BlackBerry Can’t Shake Handsets as It Bets on Software

Photographer: Pau Barrena/Bloomberg

BlackBerry Ltd. has been clear its future lies in selling services and software to professionals who are doing more of their work on the go. So why does it keep unveiling new phones?

The Waterloo, Ontario-based company debuted the Leap touch-screen phone at the Mobile World Congress on Tuesday, and said it has plans for three more devices this year. That’s in addition to the Passport and Classic, two keyboard-equipped phones announced in the second half of 2014.

“For a company touting a software turnaround, that’s a lot of handsets,” said Daniel Ernst, an analyst at Hudson Square Research in New York.

While some are perplexed, others say BlackBerry needs as much hardware revenue as it can get to help it through the transition. With Foxconn Technology Group building most of the phones, the risk of a dud isn’t as big as it might appear.

Chief Executive Officer John Chen took over BlackBerry in November 2013 with a plan to replace hardware revenue by opening up the company’s device management service, known as BES12, to non-BlackBerry phones and building out a new software business.

Investors are on board: the shares have doubled since Chen’s first day on the job. They were little changed at C$13.60 at 10:24 a.m. in Toronto.

There’s still a long way to go to reduce the company’s reliance on phones. Hardware sales accounted for 46 percent of revenue in the quarter ending Nov. 29 while dropping 24 percent to $361 million from the same period a year earlier.

Cheaper Manufacturing

“They have optimistic targets for software growth of $500 million, but quite frankly they will need to grow at a very fast pace for several more years,” Brian Colello, an analyst at Morningstar Investment Services said by phone from Chicago. “To the extent that they can gain anything in hardware and eke out profitability, it will help BlackBerry through the transition.”

One of Chen’s first moves was to transfer manufacturing to Taiwan-based Foxconn as BlackBerry’s share of the global smartphone market slid to less than 1 percent.

BlackBerry designs the phones while Foxconn takes the risk, said Ken Dulaney, a Santa Clara, California-based analyst at Gartner Inc.

“That’s the trick he’s pulled off,” Dulaney said by phone. The price of manufacturing also is dropping rapidly, making it easier to generate profit on lower-end phones, he said.

Hardware margins were positive in the last two quarters, James Yersh, BlackBerry’s chief financial officer, said during a conference call on Nov. 29.

Keyboard Aficianados

Ernst, the Hudson Square analyst, said he doubts BlackBerry will make money from the new phones and the company should focus on selling its software and device-management service.

“There’s a certain segment of the market that wants that keyboard and I don’t think that goes to zero any time soon,” he said. “But to have so many different models it just makes it harder to do that job.”

The Leap is geared toward business users who don’t want a keyboard, Chen told Bloomberg TV on Tuesday.

“The mid- or high-end professionals, they love the keyboards,” he said. “The entry-level people, a lot of them like to have a touch screen, so they’ve been asking for one and so we did one for them.”

The device plans were unveiled a day after Chen announced the company would take software and applications running on BlackBerrys and re-purpose them for Apple Inc.’s iPhones and iPads, and Android and Windows devices. BlackBerry has also announced partnerships with Samsung Electronics Co., Google Inc. and Boeing Co. to integrate those companies’ mobile business tools into BES12.

BlackBerry doesn’t have to worry about that strategy undercutting its own device sales because its target market is so narrow, Colello said.

“If they could carve out a nice, profitable niche selling to government, selling to regulated industries, then the hardware business might not be a total drag,” he said. “That’s the case they are trying to make.”

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