What is BlackBerry management trying to hide?
Services generate the highest profit margin but the company won't give that information to investors.
I won't throw salt on the wounds of BlackBerry (BBRY) shareholders. I've been accused of doing this too much after each earnings release (TheStreet). But if you will allow me, I've got a few things I need to get off my chest after this recent disaster.
The last time I talked about BlackBerry on TheStreet, I told investors the company was sending some mixed signals. I said this despite what was (on balance) a decent quarter, upon which shareholders jumped for joy.
I said, not so fast. After having taken some time to sort through the 8-K filing, I pointed out what I thought were potential weaknesses in the company's business -- particularly in the service revenue.
BlackBerry investors insisted on dismissing my pessimism, reminding me of how long I've been "bashing" the company. But on Friday, BlackBerry's glaring service weakness that I discussed exactly three months ago came home to roost. Following BlackBerry's better-than-expected fourth-quarter earnings results in March, I wrote on TheStreet:
It's hard to see a "glass-half-full" scenario for BlackBerry. This is regardless of any small victory that the company may earn along the way. To that end, while fourth-quarter results were impressive, it's just not going to be enough. But until BlackBerry's [first-quarter] results are announced, investors won't know how the all-important U.S. market feels about the new phones.
Unfortunately, the upbeat numbers couldn't keep three million subscribers from churning out of the company's once-dominant service, which was another mixed signal. BlackBerry said it ended the quarter with 76 million subscribers, down from 79 million. This is the second consecutive quarter during which the company saw subscriber defections after peaking at 80 million last summer.
This is because service business, which had been BlackBerry's highest margin segment, has been one of the biggest differentiators of BlackBerry from rivals Apple (AAPL) and Samsung. Although service revenue was steady at 36% of sales in the fourth quarter, it also declined 12% year over year, generating revenue of only $972 million.
While this sounds like a great number, it was down from $1.1 billion in the fourth quarter of 2012. This is even though service revenue had only accounted for 27% of sales in that same quarter. What made this situation even more critical was that subscribers were canceling the service even though the prospect of BlackBerry 10 was on the tip of everyone's tongue.
My point three months ago was simple: Without a strong, high-margin, revenue-generating segment like services, the company's value was eroding. This was when the stock had already tripled in six months. I raised the argument that BlackBerry can't survive solely as a hardware vendor. It is not going to out-innovate Apple or Samsung. Investors disagreed.
On Friday shares of BlackBerry closed down 27.76% to $10.46 after having been down by as much as 29%. Much of the reason for the decline has to do with continued erosion of the company's service business. I can only speculate that more subscribers churned out of the service, because the company has decided to withhold that information. I'm not sure what purpose this serves.
So, how this company thinks it's suddenly okay to not provide investors with this information is inexcusable. I exposed the year-over-year and sequential service decline last quarter. If I'm forced to speculate on how services performed this quarter, so be it. But logic says management would not withhold that data it the company was proud of the performance.
Along similar lines, in Friday's press release the company has also decided to withhold unit shipment data for BlackBerry 10. Again, other than to anger writers and analysts such as myself, I'm puzzled as to what management hopes to accomplish by being less transparent. I'm sure BlackBerry investors will have plenty of justification. But help me understand how not knowing makes you a more intelligent investor?
As a matter of principle, I don't feel obligated to detail the hardware performance either. But I will say that even though overall revenue was up 9% year over year, the company still disappointed the Street by as much as 50%, according to some projections. Likewise, device revenue was up 31% year over year. Now, normally I would tip my cap for this. But seeing as management has taken a new stance on disclosure, I don't have sufficient data to fully and fairly appraise what's in that 31%
Interestingly, though, there was a point when I felt that management spoke too much and kept putting its foot in its mouth (TheStreet). As an analyst, I didn't realize then how good I had it. If I seem too harsh, it's because this company has an uncanny way of shooting itself in the foot.
As much as I would like to say something remotely positive, I can't.
One other thing: I'd like to hear from the analysts who were touting this company and raising its price target to $20 per share several months ago. What information were you using?
At the time of publication, the author held no position in any of the stocks mentioned.
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