BlackBerry Sees Growth a Year Away as Turnaround Takes Time

Mar 28, 2014 4:21 pm ET

(Updates with closing share price in sixth paragraph.)

March 28 (Bloomberg) -- BlackBerry Ltd. said sales won’t grow until the fiscal year that begins next March, showing the tough road ahead even after cost-cutting helped the smartphone maker post a smaller quarterly loss than analysts estimated.

“There’s no doubt in my mind the revenue will come -- no doubt,” Chief Executive Officer John Chen told reporters today at a briefing at BlackBerry’s headquarters in Waterloo, Ontario. “When will that happen? Probably not fiscal year 2015. Probably more like fiscal year 2016, when our yield and margin are stable and our revenue growth kick us into profitability.”

The outlook put a damper on earnings results that showed Chen is making progress in restoring BlackBerry’s profitability. The shares dropped to a two-month low after Chen’s comments, wiping out a gain of as much as 6.5 percent earlier in the day.

Chen took over in November and six weeks later announced a deal with Foxconn Technology Group to outsource production, distribution and some design of BlackBerrys. He’s also overseeing the elimination of one-third of the workforce as he focuses on making the company a smaller maker of devices and software for its core of business and government users.

The company today reported a loss of 8 cents a share, excluding one-time charges, better than the 57-cent deficit expected in a Bloomberg survey of analysts. Sales in the fiscal fourth quarter fell 64 percent from a year earlier to $976 million, the company said in a statement. That compared with the analysts’ average estimate of $1.11 billion.

The stock fell 7.1 percent to $8.41 at the close in New York, the lowest since Jan. 14. It was the biggest one-day decline since Dec. 26.

Impressing Investors

When Chen took over, the stock was trading around $6.50. He has impressed investors with his vision of a company focused less on consumers and hardware and more on software and its key clients. To that end, Chen is introducing the new Q20 “Classic” phone, which has a physical keyboard and brings back the “menu,” “send” and “end” buttons, missing features that alienated BlackBerry loyalists and led to disappointing sales.

“They’re looking like they’ve successfully restructured this company for a better cost basis,” said Michael Genovese, an analyst with MKM Partners LLC. “But the next part after you do that is getting the revenue growth.” He has a neutral rating on the stock.

Chen told analysts today he’s aiming to expand sales through the BlackBerry Messenger instant-messaging service and from QNX software, used in cars and industrial settings including power plants.

Profitable Devices?

There are now about 85 million BBM users, and the service has 500,000 BBM channels -- theme-oriented chat rooms -- including new ones with Time and Rolling Stone magazine. While he looks for ways to make money from the channels, Chen said he’s also focusing on producing a more secure version of BBM that BlackBerry has developed for clients in industries like financial services.

While software and services may be the focus, “I hope nobody thinks we don’t take seriously our handset business,” Chen said.

The current introduction of the Z3 across Southeast Asia and the release later of this year of the Q20 should make that clear to investors, who will see that Chen aims to sell the devices profitably, he said.

“I have no intention to lose money on handsets,” he said.

BlackBerry recognized revenue on 1.3 million smartphones last quarter, down from 1.9 million in the prior quarter.

Turnaround Time

The company said it actually sold 3.4 million BlackBerrys to customers last quarter, including shipments that had already been recognized for revenue, helping to cut its inventory by 30 percent from the previous quarter. Of those devices, 2.3 million were older-generation BlackBerry 7 models.

While there are signs of progress, Chen has sought to temper expectations that a turnaround will be rapid. He reiterated today that he expects the company to stop losing cash by the end of the fiscal year that concludes in March 2015 and that BlackBerry will become profitable at some point in the following fiscal year.

Chief Financial Officer James Yersh said on today’s conference call that revenue declines this quarter will be similar to last quarter’s drop.

Stopping the drain on cash will be crucial. BlackBerry had $2.5 billion in cash and short-term investments at the end of last quarter, down from $3.1 billion at the end of November, it said today.

Raising Cash

Chen has been looking for ways to replenish the coffers. Last week, BlackBerry said it had reached an agreement to sell most of its more than 3 million square feet of Canadian real estate, which could fetch more than $500 million. The company said in December that it got a $696 million tax refund from the Canadian government and expects another ‘’significant’’ refund by the end of August.

“It’s at a point where you either believe in the story or not,” said Anil Doradla, a Chicago-based analyst at William Blair & Co. LLC. “I think the jury’s still out.”

--With assistance from Beth Mellor in New York and Gerrit De Vynck and Eric Lam in Toronto.