Already planning a huge round of layoffs in a bid to bring costs in line with its sales, BlackBerry Ltd. must confront another painful reality of its business: a big overhang of unsold devices.
Released this year, the company's new BlackBerry 10 smartphones were well received by critics but have sold poorly in many of BlackBerry's key markets – most notably, the United States. As a result, many devices the company has shipped to retail channels remain unsold.
The company is now in the midst of a strategic review that could lead to a sale of all or parts of the business. Analysts, however, assign little value to BlackBerry's handset business, and some expect the company will need to book a substantial writedown sooner or later as it takes the difficult steps to make itself a more appealing acquisition target.
The handset business is likely to be of little use to potential buyers for the company, analysts say.
As such, a move by BlackBerry CEO Thorsten Heins to write down inventory and slash staff could help streamline the company before any potential buyer made a formal offer.
"Apple and Microsoft don't need the handsets, so you would have to shut that down," said BGC Financial analyst Colin Gillis. "It looks like Thorsten is going to do a lot of that work himself."
Mr. Gillis said BlackBerry may go ahead with writedowns when it reveals its quarterly earnings next week, or could wait another quarter so as to give itself more time to market them and try to gain traction from its newest phones – including the new flagship phone, the Z30, announced this week.
BlackBerry once ruled the smartphone market, but its market share has collapsed amid relentless competition. BlackBerry's sales plunged in the fiscal year ended March 2 as consumers flocked to iPhones and devices powered by Google's Android operating system.
It's not clear how large a writedown would be. BlackBerry reported total inventories of $887-million as of June 1. Analysts at Bank of Montreal have pegged the cost of shutting the handset unit at about $800-million. That cost would include items such as severance, product writedowns and the technical hurdles of extracting the handset business from BlackBerry's wider operations. BlackBerry didn't respond to a request for comment.
Meanwhile, major staff reductions loom. Sources close to BlackBerry this week told The Globe and Mail that the company is targeting job cuts of up to 5,000 employees, or close to 40 per cent of its global employee count of 12,000 people, between now and the end of its fiscal year in late February or early March, 2014. The cuts are expected to be broad-based, in terms of both functions and geography, although the Waterloo, Ont., area – where BlackBerry is based – is expected to take the biggest hit in sheer numbers. A BlackBerry spokeswoman this week refused to comment on what she called "rumours and speculation," but added that "organizational moves will continue to occur to ensure we have the right people in the right roles to drive new opportunities in mobile computing."
Analysts assign much of BlackBerry's current market value to its arsenal of patents and engineering talent.
Even if BlackBerry doesn't find a willing buyer, massive cuts to the hardware business would help BlackBerry transform into a much smaller, software-focused company, notes Frost & Sullivan director Ronald Gruia.
Even without BlackBerry's sales-related issues, the company faces several unrelated hurdles in getting a deal done. With a market capitalization of $5.5-billion, it is too large for most individual private equity firms (and even some competitors) to buy outright. Many of the companies that do have the cash to purchase BlackBerry also have little use for much of the company's business, since they tend to have their own handset operations.
After starting the year on an upward swing, BlackBerry's share price has given up all the gains made earlier in 2013. However the stock experienced a bump last month when the company said it was effectively putting itself up for sale. But if BlackBerry devices fail to gain traction with consumers, any buyer for the company may balk at its current valuation. That could make for a rare scenario – a "take-under," where a bidder manages to buy the company for less money, per share, than BlackBerry's current share price.
"Already you have a 20-per-cent premium baked into the stock since the news [of a strategic alternatives committee] hit," said Mr. Gillis, adding that a buyer may still have to spend more money in severance costs related to a shutdown of the handset business (should BlackBerry not pre-emptively do that). "People might be looking at this and saying that this is possibly a take-under."
BY THE NUMBERS
As BlackBerry Ltd. prepares to release its latest quarterly earnings in a week, analysts are beginning to worry about the company's huge backlog of unsold inventory. Already, the value of BlackBerry's unsold tablets and smartphones hovers near the $1-billion mark. And thanks to customer uncertainty about the company's future, that number may climb even higher.
The value of unsold inventory at BlackBerry as of last June, a 47-per-cent increase from the previous quarter.
The number of new BlackBerry 10 phones shipped last quarter, less than 40 per cent of total BlackBerrys sold in the quarter.
Number of BlackBerry employees as of March of this year, up to 40 per cent of which could be cut in the coming months, according to a source close to the company.
Number of product writedowns the company has taken in the past two years.