Will BlackBerry keep making hardware?
Investors find out Wednesday if CEO has turned fortunes around
“Software is the new BlackBerry.”
So screams the headline on BlackBerry Ltd.’s website just days before CEO John Chen hits his self-imposed September deadline to make the mobile company’s foundering hardware division profitable again or get out of the segment.
Investors and diehard BlackBerry fans alike will find out whether Chen managed to meet the goal he first voiced a year ago when the company releases its quarterly results Wednesday. If he fails, it could spell the end of a storied device that once catapulted the Waterloo, Ont., company to the top of the TSX as the most valuable in Canada.
Yet Chen has remained stalwart in his belief there’s a market for BlackBerry devices among security-conscious customers, particularly governments, despite cries from some industry watchers that BlackBerry should hurry up and ditch money-losing hardware to focus on its growing, albeit smaller, software and services business.
The hardware division lost US$21 million in the quarter ended May 31 on sales of 500,000 phones, a far cry from peak quarterly sales of 13 million units in 2012.
Since then, BlackBerry launched the DTEK50, a mid-range Androidpowered smartphone billed as the “world’s most secure.” It got decent reviews, but nowhere near the attention the consumer market gave Samsung and Apple’s latest offerings. Details about another higherend BlackBerry were posted on the company’s website in an apparent leak for a brief period last week — it didn’t feature the QWERTY keyboard loved by so many — but spokespeople kept their lips sealed about another launch date and the specifications were hastily removed.
Chen has said he needed to sell three million phones annually to break even in the hardware division. Yet an accounting tweak to the division now called “mobility solutions” might help it get out of the red no matter how many smartphones were sold in the latest three-month period, which ended Aug. 31.
Last quarter, BlackBerry expanded the division to include revenue from device software licensing alongside smartphones. If this initiative makes enough cash — it made nothing last quarter, but the company was in talks to license tech to a set-top box company — the division could be profitable, regardless of the success of the DTEK50 and older models.
That move is “essentially shifting goalposts,” said Partha Mohanram, CPA Ontario Professor of Financial Accounting at the University of Toronto’s Rotman School of Management.
While changing the composition of a division may be a one-time thing, Mohanram cautioned investors to look for “recurring nonrecurring events” and a tendency to report non-GAAP earnings (he refers to this as “earnings before bad stuff”). These tactics put an element of spin on BlackBerry’s financial statements, based on a perfunctory look, but he said it’s a common way to take advantage of flexible accounting rules.
“That’s the way things work in this earnings-management game. Guys are constantly changing the game,” he said.
Meantime, BlackBerry has been touting its success in the software market, announcing deals with the U.S. Senate, U.S. Army and U.S. Department of Defense. It’s on track to grow revenue in this division by 30 per cent annually, and revenue from software surpassed that from hardware for the first time last quarter.
Alan Middleton, marketing professor at York University’s Schulich School of Business, believes the focus on security is still BlackBerry’s best bet for success given the spotlight on cyber crime.
There’s an inevitable commoditization of hardware over time, Middleton said, pointing to Motorola and Nokia as examples of must-have cellphones that have fallen off the radar. So the question for BlackBerry becomes whether it needs its hardware to deliver on its security promise, Middleton said.
“I think they’ll stay in the device business a bit longer to make that transition to ... the premium, secure integration of software and hardware,” he said.