Seeking Alpha
Long/short equity, contrarian, deep value, event-driven
Profile| Send Message|
( followers)  

It is amazing how much damage a management team can do when it is driven by a set of wrong assumptions. In the case of BlackBerry (NASDAQ:BBRY) the failure is not a failure of opportunity or of capability but a failure of management. Interestingly, the failure took place during a period of relative success, victim to the hubris akin to megalomania where a Chief Executive Officer convinces himself that with a small arsenal of resources, he can beat the titans at the game they have been playing successfully for a few years.

BlackBerry did some terrific things along the way. It developed a network operating system of unparalleled integrity, providing corporations with secure communications of sensitive information. It created a BBM messaging service that every user knows is rich, powerful and fun. It has made that messaging service capable of running on iOS and Android platforms with the promise of making it available to literally more than a billion users. It has designed highly functional handsets with excellent and useful features, in particular, the BlackBerry Bold 9900 running on the BB7 OS. I have yet to hear anyone who has used a Bold criticize it, although I expect the comment section of this article will surface a few. I was surprised when the new Q10 and Q5 phones were announced that they had abandoned hardware features of the device that users found attractive including the mini-track pad and the back button.

The hardware design was a minor issue with many users impressed with the new OS despite the changes. The real question is what did go wrong and more importantly what can BlackBerry do now to right the ship?

What went wrong is simple and sad. BlackBerry management thought they could stage a head-on assault on Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) and, with visions of selling millions and millions of the new phones, committed to building a mountain of BB10 devices on some form of "take or pay" contract (the details of which we don't know) and found itself in a box when demand was insufficient for them to meet their supplier commitments.

Having ordered the devices, management attempted a worldwide launch of the devices, a challenge for any management team, and did so with a relatively weak library of applications. And they launched the devices very late in the game when it was becoming clear that new Android smartphones and Apple's iPhones had the technology and applications edge. It should have been no surprise that the world did not declare a holiday and line up overnight to buy the new phones.

Of those judgments, and they are judgment calls, the only one that caused a severe wound is the size of the commitments they made to suppliers and the concomitant write off of $1 billion of product either in inventory or committed. They could even survive that error, in my view.

But the judgment they are unlikely to survive borders on dishonesty. I "joined the bears in the BlackBerry bush" when BlackBerry released its Q1 results, which were pretty close to the number I had forecast earlier. But in the conference call, I sensed management unease and a lack of transparency. Management's reluctance to disclose the sell through of the devices at the time caused me some discomfort. They always had in the past.

What we know now is that Thorsten Heins, who in the euphoria of the Q10 launch had boldly claimed that BlackBerry would sell "tens of millions" of its new phones, had learned that of 2.8 million BB10 devices shipped to carriers, only 0.6 million had sold through to end users. BlackBerry could quite properly account for those as sales as long as it had evidence the carriers were not going to return them, and by the time of quarterly release I am sure they had such evidence.

At the same time, BlackBerry must have had some evidence that the market for their devices was slowing down quickly, particularly for the Z10 model. And certainly they knew how many phones they had committed to buying from their suppliers.

At this point, Mr. Heins and his board of directors (if they knew) faced one of the decision points that separate strong leadership from weak and good companies from bad. The correct decision is the simple one. Tell the truth. As my dad used to say, it is easier to remember.

The truth they did not tell investors until it was forced on them as Q2 results were coming due for release was that they had made commitments to buy a lot more devices than they could sell and they were going to take a bath on them.

How much simpler to state these facts in the Q1 release?

Management could have said:

"We sold 6.8 million phones to carriers. The sell through of BB7 devices remains strong. Our new phones are getting good reviews but the sales are taking time to materialize. We have recognized 2.8 million BB10 units sold to carriers as revenue in accordance with our policies but at the end of the quarter only 600,000 have been taken up by end users.

We are taking immediate steps to deal with this. First, we tried to position the Z10 as our flagship product at a premium price. The feedback we are getting is that the device is solid but the price is too high. We are cutting the price to $350 a unit from $600. At the same time, we are negotiating with our suppliers to shift the mix of our committed volumes to Q10 and the soon to be released Q5 devices where we expect to find stronger demand.

We have rolled out our BES 10.1 enterprise software and it is well received. We are planning to release our BBM messaging service for iOS and Android platforms later this year. We are confident in our products and our plans. We expected some setbacks and we can deal them."

They did not and here we are. So now what?

Surprisingly, in spite of the complexity of the situation, at least one option on the way forward is clear. BlackBerry can simply exit the handset business except for limited volumes to be considered as "add ons" to corporate customers. I am quite confident it can dispose of the surplus units at a distress price in markets where BlackBerry is popular. I recall that Hewlett-Packard was able to dispose of its entire unsold inventory of Touchpad tablets in a few hours when the company made the decision to exit tablets and cut the price to $99 a unit. BlackBerry can define itself as a network services supplier with current quarterly revenues of $800 million. And the company can promote the widespread use of its BBM messaging service on all platforms.

It has enough cash to carry out all of the above if it moves quickly to do so. Will the stock price sink? Of course it will. But over time and with any success in the new direction, it will start to show growth in earnings and cash flow and emerge as a stronger company, or at least it has a chance of doing so.

I am sure that BlackBerry management and its board have their own plan and their announcement of a focus on corporate customers and only four devices gives us some insight into that plan. They are far better, are able to decide the right course than anyone looking in. But it is vital the company get back to business.

What BlackBerry is doing now with its preoccupation with a tenuous sale transaction is self-immolation. Controversy does not win customers. You cannot build a company by selling it. The saga of a board flailing at a weak offer to buy the company unsupported by funding and being hammered daily in the stock market is not going to make BlackBerry a stronger company. It is more likely to destroy what value is left. It is time to face facts and get on with it.

Source: Memorandum To The BlackBerry Board Of Directors: Stop The Charade And Manage The Company

Additional disclosure: I own BlackBerry calls and puts. The calls are a residual from when I was bullish and when I believed there might be an auction for BlackBerry. The puts reflect my current views.