BlackBerry (NASDAQ:BBRY) CEO John Chen is looking to get the company more focused on software and services while reducing its reliance on smartphones, as part of a turnaround strategy that he thinks will take about two years to show results.  The company is seeing deep market share losses on the devices front, with BlackBerry smartphone shipments last quarter dropping by nearly 80% year-over-year. In order to reduce its exposure to the mobile device market and mitigate inventory risk, Blackberry entered into a 5-year strategic partnership with Foxconn to manufacture its smartphones late last year. More recently, it tapped Wistron to initiate a new production run of the popular BB7 device, Bold, for worldwide distribution. By outsourcing a large chunk of its hardware business, BlackBerry wants to enhance the division’s profitability while focusing its in-house resources on more strategic goals of driving revenue growth in enterprise services and BBM. By our estimates, BB software and services account for about 45% of its overall value.
Exit through sell-off possible
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However, should the devices business prove too difficult to turn around, it is likely that the company will consider exiting the business altogether. In a recent interview with Reuters, John Chen said that he “will not be in the handset business” if it continues to be unprofitable. He clarified later that he has no plans of selling the business in the near term and is focused on returning it back to profitability.  However, it is unlikely that management will not consider a sell-off if the devices business fails to stabilize at cash flow break-even at least. BlackBerry is targeting the end of FY2015 to become cash flow neutral from operations and the end of FY2016 for overall profitability.
In the near term, BlackBerry will continue to run its devices business in the hope that its smartphone unit sales stabilize at a level where it can turn a small profit. Last quarter, the company shipped only 1.3 million handsets, down from about 6 million in the prior-year quarter. However, the sell-through was stronger at 3.4 million. As the company reduces its inventory levels, its shipment figures could also improve. Chen said during the interview that the company could turn a profit on shipments of as few as 10 million units, or a quarterly shipment run-rate of 2.5 million. In order to achieve this, BlackBerry will have to make itself relevant in the enterprise market once again and leverage its Foxconn partnership to gain deeper traction in emerging markets.
BES12 key to BlackBerry’s service fortunes
While the profit margins on emerging market sales are likely to be lower, where BlackBerry could really add value is in the high-end enterprise market. However, BlackBerry’s travails in the consumer market have cost it dearly in the enterprise space, especially as the BYOD trend has gained momentum, with IT administrators increasingly accommodating employees bringing their own devices to work. Although BlackBerry’s installed base is large, it is losing share to Apple and Samsung among the devices being sold to businesses and their employees. Globally, its market share in business devices declined from over 30% in 2010 to about 8% in three years, according to IDC. 
BlackBerry is therefore looking to make its services business less reliant on its hardware by providing cross-platform (Android and iOS) support with the latest version of its BlackBerry Enterprise Service, BES10. This is invaluable to large security-conscious enterprises and government organizations that want to support BYOD but are reluctant to undertake the complex process of transitioning all their devices to a different mobile device management (MDM) solution. In order to make it easier for enterprises to transition from the earlier BES5, which manages the older generation of BB devices, to the cross-platform BES10, the company plans to unify the two platforms with the launch of BES12 towards the end of the year. While cross-platform support is important to many companies, those in highly regulated sectors such as healthcare, financial and legal services could find themselves more comfortable with having an end-to-end enterprise solution that includes BlackBerry’s device offerings.Notes:
- BlackBerry CEO Sets 2-Year Goal to Cut Device Reliance, Bloomberg, April 11th, 2014 [↩]
- Devices Business is an Important Part of Our End-to-End Strategy, BlackBerry Blog, April, 2014 [↩]
- For BlackBerry, Consumers Aren’t the Only Problem, WSJ, September 2013 [↩]