BlackBerry Earnings Preview: Hardware Alliances And Enterprise Business In Focus

June 18th, 2014 by Trefis Team

BlackBerry (NASDAQ:BBRY) will announce its fiscal Q1 2015 earnings on June 19 (FY ends in February). The company has been reorganizing itself to become a niche but profitable organization, with a focus on software and services targeted at the enterprise sector, after its BB10 smartphones have been off to a slow start in a market dominated by the iPhone and devices running Google’s Android operating system. The company’s CEO, John Chen, is optimistic about a turnaround, indicating that he seeks to achieve cash flow breakeven by the end of the fiscal year while attaining profitability during FY 2016. [1] During Q4 FY 2014, the company announced a mixed set of results with its adjusted net losses narrowing to around $42 million from over $350 million in the previous quarter, while revenues fell by around 18% to $976 million. [2] For this quarter, we will be watching the company’s progress in farming out parts of its handset business and its performance in the software and services space.

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Trefis has an $8.40 price estimate for BlackBerry, which is about in line with the current stock price.

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Devices Business: Progress On Foxconn and Wistron Deals

BlackBerry’s device business has been seeing significant headwinds of late. The company shipped just  about 1.3 million handsets during the previous quarter, marking an 80% decline over the same quarter during the last fiscal year. However, the sell through – a measure of the quantity of units sold by retailers to end customers – was better at around 3.4 million units. The company has made some strategic decisions to help the division return to profitability, possibly running it as a low-margin business that will assist in driving enterprise software and service sales.

Late last year, the company entered into a five-year strategic partnership with Foxconn, in a deal that will see BlackBerry phones being increasingly co-developed and produced by the contract manufacturer. This will allow BlackBerry to cut down its fixed costs, reduce its inventory risk (inventory write-downs accounted for a significant part of the company’s losses last year), shorten development times and stabilize a cash-bleeding business. The first handset from this partnership, the BlackBerry Z3, was launched during the month of May. While we do not expect the deal to have a significant impact on the company’s earnings for this quarter, it should prove positive going forward.

Earlier in the quarter, the company signed an agreement with Wistron to initiate a fresh production run of its popular BB7 device, Bold, for worldwide distribution. BlackBerry had been previously selling the Bold devices at a loss, but the company expects the new Wistron produced units to be profitable. This is a good move, since BB7 devices account for about two-thirds of the company’s sales mix.

Software and Services: Watching Customer Attrition, Updates On BES 12 Launch

BlackBerry has been facing headwinds on the services front as well, with a dwindling subscriber base that fell from around 79 million in early 2013 to below 55 million (estimated) at the end of the last quarter, due to attrition of retail customers. However, the company is focusing on the enterprise market to help stem the decline. Unlike the retail market, the enterprise market for software and services is less prone to large-scale subscriber defections since companies typically plan and invest large sums of money in their information systems, making them less susceptible to short-term technology transitions. Blackberry has significant strengths in the enterprise space owing to a large installed base for its BES (BlackBerry Enterprise Services), its proven mobile device management software (MDM) and its reputation for cutting edge security.

However, the Bring Your Own Device (BYOD) concept has been gaining traction in the enterprise market, allowing  employees to bring in mobile devices of their choice, with the enterprise email and security needs alone being addressed by corporate IT departments. BlackBerry was reasonably quick to catch on to this trend, providing cross-platform (Android, iOS and Windows) support with the latest version of its BlackBerry Enterprise Service, BES 10. The company will also be launching its BES 12 offering later this year. This cross platform solution will manage both BES 10 and  BES 5 (which connects with the popular BB7 based phones such as the Bold which were not supported under BES 10) into one common platform that will allow companies to have a single infrastructure to manage all their devices, including those sold by other vendors. This should prove attractive for large,  security-conscious organizations that want to support BYOD.

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Notes:
  1. BlackBerry’s CEO Discusses F4Q 2014 Results – Earnings Call Transcript, Seeking Alpha, March 2014 [↩]
  2. BlackBerry Q4 2014 Earnings Press Release, BlackBerry, March 2014 [↩]