BlackBerry says report of high Z10 returns is 'false'

Latest crisis underscores tentative time in phone maker's recovery

BlackBerry's recent launch of the Z10 smartphone and the upcoming Q10 qwerty device were intended to put the company back on solid ground, but BlackBerry seems to be defending itself from a new crisis every week.

The BlackBerry Z10 smartphone. (Photo: BlackBerry)

In the latest mini-calamity, BlackBerry on Friday said it will seek a review by U.S. and Canadian securities officials of what it called a "false and misleading report" by investment analysts at Detwiler Fenton that said Z10 smartphones are being returned by customers in unusually high numbers.

Reaction to the Detwiler report, and others citing weak Z10 sales, apparently caused a 7.8% drop in BlackBerry stock on Thursday, down to $13.55 a share.

"Sales of the BlackBerry Z10 are meeting expectations and the data we have collected from our retail and carrier partners demonstrates that customers are satisfied with their devices," said BlackBerry CEO Thorsten Heins in a statement Friday.

"Return rate statistics show that we are at or below our forecasts and right in line with the industry. To suggest otherwise is either a gross misreading of the data or a willful manipulation. Such a conclusion is absolutely without basis and BlackBerry will not leave it unchallenged," Heins said.

The Detwiler report was shared with the investment firm's clients but not directly with BlackBerry or the public. Detwiler could not be reached to comment.

BlackBerry called Detwiler's finding that Z10s were being being returned in unusually high numbers "absolutely false," and questioned Detwiler's research methods, adding it would seek a U.S. Securities and Exchange Commission and Ontario Securities Commission review.

BlackBerry also said that Verizon Wireless had refuted claims by Detwiler that returns were unusually high, but Verizon refused to comment.

Bloomberg quoted the Detwiler report as saying there was a significant increase in customer returns of the Z10 because the interface was not intuitive. "In several cases, returns are now exceeding sales, a phenomenon we have never seen before," Detwiler said.

Questions on smartphone end-user sales

How good, or bad, are Z10 sales?

At a fourth-quarter earnings call on March 28, Heins said BlackBerry had shipped 1 million Z10 smartphones in the quarter that ended March 2, based on sales mainly in Canada and the UK, and weeks before the phone went on sale in the U.S.

Two technology analysts, Bob Egan of The Sepharim Group, and Jack Gold of J. Gold Associates, discounted the Detwiler report based on information they were receiving.

Egan said the 1 million Z10s that had shipped by March 2 represented only 700,000 actual sales to end customers. Half of the 700,000 were customers who had moved over from Android phones or iPhones, he said, based on comments by Heins and BlackBerry officials.

Questions on U.S. rollout of the Q10

Egan also said he learned from discussions with BlackBerry that the global release of the Q10 will follow the same pattern as with the Z10, with shipments to Canada and the UK first, and the U.S. following, possibly 45 days later.

Using that release pattern, if Canadian retailers put the Q10 on sale by the end of April, it could be late May or June before Q10 sales start in the U.S. "Releasing the Q10 in the U.S in late May or June is a real mistake," Egan said.

His reasoning is based on expectations that the Q10, with its qwerty keyboard, will be more popular than the Z10, especially with traditional BlackBerry users in the U.S.

"The BlackBerry loyalists, many in the U.S., really haven't yet started buying new BlackBerrys," Egan said. "It's illogical to delay the introduction of the Q10 in the U.S. because it's such a strong market that's pretty fertile for them."

The late rollout of the new devices in the U.S. could be because BlackBerry views the U.S. market as less important than some other countries, analysts suggested, although BlackBerry originally said the U.S. delay was due to carrier technology testing.

Total fourth-quarter BlackBerry revenues in the U.S. were 14%, down from 19% the previous quarter, while the areas of Europe, the Middle East and Africa surged to 46% of total revenues in the fourth quarter, up from 43% the prior quarter.

U.S. carriers haven't said when they will ship the Q10, although some Sprint store representatives have told customers that the phone may not arrive until August. Verizon Wireless and AT&T are expected to carry the qwerty device.

Questions on service revenues

Even if BlackBerry does well with sales of the Z10 and Q10, the phone maker still faces serious questions on how much revenue it generates from the services it sells, Egan and other analysts said.

"BlackBerry can be successful selling devices, but in terms of how Wall Street perceives the company, it will be what happens to service revenues," Egan said.

In the past, services revenues were based on what BlackBerry charged for BlackBerry Enterprise Server software, which runs behind corporate firewalls and inside carrier networks to serve consumers, providing management and security capabilities to devices and end users. Going forward, BlackBerry refers to BES as BlackBerry Enterprise Services 10.

In the fourth quarter, 36% of revenues that Blackberry collected were from services. (Hardware revenues were 61%, for new Z10s and older BlackBerry devices. )

Heins said that in the current first quarter, BlackBerry expects to see a single digit decline in service fees, which would bring services to 35% of total revenues.

Egan said it isn't clear how BlackBerry is going to levy service fees, since the Z10 and Q10 can function without the need for BES 10. Also, many enterprises are moving to Exchange ActiveSync, which can be used in place of BES 10, Egan said.

Without BES 10 support from either an IT shop or a carrier, a new Z10 or Q10 won't have important new features such as BlackBerry Balance, a means of separating work and personal data on the device.

"They have been talking at BlackBerry about how they are working on changes to how service revenues are computed and how they are presented to enterprises and carriers and individuals, but that's a big uncertainty," Egan said. "Are hardware sales going to be enough to offset losses on the services side? They haven't disclosed how they will make that up."

Gold tended to agree with Egan. "Service fees is an issue for BlackBerry going forward," he said. "Their percentage of income from services has been falling. This is a result of both BlackBerry devices being abandoned by users, as well as some companies removing the BES installations. The new devices don't have to use BES, but won't have all the features implemented without it. And it remains to be seen if the carriers continue to offer BES and the related services, which remains a good revenue producer for BlackBerry."

Egan said the fact that BlackBerry hasn't been transparent with how it is charging for services could be due to ongoing negotiations with various carriers.

Big quarter underway

BlackBerry's first fiscal quarter is nearly half over and might be the most critical quarter it has faced since Heins joined the company in early 2012.

"The current quarter is extremely important, absolutely critical for a number of reasons," Egan said. He explained that BlackBerry and Heins already have done "nearly everything they can do internally to shrink themselves to greatness."

Recent steps have included layoffs and renegotiations of terms to suppliers and a slowdown in bad device returns, Egan said. "Operationally, they have made themselves pretty efficient internally."

But now the pressure is on BlackBerry to show progress in executing externally -- mainly through sales. "They have to produce and sell great devices, capture service revenue growth and increase their portfolio to try to compete against Samsung, which has its aim on business customers. Meanwhile, Microsoft with Nokia and Apple have continued to execute well," Egan said.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

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This story, "BlackBerry says report of high Z10 returns is 'false'" was originally published by Computerworld.

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