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BlackBerry's 2014 sets stage for a better 2015

BlackBerry's 2014 sets stage for a better 2015

BlackBerry’s Q3 earnings report, which capped off the company’s march back to profitability with a small profit amid tumbling revenues, highlighted a year in which it managed to finally bury rumours of its imminent demise.

Just over a year after John Chen took over as CEO, Blackberry is slowly beginning to put years of negative headlines behind it as it transitions away from a disastrous failure to counter Apple and Google in the consumer smartphone market and toward an enterprise-focused business model that relies more heavily on software and services revenues than outright handset sales.

The shift doesn’t come without its risks: BlackBerry’s revenues, which at US$793 million in the quarter were were well below analyst expectations of $932 million, continue to sink as its handsets, no longer marketed directly to consumers, become a uniquely corporate offering.

While the company’s finances are light-years improved compared to this period last year - its return to positive cash flow, with a surprise $6 million or $0.01 per share profit, comes three months ahead of Chen’s original target - the stigma of current performance being compared to past handset sales remains something BlackBerry’s marketing and PR teams will have to deal with.

Erasing old memories

At this time last year, BlackBerry was reeling from the failure of its first wave of next-generation devices based on the BlackBerry 10 operating system. The Z10, which had been intended to go head-to-head with Apple’s iPhone and devices powered by Google’s Android operating system, was rejected by consumers turned off by BlackBerry’s relative lack of apps, me-too hardware design, and a relentless onslaught of negative press that had some predicting the company wouldn’t live to see 2015.

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In contrast, 2014 saw BlackBerry regain its footing somewhat as it accelerated its pivot to enterprise. New device launches reflected lessons learned from earlier failures. Namely, pre-launch production of the Passport and just-released Classic was significantly constrained compared to the build-it-and-they-will-come mentality that resulted in a nearly billion-dollar writedown of unsold inventory in September 2013 - the fourth such writedown in the previous two years. In contrast, deliberately lower Passport and Classic production numbers resulted in early-stage shortages as BlackBerry struggled with unexpected demand for the new handsets.

Restructuring complete

This year also saw BlackBerry turn its balance sheet around as it completed the last round of major layoffs and announced it would begin hiring again. Soon after announcing the acquisition of German security vendor Secusmart, Chen said the company’s restructuring efforts were complete. BlackBerry shifted marketing gears, as well, bringing in ex-Avaya executive Mark Wilson as its SVP of marketing and kicking BBDO to the curb. Its replacement is gyro, a B2B ad agency whose first BlackBerry campaign, focused at healthcare workers, launched in October in support of the Passport.

The company scored a symbolic win when Ford picked BlackBerry to power its next-generation in-vehicle entertainment and navigation platform. Known as Sync 3, the new QNX-based system replaces Microsoft’s MyFordTouch technology, which so frustrated consumers with slow, glitchy performance that it sent Ford’s quality ratings plummeting. The replacement platform, which will start hitting dealerships as 2016 models roll into dealerships starting early in 2015, is based on technology that is already widely used in the automotive industry. BlackBerry’s QNX code is found in 30 million vehicles across 250 separate model lines, and it leads the embedded vehicle operating system market with 53 per cent market share, almost double Microsoft’s 27 per cent. Data from the Markets and Markets research firm shows the global vehicle infotainment market hitting $14.4 billion by 2016.

Earlier this month, BlackBerry also received a notable boost from Export Development Canada. As part of an US$850 million loan package to Vodafone, the British telecom giant will commit to purchasing $750 million worth of handsets, software and services from BlackBerry over the course of the five-year agreement.

Building on its enterprise fundamentals

If 2014 was a year of consolidation and solidification, then 2015 promises to be a year of building on that foundation. Chen had promised a return to profitability by the end of the company’s 2015 fiscal year, and today’s numbers validate that he is well ahead of that schedule. As BlackBerry deepens its shift into its core enterprise market over the next year, it will become less reliant on handset revenues and more dependent on software and services-based revenue from corporate clients. The downside, namely slower uptake thanks to longer-lead IT buying cycles, will be more than offset by the recurring, consistent nature of such revenues, and the general shift away from fickle, style-focused consumer buyers.

Much of BlackBerry’s 2015 growth story will be based on enterprise-centric products that were introduced or upgraded in 2014, including the BES12 enterprise mobile management (EMM) solution, the BBM (including Channels and eBBM) messaging platform, and the Enterprise Identity and VPN Authentication security offerings. Chen has also promised to reveal the company’s handset roadmap - including a possible update to the Passport - at the Mobile World Congress next March in Barcelona, Spain.

With cash-on-hand increasing $43 million in the quarter, to $3.1 billion, and an increasingly diversified enterprise products and services roster, BlackBerry ends this year more comfortably than the last. But with handset sales continuing to lag - the company recognized revenue on 2 million devices this quarter, just ahead the year-ago figure of 1.9 million but far below the 10 million annual run rate Chen identified as the handset unit’s breakeven point - the company needs to maintain pressure on devices as it simultaneously ramps its enterprise portfolio.

It’s a tough balancing act for any company. But as 2014 draws to a close, BlackBerry for the first time in years no longer finds itself justifying its existence. Expect next year’s numbers to continue the positive shift in BlackBerry’s fortunes.