BlackBerry CEO Chases BBM, Server Growth as Stock Surges
BlackBerry Ltd. Chief Executive Officer John Chen has surprised skeptics and pleased investors by cutting costs and fueling a 56 percent surge in the smartphone maker’s stock.
Now he says his next priorities are ending losses in the hardware division and expanding instant messaging as he tries to turn around a company with falling sales and dwindling market share.
“I’ve got to get the devices business profitable, I’ve got to get the server business growing again, I’ve got to get BBM scaling,” Chen, 58, said last week in an interview during Mobile World Congress in Barcelona. “I have my hands full with a number of things to do.”
Not that he hasn’t been busy so far. Since being named CEO in November, Chen has reached an agreement with Foxconn Technology Group (2354) to outsource smartphone production and shored up cash by deciding to sell much of BlackBerry’s Canadian real estate. He’s also won over skeptical shareholders in part with his candid assessment about what needs to be fixed at Waterloo, Ontario-based BlackBerry.
“He’s done quite an impressive job, better than expected coming in, providing clear guidance in terms of direction of the company and taking action immediately,” said Philip Petursson, managing director at Manulife Asset Management. The Toronto-based firm oversees $263 billion in assets including BlackBerry shares. “It’s been well received in the marketplace, and that’s reflected in the stock price.”
Chen inherited a company that had been losing market share to rivals led by Apple Inc. (AAPL) for years and whose stock had tumbled more than 90 percent from its 2008 peak -- including on the day he was named CEO, when the company announced that an attempted $4.7 billion buyout had collapsed.
Since then, the shares have climbed 56 percent, giving BlackBerry a market value of $5.3 billion yesterday. That’s one of the best performances among new CEOs in the Nasdaq Composite Index. The average gain during the first four months on the job was 12 percent, according to data compiled by Bloomberg, based on a list of executive start dates in the last five years provided by Equilar, an executive compensation and corporate governance data company.
“There was quite a bit of an extreme negative view on BlackBerry, and now we were able to lay out a plan and show some execution,” Chen said in a follow-up conversation this week.
Much remains to be done, said Walter Todd, who oversees about $950 million at Greenwood Capital Associates LLC in Greenwood, South Carolina. The recent surge doesn’t mean that BlackBerry is in the clear just yet because the shares were already so low, he said.
“Can you stop the bleeding, can you keep things from getting worse? Sure,” Todd said. What Chen needs to prove is that BlackBerry can grow again, he said.
“If he can show that he’s stabilized the business, then that that would open the door for” BlackBerry to become a takeover target again, Todd said.
Chen says that while he has no current plans to put BlackBerry back on the block, he won’t rule out eventually selling the instant-messaging business.
Chen honed his turnaround skills at software maker Sybase Inc. before selling it to SAP AG (SAP) for $5.8 billion. Long before that, as a high-school student in Hong Kong, he got his first taste of strategy playing in bridge club tournaments.
“It’s really not about how good a hand you’ve been dealt,” he said. “It’s about how you do the best with the hand you have. It’s an interesting parallel with life, and it’s an interesting parallel with work for sure.”
Raised in Hong Kong after his family fled the Communist takeover of mainland China, he left the former British colony in his last year of high school to come to the U.S and enroll at Northfield Mount Hermon, a boarding school in Massachusetts.
“It was a complete foreign language, foreign culture,” he recalls. “I loved the change.”
Chen stayed on the East Coast to do a bachelor’s degree in electrical engineering at Brown University before completing a master’s degree at the California Institute of Technology. His first job after graduating was as a design engineer at Unisys Corp. Stints at Pyramid Technology Corp. and Siemens AG followed before he joined Sybase.
In one of his earliest moves as CEO of BlackBerry, Chen announced a deal for Foxconn to help design, produce and distribute new BlackBerrys over the next five years. The deal lets BlackBerry share inventory risk with Foxconn in exchange for a bigger chunk of the profit on each phone sold.
Even though the Foxconn agreement was announced early on the morning of Dec. 20, some investors didn’t appreciate its significance until Chen spelled it out during his first earnings call, said Eric Jackson, president of Toronto-based hedge fund Ironfire Capital.
“From the moment he started talking, the stock began climbing,” Jackson said. Jackson said he’s now building a long position in the stock, having shorted it in the past. Bets against BlackBerry reached a one-year low last month, according to financial-information provider Markit.
Unsold inventory had been one of BlackBerry’s biggest problems, saddling the company with more than $5 billion of charges in two quarters, tied primarily to the Z10 touchscreen model that flopped with consumers last year.
The fact that the sub-$200 Z3 that goes on sale in Indonesia in April was developed in just three to four months is a testament to the partnership with Foxconn, Chen said.
The next step was shoring up cash to help fund a recovery. Chen reiterated this week that BlackBerry should stop losing cash by the end of the fiscal year that concludes in March 2015 and that it will start making money sometime in the following fiscal year.
“I feel comfortable we have enough cash lined up to engineer this turnaround,” Chen said.
Fairfax Financial Holdings Ltd. (FFH), BlackBerry’s biggest investor and leader of the failed buyout attempt, instead spearheaded a $1.25 billion cash injection. Then, Chen announced a plan in January to sell most of the company’s Canadian real estate, which could raise as much as C$550 million ($500 million).
“John has acted quickly and decisively,” Fairfax CEO Prem Watsa said in an e-mail. “John is a tremendous asset to BlackBerry and he has only just started.”
While BlackBerry’s market value is a far cry from its heyday in 2008 at almost $82 billion, Chen has managed to drum up some shareholder optimism that has been largely missing since Apple and Samsung Electronics Co. began wiping out its smartphone dominance. 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.
Chen is also getting help as technology industry dealmaking underscores the value of BlackBerry’s BBM business. Facebook Inc.’s $19 billion purchase of WhatsApp Inc. put the spotlight on BlackBerry Messenger, spurring investors to reassess the value of the rival instant-messaging service.
To aid his turnaround plan, Chen has brought in familiar faces from SAP and Sybase for key executive positions. Chen adheres to what he calls a “one-third” strategy: hiring that fraction from among those he’s worked with at previous companies, promoting another third from the company he’s working at, and a final third that are neither.
“You rely on the people you trust and who trust you,” Chen said. “There’s also the people that have seen what has gone wrong, who know why everything happened. Then you need another group of people that can give you new ideas and second guess you a little bit.”
Mitchell Kertzman, who brought Chen to Sybase in 1997, promoted him to be his co-CEO in February 1998. The Dublin, California-based company had just announced a $70 million restructuring and the firing of 10 percent of its workforce.
Chen, who became lone CEO in September 1998, slashed costs and returned the company to profitability the following year, morphing the database provider into one of the pioneers of mobile enterprise software.
“Customers had lost confidence in the company, in the technology,” Kertzman said. “There were big challenges there, so it was not dissimilar from BlackBerry in a sense that it was a pretty broken company.”
There were differences too, Chen says. While Sybase’s technology had fallen behind competitors’, its customer base was relatively faithful, he said. While BlackBerry had new technology with the BlackBerry 10 operating system, the customer base had fallen off. It took only 12 months to make Sybase profitable. Yet, returning the company to growth took longer to achieve, he said.
With BlackBerry, “I see us taking a slightly longer route to get to financial stability, or at least the financial stability I like, and then growth might be a little faster than my past experience,” he said.
SAP bought Sybase in 2010 for more than six times its value when Chen took over in 1998. SAP co-CEO Bill McDermott recalled testing out SAP’s customer management software on an iPad using the Sybase mobile platform and being immediately impressed.
“I called up John and said ’John, sometimes dating is the right way to go, and sometimes you gotta get married. We are at one of those moments, my friend,’” McDermott said in a recent e-mail exchange. “We had a deal in principle 16 days later.”
At BlackBerry, Chen’s design philosophy is more comfort-food than wow-factor. The new Q20 phone -- Chen calls it “the Classic” -- brings back buttons and other features that loyalists complained were missing from models introduced last year.
“John understands how to keep the main thing the main thing,” McDermott said. “I have no doubt he will instill that clarity of purpose at BlackBerry.”