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BlackBerry Chief Executive John Chen attends the launch event for the new Blackberry Classic smartphone in New York, December 17, 2014. (BRENDAN MCDERMID/REUTERS)
BlackBerry Chief Executive John Chen attends the launch event for the new Blackberry Classic smartphone in New York, December 17, 2014. (BRENDAN MCDERMID/REUTERS)

Listen up: Chen's message for skeptics as BlackBerry revenue falls short Add to ...

Halfway into his promised two-year turnaround of BlackBerry Ltd., chief executive John Chen is growing frustrated by the chorus of skeptics who doubt he can pull it off.

“There is a level of frustration on our part that they don’t understand the steps that we had to go through to strengthen the balance sheet,” Mr. Chen told journalists at the smartphone maker’s Waterloo, Ont., headquarters Friday afternoon.

Review of BlackBerry's new Classic phone (the physical buttons are back!) (The Globe and Mail)

Earlier that day, Mr. Chen delivered a mixed bag of results that seemed to perplex investors: The stock opened down 9 per cent on the Nasdaq before clawing back most of the decline to close at $9.99 (U.S.), down eight cents.

The company reported third-quarter revenue of $793-million for the period ended Nov. 29, far short of analyst expectations in the mid-$900-million range. Mr. Chen said he was puzzled about why they expected revenue to rise from last quarter’s $916-million, when he indicated otherwise on a conference call at the time, saying “From a revenue standpoint, we might not be at the lowest point, but we are near the bottoming out of this revenue.”

“They’re not listening to what I said,” said Mr. Chen, who joined the company 13 months ago. “Because we don’t give guidance, we don’t call them up and say, ‘Which part of English do you not understand?’” He said the company will “probably need a couple of quarters” to turn revenue around.

But Mr. Chen sounded upbeat as he delivered on his pledge to generate positive cash flow from operations by the end of the fiscal year, producing a $43-million gain on the quarter. Thanks to steep cost cutting, the company also reported a profit of one cent a share, adjusted to factor in the fluctuating value of the company’s debentures. The company also has $3.1-billion in cash and investments, though it reported a net loss of $148-million, or 28 cents a share, compared to a loss of $4.4-billion or $8.37 a share a year earlier.

BlackBerry’s results reveal a company in mid-turnaround, with a lot of moving parts as Mr. Chen attempts to move the focus away from handsets to software and services. The CEO acknowledged he wasn’t happy with the revenue, telling analysts on a conference call: “Making money and generating cash have got to be the number one priority.” But BGC analyst Colin Gillis said the company’s adjusted profit “shows the leverage available if the firm is able to stabilize and grow revenue.”

Handset sales accounted for most of the revenue drop, and some analysts think the company won’t meet Mr. Chen’s goal of selling 10 million devices next year. The company sold 6.9 million in the first nine months.

Mr. Chen blamed the shortfall partly on the unexpected success of the new oversized Passport smartphone as BlackBerry scrambled to meet higher-than-expected demand. The company was unable to deliver all orders in the quarter on time, meaning the revenue from many of the phones will only appear in the fourth quarter. In another welcome development, the response to this week’s launch of the Classic, a smartphone aimed at diehard users, was positive. Unlike recent BlackBerry products, carriers seem willing to promote the new device.

In addition, the company has been selling excess inventory of millions of poorly-received touchscreen phones at reduced prices.

Another area of concern is the profitable stream of fees charged for users of BlackBerry’s older handsets, which is falling at a rate of more than 10 per cent every three months and accounted for 46 per cent of revenue.

Mr. Chen has promised replacement revenue from new software and service offerings, but said those sales likely won’t appear until June. The company is targeting large customers to deploy new server software to manage all of their smartphones, signing up 4,900 for a free upgrade from their existing software.

But Morgan Stanley analyst James Faucette said in a note those commitments only amount to a “free reservation” and the number that become actual paying customers “will not be known until the new year” and will likely be “much lower.” He added that with little left to cut, Mr. Chen’s goal of achieving a profit next year “will have to come with revenue growth.”

 

Editor’s note: An earlier version of this story incorrectly reported that software revenue had increased to about $63-million in the third quarter from $59-million in the second quarter. In fact, software revenue declined to $54-million.

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Follow us on Twitter: @SeanSilcoff, @ljkawa

 

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