BlackBerry: The state of the turnaround

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Can BlackBerry grow its enterprise mobility, secure communications and Internet of Things businesses fast enough to offset declining revenues from handsets and service access fees?

BlackBerry, once synonymous with business-class smartphones and push email, notably failed to adapt to the iPhone-era smartphone market. Since November 2013, under turnaround specialist John Chen, the Canadian company formerly known as RIM has been attempting to transform itself into a multi-platform Enterprise Mobility Management (EMM) vendor, while also developing revenue streams focused on secure communications and the Internet of Things (IoT).

So how is the turnaround going? Let's start by summarising how far BlackBerry has fallen.

In 2009, RIM sold 34.5 million smartphones, giving it a 19.8 percent share of the worldwide market — second only to the then-dominant Nokia, according to IDC:

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Data: IDC / Image: Tech Pro Research

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Fast forward to fiscal 2016 (ended 29 February 2016) and BlackBerry reported sales of around 4 million handsets to end customers, a figure that would account for a fraction of a percent of today's smartphone market (according to IDC, 1,432.9 million units were shipped last year).

In its heyday, BlackBerry's revenue came predominantly from hardware sales, which peaked at $4.48 billion in each of the final two quarters of fiscal 2011 (ended 26 February 2011). The next biggest revenue stream, bringing in around $1.1bn a quarter by the end of fiscal 2012, was 'services' — mostly infrastructure access charges to carrier partners based on the number of BlackBerry subscribers:

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Data: BlackBerry / Image: Tech Pro Research

The company's subscriber base peaked at 80 million in calendar 2012, but in March 2016 the number stood at just 23 million.

Total revenue for fiscal 2012 was $19.91 billion — a peak from which, as the above graph shows, it subsequently plunged: revenue for fiscal 2016 was down to $2.16 billion.

Declining revenue from hardware and associated services, and a still-developing mobility management/security strategy, saw BlackBerry's profits evaporate:

bb-tpr-profits.jpg
Data: BlackBerry / Image: Tech Pro Research

The biggest pain point came in Q3 2014, with a massive $4.4 billion loss that BlackBerry explained as: "a non-cash, pre-tax charge against long-lived assets of approximately $2.7 billion...a primarily non-cash, pre-tax charge against inventory and supply commitments of approximately $1.6 billion...and pre-tax restructuring, legal and financial advisory charges of approximately $266 million related to the Cost Optimization and Resource Efficiency ('CORE') program and the strategic review process."

These write-downs were due, respectively, to a decline in the value of the company's global network of NOCs (Network Operating Centres), unsold BlackBerry 10 OS handsets, and the cost of coming up with a way forward.

Naturally the firm's share price is currently a fraction of its 'heyday' levels:

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Image: Google

At the time of writing, BlackBerry shares were worth $7.00, valuing the company at $3.5 billion — a far cry from October 2007, when it became Canada's most valuable company with a market capitalisation of $67.3 billion.

The turnaround strategy

Enterprise Mobility Management

According to its latest annual report, BlackBerry's current strategy is to "leverage its strengths in mobility management and security to refocus its business in the Enterprise Solutions and Services space, while maintaining a presence in the highly competitive smartphone and devices market."

Acquisitions are a key element in BlackBerry's stated goal "to maintain its market leadership in the enterprise mobility segment by continuing to extend the functionality of its enterprise software infrastructure beyond EMM, to offer the most comprehensive and secure mobile platform and, on top of this extensive foundation, deliver vertical solutions and endpoint management in the IoT."

Here's a summary of the acquisitions that BlackBerry has made under John Chen's leadership:


Date Company Business Amount paid

29 Jul 2014

Secusmart

secure voice/data encryption, anti-eavesdropping solutions

$82m

11 Sep 2014

Movirtu

virtual identity solutions for mobile operators

$32.5m

21 April 2015

WatchDox

secure enterprise file-sync-and-share

$59m

21 Jul 2015

AtHoc

secure, networked crisis communications

$250m

4 Sep 2015

Good Technology

secure mobility solutions

$425m

19 Feb 2016

Encription

penetration testing and IT security training services

$8m


The acquisitions of Good Technology and WatchDox, in particular, have bolstered BlackBerry's EMM standing, such that Gartner now ranks the company as a 'leader' in its recent 2016 Magic Quadrant for Enterprise Mobility Management Suites (in 2015, the company was a 'niche player'):

syme-emm-gartner-mq-2016.jpg
Image: Gartner

Gartner considers that these acquisitions "position BlackBerry to take a leading role in MCM [Mobile Content Management] and containment," noting that "Companies in highly regulated industries will find the strongest set of protections in the Good EMM Suite." Concerns include market confusion as the existing BES 12, Good and WatchDox products are integrated into a new suite, and national policy issues relating to BES 12 cloud service locations (Canada and The Netherlands).

The other Chen-era acquisitions enhance BlackBerry's BYOD capability and boost its secure communications portfolio: Movirtu's Virtual SIM platform allows business and personal numbers to be used on the same handset, with separate billing for voice, data and messaging on each; Secusmart specialises in high-security voice and data encryption and anti-eavesdropping solutions for government organisations, enterprises and telcos; AtHoc provides secure, networked crisis communications enabling real-time information exchange — between people and 'things' — during business continuity and 'life safety' operations; and Encription specialises in penetration testing and IT security training.

These companies' offerings have surfaced in BlackBerry services such as WorkLife, SecuSUITE and Professional Cybersecurity Services.

Handsets

BlackBerry continued to launch new BlackBerry 10 OS handsets under John Chen, starting with the large, square Passport in October 2014 and continuing with the traditional-looking Classic (December 2014) and the touchscreen-only Leap (April 2015).

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The final BlackBerry 10 handsets: Passport, Classic, Leap.
Images: BlackBerry

The company's most recent handset is the Priv (November 2015), which combines a 5.4-inch touchscreen with a slide-out keyboard. Crucially, the Priv runs a security-hardened version of Android — effectively an admission that BlackBerry 10 OS has lost the battle for app developers' hearts and minds.

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The security-hardened Android-based Priv.
Images: BlackBerry

Here are BlackBerry's handset sales figures under John Chen's stewardship, which clearly show that he has, so far, been unable to stem the decline:

bb-tpr-hardware-sales.jpg
Data: BlackBerry / Image: Tech Pro Research

In an April 2016 interview with The National, Chen admitted that the $700 Priv was "too high-end a product" and said that a pair of more affordable Android handsets would launch later this year — one with a keyboard, one without. BlackBerry's CEO also revealed that the company had no plans to release new BB10 OS devices, but that updates would continue.

"Since I started at the company I've been saying I'll make the handset business profitable. If I can't make it profitable because the market won't let me, then I'll get out of the handset business. I love our handset business, but we need to make money," said Chen.

At the company's recent quarterly earnings call (for Q1 2017, ended 31 May 2016), Chen clarified his position on the handset business: "We lost $21 million in Q1; the number in Q2, on a loss basis, will be much smaller, and I do believe that in the Q3 timeframe we will either break even or have a slight profit. From that point, it's up to the new product rollout, as well as the traction of our device software licensing program in handsets: if the software licensing program is successful, then I could tell you that the sustainability of profitability is very high."

The 'device software licensing' plan referred to in the Q1 2017 call is a new scheme to generate revenue from BlackBerry's long expertise in phone manufacturing. "The reason for putting that unit together is so that I could start shifting some of our [handset] business focus onto software," said Chen. "You know, a lot of the good stuff that we do in devices, like the BlackBerry Hub, some of our antenna technology, power management technology in software...the list goes on: those I'm willing to license to OEMs, phone manufacturers, device manufacturers, even equipment people. This is different from giving you a patent: you can use my Hub, and you might pay me a dollar a phone, or an annual fee for using the Hub, but you don't have the rights to the underlying patent that supported the Hub."

Fiscal 2017, which ends on February 28, 2017 looks to be a make-or-break year for BlackBerry's handset business.

Internet of Things & connected cars

Back in January 2015, the launch of the BlackBerry Internet of Things Platform combined the company's strengths — embedded QNX software, a global network infrastructure, secure communications heritage and device lifecycle management — into a tailor-made solution for the fast-developing IoT market, which many observers see as a potential security nightmare. Initially targeted at the shipping and automotive industries, the modular, cloud-based platform delivers real-time data collection, visualisation and analytics, remote diagnostics, OTA software updates and asset tracking. Other relevant IoT sectors that BlackBerry intends to target include the smart energy and healthcare markets.

At the beginning of this year, CES 2016 saw BlackBerry making plenty of noise on the automotive front, announcing the QNX Platform for Advanced Driver Assistance Systems (ADAS) and the QNX Acoustics Management Platform (AMP) — covering self-driving cars and in-car 'infotainment' systems respectively.

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BlackBerry Radar: an end-to-end IoT-based system that monitors the location of trailers and containers, delivering timely, actionable data to fleet managers via a secure, online portal.
Image: BlackBerry

Another recent IoT-related announcement is BlackBerry Radar, an end-to-end asset tracking system for trucking companies and private fleet operators. In the Q1 2017 earnings call, John Chen outlined the current state of play: "We did a trial with two [customers], and we're still currently on trial with three. Feedback's been very strong for the first two trials that have finished, and we'll start shipping in the middle of July." Asked whether the company was forecasting significant revenue from Radar in FY2017, Chen replied "not much".

Outlook

BlackBerry's pivot from hardware and associated services to primarily software is clearly a work in progress.

Building on BES 12 with the acquisitions of Good Technology and WatchDox has given BlackBerry a potentially strong position in the EMM market, although there may be integration issues ahead. However, by Gartner's reckoning there are over 100 companies offering EMM functions, so this is clearly a very competitive market.

BlackBerry continues to make (Android) smartphones and support its legacy installed base, largely to service the government, defence and regulated-enterprise niche. But unless profitability perks up, BlackBerry handsets will soon become museum pieces.

The IoT, and particularly the automotive industry, could play a significant role in BlackBerry's future because the company has a persuasive mix of assets on which to build its solutions, but it's still early days.

Essentially, BlackBerry's turnaround comes down to this: can the company grow its software revenue fast enough to offset declining revenues from handset sales and service access fees?

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Data: BlackBerry / Image: Tech Pro Research

The jury, at the moment, is out. However, with continued good management and a following wind, BlackBerry could yet prosper by majoring on enterprise mobility, secure communications and the Internet of Things.

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