BlackBerry's Failed Turnaround Sends Avoid Signal

Nov.11.13 | About: BlackBerry Ltd. (BBRY)

BlackBerry (NASDAQ:BBRY) has taken its eye off the ball too many times and is now paying the price in the smartphone wars. The stock has been in a downward spiral most of the year with occasional dead cat bounces, one of its few bright spots. Financing has become a big problem for the company, although a scrapped buyout proposal has transformed into funding to help it stay afloat. In late October 2013 BlackBerry fell from above $8 to below $7, far below its January level near $18. Returning to its heyday levels of triple digits seems very unlikely in the next year.

The Need for Restructuring

CEO Thorsten Heins is stepping down as the company has been trounced in the smartphone market by Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), not to mention others like Nokia (NYSE:NOK). Heins' tenure lasted less than two years and his interim replacement is former Sybase CEO John Chen. The company announced it would no longer seek a buyer and will instead receive $1 billion in funding from its top investor, Fairfax Financial (OTCPK:FRFHF), who had intended to acquire the company but could not come up with enough cash.

BlackBerry appears to have been trapped between a comfort zone and the new century's demand for innovation. If not for Apple and Google redefining the rules for both tech and business, BlackBerry may have remained strong today. But the new game is neither to play still to your laurels, nor is it to play follow the leader. The new paradigm for successful companies is constant innovation, which is why BlackBerry has fallen so far behind. A visionary leader is now what every tech company needs, but BlackBerry's leadership remains a solid blur.

Where Heins Went Wrong

Heins took his focus off business customers and began to chase mainstream consumers as an attempt to follow mobile leaders Google and Apple. BlackBerry, the one time cell phone leader when the parent company was called Research In Motion in the pre-iPhone era, simply could not innovate fast enough to keep up with Android or iPad. By losing focus on what BlackBerry fans already embraced, such as the Qwerty keyboard, and rolling out the failed Z10 phone to introduce the BlackBerry 10 OS, the company had to take a $1 billion writedown on unsold inventory.

Red Flags

Even though there's always a chance BlackBerry will be acquired by another company within the next decade, there are numerous red flags that should serve as caution to investors who think the stock may have bottomed. One big warning sign is the company's weak cash position. Even with a $1 billion influx of cash from convertible debentures, the company still has $1 billion in liabilities on its balance sheet. The company has also racked up operating losses and appears to be headed for further inventory writedowns. Furthermore, the stock is currently trading at record lows and has yet to establish stable support levels.

The old saying "don't try to catch a falling knife" may apply to BlackBerry. The company has lost billions in market value that has shrunken to about $3 billion. When it announced the buyout deal with Fairfax had collapsed and turned into a convertible debenture financing story, the stock fell 17 percent on the news. Chen's response so far indicates a recovery will be a long process. There is no sign yet that BlackBerry has any clear answers on how to reposition itself. Historically, the company built its fallen empire on email messaging but has struggled to capture the imagination of smartphone fans in the Android/iPhone/iPad era.

Successful turnarounds usually involve liquidating weaknesses and building on strengths. So far there is no indication that BlackBerry is making the right moves to compete with Apple or Google.

The Road Ahead for BlackBerry

Interim CEO Chen has stated that BlackBerry is an iconic brand but will take time, discipline and tough decision-making to turn around. Chen's background in enterprise and mobile software has fueled speculation that he will be the Waterloo, Canada company's permanent CEO. Chen has also announced that he may emphasize software and services instead of devices. Since BlackBerry devices have fallen to sixth place in market share it's evident that the company's marketing strategy needs to change.

It may need to spin off the device business and pursue cloud software in its restructuring. Since its enterprise software service unit that includes its BBM messaging is still successful, the company may consider making it the focal point of its brand. The BlackBerry 10 operating system, which launched in January, has been a huge disappointment, since it was meant to be a turnaround play but failed to satisfy customers or investors.

The company's lost direction has painted an uncertain future. Betting on this company is a bad gamble since there is absolutely nothing about it at the moment that points to innovative leadership.

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.