BlackBerry CEO hints at major rebuild as handset sales slump

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BlackBerry Ltd. chief executive John Chen called his strategy for restoring the pride of Waterloo, Ont., a turnaround. But his comments at Tuesday's annual general meeting instead signalled his desire for a complete rebuild.

After the release of earnings that disappointed analysts, Mr. Chen highlighted recent moves that suggest the company is reconsidering every part of the slumping hardware business that once made it the world's biggest smartphone maker. From contracting out work, to shifting tasks to new staff or abandoning some areas altogether, the CEO implied all options are on the table in his bid to squeeze efficiency from the slumping unit that still accounts for most of its revenues.

In the midst of a push to pivot the company primarily from a handset maker to a software and services provider, Mr. Chen said he's looking at the business as if he were starting a new handset company. "The way I think about it is, if we're going to start a device business today, what are the levels of investment that should be put together?"

Because 75 to 80 per cent of handset components are common across all device makers, Mr. Chen said he's reallocating hardware staff, contract manufacturing partners and even some parts of software design to deliver on those elements of the device that define the BlackBerry experience.

"BlackBerry's defocusing efforts on the hardware business, managing it for profitability with reduced spending and reallocation of resources to growth initiatives," RBC Dominion Securities analyst Mark Sue wrote in a note. "BlackBerry is blocking and tackling well near term, delivering cost reductions and launching products on time. It's hard to cut your way to glory."

First-quarter earnings revealed the company made 40 per cent of its $658-million (U.S.) in revenues from hardware on sales of a mere 1.1 million BlackBerry smartphones, a greater share than last year, when the company was collecting more money from service-access fees. The company reported an adjusted earnings-per-share loss of $0.05, which missed estimates in the $0.02 loss range. The overall pie is shrinking though, and to offset that decline, Mr. Chen has pledged that by the end of fiscal year 2016, BlackBerry can hit $600-million in revenues from software sales and messaging services. What roiled markets on Tuesday was mixed evidence about whether the plan is starting to work.

A bright spot in the morning's otherwise weak first-quarter earnings was software and licensing revenue, up 150 per cent year over year to $137-million. But even there Mr. Chen admitted he may have "fumbled the ball." Markets beat back a BlackBerry rally in the midmorning after it digested that some of that total came from a large patent-licence deal with Cisco Systems Inc.

"Initially, it looked like software was starting to explode, then on the call there's some one-time licensing – who knows if it's one-time – there was some unspeakable licensing in there. This is not the first quarter that had some cats and dogs thrown in [the software and licences category], but this time they had a big kitty, so it really stuck out," BGC Partners analyst Colin Gillis said.

Mr. Chen acknowledged he may have confused analysts in the morning conference call when he threw out 23 per cent as a year-over-year number for software growth, when he should have said 30 per cent or more (the 23 per cent, he says, was just for its BlackBerry Enterprise Services mobile-device-management software).

"The analysts should know better," Mr. Gillis said. "It's too early for the software business to be standing on its own."

Mr. Chen says that most of the revenue growth in software is happening in North America, which is a downside for what was once a globally relevant company. In the key overseas markets, the overall revenue trend was all downward: EMEA (Europe, the Middle East and Africa) revenue fell 41 per cent, Asia-Pacific fell 43 per cent and in Latin America it dove 66 per cent.

As part of the reallocation of resources, the Sweden-based software team responsible for some of the company's user-interface work was axed to save money (they have not yet been replaced) and Mr. Chen has moved some workers in the handset team to other units in the company. He said he couldn't promise that job cuts had ended, as he would need to keep expenses in line with still-falling revenues, but he is hiring different kinds of workers, pointing to a spate of hires at the company's Ottawa offices related to QNX's smartcar and Internet of Things teams.

But for all that, Mr. Chen repeated several times on Tuesday he is not abandoning hardware, where he thinks BlackBerry "has a shot."

"In the hardware business if you get one hit, you can be huge. You get guys like Xaomi, now worth $40-billion right out of the gate," said Mr. Gillis, though he said even BlackBerry's new deals with contract manufacturers Compal and Wistron doesn't mean he can match the cost advantage of Xaomi.

Security was at the heart of his message to shareholders: The company hopes secure software will dig it out of its hole. Even if Mr. Chen acknowledges that the miserable handset sales this quarter, 1.1 million, are in some way a legacy of security decisions.

Despite these worrying signals, he rejected any talk of an imminent takeover. "Oh no. No no no. Not at this price," he declared, and said the company has "enough ingredients to put up a good fight until the fight determines one way or the other. We'll be violently successful and the shareholder gets a huge reward." He didn't finish the thought, though he did remind everyone that he's 19 months into a five-year contract.