Today (Tuesday, July 9th) at 10:00am ET, BlackBerry (NASDAQ:BBRY) will hold its Annual and Special Meeting. Given the recent miss on Q1 2014 results, the disastrous earnings call that followed, the 30% drop in stock price, and yet another tsunami of negative reporting about BlackBerry's imminent demise, the BlackBerry board of directors must now assess the damage to its brand value, business strategy and customer relations.
Investors should not underestimate the importance of decisive board leadership on these matters because over the next quarter, rightly or wrongly, many enterprise and consumer customers will be less likely to invest in expensive technology products from a company that they perceive as unlikely to provide software and hardware updates as well as technical support over the long term. Moreover, many independent application developers will be reassessing their development plans for the BlackBerry 10 platform with a similar level of concern.
Inside of this context, some commentators and investors have called for a change of BlackBerry's top leadership. Many have been particularly critical of Thorsten Heins, CEO. If the BlackBerry Board plans to minimize or even reverse the current trend, there are three areas of Mr. Heins' performance that they must address right now: Strategy, Execution and Public Relations.
In this article, I will highlight the key issues relating to each of BlackBerry's primary business initiatives and how they relate to the performance of BlackBerry's top leader.
The flat screen Z10 began its phased roll out in Great Britain January 31st, 2013 and by the Q1 earnings call had become available in 147 countries, including the United States. During its first months in the market, analysts of all stripes engaged in epic levels of channel checking and public debate to determine the Z10's consumer appeal and sell through. This is because the Z10 is widely viewed as BlackBerry's best hope to attain broad appeal with retail consumers from outside of its traditional enterprise customer base.
Above any other issue, the Z10 sell through number was the primary data point everyone anticipated during the Q1 call. The bears won! BB10 shipments came in at ~2.7m units well below the 3-6M anticipated during the debate. But importantly many argued that Thorsten Heins strengthened the bear sentiment by not providing more specific numbers to differentiate (1) between BB7 and BB10 sales; (2) between channel fill and sell through; or (3) between the Z10 and Q10 models.
This once again left investors to speculate. One estimate, presented here on Seeking Alpha, has calculated Z10 sales at a mere .8M the 2014-Q1. Most analysts simply do not buy Thorsten's argument that Z10 sales were so low because it was still in the early stages of its launch. The Z10 had been available for four months and didn't catch - period!
The Qwerty keyboard Q10 launched April 29th in the United Kingdom and is currently available in 96 countries, including the U.S. It is expected to launch in 50 more countries within Q2. By most accounts the Q10 is outselling the Z10 and is expected to make a significant positive contribution to Q2 earnings.
Many believe that Thorsten Heins should have released the Q10 first, because it was in a better position to catch the pent-up demand from BlackBerry's core audience: hyper connected professionals. They also contend that the Q10 should have received greater marketing support with carriers rather than a series of expensive high profile sponsorships with Sports Teams, Formula One, and Entertainers.
Michael Collins, a long time BlackBerry commentator had this to say,
…imagine what kind of support Heins would have obtained from AT&T (NYSE:T) and others had he shown them a $50M Media plan surrounding AT&T Q10s.
The Q5, a lower cost Qwerty device intended primarily for emerging markets, presents a wildcard for Q2 earnings. It premiered in Dubai in late June and is expected to launch in 59 countries in Q2. Initial technology reviews such as this one have been respectable but most have not rated the device an exceptional value unless BlackBerry lowers the price. In fact one BlackBerry analyst presents a compelling case that BlackBerry must now accept slightly lower gross margins in order to gain higher market share by lowering the price point for all BB10 devices.
Regarding BlackBerry's efforts to deliver their promised BB10 update for Playbook, Thorsten Heins stated during the Q1 earnings call that, "I am not satisfied with the level of performance and user experience, and I made the difficult decision to stop these efforts." Many if not most loyal Playbook owners including this succinct writer perceive his decision as a breach of trust.
Many saw it coming; the choice fit well with one of Mr. Heins' most controversial market views. In a recent interview he stated,
In five years there won't be a reason to have a tablet….Maybe a big screen in your workspace, but not a tablet as such…[from a hardware perspective]…Tablets are not a good business model.
Heins has his finger on a key pain point for consumers and developers alike: the lack of synergy presented by having one operating system for mobile platforms and another for desk top computers. Heins is right to argue that the first company to market a single, native and fully functional OS for both mobile and desk top platforms will achieve a major market advantage. But he may be badly mistaken to assume that tablets, laptops and desktops will simply run as slave screens for smart phones; and he can't afford to alienate his tablet audience in order to get there.
Future Hardware Products
Some believe that Mr. Heins is missing valuable opportunities to maximize sales to BlackBerry's core consumer audience: Qwerty keyboard lovers. In a recent article posted here on Seeking Alpha, Michael Collins makes the argument:
BlackBerry [hasn't] even so much as hinted of the release of the second most popular keyboard device, the BlackBerry torch 'slider'. Rather, Mr. Heins is going [to] repeat the Z10 mistake again with the BlackBerry 'A10 Phablet' as he insists on pushing flat screens upon an unwilling Qwerty audience.
There has been a great deal of anticipation among BlackBerry loyalists regarding the rumored "A10", a larger flat-screen device with more powerful hardware than the Z10. But with news of slow sales of the Z10 and the perceived abandonment of the Playbook, has Mr. Heins unwittingly dampened that market buzz?
BES10 & Secure Work Space
BlackBerry's outlook in Enterprise Mobility is bright. With the number of companies that have either ordered, downloaded, or installed BES 10 growing from 12,000 in mid May to 18,000 by late June, BlackBerry has a clear opportunity to capitalize on the $99.00 per unit, per year, license fee they will charge enterprise customers to adopt its Secure Work Space application for Apple and Android phones. This represents a strong step by BlackBerry to address the BYOD trend and retain its market position in enterprise mobility. Thorsten deserves substantial credit for this accomplishment.
Mobile Software Updates for Vehicles
It is too early to determine how well BlackBerry will perform in the machine-to-machine (M2M) communications market for automobiles, but according to project management, BlackBerry is in talks with every major automaker to ensure that the system meets industry standards. Mr. Heins is right to leverage every available corner of the M2M market that is now available from their acquisition of QNX.
There are also intriguing signs regarding the cross platform launch of BlackBerry Messenger (BBM) and its related consumer services software. The May 14th Beta launch of BBM Channels, BlackBerry's new social networking application, has generated 60,000 active users and 20,000 channels in 160 countries. BlackBerry recently updated the app with a number of new features. But for BlackBerry to compete in social media, Thorsten Heins will have to nail the public relations by listening to its core customers. Here is one example.
In late February, BlackBerry in partnership with Indonesia's PT Bank Permata announced a pilot mobile payment service: BBM Money. Monitise (LSE: MONI.L) reported May 22nd that 60,000 subscribers have adopted BBM Money in the first 90 days. Moreover, Google Trends reveals that among Indonesians search interest for the term "BBM Money" grew from 44 of 100 basis points to 49 between May and June. It is intriguing to note that in contrast to the North American and the Europe, Africa, Middle East (EAME) regions, BlackBerry's subscriber base in Asia Pacific increased by 29% since the end of the fiscal 1st quarter 2013. But recent accounts of yet another Indonesian Service Outage have shaken consumer confidence in the new system.
From the beginning of his first tenure as CEO in January of 2012, Thorsten Heins accepted personal responsibility for the daunting turnaround of a struggling company. From the start he did not receive a warm reception from Wall Street. But Mr. Heins brought a clear vision to his new role: To make BlackBerry the market leader in mobile computing within five years. He fights hard, but he needs to improve his Strategy, Execution and Public Relations.
Clearly, BlackBerry still has massive long-term potential for upside to its share price. It has a strong balance sheet, a worldwide presence in mobile computing and is pursuing a significant number of business initiatives any one of which could radically improve its market position. Nonetheless, BlackBerry should be treated as a speculative long-term investment up and until we see significant improvements to its Strategy, Execution and Public Relations.
The above listed article provides a framework for healthy debate. Here are some final ideas. If you were a member of the BlackBerry board meeting this Tuesday, what questions would you have for Mr. Heins? By what metrics would you measure his performance? What would be your approach to maximizing BlackBerry's market potential?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.