BlackBerry Stands by Hardware as Sales Slip to 2007 Level

BlackBerry Ltd. (BB)’s new chief executive officer, rejecting calls to exit the hardware business, gets a chance this week to convince investors he has the time and vision to revive a unit that’s dragging sales back down to 2007 levels.

Handpicked by BlackBerry’s largest investor for the CEO job, John Chen has begun building his case that the company should keep its unprofitable smartphone business, even as investors and analysts urge the company to focus on more lucrative software and services. Analysts are estimating a 42 percent revenue drop in its quarterly results Dec. 20, putting pressure on Chen to win over skeptics.

Chen’s reluctance to part with hardware echoes the sentiment of his predecessor Thorsten Heins, who vowed when he joined in January 2012 not to break up the company. Unlike Heins, Chen is an outsider who has orchestrated a software-led turnaround before, an experience that will afford him some patience from investors.

“He’s got the mandate -- I suppose the constraining factor is time,” said James Cordwell, an analyst at Atlantic Equities LLP. “A change in direction is what people need.”

Chen has already begun cleaning house, with the recent departures of the company’s previous marketing, operations and finance chiefs. Yesterday BlackBerry announced the hiring of John Sims, a former colleague of Chen’s at Sybase Inc. and SAP AG, to run global enterprise services.

Two additional executives were named today. James Mackey, an SAP veteran who most recently worked at Open Text Corp., is now leading corporate development and strategy for BlackBerry. Mark Wilson, formerly of Sybase and later with Avaya Inc., was appointed to oversee marketing.

Strategic Changes

BlackBerry’s new CEO must now follow up those personnel moves with some big strategic changes to win the confidence of more skeptical shareholders, said Cordwell, who is based in London and rates BlackBerry the equivalent of a sell.

Heins, who stepped down last month, had bet that a new operating system with a faster Web browser and snappier navigation would put BlackBerry back in the game with Apple Inc. (AAPL)’s iPhone and Samsung Electronics Co. (005930)’s Galaxy lineup. Delays to the release of BlackBerry 10 -- and the decision to put the touch-screen Z10 version on sale first -- alienated the BlackBerry faithful, who were forced to wait for the Q10 model that came with a physical keyboard.

BlackBerry will probably report sales of $1.58 billion and a loss of 45 cents a share, excluding one-time items, according to the average estimate in a Bloomberg survey of analysts. The company took a writedown of almost $1 billion in September for unsold Z10s and reported a 45 percent decline in year-over-year sales to $1.57 billion.

2011 Peak

Back in December 2007, BlackBerry reported fiscal third-quarter sales of $1.67 billion. With consumers and business users snapping up its devices, sales surged as high as $5.56 billion in the quarter that ended in February 2011, then began to recede amid tougher competition.

More inventory writedowns are likely this week, making the future of BlackBerry’s hardware business the priority Chen has to address, said Mark Sue, an analyst at RBC Capital Markets in New York.

“The question we’ve been hearing the most from investors is, ‘How can BlackBerry reduce its exposure to handsets?’” Sue said in a note this week. He rates the stock the equivalent of a sell.

Sybase Experience

BlackBerry optimists point to Chen’s experience at Sybase. When he took control of the business software maker in 1998, Sybase was in the midst of cutting 10 percent of its workforce and was trading near a record low. Chen shifted the Dublin, California-based company away from its focus on database software to expand into mobile-data management. In 2010, he sold Sybase to SAP for $5.8 billion, more than six times its value at the start of his tenure.

Chen has repeatedly signaled, though, that he has no plans to close BlackBerry’s money-losing hardware business. In an open letter on Dec. 2, he acknowledged that “BlackBerry devices are not for everyone” while pledging that smartphones would remain one of its four areas of focus in future.

Meanwhile, the shares continue to slide as investors dump the stock, uneasy about the company’s reliance on phone sales. BlackBerry has tumbled 22 percent since Nov. 1, the last trading day before its biggest investor, Fairfax Financial Holdings Ltd. (FFH), brought Chen in as CEO. Along with the hiring, BlackBerry abandoned a plan to sell the company and go private, and settled for a $1 billion cash injection instead.

The stock fell 0.7 percent to $6.06 at the close in New York, leaving it more than 95 percent below its 2008 high.

BBM Boost

While he works to fix the hardware business, Chen is making moves to strengthen BlackBerry’s other products. The company said today that its BlackBerry Messenger messaging service will soon come preloaded on LG Electronics Inc. (066570)’s G Pro Lite smartphone. BlackBerry made BBM available for free in October to users of the iPhone and devices like the Pro Lite that use Google Inc.’s Android operating system.

BlackBerry’s cash reserves will be critical to its fortunes in 2014, whether or not its phones are merely a stopgap to reassure existing customers while Chen comes up with a more software-centric future for the company.

Cash and short-term investments fell by almost $500 million to $2.3 billion in the quarter that ended in August, and analysts estimate they fell by at least that much the following quarter. On the plus side, BlackBerry negotiated a $1 billion convertible bond sale to investors such as Qatar Holding LLC last month. It’s also seeking a tax refund of as much as $1 billion before the end of this year, according to two people with knowledge of the negotiations.

‘Ugly’ Quarter

“BlackBerry has the cash resources to get through its transition to cash flow break-even sometime in fiscal 2015,” Todd Coupland, an analyst at CIBC World Markets in Toronto, said in a note this week. He rates BlackBerry the equivalent of a sell. “The turnaround will take time,” he said, and this quarter is going to be “ugly.”

If BlackBerry makes it to 2015, it’s likely to be a smaller company focused more on managing fleets of smartphones -- such as iPhones and Galaxys, as well as BlackBerrys -- as more businesses let their employees use their personal devices for work, said Atlantic Equities’ Cordwell.

“The question is, given how well resourced everybody else is in this space, what can he actually do with the constrained resources he’s going to have,” he said.

“Survive? Yes. Thrive? Not so sure.”

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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