Why BlackBerry has become an interesting company again
Maybe you stopped caring about BlackBerry long before its share of the global smartphone market fell below 1 percent. Maybe you never even got the whole CrackBerry thing a decade ago. Whatever the case, if watching a dying company attempt a bold turnaround in two years – two years – is an interesting idea, you might want to take another look at the company.
Corporate turnarounds often take five or more years and are a process of slow-motion chaos. If you speed that process up, as BlackBerry's CEO John Chen is trying to do, the impact of that chaos becomes much more palpable. Chen, known for his improbable but successful turnaround of Sybase, knows BlackBerry doesn't have five or ten years to fix things.
The earnings report BlackBerry delivered on Friday shows just how chaotic things are as the company struggles to right itself. Investors are acting like they're unsure how to react. BlackBerry's stock fell 2 percent to $9.10 once the earnings announcement was released, then rose as high as $9.87 once Chen started talking in a conference call. On Monday, as analysts responded with reports, the stock fell 7 percent to $8.80.
Nobody can decide whether to embrace the good news or the bad from the company. The good: BlackBerry posted a net profit of four cents a share in its most recent quarter through February, well above the four cents a share loss that analysts had been looking for. The bad: BlackBerry said revenue fell 32 percent to $660 million, well below the $800 million that analysts were expecting.
Chen is steering BlackBerry away from the older, lower-margin handsets that have been popular in some emerging economies and toward new models like the Passport and the Classic (along with four new devices this year, like a $275 all-touch phone). Handsets made up 42 percent of BlackBerry's total revenue, but revenue in the segment declined 23 percent.
That decline in handset revenue is something of a disappointment given that 90 percent of shipments in the quarter came from newer models. One factor may be the longtime popularity of BlackBerries in Venezuela, which has been the worst-performing economy in the world this year, thanks to low oil prices. BlackBerry said Latin American revenue collapsed 53 percent last quarter.
The 44 percent drop in services revenue was a little less worrying, if only because it was expected. Services revenue come from mobile carriers that once paid BlackBerry to manage secure email and messaging, but now choose to handle those tasks themselves. That's a long-term decline that Chen has little power to slow, so he's focusing instead on pushing software platforms like BES 12.
Software revenue, which makes up only 10 percent of the total, grew by 20 percent year-over-year. Chen has previously forecast that software revenue would double in the year through February 2016. Last quarter, the company won 2,200 new customers, including Delta Airlines, the government of Canada, and the Essar Group conglomerate in India.
With overall revenue declining 32 percent, how did BlackBerry manage to post a profit? Because of aggressive cost cutting. Research and development costs fell 45 percent in 2014 to $711 million. Sales, marketing and administrative costs fell 55 percent to $938 million.
There are signs of financial health as well. The company said it had positive cash flow of $76 million, in contrast to the negative cash flow of $784 million in the same quarter a year earlier. The company's cash balance rose to $3.27 billion, which is as high as it's ever been in the company's history, even during the glory days. Cash on hand increased by $608 million during 2014.
To Chen, this mix of good and bad means the turnaround is going according to plan. In the conference call with investors, he stated that "our financial houses in order" and that "our financial viability is no longer in question. We are now turning our attention to revenue stabilization and achieving sustainable profitability sometimes starting this fiscal year."
Analysts aren't so sure. RBC Capital said slowing services revenue “may continue to sustain lingering concerns about BlackBerry’s declining subscriber base” although software revenue remains encouraging. Others worried about the disappointing handset sales. Still others questioned whether the company can attain its goal of doubling software revenue this year.
In short, year one of BlackBerry's two-year turnaround slashed costs and stabilized its finances, but it also left it in a moment of peril. Year two will need to see more revenue from smartphones and software – a goal analysts and investors are starting to doubt – because to keep cutting costs means cutting into the bone.
Chen said he's “90-percent, 95-percent done” with the cost cutting. Asked if the layoffs have hurt morale, he said it's a lot better than a year ago: “The company needs to financially be stable. I don’t know of any way to improve the morale of a company and the people if the company is not doing well.”
BlackBerry may never again be the smartphone giant it once was, but it's become an interesting company for another reason: It's a case study in progress of a hard-core campaign to revive what many considered a lost cause. That's a rare accomplishment in tech, and it makes BlackBerry – for the next year at least – a company again worth considering.