BlackBerry Bolsters Enterprise-Focused Hardware Strategy With The Classic


BlackBerry (NASDAQ:BBRY) is set to launch its latest handset, the BlackBerry Classic, on December 17. While the company has been taking significant market share cuts over the past few years, it has been looking to leverage its reputation for security and its brand equity among core business users to drive a turnaround in its smartphone business. BlackBerry is returning to its roots with the Classic, which is targeted squarely at BlackBerry loyalists and enterprise customers. The device will feature the classic BlackBerry form factor – with a physical QWERTY keyboard and traditional navigation keys, along the lines of the BB7-based Bold and Curve devices. The Classic will run BlackBerry 10 software and will also support Android apps from the Amazon App Store. In this note, we take a look at why the uptake of devices such as the Classic and the recently launched Passport could prove important to the company’s turnaround.

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The Handset Business Still Remains Important For BlackBerry

BlackBerry remains a company in transition. BlackBerry services – one of the company’s largest divisions –  has been posting declines in system access fees (SAF) of between 10-15% in each of the last few quarters on the back of subscriber attrition, and the company expects revenues from the division to decline by half by FY 2016. [1] The onus of the company’s recovery ultimately falls on the handset business and its currently small, yet promising, software division. While the outlook for the software business looks encouraging, it accounts for just 7% of total revenues as BlackBerry has been running promotional programs to improve the user base, though the monetization of the business is likely to gather steam early next year. In the near to medium-term, BlackBerry could be dependent on the cash flows from its handset business to drive its operations. The handset business is also likely to be an important enabler in driving subscriptions for its software and services offerings, while keeping the company’s core base of users engaged.

Going After Mainstream Smartphone Market A Misguided Strategy

The smartphone market momentum has clearly not been working in BlackBerry’s favor over the past few years, given the dominance of the iOS and Android platforms. During Q2 FY 2015, the company shipped just about 2.1 million smartphones, down from around 3.7 million units a year ago and the company’s smartphone revenues have declined by about 45% year-over-year as of Q2. The company’s global market share has fallen to just 0.5% (in terms of mobile operating systems) from close to 9.6% three years ago. [2] Much of the company’s smartphone losses have been due to its somewhat misguided strategy of going after the mainstream smartphone market with products such as the BlackBerry Z10 – touchscreen devices without physical keyboards – which were designed to compete with the likes of the iPhone and other Android based devices. However, these devices failed to find favor with customers owing to their weaker software and app ecosystem, and the company was forced to take inventory write downs to the tune of $900 million last year. [3]

Smartphones Catering To The Enterprise Niche

We believe that the company’s current strategy of staying true to its core user base of business users – in industries such as healthcare, banking and insurance – rather than chasing the mainstream could help to transform the handset division into a stable business for BlackBerry. The company’s current flagship device, the BlackBerry Passport, which was introduced during Q3 FY 2015, was reasonably well received by customers and critics. Although total sales numbers for the device are not available, the initial demand was strong, with BlackBerry quickly selling its initial supply of 200,000 units, leading to stockouts in most regions. While devices such as the Passport and the Classic could have high manufacturing costs, given their lower volumes and a potential lack of standardized components (for example, both devices use square displays which are quite uncommon in the smartphone business), BlackBerry could still turn out a reasonable profit from the devices. The company has been increasingly sourcing its devices from contract manufacturers, allowing it to rein in fixed costs, lower inventory risk and potentially reduce the volatility of the smartphone divisions performance. During Q2 FY 2015, the company reported that the handset division was profitable at the gross margins level (Non-GAAP), driven by the cost reduction program and its increasing use of contract manufacturing. [4]

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Notes:
  1. BlackBerry Investor Presentation []
  2. Smartphone OS Market Share, Q3 2014, IDC []
  3. BlackBerry to Fire 4,500, Write Down Up to $960 Million, Bloomberg, September 2014 []
  4. BlackBerry Q2 2015 Earnings Press Release []