Today we had our first taste of a BlackBerry quarterly conference call under the leadership of John Chen. We like this guy. He didn’t come armed with a script of prepared remarks to read at us like most CEOs. Instead, he just talked, unscripted, about what’s happening in the business. 

Chen has only been on the job for 45 days, but it’s obvious he’s not just sitting around thinking about what needs to happen. He’s out there doing it. From redesigning the executive team to signing a company-changing deal with Foxconn, this CEO is a man of action and he may just be able to pull off what seems like an impossible task. He might actually bring BlackBerry back to consistent profitability. But … don’t count on it happening anytime until fiscal 2016, which for BlackBerry, begins in March 2015. Between now and then it is quite likely this company will continue to burn some cash and lose some more subscribers.

Let’s take a very quick look at the quarterly numbers so we can then move onto the more interesting stuff.

BlackBerry generated only $1.2 billion in revenue this quarter, down from $1.6 billion last quarter. The single largest source of the decline came from the hardware business. They recognized revenue for only 1.9 million handheld devices compared to 3.7 million last quarter.

Chen has only been on the job for 45 days, but it’s obvious he’s not just sitting around thinking about what needs to happen

I won’t get into a detailed explanation of this here, but there is a difference between what BlackBerry counts as revenue versus what sells through to end customers. They’re in a funny period where devices previously sold into the channel and previously recognized as revenue are now flowing through to end customers. At the same time, new devices shipped into the channel aren’t being counted as revenue until they sell to an end customer. So revenue is a bit understated. It’s more important to look at sell through numbers rather than revenue recognition. 

A total of 4.3 million devices moved into customers’ hands this past quarter, a lot more than the 1.9 million the recognized revenue on. This compares to 5.9 million units shipped to customers in the August quarter with revenue recognized on 3.7 million. 

Any way you slice the numbers, sales of BlackBerry devices are declining and BB10 sales are not very strong. In fact, out of the 4.3 million shipments to customers this past quarter only 1.1 million were powered by BB10. The remaining 3.2 million run the legacy BB7 operating system.

Of course this is helping BlackBerry slow its decline on service revenue. Most of the service revenue comes in the form of SAFs (system access fees) paid by carriers to BlackBerry for each device on the network. More BB7 sales means more service revenue.

And this brings us to a discussion of the future of BlackBerry 10. Plenty of analysts and industry pundits have been calling for BlackBerry to exit the hardware market. Others with unrealistic expectations have been suggesting BlackBerry should sell the hardware business. I have no idea who these people think will actually pay for it. I’ve always stuck to my view that the hardware business is worth nothing to anyone else.  We saw other analysts calculating how much it would cost for BlackBerry to shut down its hardware operation. Most of the costs would come from purchase obligations the company had with its suppliers. 

Well guess what?  Today BlackBerry did shut down its hardware business (sort of).  Except they’re still going to sell hardware.  Sound crazy?  Here’s the explanation.

Today BlackBerry did shut down its hardware business (sort of). Except they’re still going to sell hardware

When BlackBerry was at the top of its game it used to do business with almost every major contract manufacturer out there. Then, as part of the “CORE” restructuring program last summer Thorsten Heins consolidated BlackBerry down to 3 external manufacturing sites. None of those involved the world’s biggest contract manufacturer, Foxconn, who also happens to make iPhones for Apple.

Today, BlackBerry announced a massive shift in its device strategy. Foxconn is their new manufacturing partner, and it sounds like they’ll be dropping their relationships with all other contract manufacturers. In my mind this amounts to nothing less than a shut down of their prior hardware business alongside the startup of a new, much leaner hardware business via Foxconn. John Chen made it pretty clear that he hopes Foxconn will take on all aspects of hardware design while BlackBerry’s designers contribute industrial design and its software engineers continue to build the OS.

Simply put - in 45 days John Chen has gotten some major negotiation work done such that BlackBerry can get much leaner and faster in how it brings hardware to market, while still keeping all of the benefits of running its own highly secure and reliable operating system.

For all the talk about low end devices (i.e. “Jakarta”, a 3G device destined for the Indonesian market), there is absolutely no reason BlackBerry can’t use this same model to produce high end products for the enterprise market. I was pleased to hear Chen actually say they were exclusively focused on the enterprise market when it comes to high end devices in the near term.

This flies in the face of what I consider to be a an idiotic aspect of the open letter written by analyst Brian Blair recently. I don’t think the whole letter was idiotic. In fact I agree with much of what he wrote. But he suggested BlackBerry should completely exit the high end market. This makes no sense whatsoever. It’s pretty obvious they have a bunch of good enterprise customers who have decided to use BlackBerry 10. To do anything other than continue to make great hardware for enterprise customers AND price it at an appropriate premium would be stupid. In  fact I think BlackBerry should consider making low-end devices that are not BES compatible at all. This would ensure enterprise hardware sales have great margin, while still offering low margin hardware to the emerging markets.

In fact I think BlackBerry should consider making low-end devices that are not BES compatible at all

Here’s one more little nugget I wanted to discuss:  Intangible asset purchases have been making it impossible for BlackBerry to profit in hardware. In plain english, on every quarterly cash flow statement you can see BlackBerry spending hundreds of millions of dollars for licenses related to handsets. They’re massively over paying because these deals were struck when volumes were higher. They were spending over $500 million per quarter for the last two quarters. This translates into over $2 billion per year. That’s a LOT of cash. Guess what?  It sounds like they renegotiated these deals in the November quarter. These license purchases amounted to only $234 million. They’ve got another $500 million to spend over the next year, which is far lower than previous spending. After these commitments are done, cash use should drop further. This is an important cash savings, which further convinces me the company has a strong enough balance sheet to make a go of its turnaround.

Let’s wrap this up by talking about enterprise services. I love how Chen so clearly articulated his focus on the low hanging fruit. The most logical BlackBerry customers are those in regulated markets. Talk about something Wall Street understands!  Chen said he’s building a team of sales people to focus entirely on regulated markets, which obviously includes verticals such s finance, legal, medical and government. 

It looks to me like Chen is implementing Pareto’s principle. He has walked in and immediately figured out who are the 20% of enterprise customers that could realize 80% of the value of what BlackBerry brings. He’s focused on building devices and solutions and a sales team to go hardcore after these customers first. Only then will he expand beyond them.

The bottom line: the quarterly results were about as ugly as people thought, but the strategic plan Chen is implementing is hard to argue with

The bottom line: the quarterly results were about as ugly as people thought, but the strategic plan Chen is implementing is hard to argue with. It makes sense, and he’s clearly a man of action, which is good. Will it be enough?  I don’t know. It’s going to take them the better part of the next year to turn things around and stop the business from shrinking. But I think they’ve got a strong enough balance sheet to do it.

As for the stock … I don’t know. We’re not going to see any inspiring numbers for a while, but then again expectations for this company are practically zero right now. Betting on the stock is a bet on the company’s ability to stem the losses on hardware while building up new revenue in the enterprise business. If you’re convinced they can succeed, you should probably buy the stock (and you get any potential BBM upside for free at this point). Otherwise stay away. And no matter what … take responsibility for your own decisions. If you’re going to complain and blame someone else for an investment loss then you are not enough of a grown up to own stocks.