BlackBerry Cuts Costs With Foxconn Deal, Doubles Down On Enterprise and BBM

by Trefis Team
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BlackBerry (NASDAQ:BBRY) released a weak set of Q3 FY2014 numbers Friday, as revenues dropped year over year by more than half and losses mounted to over $4 billion due to tepid sales of BB10 smartphones. The company managed to sell only 1.9 million BlackBerry handsets during the quarter, about 72% fewer than what it had a year ago. As a result, BlackBerry had to take a huge $1.6 billion hit on write-down of unsold inventory and supply commitments, primarily attributable to BB10 handsets. The company did not reveal its subscriber figures but provided color that the decline has been fairly consistent in the last couple of quarters, in the low-to-mid-teens. Assuming a decline of 12.5% in the last two quarters, BlackBerry’s installed subscriber is likely to have declined from 72 million at the end of the May quarter to about 55 million currently.

See our complete analysis for BlackBerry here

However, optimism surrounding new CEO John Chen’s turnaround strategy for BlackBerry pushed it up by almost 15% after the earnings call. A bulk of the profitability concerns surrounding BlackBerry’s declining devices business was assuaged by the company’s announcement of a strategic partnership with Foxconn that will see Blackberry phones being increasingly co-developed and made by the contract manufacturer. Starting out, BlackBerry is offloading its device manufacturing processes for emerging markets to Foxconn, while it focuses on the high-end enterprise device market. This may limit the long-term potential for margin upside, but it gives BlackBerry an opportunity to rein in fixed costs, minimize inventory risk, and stabilize a loss-making arm as soon as possible, while it looks to add value through its end-to-end enterprise security and BBM software solutions and services. BlackBerry is looking to run the hardware business as a low-margin business that will drive its enterprise sales in much the same way as Apple runs its App Store to support iDevice margins.

With BB services accounting for almost 40% of its value by our estimates, the company is doing the right thing by increasing its focus here. We have a revised $8.80 price estimate for BlackBerry, about 20% ahead of the current market price.

Value in enterprise niche and BBM

BB10′s failure to generate demand in a consumer market heavily dominated by the iPhone and Android-based smartphones has left BlackBerry with few options but to double down on its enterprise niche. The company has cut its future smartphone portfolio down from 6 to 4 devices as it targets a smaller but focused customer demographic in enterprises. It also aims to cut around 4,500 jobs that will trim its workforce by about a third and cut operating expenses by a half by May. BlackBerry expects the Foxconn deal as well as the restructuring to help the company become cash flow neutral from operations in FY15 and profitable by FY16 (ends Feb 2016). Not losing cash on the devices front will allow BlackBerry to invest and strengthen its enterprise software offerings, not just in security but also other value-added services such as BBM.

However, the enterprise market is changing, as IT administrators accommodate employees bringing their own devices to work (BYOD). Although BlackBerry’s installed base is big, it is losing share to Apple and Samsung among the devices being sold to businesses and their employees. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years, according to IDC. [1] While device sales are likely to decline further, BlackBerry could still benefit from having a large installed BES (Blackberry Enterprise Services) base with a proven mobile device management software (MDM) that now has cross-platform support. This is invaluable to large security-conscious enterprises and government organizations that do not want to undertake the complex process of transitioning all their devices to a different management solution.

While enterprise software and services is  more of a mature business that BlackBerry will look to stabilize and run for cash, where BlackBerry can potentially shoot for big growth is BBM. BlackBerry recently opened up BBM for access to rival platforms iOS and Android, and has seen a very good rate of adoption among users. The company announced that in the last 60 days, BBM has managed to attract over 40 million newly registered Android/iOS users. Measured on a monthly basis and including the installed base, BlackBerry now has over 80 million active users in all — 60% of which use it daily as opposed to the industry average of 50%, according to John Chen. This gives BlackBerry a good base on which to work and invest resources, so as to add more BBM channels and features, and retain users by enhancing their engagement with the platform. While the company did not divulge any specifics about its BBM monetization strategy going forward, the CEO said that he expects BBM to generate “reasonably good” revenues in the FY16 timeframe.

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Notes:
  1. For BlackBerry, Consumers Aren’t the Only Problem, WSJ, September 2013 []
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