BlackBerry posts US$4.4 billion loss in Q3; shares soar

BlackBerry’s third quarter results for its 2014 fiscal year were every bit as disappointing as investors had feared, falling far below analyst projections and sparking a sharp selloff in the company’s stock in pre-market trading before investors had an apparent change of heart and sparked a major run-up by midday.

For the three months ending Nov. 30, the company reported a net loss of US$4.4 billion, or $8.37 per share, thanks to restructuring charges and a writedown on inventory. This compares to a GAAP loss in the year-ago quarter of $965 million, or $1.84 per share.

Excluding one-time charges, the company posted a $354 million net loss, or $0.67 per share diluted, compared to a $9 million, or $0.02 per share profit a year ago.

BlackBerry booked $1.2 billion in Q3 20134 revenue, down 24 per cent from $1.6 billion in the previous quarter, and 56 per cent from the year-ago quarter’s $2.7 billion. The results lagged analyst consensus from Thomson Reuters of $1.6 billion in revenue, or $0.44 per share.

Investors initially reacted negatively, sending the stock down more than 7 per cent in pre-market trade. However, by midday shares soared more than 15 per cent on the Nasdaq to $7.19 as investors were cheered by the company's cash reserves and a new partnership with Foxconn.

In a statement, CEO and Executive Chairman John Chen reiterated BlackBerry’s near-term priorities as it attempts to reshape itself.

“With the operational and organizational changes we have announced, BlackBerry has established a clear roadmap that will allow it to target a return to improved financial performance in the coming year,” he said. “While our Enterprise Services, Messaging and QNX Embedded businesses are already well-positioned to compete in their markets, the most immediate challenge for the Company is how to transition the Devices operations to a more profitable business model.”

Some good news

On the positive side, BlackBerry’s cash reserves increased to $3.2 billion from $2.6 billion the previous quarter, erasing a $500 million erosion the previous quarter. Its BlackBerry Messenger for iOS and Android software continued to make inroads, clocking 40 million new registrants over the last 60 days. Over a dozen OEMs, including handset heavyweight LG Electronics, have committed to preloading BBM onto their devices, and BBM Channels, its enterprise social media platform, is now home to over 250,000 channels, some created by global brands including USA Today and Coke Indonesia.

The company also announced a five-year partnership with Foxconn, the Chinese electronics manufacturing giant, to jointly design and manufacture new devices. The deal is the clearest sign yet that BlackBerry is moving rapidly away from its traditional hardware manufacturing roots and toward the more standard industry model of vendors outsourcing device design and build to global-scale suppliers like Foxconn. While the move increases the potential for commoditization – Foxconn makes mobile devices for Apple and a range of other major vendors – and could make it more difficult for its offerings to stand out from the competition, the company had little choice.

“It’s a seismic shift in in production for BlackBerry, and it’s also a sign of the times, an acknowledgment of reality,” IDC analyst Kevin Restivo told Yahoo Canada Finance. “The value of a smartphone is increasingly in the software and services layer, and not in the hardware. It’s tougher and tougher to drive significant margins unless your name is Apple or even Samsung. So the question then becomes, ‘Why not let Foxconn do this if it’s cheaper?'"

BlackBerry says the Foxconn partnership will allow it to quickly respond to changing dynamics, especially in emerging markets like Indonesia.

That competitiveness will demand a very rapid transition to software and enterprise mobile management solutions – something Chen addressed specifically during this morning’s call.

“It’s clear that BlackBerry as a business can’t rely almost exclusively on handsets and revenues from phones in future,” Restivo said. “Over the medium to long term, BlackBerry needs to be a company that’s much more dependent, if not exclusively dependent, on products like BBM and BlackBerry Enterprise Server.

“The harder questions are how to do so,” Restivo added. “These are products with a lot of momentum – meaning user growth – but like so many technology products the revenue behind them doesn’t always come with user adoption. So it’s incumbent on BlackBerry to figure out how to derive real revenues from BBM and BES.”

A tough time

The results cap a devastating year for the Waterloo-based smartphone maker. Its near-billion-dollar loss in the previous quarter was driven by a 45 per cent drop in revenue over the previous Q2 2012 and a massive inventory writedown on backlogged Z10 smartphones. It announced plans to lay off 4,500 employees globally – or almost 40 per cent of the company – as its transition plan under now-former CEO Thorsten Heins failed to turn things around. Heins was finally ousted last month, and turnaround specialist Chen, who turned the once-moribund Sybase into a $5.8 billion jewel in software giant SAP’s crown, was brought in to clean up the mess.

All eyes now look to Chen as the company tries to turn investor focus to its 2014 turnaround plans. BlackBerry’s high-level guidance for the next quarter focuses on maintaining its cash position and continuing to cut costs. Chen says the company remains focused on what comes next.

“We have accomplished a lot in the past 45 days, but still have significant work ahead of us as we target improved financial performance next year,” he said. “However, the Company is financially strong, has a broad and trusted product portfolio to work with, a talented employee base and a new leadership team dedicated to implementing our new roadmap.”

IDC’s Restivo said that leadership team is already making the right impression.

“Chen and his team have a very grounded view of the business and of the marketplace,” he said. “Today’s call with investors instilled a degree of confidence. People need to believe that he can lead them to the next phase: Profitability.”

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.