BlackBerry pleads for patience as sales plummet

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New BlackBerry Ltd. chief executive John Chen asked investors for patience on Friday, promising the troubled smartphone company's eroding business will give way to better results next year as he shifts its focus from making handsets to growing software and services revenues.

"You have to bear with me a little bit," Mr. Chen, told analysts on a conference call. "We still have a lot of work to do, but I'm very hopeful."

BlackBerry's business continues to decline steadily, five months after shareholder Fairfax Financial Holdings pulled its takeover offer and instead led a refinancing of the Waterloo, Ont.-based company. It posted revenues of $976-million (U.S.) in the fourth quarter, ended March 1 – its first sub-$1-billion quarter in seven years, down 64 per cent year-over-year and below expectations.

Mr. Chen maintained the company will turn cash-flow positive by early next year. But its cash resources still dipped by $530-million over the quarter to $2.7-billion, notwithstanding a $250-million injection from the refinancing. The company recognized revenue on 1.3 million handsets, down from 1.9 million the previous quarter. "They're in danger of falling below one million [device sales] a quarter," Citi Research analyst Ehud Gelblum said. "You've never seen a handset company sustain itself with numbers like that."

Shares of the company fell 7 per cent on Friday, falling 65 cents to close at $9.31.

Mr. Chen inherited a company whose decline was exacerbated by the disastrous launch last year of the BlackBerry 10 platform, its much-delayed response to iPhone and Android. Consumers ignored its all-touchscreen Z10 model, while its keyboard-enabled Q10 flopped with long-time users. It was missing many familiar features of past BlackBerrys and was not compatible with older BlackBerry servers installed with corporate and government ("enterprise") customers, forcing them to upgrade. Few did.

Instead, loyal customers have largely stuck with BlackBerry's older phones, particularly the Bold, which continues to far outsell BlackBerry 10 devices, prompting the company to put it back into production.

Another critical concern is BlackBerry's high-margin services business. For years, the company fought to protect the "service access fees" it charged carriers to access its proprietary network. However, Mr. Chen's short-lived predecessor Thorsten Heins bowed to pressure to reduce the fees, a move the new CEO says was a mistake. Service revenues are now declining by more than 10 per cent from quarter to quarter, amounting to just $547-million in the fourth quarter, down by more than $400-million from a year earlier.

Mr. Chen is aiming to win back enterprise customers, particularly in regulated areas such as banking and health care, who have chosen other device management service providers. He also expects to drive growth and revenue from the company's BBM instant messaging service and QNX software division, which provides machine-to-machine communication capabilities to auto makers and other industries.

The company this week announced plans to derive revenue from BBM, ranging from selling virtual "stickers" like other instant messengers, to enabling users to make payments over the service.

Meeting with journalists at BlackBerry headquarters, Mr. Chen said he sees even greater revenue growth potential for QNX over the next two to three years, from applications for software interfaces such as bank machines, government control systems and mobile military communications. "The important point is to establish a growing software business, have a good monetization plan for BBM and continue to expand the QNX reach and to make sure that hardware doesn't lose money," he said.

Mr. Chen expects to solve the BlackBerry 10 compatibility problem by introducing new server software by November that will enable enterprises to manage any BlackBerry or rival device.

He will do that in tandem with the launch of a new smartphone, called the BlackBerry Classic Bold, that restores familiar features such as a five-button utility belt that disappeared from recent devices, in a nod to under-appreciated faithful customers.

Much of the financial risk of making handsets has been shifted to new manufacturing partner Foxconn Technology Group in exchange for a share of the profits. "People are now considering pausing before they get off our platform," Mr. Chen said.

BGC Financial analyst Colin Gillis said Mr. Chen is trying to turn BlackBerry into "a software and service company that uses its hardware, which is becoming commoditized, as a way to drive its services. The hardware is just becoming the tool to get you onto the platform. Whether it works or not remains to be seen."

With files from Jacquie McNish and Bertrand Marotte

With files from Jacquie McNish and Bertrand Marotte.