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BlackBerry posts surprise profit, but subscribers slip

A new Blackberry Z10 smartphone is displayed at a store in New York, March 22, 2013. REUTERS/Brendan McDermid
A new Blackberry Z10 smartphone is displayed at a store in New York, March 22, 2013. REUTERS/Brendan McDermid

By Euan Rocha

TORONTO (Reuters) - BlackBerry reported a surprise quarterly profit on Thursday after shipping 1 million new Z10 smartphones, but the Canadian company still fell short of convincing markets that its turnaround plan is already a runaway success.

BlackBerry shares were up 2.3 percent at midday on the Nasdaq, down from their 10 percent gain immediately after the results came out.

Expressing lingering doubts, some analysts focused on a decline in the company's subscriber base, a potential threat to its long-term growth prospects and turnaround plans. Others, however, zeroed in on strong sales of the new touchscreen Z10 device, which BlackBerry started rolling out at the end of January.

"I think the one million units is a nice start," said Morningstar analyst Brian Colello. "I think the encouraging thing is that BlackBerry was still able to sell a good portion of older models and generate solid service revenue during the transition. I think that will be important in terms of cash balance and profitability."

The well-reviewed Z10 smartphone is the first in a line of devices that will be powered by the new BlackBerry 10 operating system. It is a key plank in the company's attempt to regain relevance and win back market share in the smartphone arena it once dominated.

In a positive sign, BlackBerry said roughly 55 percent of the buyers of the Z10 were coming from other platforms - news that should allay fears that BlackBerry would be unable to attract users who have never used one of the company's devices, or who have abandoned BlackBerry in favor of Apple's iPhone and smartphones using Google's Android software, or other platforms.

The results offered solace to both bulls and bears on BlackBerry, which virtually invented on-your-hip email before ceding ground to rivals.

Some analysts noted that the company's quarterly revenue missed expectations and fretted about the decline in subscriber numbers to 76 million from 79 million during the fourth quarter.

But others focused on the unexpected profit and on the Z10 sales. The stock was up 2.3 percent at $14.89 on Nasdaq. Its Toronto-listed shares were 2 percent higher at C$15.10 at 1230 EDT (1630 GMT). The stock was the most actively traded issue on the Nasdaq on volume of more than 65 million shares.

"All in all, I'm happy because I think the majority seemed to be expecting the world to cave in on them, and that did not happen," said Eric Jackson, founder and managing partner of Ironfire Capital LLC, which owns BlackBerry shares.

BREAK-EVEN FORECAST

BlackBerry said its fiscal fourth-quarter net income was $98 million, or 19 cents a share, compared with a year-earlier loss of $125 million, or 24 cents a share. The swing to profit largely reflected a provision for income tax recoveries.

Excluding one-time items, the company reported a profit of 22 cents a share. Analysts had expected a loss.

BlackBerry surprised some investors by saying it believes it will approach break-even in its first quarter, based on a lower cost base, a more efficient supply chain and improved hardware margins.

Analysts on average had expected a loss of 10 cents a share in the first quarter, according to Thomson Reuters I/B/E/S.

The Z10 device is currently available in more than 25 countries, and the company's new Q10 device, equipped with the physical keyboard that BlackBerry aficionados love, is expected to start being rolled out in April.

BlackBerry said it will step up investment on marketing the new phones in the current quarter.

"As the business migrates to BlackBerry 10 we intend to enhance our business offering with new value-creating services to continue to generate service revenue," Chief Executive Thorsten Heins said on a conference call on Thursday.

Heins said BlackBerry plans to generate service revenue through licensing deals for BlackBerry 10, advanced security tools and additional enterprise services.

BlackBerry's strong focus on security was long a draw for corporate and government users, and the company boasts of a new "Balance" feature that allows BlackBerry 10 users to isolate and secure corporate and private activities.

Analysts have been concerned that revenues from BlackBerry's very profitable services business would drop as it alters its fee structure for those users moving across to the BlackBerry 10 devices.

QUARTERLY RESULTS

Gross margins in the quarter were 40.1 percent, up from 33.5 percent, a year earlier, driven by higher average selling prices.

"Those were really solid results," said Jefferies & Co analyst Peter Misek. "The gross margin blew everybody out of the water, that was fantastic."

"Overall, this is step one on the recovery ladder and a very, very, very good result," Misek said.

Still, BlackBerry is not out of the woods. Quarterly revenue fell to $2.68 billion from $4.2 billion a year earlier, and was below analysts' estimates of $2.84 billion.

BlackBerry said Mike Lazaridis, who co-founded the company nearly 30 years ago, would step down as vice chairman and director.

Lazaridis, co-chief executive until last year, told Reuters he has no plans to sell his stake in the smartphone maker even as he steps down from the board to focus on a new quantum computing investment fund.

(Additional reporting by Allison Martell, Alastair Sharp, Sinead Carew and Julie Gordon; Editing by Janet Guttsman, Lisa Von Ahn and Peter Galloway)

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