Societe Generale Report on BlackBerry Makes No Sense

NEW YORK ( TheStreet) -- I'm long BlackBerry ( BBRY). Therefore, you can imagine I was thrilled to see Societe Generale upgrade the company to buy from sell yesterday.

The stock jumped 6%, and it's up another 2% today.

Given that I'm long the stock, I'm biased to think it is "cheap" and deserves all the upgrades it can get.

However, I've got to be straight with you: the Societe Generale report simply makes no sense.

Let me summarize.

BlackBerry will next report earnings on June 28 for the May quarter. This is a battleground stock to say the least. Short interest on the float is in the mid-to-high 30% range. The revenue and earnings estimates for the May quarter are all over the map on Wall Street.

Bears believe the June 28 report will be the beginning of the end for the company. Bulls think it will be the start of an amazing comeback.

SocGen took its revenue estimates up from $2.7 billion for the quarter to $3.7 billion -- a huge upward revision.

The analysts based this change on some "channel checks" they did. The channel checks seemed to be done mostly in the U.K. However, they defended this approach by saying that the U.K. would be representative of other markets.

The U.K. got copies of the Z10 and Q10 earlier than other countries. Therefore, SocGen says how consumers react in the U.K. will provide a preview of how the devices will be received in other countries. That's perhaps defensible, but it is important to understand where they're coming from.

They say things are going well in the U.K. for BlackBerry -- especially for the Z10. They also point to some StatCounter data that show total Internet traffic on wireless devices in the U.K. has actually bottomed for BlackBerry in recent months and is at last starting to creep up.

So, here's why they lose me. They believe that BB7 devices are plummeting in popularity now that the BB10 devices are available. SocGen thinks that BB7s will drop from 5 million devices shipped last quarter to 1 million this quarter.

Then, they think that Z10s will go from 1 million devices last quarter to 4 million devices shipped this quarter. They also think that 1 million Q10s will get shipped this quarter, even though they were only available for a few days at the end of the quarter in the U.K. and Canada.

In some ways, I would love this if it were true. According to estimates I've done, it's likely BlackBerry's losing money every time it sells a BB7 or PlayBook tablet device. The sooner the company can exhaust its inventory and shift the world to BB10s, the better.

However, it's hard for even a BlackBerry bull like me to see the Z10s going from 1 million to 4 million units in the quarter. I think the number will surprise the BlackBerry bears, but I think it's more likely to expect something in the range of 2.5 to 3 million Z10s.

But let's assume that SocGen is right. The analysts say the Z10 Average Selling Price (ASP) is $500 (which is probably right), and the Q10 goes for an ASP of $550 (also believable). They think the BB7s go for an ASP of $200. Put it all together with their numbers and you get to device revenues of $2.7 billion. Figure then that BlackBerry service revenue slightly declines (in the single digits) and you have to add another $900 million of revenue. You're now at $3.6 billion. Add in some software sales, and you get to their $3.7 billion revenue numbers.

However, what's most puzzling to me is that, if SocGen is correct, BlackBerry will suddenly shift from selling a bunch of low-margin phones where it loses money, to highly profitable phones in addition to service revenues with close to 90% gross margins.

Yet, with the extra billion dollars of revenue from the Z10s, SocGen thinks EPS from BlackBerry will only move from SocGen's old target of $0.00 to 6 cents a share. I just don't understand that -- unless the analysts think there's going to be much more exorbitant marketing costs than they previously expected.

The good news here in this report for BlackBerry bulls is that SocGen is probably right that the U.K. is a good test for the company's results elsewhere. And it does appear that there is stabilization there for BlackBerry. Now, the company just needs to see some actual growth.

If SocGen is right and the company surprises with its Z10 sales in the quarter, the stock will unquestionably fly on the earnings, and the many shorts will be forced to quickly cover, adding some accelerant to the fire.

I think the Z10 numbers will surprise (along with early Q10 shipments). BlackBerry has been adept at figuring out ways to make its numbers look great in the last few earnings calls, and I would expect them to stuff as many new devices into the channel as they can -- figuring they're eventually going to sell them anyways.

Unlike SocGen, I don't think the BB7s will fall off a cliff -- although the sooner they go, the better.

To me, it looks like a really safe bet that BlackBerry will beat on the bottom line. I'm less sure on the top line.

We will see.

At the time of publication, Jackson was long BlackBerry.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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