Once a leader in the mobile world, BlackBerry (NASDAQ: BBRY ) posted a whopping $4.4 billion loss on revenue of $1.2 billion in the third quarter. This shows the company is still far from a turnaround. To avoid burning more cash, the Canadian manufacturer needs an urgent improvement in top-line performance. This is a very challenging task, considering Apple's (NASDAQ: AAPL ) iOS-based iPhones and Google's (NASDAQ: GOOG ) Android-based smartphones continue gaining momentum.
This situation makes investors worry about the final outcome for BlackBerry, which was not able to position its mobile operating system as a real alternative to iOS and Android. In this difficult context, what can BlackBerry do to stop bleeding cash?
BlackBerry has issues
First, it's important to understand the nature of BlackBerry's massive loss. The loss is the result of a huge inventory writedown taken on its Z10 smartphone, a 4G high-end device that uses the new BlackBerry 10 mobile system.
The pricing strategy of the Z10 may have been one of the company's biggest mistakes. This product was BlackBerry's last chance of capturing market share in the high-end smartphone world, and it's a very good device, technically speaking. However, BlackBerry may have underestimated the market power of Apple's iOS and Google's Android. Both operating systems have rich communities of thousands of developers and fans, and millions of apps in their libraries. And Android, the most popular platform for developers, controls 80% of the global smartphone market.
To remain competitive in this fierce market, BlackBerry should have adopted a very aggressive pricing strategy. Instead, the company initially priced its flagship product quite high. However, due to weak sales, the price of the device fell to $49 only four months after the launch.
In the most recent quarter, the company sold only 4.6 million phones, a significant decrease from what it was selling a year earlier. Further, roughly 70% of the units sold were older BlackBerry 7 devices.
A big turnaround is needed
As Morningstar analyst Brian Coello notes, the latest earnings indicate this is a company in free fall. To avoid bankruptcy until the company achieves its 2016 back-to-profitability target, BlackBerry should avoid burning its precious cash, which is equivalent to roughly $4 per share. To avoid burning cash, a big turnaround is needed.
First, weak sales of BlackBerry's flagship smartphone clearly suggest the company is simply not prepared to compete against Apple for the high-end segment. As a luxury brand, Apple is widely regarded as the best choice in high-end devices. In the U.S. high-end market, smartphone buyers are five times more likely to pick Apple over Samsung.
Instead, focusing on selling BlackBerry 7 devices in emerging markets sounds more reasonable. Here, the company should focus on differentiating its low-cost smartphones from Android players as much as possible. In the past, BlackBerry has emphasized its high security standards and business applications to achieve differentiation.
Second, BlackBerry's integrated strategy of developing both software and hardware for mobile seems too expensive for a company in crisis. Instead, the company should narrow its focus.
It seems that BlackBerry plans to prioritize software development, as it recently announced a five-year manufacturing deal with Foxconn, so it can cut hardware expenses. This is a promising deal, as it would allow BlackBerry to leverage Foxconn's scale advantages, and have more exposure to Asian markets.
In late November, the company announced that original equipment manufacturers in India, Africa, Indonesia, Latin America and the Middle East will pre-install BlackBerry Messenger on Google Android devices they sell. This move should allow the Canadian manufacturer to remain relevant in key emerging markets.
Final Foolish takeaway
BlackBerry's recent $4.4 billion loss is mind-boggling. However, investors should keep in mind this was primarily driven by an impairment charge against long-term assets, and charges associated with inventory commitments. Also, the company seems to be exiting the high-end segment and putting more emphasis on software. These moves should help BlackBerry to stop burning cash and potentially return to profit by 2016.
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