BlackBerry’s Turnaround Plan: Seven Ways to Fetch a Better Price

BlackBerry’s latest quarterly results are out, and John Chen’s turnaround plan seems to be making a difference. Sweeping layoffs, restructuring, an open platform: what has BlackBerry done to revive itself and fetch a better price? What comes next?

Even if you think BlackBerry’s new Passport phone defies all common sense about what looks good, and even if its share of the global market has fallen below 1%… BlackBerry, it turns out, has no intention of giving up easily. It wants to get back on its feet and sell itself at a good price. To that end, it hired John Chen, a CEO with a record of turning companies around. At last weekend’s earnings call for the second quarter of fiscal 2015, Chen called this “the beginning of BlackBerry’s eight-quarter turnaround plan.”

Chen’s plan holds few surprises. It follows the familiar turnaround playbook that took shape in the 1980s, and resembles the two turnarounds he has led himself.

The traditional approach is simple: raise revenue and cut costs. Slash unprofitable divisions and jobs while looking for new sales and sources of cash. When Chen took charge of two troubled companies, Pyramid and Sybase, he promptly cut jobs and divisions, keeping only their business-to-business operations. After returning to profit, Pyramid and Sybase were acquired by Siemens and SAP, respectively.

By the standards of a traditional turnaround, selling the company for a good price counts as a considerable success.

Since Chen took over, BlackBerry’s results have finally begun to improve. He said the square-screened Passport had received more than 200,000 orders and had sold out on several websites. Excluding one-time charges, BlackBerry lost $11 million this quarter, a much better result than analysts expected and than it reported a year earlier.

The best news may be that BlackBerry’s hardware business posted a gross profit for the first time after five quarters of gross losses.

But that still leaves our question: what has BlackBerry done to make itself worth more to a buyer?

Release fewer new phones

The Passport is the only BlackBerry phone in two years that could be called a “flagship.” To avoid running through its cash too quickly, BlackBerry has been cautious about new phones and research spending. According to internal BlackBerry documents obtained by N4BB, apart from the P9983 and Passport, due in the third quarter, it plans to release only one more phone before year-end: the Q20 Classic. That would leave BlackBerry with just four phones on sale at the start of 2015, the fewest in its history.

The document also redefines BlackBerry’s target customers. Plainly, the company intends to cut its lineup to four phones a year.

BlackBerry has adjusted production as well. One major reason the Passport sold out was that too few units were available on launch day. Most of the stock did not reach retailers until a week after preorders opened. That may suggest BlackBerry expected far fewer Passport sales than it has seen.

With phone development, the more models you release, the faster you may fail. Saving money is no bad thing.

Open up the platform

BlackBerry is opening up the software system it has long prized. The shift began with BB10: employees using BlackBerry phones no longer had to use the BES platform. ActiveSync let them connect to Microsoft Exchange or Google Apps to sync email, calendars and other information.

More striking is BlackBerry’s expansion onto iOS, Android and other platforms. BBM, its messaging app, is already available on the major platforms. Its conferencing service, BBM Meetings, and money-transfer service, BBM Money, are due by year-end, with cross-platform support planned from the outset. These consumer apps are no longer reserved for BlackBerry devices.

BlackBerry has also launched Blend, a cloud service that lets users access their BlackBerry messages, calendars, personal files and other information across devices. It currently runs on Windows and Mac computers and Android and iOS tablets. The aim is clear: keep existing BlackBerry users from leaving because syncing their devices is too much trouble.

These services are meant to do more than support phone sales. BlackBerry has created a value-added software services division and plans to charge subscriptions for the services. That would give it a new source of revenue to offset the decline in monthly fees as longtime users leave.

Asked when services such as Blend would bring in meaningful revenue, Chen answered: fiscal 2016 (2015).

Rethink the enterprise business

BlackBerry wants more than that. It aims to win back enterprise customers, and BES 10, its enterprise platform with military-grade encryption, is central to the effort.

BlackBerry can no longer count on selling enterprise services together with its phones: the phones’ shrinking market share would drag the services down. It has separated the enterprise business from the handsets and made it compatible with iOS and Android.

BES is now an enterprise security solution in its own right, no longer tied to BlackBerry’s rapidly declining phone business.

To attract users, BlackBerry launched EZ Pass, offering lower prices to persuade BES 7 customers and users of rival security platforms to switch to BES 10. EZ Pass has two tiers. Silver provides “device, application, email and security management for iOS, Android and BlackBerry.” Gold adds “secure work environment solutions for iOS and Android, as well as advanced BB10 security features for the most security-conscious companies.” On top of an annual fee per user, companies must pay for technical support.

The strategy has worked surprisingly well. BES 10 added 3.4 million users this quarter, including 840,000 who had recently switched from competitors.

BES 12, the next-generation enterprise platform now in testing, already has 70 trial customers, many of them Fortune 500 companies. BlackBerry hopes its security features will continue to attract customers with stringent requirements, including governments and banks.

Across consumer software and enterprise platforms, BlackBerry plans to stick with subscriptions. A customer who pays once brings a quick sale; recurring payments provide revenue for the long term.

Outsource phone production

BlackBerry CEO John Chen and Foxconn chairman Terry Gou at the launch of the BlackBerry Z3.

Outsourcing production of low-end phones is an important part of BlackBerry’s turnaround. It eases the burden of manufacturing and holding inventory, and is the main reason the hardware division’s gross margin has improved and its gross profit has turned positive.

Previously, BlackBerry bought most components and made most phones itself, contracting out only some production. Its manufacturing operations have long been secretive because of security concerns. No one seems to know exactly how many factories it has, where they are or what each does. We do know that many BlackBerry phones are made in Canada and Mexico. BlackBerry previously worked with contract manufacturer Celestica; in 2012, Celestica said that partnership was coming to an end.

On December 19, 2013, BlackBerry announced a partnership with Foxconn to develop inexpensive BlackBerry smartphones. The phones are made in Foxconn factories in Indonesia and Mexico, while BlackBerry retains all intellectual property rights to the products. BlackBerry says the first phone from the partnership, the Z3, has been well received in developing countries such as India, but it has declined to give sales figures.

Cut costs

There are many ways to save money. BlackBerry has already tried several.

First came large-scale layoffs. Last September, BlackBerry announced plans to cut 4,500 jobs, about 40% of its workforce. Of those positions, 120 were in product development and wireless operations. At this quarter’s earnings call, Chen said the layoffs were largely complete.

BlackBerry also intends to spend its remaining cash carefully. Under Chen’s plan, it does not expect positive cash flow until fiscal 2015; in the meantime, it aims to keep its cash balance steady. Research and development spending, its largest expense, has fallen from $720 million in the first half of fiscal 2014 to $420 million. “We think our current spending is about right,” Chen said. “If it grows, it won’t grow much. We’re managing it very carefully. We’re reallocating a lot of resources to focus on BES 12, value-added services and the newly established BlackBerry Technology Solutions division.”

In other words, BlackBerry is shifting money and resources from phones to its other three businesses.

It has also sold its European research center to Volkswagen and most of its Canadian property, including its own office buildings, for $280 million. It plans to lease its current office space back from the buyers.

Taken together, the measures are meant to bring in cash and curb spending. BlackBerry’s cash outflow this quarter was just $36 million, down from $260 million the previous quarter.

“Squeeze” more value from loyal customers

Can BlackBerry slow the departure of customers from its legacy business?

“I don’t know right now, but I’m trying,” Chen said. “The people still using the legacy business are particularly loyal customers. The good news is that many of them are moving to BB10. The bad news is that you’ll see the user numbers fall. But the good news about the move to BB10 is that we have other ways to add value to customers’ phone software and earn revenue from it.”

Those loyal customers are a small gold mine left over from BlackBerry’s old business. Value-added software, subscriptions: there is still a little value to extract.

Sell patents

Motorola and Nokia have sold patents, but BlackBerry is taking a somewhat different approach. After becoming CEO, Chen organized the company around four businesses: hardware (phones), enterprise software, value-added services and BlackBerry Technology Solutions.

The Technology Solutions division was created only this quarter. Led by former Ericsson president Sandeep Chennakeshu, it includes BlackBerry technologies such as QNX, Certicom and Paratec, along with 44,000 patents. It is also responsible for developing Ion, BlackBerry’s Internet of Things initiative. BlackBerry plans to sell these technologies, and the rights to use them, to the automotive, healthcare and other industries.

Asked whether he wanted to sell all 44,000 patents as a package, Chen replied, “No, I’m actually selling whatever I can.” In other words, he will sell patents as buyers emerge. A package deal would help carry the less valuable patents. It might fetch more than separate sales that leave a pile of unwanted patents behind, but that money would arrive too late to meet BlackBerry’s immediate needs.

BlackBerry does not yet seem to have a clear plan for the division. Separating out the technologies and patents most valuable to competitors and the wider industry might also make them easier to package and sell later.

What next?

Chen’s “eight-quarter turnaround plan” aims to bring BlackBerry back to positive cash flow in fiscal 2015 and profitability in fiscal 2016 (2017).

Here is a bold guess: to make a profit, BlackBerry will split its enterprise and consumer businesses entirely.

Its enterprise software division has already become a provider of complete solutions for companies that put a premium on security. It looks increasingly like an IT strategy consultancy. The phone business does not even need to catch up with rivals; it only needs to stop losing money. So BlackBerry is cutting the division’s spending, reducing the number of models and even lowering production.

Value-added software services such as Blend could provide new revenue. As for the Technology Solutions division, whether it sells its technologies together or separately, any proceeds will help.

BlackBerry appears to be preparing to become a smaller, more efficient company that can fetch a good price once it returns to profit.

In fact, before Chen took over in November 2013, BlackBerry considered a sale. Possible buyers included several technology giants and Lenovo, but no deal emerged. A Lenovo executive told QDaily the company had indeed considered an acquisition, but had concerns about regulatory approval.

During the earnings call, Chen repeatedly said things like “I hope,” “I don’t know” and “I believe.” Answering a question from an RBC Capital analyst, he said, “We’re seeing signs that we’re winning contracts back in many places, especially at some very large companies. I don’t know what our market share is… But now they can see our efforts, that the company is stable, and that we have plenty of cash, good technology and a plan for what comes next. We’re winning those contracts back, and we intend to win more.”

“If the Passport succeeds, it can speed up our turnaround,” Chen said before its launch. “If it doesn’t, I can still carry out the turnaround.”

BlackBerry’s path back looks punishing and fraught with risk. But it is not ready to concede defeat.