BlackBerry - Strategically Changing The Course Of Its Future

| About: BlackBerry Ltd. (BBRY)


BlackBerry outsourced its hardware business to Foxconn Technology Group, the Indonesian company.

The company decided to restart the production of BlackBerry Bold handsets after production was halted in February.

The company is beginning to focus on its software segment as the CEO, John Chen, believes that this is where future growth of the company is hidden.

The intent of this article is to highlight the problem areas of the struggling company, BlackBerry Limited (NASDAQ:BBRY). A company that was once a renowned supplier of phones to businesses and the corporate world is now desperately seeking to find a saving grace. The following article sheds light on the recent quarter's earnings announcement, potential headwinds, and potential savers.

Revenue Attribution

BlackBerry recently released its earnings report for the fourth quarter and fiscal year ended 2014. Even though the company reported a loss the overall loss figure incurred by the company was much less than what had been anticipated by analysts. The company's smartphone revenue has been declining over the years and presently accounts for 56% of its top line that once formed 80% of the total revenues. On the other hand the contribution to revenue through services segments has increased from 16% in 2011 to 40% in 2014. Geographically, the company's sales are distributed across North America, Latin America, Asia Pacific, and Europe, Middle East, and Africa. The detailed geographical distribution of revenue as per the recent earnings release is indicated in the table below.

Source: Earnings Release, 2014

Actual Versus Estimated Earnings

During the recently ended quarter, the company did manage to narrow its loss figure compared to the previous quarter but still failed to surpass or even meet analysts' expectations for the company's top line. The company reported a net loss of $423 million on revenues of $976 million. On a per share basis, BlackBerry reported a loss of $0.80 per share this quarter compared to a profit of $0.19 per share in the same quarter last year. After adjusting for non-recurring and/or special events the reported loss came down to $0.08 per share. However, this reported loss is much smaller than analysts' expectations of negative $0.55 per share.

The top line of the company fell by 64% YoY to $976 million compared to $2.7 billion a year ago. Analysts expected revenues of $1.11 billion. The revenue plummeted across all functional and geographical segments of the company with a 37% drop recorded in the hardware segment, 56% drop in services and a 7% decline in the software segment. On a full-year basis the company generated total revenues of $6.8 billion compared to $11.07 billion the previous year realizing a tremendous drop of approximately 58%.

Fighting With A Declining Top Line

Total BlackBerry smartphone sales amounted to $3.4 million for the recently ended quarter, $2.3 million of which were older BlackBerry7 models. This highlights the failure of newer models to resonate with consumers' requirements. As discussed earlier in the article the amount of revenue generated by devices has reduced enormously over the past few years. Recently the company even had to write down its BlackBerry Z10 devices which roughly amounted to one billion dollars. The device remained unpopular with customers and had a few glitches to be fixed that only added to its unpopularity.

Declining sales and the increasing unpopularity of newer devices forced the company to look for ways to cut down its costs that might help boost its margins. For that reason, BlackBerry outsourced its hardware business to Foxconn Technology Group (OTC:FXCOF), the Indonesian company. Indonesia is a high growth market for smartphones and Foxconn wants to diversify its association with smartphone companies rather than relying on a single smartphone-maker, Apple Inc. (NASDAQ:AAPL). According to the terms and conditions specified in the five-year contract, Foxconn will be responsible for managing the manufacturing end of BlackBerry devices. The deal is expected to be materialized by June 2014.

To further cushion the decline in sales in newer handsets and the fact that older devices outpaced the sales of newer devices the company decided to restart the production of BlackBerry Bold handsets the production of which was halted in February. Smartphone sales volume declined by 32% compared to the previous quarter leveling at 1.3 million device sales.

BlackBerry announced it would slash its workforce count by about 40% to cut down its costs. This move will remove roughly 4,500 employees. The move is expected to bring down the operating costs of the company by May of the present year. A reduction in the operating costs will benefit the bottom line to some extent.

Going Forward

The company is beginning to focus on its software segment as the CEO, John Chen, believes that this is where the future growth of the company is hidden. However, realizing that the software growth will be close to impossible minus its hardware segment, BlackBerry intends to hold on to and continue to develop its hardware segment.

As of now, the company plans to boost its revenue base through BlackBerry Messenger and from QNX software (used in cars and industrial settings). The company is working on improving security concerns in its messenger software to strengthen confidentiality in office communication. The recent introduction of Z3 and the scheduled introduction of Q20 and BES 12 later this year are expected to boost future revenues.

The company is realistically moving forward by setting achievable goals and providing decent outlooks. The company's revenues are expected to remain dismal even this quarter. However, considering that the company is now working on both its hardware and software segments I believe that the growth will indeed come sometime after 2015. However, realizing that competition is not standing still through this time optimism is darkened to some extent.

Concluding Remarks

We know that the brand is losing popularity among both the business and non-business consumer class. We also know that the company is facing a tough financial position as of now and this forced it to restart production of BlackBerry Bold devices and even forced it to sell off its Canadian real estate holdings. As disappointing as the current sales performance may be, I would like to maintain a contrarian view to the market based on its smart strategic moves to go forward.

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.