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Research In Motion Ltd (BBRY) Earnings Preview

 June 27, 2013 02:46 PM


Tomorrow morning BlackBerry reports and opinions are all over the board.

On the one side we have the incessant bears, who believe the company is on the verge of failure.  They've been sequentially wrong for the last two years; the most-notable failures in this regard have been both predictions of sold-phone numbers one third or less of actual results and worse, predictions of significant cash drain through the development and release of the BB10 devices when actual results were that of a cash build.

On the other side we have predictions of both profits and significant beats on shipments.

[Related -Why Is BlackBerry (BBRY) Soaring This Morning?]

Then there's my view, which is that this is a longer game than the next quarter, and thus the real issue is whether the devices are finding acceptance and the firm is able to execute (and is executing) on both its new hardware and service offerings.

Let's start with the devices.  The maturation process on the software for BB10 has accelerated dramatically in the last three months.  10.1 is now "in the wild" among most users, and it has brought both dramatic improvements in stability and the device's capability.  To put this in perspective the sort of "teething issues" that all new technology devices have are now essentially all resolved and what's now occurring are feature additions.  

[Related -BlackBerry (BBRY) Options Using the IB Probability Lab]

I cannot overstate the dramatic level of improvement in this regard, although there are plenty of people who will likely to discount it. As someone who has made his living for three decades writing software and building networks, however, I can tell you with certainty that this is a huge mistake.  

Rapid enhancement development while the code's stability remains or improves comes only from good initial design.  Good initial design takes time and a cohesive team effort (for larger projects) which is difficult to achieve -- but the benefits are tremendous.

This is where Android and to some extent IOS have failed to deliver; both have had relatively slow "turn times" and new releases often come with major instability problems that later have to be patched.  BB10 has demonstrated neither problem.

This speaks to the efficiency and efficacy of good design in Waterloo and is not being factored into so-called "analyst" views, mostly because the so-called "analysts" don't understand software engineering and how these factors play into the final quality of your product and its maintainability.

This is also, incidentally, a fairly-major change for BlackBerry.  Prior to BB10 the firm's devices and operating systems suffered from the same sort of turn rate and bug problems that both Android and IOS have dealt with.  The demonstrable improvement in the new devices is not incremental -- it is revolutionary.  

My expectations are for sell-in to approach but probably not reach 5 million units.  I also now expect Heins to once again surprise with a cash increase, despite marketing spend.  

Finally, the firm released yesterday a note that over 18,000 corporate copies of "BES 10", the newest revision of BlackBerry's device management platform, are installed and either operational or in testing.  BES10 is the enabling piece for large corporations along with governments to deploy the new BB10 devices widely with "Balance", the feature set that allows both personal and business use to coexist in two separate, secure containers.

Much has been made of the recent IOS and Knox (Samsung) DOD approvals.  Beware folks -- the issue is not the approvals but the supplements, and those have been far-less discussed.  Nobody I know of has them for Knox yet as it is not yet shipping, but for IOS the list of "requirements" to allow an IOS device on a DOD network is long, distinguished, and disabling for those who would want such a device in the first place.  For BB10 devices running under BES10/Balance the list of requirements on the personal use side is empty -- that is, there is not even a restriction that the user partition be encrypted! 

(It is, however, a good idea though for obvious reasons when it comes to your data!)

When the report comes keep in mind that the Q10 is basically not in those numbers at all, since it just began shipment up against the close of the quarter.  We will get a good look at the Z10's sell rates -- and essentially all of the BB10 devices will be Z10s.  Is the sell rate fading?  I don't know, but this much I do know -- you couldn't pay me to take an IOS or Android device at this point, and if anything my opinion has only hardened further over the last couple of weeks having now traveled with the Zed on a cross-country trip.  The differences in user experience for me over that trip compared against the Samsung Android device I formerly used on the same route, going to the same places, with the same carrier were profound, reaching from ease of multi-tasking and obtaining what I needed efficiently (e.g. booking a hotel room while driving) to the dramatic improvement in battery consumption while on Mackinaw Island (literally double or better that of the Samsung.)

Never mind the ridiculous ease with which the device handles running its internal WiFi hotspot while doing other things.  I noted no slowdown in the device at all while the hotspot was active, even in places where 4gLTE service was lit and I was obtaining data transfer rates well in excess of 20Mbps.  Those sorts of data rates were deliverable on a consistent basis to tethered devices as well as leaving the phone's functions fully accessible without any noticeable performance impact.  Impressive.

As for the short-term stock movement tomorrow I'm a bit cautious, and find the stock to be in a dangerous place for both shorts and longs here.  Price is up against a shelf that has proved difficult to break in the last couple of months; many are looking at the $15 level as key.  I see $15.32 as far more important, which makes for the potential of a big headfake on a spike northward just over $15 that then fails.  On the other side if you're short and get caught on a move over $15 that holds you're in trouble as there's little beyond that $15.32 level to hold price until well north of $16, and that would represent a large move in percentage terms.

Weekly option implied volatility is nearly 200%, with premiums at the money for options expiring at the close tomorrow of about a buck.  This puts a ~$2 price on a straddle, implying some 13% of expected price movement!  Yowza.  Of course if you can guess which way then you can capture half of that in buying the right direction -- and if you're wrong, you lose everything you pony up.  Spreads are unattractive with pricing on the $14.5/$14 PUT for tomorrow costing you 30 cents for a potential 50 cent move (leaving you only 20 cents) and that assumes you get the direction right. 

No thanks.

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(1)
 
6/27/2013 10:38:14 PM
Engineer by Geoffrey Bailey
As someone who writes software I understand Karl completely. What he says about BBRY's software is really big. Writing maintainable code is very important in terms of time spent and bang for the buck, and it doesn't cost much more up front to do it right. I see BBRY doing all the right things. They have learned from their mistakes and they will come back with a vengeance. I'm not sure if that will be apparent to everyone this quarter or a later quarter, but the 34% who sold short are in a dangerous position. Well done, Karl Denninger. About 80% of stock posts are from people who are stating yesterday's news, trying to manipulate the market, or don't know what they are talking about. In order to know where a company is going you have to look at something other than just yesterday's news. Karl you really stand out in the crowd by providing that other information. Great job!
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