- BlackBerry's CEO John Chen has reiterated his earlier predictions that the company will be able to turn a profit in 2016.
- The company is counting on its new Android smartphone, BlackBerry Priv, to do the trick for it.
- How achievable is BlackBerry's goal?
BlackBerry (NASDAQ:BBRY) CEO John Chen has reiterated his earlier predictions that the Canadian smartphone maker would be able to turn a profit in 2016, partly aided by its handset division and its new Android smartphone, BlackBerry Priv. Chen told CNBC in Manila that even though the company’s fixed costs remain very high, he was optimistic that profitability in 2016 was achievable.
Chen’s latest piece of commentary on BlackBerry seems to resonate with the mostly positive reviews that BlackBerry Priv, which several analysts have dubbed the best-looking BlackBerry yet, has been receiving. But how realistic is Chen’s target for BlackBerry?
BlackBerry ended the last quarter with a non-GAAP operating loss of ($84) million and a GAAP operating income of ($33) million. BlackBerry’s gross margin fell a jaw-dropping 660-basis points to 40.9%. The company pinned the large loss and shrinking margins on low hardware volumes and diminishing Service Access Fees (SAF). BB 10 is basically free to use, and as users of older BlackBerry operating systems continue to shift to BB10, BlackBerry’s SAF revenue has been on a decline.
Our primary focus is on BlackBerry’s hardware segment. BlackBerry said that it sold 800,000 smartphone units during the last quarter at an ASP of $240. Despite the rapid ascent of BlackBerry’s software segment, the hardware segment remains one of its most important accounting for 41% of revenue, with SAF accounting for 43% and software & services bringing in 15% of BlackBerry’s revenue.
For the hardware segment to break even or become profitable, the company will either have to sell a lot more smartphone units or sell high margin products. And, BlackBerry Priv might be able to do just that. An unlocked BlackBerry Priv sells for a hefty $699.
Apple (NASDAQ:AAPL) reported that its iPhone’s ASP clocked in at $670 during the third quarter, while its gross margin came in at 39.90%, a 22% sequential increase. Apple usually uses high-end components in its iPhones, while BlackBerry mostly uses mid-range components. In fact this seems to be the case with BlackBerry Priv. ArsTechnica has already dissected BlackBerry Priv. The smartphone innards are pretty average with its 1.8GHz Snapdragon 808 processor having a performance comparable to Alphabet Inc-C (NASDAQ:GOOG) Nexus 6P and other mid-to-high range Android smartphones in the $380-$500 price point range. BlackBerry Priv, however, sports a considerably inferior performance compared to iPhone 6S.
This seems to suggest that BlackBerry Priv has lower costs and hence better margins than iPhone 6S, and much higher margins than BlackBerry’s older smartphones. BlackBerry Priv may carry a gross margin of as much as $300 per unit.
The high price point for BlackBerry Priv essentially makes it a niche product. Unlike iPhone 6S which has been depressing sales of older iPhone models, BlackBerry Priv is unlikely to affect sales of older BlackBerry models due to the price disparity. Assuming all other factors hold constant, BlackBerry Priv would have to sell ~250,000 to 300,000 units a quarter just for BlackBerry Priv to break even.
It’s rather doubtful if BlackBerry can sell that many BlackBerry Priv’s in a quarter, considering sales of all the other models are averaging less than a million per quarter. But with the kind of reviews the new smartphone has been receiving, maybe what BlackBerry needs is a lot of advertising. Many consumers regard BlackBerry as an also-ran, and the company will have to work hard to change that perception.
BlackBerry has reaffirmed its earlier predictions that it would turn a profit in 2016. Although BlackBerry Priv’s fat margins are likely to give it a nice boost to help it move closer to its goal, the hardware segment alone might not be enough to do the trick for BlackBerry. There is a strong likelihood that BlackBerry is counting on its recovering software business to provide the extra push required for profitability. A profit, however thin, in 2016 is a solid possibility for BlackBerry.