April 10 (Bloomberg) -- BlackBerry Ltd.’s John Chen is giving himself two years to overhaul the smartphone maker and offset declining handset demand with sales of software that connects computers with all manner of machines, from cars to heart monitors.
Chen, who took over as chief executive officer in November, is stepping up BlackBerry’s reliance on business customers instead of the smartphones that made the company famous. In the worst-case scenario in which he misses his goal of generating cash flow by this fiscal year, Chen said he’ll have six to eight quarters to replace declining hardware sales with higher-margin software revenue.
“I don’t have a plan to get rid of handsets, I have a plan to not be dependent on handsets,” Chen said yesterday in an interview at Bloomberg’s headquarters in New York. “All I need to do is replace the handset revenue, and this company will be very different.”
The shift is the key to Chen’s goal of returning the money-losing company to profit by the fiscal year that ends in March 2016. Chen is in a race against time with device sales continuing to slide -- 77 percent last quarter alone from a year earlier. His plan to create fresh revenue streams from its QNX software and BBM instant-messaging services has been welcomed by investors who had driven the stock up 23 percent since he took the helm after a failed sale process.
BlackBerry bought QNX in 2010 for $200 million from Harman International Industries Ltd. and set about building a new smartphone operating system, BlackBerry 10, on the software. It’s already widely used in cars and industrial settings like coal mines and hospitals. Now Chen wants to make it more prevalent anywhere machines need to communicate with other machines.
“This is where the industry is going,” Chen said. “It’s all about device interaction. This is why it’s so important to be agnostic.”
Chen said that by replacing single-digit phone margins with software margins that are routinely 70 percent to 90 percent, BlackBerry can be profitable with the same level of revenue. Chen reiterated yesterday that he expects the Waterloo, Ontario-based company to stop losing cash by the end of this fiscal year.
The company is focused on supplying both software and hardware to customers in regulated industries such as finance, government, health care and law who need security, risk management and high productivity, Chen said. About 80 percent of BlackBerry’s installed base of smartphone customers are in a regulated industry, and an even higher percentage of customers dependent on its servers are in such a field, he said.
Emphasizing this core base of users and technology that caters to them “will be the best way to capture and reverse the decline of our value,” he said.
Chen took over after a plan to sell BlackBerry and take it private had collapsed. He said that he’s focused on making BlackBerry competitive again, not selling the company at a distressed price.
“I’m not running the company for a sale,” Chen said. “I’m running the company to generate value, to grow the business.’
He pointed out that he ran Pyramid Technology Corp. for five years before he sold it and Sybase Inc. for 12 years before SAP AG bought it for $5.8 billion in 2010.
Today, BlackBerry shares fell 3.6 percent to $7.67, giving the company a market value of $4 billion.
Chen inherited a company that had already been losing smartphone market share to Apple Inc. and Samsung Electronics Co. for years. As recently as late 2010, BlackBerry claimed 19 percent of the global smartphone market, according to IDC. By December of last year, it had slipped to 0.6 percent.
As the company shifts its emphasis to supplying software and services, Chen recently decided to end BlackBerry’s partnership with T-Mobile US Inc.
In February, T-Mobile started offering to swap new iPhones for old BlackBerrys. Last week, Chen said he won’t renew the supply agreement with T-Mobile, the fourth-largest U.S. wireless carrier, saying that their strategies are ‘‘not complementary.”
“What kind of business person am I when I knowingly am giving a license for a company to move my customers away?” Chen said yesterday in the interview.
Severing ties with BlackBerry critics, cementing loyalties with other carriers and bringing back the older and popular BlackBerry Bold phone have been among the latest steps in Chen’s efforts to restore faith in the company.
“It was easier to do this with T-Mobile,” he said. “They are clearly focused on consumers, and I’m clearly focused on enterprise. So this is a different conversation if it was AT&T or Verizon.”
In recent weeks, BlackBerry also has taken legal action to try to stamp out product leaks and just won a court order convincing a judge that Typo Products LLC probably infringed its patents with its clip-on keyboard.
The move to cut ties with T-Mobile wasn’t emotional, he said. It was to send a signal.
“I wanted to make sure the world knows that we are not going to let people push us around,” Chen said.
To contact the editors responsible for this story: Sarah Rabil at email@example.com Anne Reifenberg