BB10 devices (especially the Q10). If even those fans are hesitant to buy the new BB10 offerings, it would be devastating to the company.

Looking ahead
BlackBerry CEO Thorsten Heins said all the right things on the company's conference call on Friday morning. He talked about investing heavily this year to assure long-term success, rather than generating short-term profits at the expense of long-term growth. However, investors are understandably skeptical about the company's turnaround plans, given BlackBerry's turbulent past.

I still think the company can secure a niche for itself within the smartphone market, while also broadening its software and service offerings. The Q10 smartphone just launched this month in the U.S., one of BlackBerry's largest markets. Moreover, it could take a few months to see sales build, because -- unlike competitors -- BlackBerry relies heavily on bulk sales to government and enterprise clients. Corporate IT departments typically take several months to approve new devices, so investors should expect the fall to be make-or-break time for BB10 in the corporate and government market.

Fortunately, the company still has a very strong balance sheet, with more than $3 billion of cash and investments at the end of May. This gives BlackBerry plenty of breathing room to execute its business plan over the next several quarters and hopefully create some momentum around BB10. Investors betting on a quick turnaround were disappointed on Friday; the earnings report was definitely a setback.

Still, while BlackBerry's prospects have dimmed, the curtain has not yet fallen on this former smartphone giant. However, time is of the essence in rebuilding the BlackBerry brand to produce a return to growth.

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Fool contributor Adam Levine-Weinberg owns shares of BlackBerry and also has long January 2014 $13 calls on BlackBerry. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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