BlackBerry swings to profit, sells 1M Z10 smartphones

BlackBerry swung to a surprising profit in the fiscal fourth quarter amid early signs of progress with its BlackBerry Z10 flagship phone.

For the three months that ended on March 2, the Canadian smartphone manufacturer reported a profit of $98 million, or 19 cents a share, compared with a year-ago loss of $125 million, or 24 cents a share. Excluding items such as its cost-savings program, the company reported an adjusted EPS of 22 cents. Sales, however, fell by 36 percent to $2.68 billion.

More importantly, BlackBerry said it sold 1 million units of the Z10 in the period. The results only include sales from a few early launch markets. Results from the U.S., which first saw the Z10 hit the market on Friday, aren't part of the fourth quarter. In total, the company sold 6 million smartphones and 370,000 PlayBook tablets, which continue to move thanks to heavy discounting.

All eyes are on how well the BlackBerry Z10 performs out of the gate. The results represent the first solid indication of how consumers are responding to the Z10, although CEO Thorsten Heins told CNET that a true gauge of its success or failure would come after two quarters.

The company has seen its stock slump recently on the perception that the U.S. launch went off more quietly than expected, but earnings more than topped expectations. Analysts, on average, projected a loss of 29 cents a share on revenue of $2.85 billion, according to Thomson Reuters.

BlackBerry's stock is up 3.8 percent to $15.12 in early trading today.

RBC Capital analyst Mark Sue attributed the dramatic disparity between BlackBerry's profits and Wall Street's forecast for a loss to surprisingly strong gross margins, as the Z10 is a more profitable device than older models. The company said that its cost-savings program kicked in a quarter early, allowing for the early return to profitability.

"To say it was a challenging environment to deliver strong results could be the understatement of the year," CEO Thorsten Heins said during a conference call today. "But getting back to a profitable quarter is just the starting line, not the finish line."

Heins shared some bright notes. He said that 55 percent of Z10 customers were coming from a rival platform, suggesting the product is attractive enough to entice users to switch.

The 1 million Z10 smartphones were sold or shipped to carriers, and isn't an indication of how many units consumers purchased. Heins said that more recently, the sellthrough rate -- or rate at which consumers buy the product from the carriers and retailers -- was about two thirds to three quarters, although the situation has been "dynamic" with some markets seeing sell-outs.

One concern for the company is its shrinking base. BlackBerry lost 3 million subscribers in the period, bringing its total base to 76 million. For a company that touts the loyalty of its customers, the decline underscores the challenges it still faces.

Heins, however, said that most of the subscriber losses were from the "prepaid" segment, and that corporate demand still appeared healthy.

BlackBerry hopes to tap into that customer base in selling the more advanced BlackBerry Z10, which runs on the company's next-generation BlackBerry 10 operating system. The OS represents a fresh start for BlackBerry, and one that the company hopes will turn its fortunes around.

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The Z10 isn't the end of the BlackBerry story. The keyboard-enabled BlackBerry Q10 is expected to launch as early as April, and is testing at 40 carriers in 20 countries. A mid-tier device is also expected to launch later this year. Heins told CNET that another higher-end device may be coming for the holidays.

While the BlackBerry 10 products offer better margins, the company is facing the loss of service revenue it was able to generate from its older BlackBerry OS products. Heins said that the company isn't giving up on the services business, and is working on rolling out new services for companies, BlackBerry Messenger, and consumers, as well as explore cross-licensing opportunities.

"We plan to stay in the services business," he said.

BlackBerry foresees breaking even in the fiscal first quarter based on an expected 50 percent sequential increase in its marketing budget, likely to be spent on its campaign in the U.S.

The company also said that Vice Chair and co-founder Mike Lazaridis would retire from the board on May 1. Last week, Lazaridis said he is starting a fund called Quantum Valley Investments.

Updated at 6:37 a.m. PT: to include additional details and executive and analyst comments.

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