BlackBerry Ltd said on Friday it was entering a handset production deal
that lowers the risk it will have to take more massive writedowns on
unsold smartphones, and its shares surged even though it posted dismal
quarterly results.
The stock rose as much as 17 percent after the
company announced the five-year partnership with Taiwan's Foxconn
Technology Co Ltd, which will initially build low-end devices for sale
in Indonesia and other emerging markets. BlackBerry said it hoped to
expand the fledgling relationship to its top-of-the-line smartphones.
(Also see: BlackBerry reports massive $4.4 billion Q3 loss, announces Foxconn partnership)
The
deal is unconventional in that BlackBerry will no longer pay upfront
for components used in the devices made on its behalf in Foxconn's
Indonesian and Mexican factories.
Instead, Foxconn will take a
share of profit on each device in return for taking on inventory
management, which can result in writedowns if smartphones go unsold.
Foxconn will also help with developing, designing and distributing the
handsets.
Chief Executive John Chen, who took the helm at
BlackBerry last month, said he expected the Foxconn deal to help
BlackBerry's handset business turn cash-flow positive, and for the
company as a whole to post a profit for the fiscal year that begins in
early 2015.
"It's almost like BlackBerry is disposing of its
consumer handset business without actually disposing of it," said
Jefferies analyst Peter Misek, who likened the deal to what
Hewlett-Packard Co and Dell have done with laptops.
The move,
which comes a month after BlackBerry said it was giving up on a plan to
sell itself, helped take the sting out of the massive, $4.4 billion loss
that it posted for the quarter ended November 30, as smartphone sales
shriveled.
A new line of devices running on BlackBerry 10 software
has failed to gain traction, forcing the company to write off $1.6
billion of inventory and supply commitments for the quarter. The
previous quarter it wrote off $934 million for unsold phones.
The
Waterloo, Ontario-based company pioneered the concept of on-the-go
email, and for years its pagers and phones were must-have devices for
political and business leaders. But in recent years it has lost its
once-dominant market share to Apple Inc's iPhone and a slew of
smartphones powered by Google Inc's Android operating system.
As of Thursday's close, the stock had fallen 47 percent this year. It was last trading up 14 percent on Nasdaq at $7.13.
"The
most immediate challenge for the company is how to transition the
devices operations to a more profitable business model," said Chen, who
is credited with turning around Sybase, a database and mobile software
company, before it was sold to German software company SAP AG in 2010.
Chen
has said he is counting on strong growth in BlackBerry's service
business, which manages smartphone traffic on the internal networks of
corporate and government clients.
"Just jettisoning all the stuff
and driving on with the part of the business that makes money makes a
heck of a lot of sense to me and that is very clearly where Chen is
going," said Ross Healy, a portfolio manager at Macnicol &
Associates who owns a small number of BlackBerry shares.
Carolina
Milanesi, an analyst at Kantar Comtech, said the deal is a good move for
Foxconn, the world's largest electronic parts manufacturer and a major
partner of Apple Inc.
"This might be the first step for them to
try and diversify, and experiment with putting their brand on the
products they make," she said.
Devices are a challenge
In
his first presentation to analysts after the release of BlackBerry's
results, Chen struck an upbeat tone tempered with a heavy dose of
realism. The mix may have helped soothe nervous investors who had
sharply lowered their expectations for BlackBerry after a string of
disappointing news.
"It's clear that he's not the old guard, he's
not there trying to do what Lazaridis and Thorsten were up to. He's
actually been taking some concrete steps," said Mark McKechnie, an
analyst at Evercore Partners, referring to BlackBerry's founder Mike
Lazaridis and Thorsten Heins, Chen's predecessor.
Chen moved
quickly to stamp his authority on BlackBerry, hiring several former
colleagues from his time at Sybase and SAP for senior roles in corporate
strategy, marketing, and enterprise strategy, a key unit in the
stripped-back company.
BlackBerry sold about 4.3 million handsets
in the third quarter, with older BlackBerry 7 models accounting for
about 3.2 million of that number.
The company recognized hardware revenue on 1.9 million devices, down from 3.7 million in the previous quarter.
On
a brighter note, its cash pile grew to $3.2 billion from $2.6 billion a
quarter earlier, but that included $1 billion raised by issuing
convertible notes to a group of investors last month after calling off a
months-long search for a buyer.
Service revenue slipped 13
percent as fewer people paid to use BlackBerry's secure network, and the
company said that level of decline could be expected to continue.
Along
with the writedown on unsold phones, the company also slashed by $2.7
billion the carrying value of some long-lived assets, mostly licensing
deals made when it was far larger.
Quarterly results
The
company reported a third-quarter net loss of $4.4 billion, or $8.37 a
share, compared with year-earlier net income of $9 million, or 2 cents a
share.
Excluding the inventory writedowns and impairment charges, the loss was $354 million, or 67 cents a share.
Analysts on average had expected a loss of 44 cents a share, according to Thomson Reuters I/B/E/S.
Revenue
fell to $1.19 billion from $2.73 billion as increased uncertainty about
the company's fate led to further sales erosion. Wall Street had
forecast $1.6 billion.
Morningstar analyst Brian Colello said BlackBerry's turnaround strategy was more important than its latest operating results.
"I
don't think it's a surprise that the revenue, operating margin and the
business continues to decline. I think the bigger question is, what is
the turnaround story at this point?" he said. "They have a lot of
different assets that could point the company in different directions."
© Thomson Reuters 2013
BlackBerry Records Profit in First Quarter Fueled by Growth in Its Cybersecurity Business29 June 2023
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