The Key To BlackBerry’s Success Is Offloading Its Handset Business

  • BlackBerry reported mixed Q1 results that highlighted the company’s problems.
  • The company tries to revive the declining handset business while expanding the software business.
  • BlackBerry needs to take a bold decision to shift its focus and save the company.

For a long period, investors played with the idea that the declining mobile vendor BlackBerry (NSDQ:BBRY) would turnaround, get back on the growth path, and trigger a rally in stock price. Blackberry’s investors had many points during the previous few years when they believed that change was just around the corner; it happened with the Priv launch, the autonomous cars initiative, the endless rumors of a buyout, the change in management, and much more. However, except a few short rallies that were quickly reversed by sharp declines, BlackBerry is in a long downtrend, as shown in the chart below.

Blackberry_chart 1_062716

The market expectations from Blackberry and the company’s guidance itself for Q1 2017 were not too ambitious, it was a slight halt in the rapid declines of sales driven by the drop in hardware sales. However, the company missed both the market consensus and guidance and reported a bigger-than-expected drop in top-line figures, which presents an intensifying decline in overall sales, as shown in the chart below.

Blackberry_chart 2_062716

Amid the continuous decline in sales, CEO Chen emphasized in the conference call the importance of the software tools to the company’s future compared to the declining hardware business. The software business includes BlackBerry prime feature – its enterprise communication security solutions that allow enterprises across industries, use cases, and devices to have a BlackBerry-level security.

For years, that was BlackBerry’s strength in the mobile market, and BlackBerry succeeded in successfully leveraging that strength to create a broad portfolio of software products to address a wide variety of enterprise security issues. Software revenues totalled to $142M in Q1, which is a 4% increase in YoY and an 8% increase QoQ, and it roughly accounts for 36% of the company’s revenues. Even though BlackBerry tries to shift the market’s focus towards the software business, the company’s traditional handset business attracts a lot of attention as BlackBerry tries to compete for market share among the Android vendors.

BlackBerry reported a significant decline in device sales when the company sold only 500K handset devices compared to around 600K in Q4 2016 and 700K in Q1 2016. BlackBerry’s biggest hope in the handset devices market – the Priv – failed to trigger BlackBerry’s growth, and according to CEO Chen, at “$700, the device was too expensive for its customers.” BlackBerry did not provide any other detail about the Priv sales. Two additional Android devices are expected to be released in July and targeted at a lower cost and ASP figure than the Priv. Following the disappointing performance of the handset business, Mr. Chen committed to ensuring the profitability of the mobile device business as it shifts its focus to designing devices and outsources the entire manufacturing process.

BlackBerry ended the quarter with a non-GAAP positive bottom line and operating income. However, the GAAP loss was significant at $670M. The company provided an optimistic outlook for an expected 30% increase in software sales, positive free cash flow for the year, and reaching the breakeven point in the handset business in the third quarter.

It is clear that BlackBerry is slowly shifting from a mobile device vendor to a security software vendor, which is, in my opinion, the right way for the company to move. Given the number of low-cost Android-based mobile vendors that deliver good enough devices, BlackBerry's strength in that market is fading away. BlackBerry is waging its last-ditch fight with its Android devices; however, I believe it is doomed to lose that fight. BlackBerry reached a point where its CEO and management should take a bold move and look for a potential buyer for the handset business that will allow the company to cash in on some of its investment and refocus the company around security software.

Abandoning the traditional core business is a very tough decision to make; however, as we now witness in Yahoo, if this decision is not made in time, the consequences for the company are much worse. After selling the declining handset business, BlackBerry should brand itself as a pure-play small-sized software security company specializing in communication and mobile. This would be a long journey but one BlackBerry must take. As long as we don’t see any signs of such a change, investors should stay away and keep a BlackBerry on their watchlist, ready to react to new developments.

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Comments on this article and BBRY stock

user profile picture
Oh I see how it works because Chen has no idea how to fix the handset business, then just abandoned it. Yup real smart, how about firing Chen for failing? Thorsten was fired for not saving this device making company. This sounds like a ice cream vendor but the management doesn't know how to sell ice cream.
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user profile picture
I guess Thorsten quit at Powermat, and I don't blame him as they were trying to control him. I would consider working with Thorsten if BlackBerry was to reinstate as CEO and get rid of Chen. I guarantee to the board of BlackBerry, with Thorsten help I would introduce the next generation smartphone that would become standard in the industry. But it appears BlackBerry's board doesn't wish to take a chance on what could really be a true turnaround for BlackBerry. Chen envisioned the wrong handset (slider device, Priv) whereas I have envisioned the correct device as to prompt BlackBerry to take back the crown from Apple.
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