BBRY: Services at Risk, Says National Bank; Carriers Unenthused, Says Wedge

Shares of BlackBerry (BBRY) are down 34 cents, or 2%, at $14.85 amidst a couple of negative notes from the Street today.

National Bank Financial’s Kris Thompson this morning reiterated an Underperform rating on the stock, and a $10 price target, writing that the recently introduced Z10 and Q10 BlackBerry smartphones, running the company’s new BB10 operating system, won’t be enough to revive the fortunes of the company’s hardware business.

Thompson cut his estimates for revenue and profit in the fiscal year starting next month to $13.75 billion and a loss of 63 cents from a prior $14.36 billion and a 1-cent profit, on sales of 35.5 million handsets, up from what he projects as 28 million for this past year.

He expects the company to have $3.81 per share in cash by the end of fiscal ’14, down from perhaps $4.87 this year and below his prior estimate for a rise to $5.07 per share.

Thompson is critical of what he calls the “delay” in the roll-out of the Z10 and Q10. The Z10 went on sale in the last couple of weeks in the U.K. and Canada and is expected to come to the U.S. in March:

For the record, we like the Z10. It�s a great upgrade for BlackBerry subscribers. But we don�t see the product reversing BlackBerry�s market share decline; only providing a short-term stabilization from BB6/7 upgrades. We do not expect the platform to win over many iOS or Android users. The apps just aren�t there; and apps are not moving to the web browser soon enough to fill this void. Z10 product launch delay an ominous sign. The bulls will say that the Z10 launched in Canada and the UK first because those are very loyal bases, production runs couldn�t support the U.S. launch, or kinks can be worked out ahead of the U.S. launch. We�d say the U.S. carriers have enough smartphones that they test new ones to their own drum beat and aren�t too interested in paying the monthly BlackBerry subscriber fee.

However, Thompson’s main complaint is less the hardware than what he sees as the breakdown of RIM’s services business. Thompson is critical of the company’s discussion of the services business, arguing it has left investors without a clear picture as to the direction of those revenues:

The product delays do not have a major impact on our estimates (although sell-through may be worse than expected given the multitude of competing devices that will now launch at the same time). Our prelim F2015 estimates suggest earnings will worsen as the high-margin service revenue is subject to a significant decline as the install base dumps BB7 (and predecessor) handsets and adopt BB10 handsets. Management has not provided any pricing info on BB10 service fees, or legacy fee concessions, so we have made some assumptions [�] many BB10 users will not pay a monthly fee � we have assumed consumer BB10 subs pay nothing and enterprise (BES10) subs pay $3/month (less than half of historical, which is a guess�.data plans need to be re-negotiated because the BB10 devices require more data since, for instance, the browser no longer compresses data, which was a major drag on browser performance).

And Brian Blair with Wedge Partners this morning opines that carriers expect consumers won’t leave their Apple (AAPL) iPhones or their Google (GOOG) Android-based handsets for the Z10, but the Q10, with its full QWERTY keyboard, might stand a better chance:

We are getting indications that U.S. carriers are not optimistic about Z10 (full touch screen) sell-through, but are instead more hopeful about the keyboard-based Q10 due out in the May � June timeframe. We agree, and believe that Android and iOS are simply too entrenched in the U.S. market for the Z10 to make much of a dent in the U.S. beyond an initial run of Blackberry brand loyalists picking up units in the May quarter. We also continue to see evidence of growing enterprise support of iOS and Android. Carriers, we believe, don’t expect consumers to leave the Android or iOS ecosystem for what is ultimately a touchscreen also-ran that is short on apps, with no related product or content ecosystem. We believe that any indications of weak sell-through of the Z10 in the next month will be met with strong selling of Blackberry’s stock, as we believe that the $16 – $18 range prices in a favorable reception of the product, which we feel is shortsighted (initial stock-outs in the UK are clearly on small volumes). However, we understand the keyboard-based Q10 offers more hope for carriers as there is some expectation that keyboard-addicted users are more likely to buy a product that is largely familiar to them. Again, we concur, but a launch is still probably 4 months away.