Blackberry Q2 2014 as expected - Disappointing

Key takeaways from Thorsten Heins, President and CEO of BlackBerry

• We are very disappointed with our operational and financial results this quarter and have announced a series of major changes to address the competitive hardware environment and our cost structure

• While our company goes through the necessary changes to create the best business model for our hardware business, we continue to see confidence from our customers through the increasing penetration of BES 10, where we now have more than 25,000 commercial and test servers installed to date, up from 19,000 in July 2013.

• We understand how some of the activities we are going through create uncertainty, but we remain a financially strong company with $2.6 billion in cash and no debt.

• We are focused on our targeted markets, and are committed to completing our transition quickly in order to establish a more focused and efficient company.

During the second quarter, the company recognized hardware revenue on approximately 3.7 million BlackBerry smartphones. Most of the units recognized are BlackBerry 7 devices, in part because certain BlackBerry 10 devices that were shipped in the second quarter of fiscal 2014 will not be recognized until those devices are sold through to end customers. During the quarter, approximately 5.9 million BlackBerry smartphones were sold through to end customers, which included shipments made prior to the second quarter and which reduced the Company

Revenue for Q2 of fiscal 2014 was approximately $1.6 billion, down 49% from $3.1 billion in the previous quarter and down 45% from $2.9 billion in the same quarter of fiscal 2013. The revenue breakdown for the quarter was approximately 49% for hardware, 46% for service and 5% for software and other revenue.

The GAAP loss from continuing operations for the quarter was $965 million, or $1.84 per share diluted, including a primarily non-cash, pre-tax charge against inventory and supply commitments of approximately $934 million (the “Z10 Inventory Charge”), and pre-tax restructuring charges of approximately $72 million related to the Cost Optimization and Resource Efficiency (“CORE”) program.

This is compared with a GAAP loss from continuing operations of $84 million, or $0.16 per share diluted in the prior quarter and GAAP loss from continuing operations of $229 million, or $0.44 per share diluted, in the same quarter last year.

Check Out: Nobodyelse can do this as good as BlackBerry, claims Thorsten Heins

The adjusted loss from continuing operations for the second quarter was $248 million, or $0.47 per share diluted. The adjusted loss from continuing operations and adjusted diluted loss per share exclude the impact of the Z10 Inventory Charge of approximately $934 million ($666 million after tax) and pre-tax restructuring charges of approximately $72 million ($51 million after tax) related to the CORE program incurred in the second quarter of fiscal 2014.

These impacts on GAAP loss from continuing operations and diluted loss per share from continuing operations are summarized in the table below. The total of cash, cash equivalents, short-term and long-term investments was $2.6 billion as of August 31, 2013, compared to $3.1 billion at the end of the previous quarter. Cash flow used in operations in the second quarter was approximately $136 million. Uses of cash included intangible asset additions of approximately $268 million and capital expenditures of approximately $112 million.

Nobody else can do this as good as BlackBerry, claims Thorsten Heins

Let’s discuss Enterprise Mobility Services, which includes both traditional enterprise business and new mobile computing opportunities in vertical markets such as automotive. Blackberry’s goal is to remain number one in Enterprise Mobility Management and have completely reengineered and rebuilt BES 10 to achieve that objective. Since announcing BlackBerry Enterprise Service 10, this service has been installed by customers all around the world and secure workspace for iOS and Android devices has been tried globally with many BlackBerry customers.

At the time of BlackBerry Live in May, 12,000 companies that had installed BES 10 for commercial or test purposes; today, this commercial and test installed base have grown to 19,000, in a period of four weeks, a clear indication of the strong enterprise interest in reengineered BlackBerry 10 Enterprise platform.

While the Enterprise environment requires longer sales cycles than consumer-only focus product, the successful adoption of BES 10 and enterprise remains the single most important driver for Blackberry for future unit sales and service revenue opportunities.

Already over 60% of all of BlackBerry’s Fortune 500 customers, as well as market of government agencies have already installed BES 10. With BES 10 the massive challenge for Blackberry during this transformation is moving from a vertical BlackBerry-only proprietary player to providing a comprehensive cross platform management solution that is evolving to an Enterprise Mobile Services platform regardless of the device deployed.

The demonstration displaying BlackBerry 10 was also provided where an employee was showing an iPad and Android Nexus phone which was being run and managed by BES 10. So this way BES 10 outside key managers lower the total cost of ownership for the enterprise mobility and it also represents a key element of the strategic cross platform direction that BlackBerry is taking.

Check Out: Blackberry - Accomplishments During First Stage of Transition


‘I probably can’t provide you a more concrete example of adapting and making real change at BlackBerry and that we have gone from dismissing to bring your own device to work trend to actually embracing it and driving it in the enterprise services and we think we’ve taken the offering and technology to a whole new level in enterprise, getting them ready for not just mobile communication but also get them ready for mobile computing and its BlackBerry who is enabling this based on a very strong BES 10 services platform’ said Thorsten Heins.

So with this type of innovation that Blackberry is driving relentlessly through the company and into the market, they have product at hand with BES 10 being a premier solution for enterprises.

Thorsten also added, ‘And we all follow the news, let’s be very, very clear, the topic of security and enterprises, the topic of privacy for consumers is coming back full force and that is for BlackBerry 10 helps protect corporate assets and information, and that is we are on the same device managed by BES 10 and balance, BlackBerry helps to also keep your privacy. Nobody else can do this as good as BlackBerry and it matters, nobody loves to talk about it’.


Check Out: Blackberry Limited Three-Phase Transformation Plan and Vision

Blackberry - Accomplishments during First Stage of Transition

“I assure you that every employee in BlackBerry understands the level of commitment and work that is needed to get us into the next stage of our transformation”.

Let me start recapping what Blackberry accomplished in the past year during the first stage of their transition, which took the company from losses and burning cash at the start of the year to a sound liquidity position in the fourth quarter at the end of that very fiscal year. 

Changes last year started at the top, as Blackberry implemented significant changes at the Board level, adding three outside members with extensive mobile communications industry and business experience and also made senior management changes in BlackBerry.

They hired a new Chief Marketing Officer, a new Chief Operating Officer, a new Chief Legal Officer, and a new Executive Vice President to lead Global Human Resources Group and Department; all of them have extensive international experience in the mobile communications industry. This new executive team responded quickly to focusing on delivering strong BlackBerry 10 platform to the market and implementing personnel changes throughout the global organization, reducing layers of management and reducing complexity in Blackberry.

Promoting a high-performance culture throughout the entire organization has been a high-priority of Thorsten Heins, CEO of Blackberry throughout the first year. “We know who BlackBerry is and we know it’s driven by its people and we will continue to invest in all those activities that reinvigorate this competitive culture of the company” says Thorsten.

Blackberry also implemented significant and major changes throughout the organization and significantly reduced their cost base with CORE programs and saved $1 billion within one year. They launched the program actually at the start of the year and achieved their savings target of full quarter ahead of the schedule. Not only did the benefits from this cost reduction program show up in terms of better financial results, but they also put Blackberry in a position to reinvest in the new platform in this coming year.

Additionally, the CORE program helped also to create a new attitude and a new culture shift in the company where teams continually look at how to innovate faster but also how to do things much more efficiently than in the past. Collaboration between their teams and supplier base also resulted in a much more efficient supply chain. Over the past year, Blackberry moved from four manufacturing partners down to two and reduced their manufacturing sites from ten to four and also outsourced global repair operations.

Now because of all these significant changes, at present Blackberry’s costs are lower, working capital performance is strong, they see way better production yields and established a much more robust supply chain that is resulting in a much more efficient way of building products. While they’ve reduced cost and drove efficiency in the company, Blackberry has also invested significantly in this huge transformation of their application ecosystem. At launch of BlackBerry 10, they had the higher number of apps available compared to any mobile ecosystem at platform launch.

Thorsten Heins added, “We started with 70,000 global BlackBerry 10 apps at launch and as of today, we have reached a number of over 120,000. And also over the past year, we reestablished credibility with our carrier and distribution partners with the introduction of BlackBerry 10 and BES 10. While we are satisfied with the reception of BlackBerry 10 in various regions, we fully understand as the management team that we still have a way to go in the U.S. market as the most ferocious and the most competitive market in our industry”.

See Also: Blackberry Limited Three-Phase Transformation Plan and Vision

Blackberry delivered their new devices, Z10, Q10, Q5, and also delivered on BES 10 Enterprise Management Service which have been designed to give enterprise and consumers more features, more flexibility and the ability to do things smarter and faster.

Talking about financial strength, Blackberry established a strong balance sheet. Last year at this time, they had $2 billion in cash and no debt on the company. By year end, cash flow was up to $2.9 billion and this was accomplished despite incurring restructuring cost of $220 million, as well as supplying other funding commitments. BlackBerry delivered on significant change in the past year and importantly, delivered on their commitment in the areas that they said they would deliver.

“Let me be very clear while we have made all this great progress and while we are proud of what we achieved in the first phase of our transition, we are still in the midst of a major complex transition of this company” said Heins. And as you may understand like most of these major transformations of companies, progress can be volatile and it can be volatile in the short-term basis.

Thorsten Heins further added, “I assure you that every employee in BlackBerry understands the level of commitment and work that is needed to get us into the next stage of our transformation. While this year, we are all embarking on the second stage of this very transformation and it will involve additional investment and it will also involve a continued drive for efficiency throughout our organization”.

BlackBerry Limited Three-Phase Transformation Plan & Vision

In Thorsten Heins’ own words explaining Blackberry’s three-phase transformation plan:

"I told you that the company would undergo significant change at all levels of the company because we needed to change. BlackBerry 10 was late. Our cost structure was too high. We needed management changes, our application development was low and the corporate culture needed to go through a necessary change in order to adapt for the new BlackBerry acting in a very, very competitive market.

So to address these challenges, we implemented and established the three-phase transformation plan for BlackBerry and we understood we had to work quickly, but we were also realistic and knew that to ensure a sustainable improvement, it would take more than a few quarters to get where we want to be.

First Phase was really the survive stage for the company and we needed to refocus the organization to deliver on commitments to reduce cost, to deliver BlackBerry 10, to maintain a strong liquidity position, to ensure our products where relevant and change the company’s sentiment out there in the public.

Second Phase of our transformation, which we’re just starting now, is to build and to invest into the future, primarily around four key value drivers that are our BES 10 Enterprise Service platform which would include secure cross platform, data and voice capabilities.

Our BlackBerry 10 devices, including targeting vertical specific opportunities as well, unlocking the opportunity with BlackBerry Messenger with the view of BBM for everyone and developing opportunities for our BlackBerry global data network beyond our traditional users.

This stage the second phase is all about building scale for our products and solutions, and we are working hard to move our installed base to BlackBerry 10 and BES 10 as we speak, and also to make BBM the mobile social networking platform of choice.

Third Phase is about benefiting from those massive changes and a significant investment we will have made in Phase 1 and 2.

In this phase, we will focus on returning the company back to profitability and establishing a leadership position in mobile computing with new services and new industries.

In Phase 3, we anticipate BlackBerry 10 becoming a leading secure mobile computing platform for a variety of endpoints, such as smartphones, but you can also think CORE, you can think machine to machine or what people just call the internet of things.

Devices and customers will be connected through a global secure and reliable BlackBerry data network. It’s one of the largest secure data networks out there. It connects 175 countries with 654 carriers connected to that network".

Check out: Waiting Eagerly, Troublesome Blackberry

Vision:

So with this vision, Blackberry moved from mobile communication to mobile computing. So all of these endpoints, not just smartphones, all the mobile computing endpoints that are out there can be managed as a service by BES 10 across platform and this will make BES 10 the leading Mobile Enterprise Services platform.

The company also anticipates that BlackBerry Messenger will have achieved an even larger scale than today and serve as a consumer messaging and communications platform.

Blackberry also anticipates that secure corporate collaboration will also be key in the future mobile computing environment as corporation’s being led by technology-savvy generation goes social in managing their business and servicing their customers.

Blackberry’s transformation is ongoing and it is in no way easy as many challenges are still remaining in front of them, but “We are realistic about what is required to move our transformation forward in a timely manner towards the success” says Thorsten Heins.

Waiting eagerly, the Troublesome Blackberry

‘We don't have to be all things to all people in our market’, said Thorsten Heins, President and CEO, BlackBerry in Q1, no wonder the company wants to sell itself before November falls.

The recent news of Nokia opens its gates to Microsoft created a lot of buzz in the market which left Blackberry eagerly waiting for a prospective buyer. The present situation of Blackberry was quite anticipated as it had opted to raise over a billion dollar by reducing its headcount to build its own Ecosystem. 

Thorsten Heins led Blackberry into a new direction which seemed promising but nothing could keep the company afloat. The fact that Mr. Heins failed to lift up the company, now all eyes are on him if he can at least do the job of selling the company, and if he does, it would be the most profitable thing he might have ever done in quite some time.

At current prices, Bloomberg estimates Heins' compensation package could be worth approximately $44 million if ousted after sale, plus bonus benefits and retirement savings and equity awards may bring in a couple more million for him, the total figure could go as much as $55.6 million. He would be pretty much desperate to look out for a prospective buyer to take in the troublesome Blackberry.

Fairfax Financial and its Chief Executive, Prem Watsa, which hold approximately 11 per cent of BlackBerry, are considered among possible buyers. Watsa resigned from the BlackBerry Board due to potential conflicts of interest.

Blackberry’s worth:

·  By the time this year ends, BlackBerry's pile of cash could be as much as $2.6 billion, which is quite low.

·  Also, if one considers their patents and intellectual property, it could be between $1 billion apiece, or $4 billion in total.

·  The Enterprise Data Network should be about $1.2 billion worth to its highest bidder; and additional software can be at $1.5 billion but, minus the $800 million which is an estimated figure of shuttering its handset business.

·  In total, the Company could be worth between the range of $5.5 billion, or $10.50 per share, or as much as $8.5 billion if broken up.

Key interesting highlights of Blackberry so far:

·  Three of their four regions returned to sequential revenue growth as BlackBerry 10 continues its roll out; Europe, Middle East and Africa their largest regions, represented 43% of revenue in Q1 and was up 9%, North America represented 25% of revenue and was up 30%, Asia Pacific represented 17% of revenue and grew 35%.

·  Blackberry shipped 6.8 million smartphones in the first quarter compared to 6 million in the fourth quarter which represented a 13% increase. Approximately 40% of these devices were BlackBerry 10 devices.

·  BlackBerry 10 is now available across 147 countries including the United States and has been an effective launch product to showcase the renewed and re-engineered BlackBerry 10 experience to both consumers and enterprises.

·  BlackBerry 10 QWERTY devices started its rollout late in the first quarter and with over 320 carrier acceptances completed today.

·  Q10 is now available in 96 countries including the U.S. with 50 more countries expected to launch within Q2.

·  Secure Work Space offers an idea of BYOD mobile security solution providing organization the flexibility to embrace BYOD on multiple platforms without sacrificing security.

·  60% of BlackBerry Fortune 500 customers have already ordered, downloaded or installed BES 10.

·  Generated cash flow from operations of $630 million in Q1 and ended Q1 with $3.1 billion in cash, highest cash position in the past three years.

·  Revenue for the first quarter fiscal 2014 was 3.1 billion, up 15% from the fourth quarter and up approximately 9% from one year ago.

·  Looking at their revenue mix, hardware revenues grew by 33% when compared to the fourth quarter and was approximately $2.2 billion.

·  Service revenue was approximately $794 million or 26% of revenue and was down $153 million or 16% from the fourth quarter. 

Now everyone's guessing who would be the one to acquire Blackberry, the news can come out in the near or not too distant future.