BlackBerry Looks for the Bottom

The bloodbath at BlackBerry (NASDAQ: BBRY  ) isn't over just yet. On Friday, the company reported its results for Q4 of the 2014 fiscal year, and while there were some positive signs, there were also a whole lot of red flags.

BlackBerry's smartphone business has been in decline for a long time. The high-margin services business is now following it as the legacy BlackBerry subscriber base erodes. This means BlackBerry's management won't get a second chance to turn the company around if its current turnaround plans miss the mark.

Losses narrow
The most impressive part of BlackBerry's Q4 results was the company's small adjusted loss. After posting an adjusted loss of $0.67 per share in Q3, BlackBerry lost just $0.08 per share last quarter. The smaller loss can be traced to BlackBerry's sharp expense cuts.

Last September, in the face of weak adoption of its BB10 smartphones, BlackBerry essentially decided to stop trying to compete in the mainstream smartphone market. At that time, the company announced plans to narrow its focus to the enterprise and "prosumer" markets, and thereby cut its operating expenses in half.

Originally, BlackBerry planned to reach this cost reduction milestone by Q1 FY15, but the company hit the goal one quarter early. Adjusted operating expenses last quarter were down 51% from the more than $1.2 billion spent just three quarters earlier.

Results will get worse before they get better
On the flip side, while BlackBerry has completed its expense reductions, revenue is still eroding rapidly. Last quarter, revenue fell below $1 billion, down 64% year over year and down 18% sequentially.

BlackBerry's channel inventory is still too high. Source: BlackBerry.

Beyond the obvious point that BlackBerry is not selling very many smartphones, revenue has fallen dramatically for two reasons. First, BlackBerry has been working through significant excess inventory in its distribution channels, particularly in the last two quarters. Most of the smartphones being sold to end users today were recognized in BlackBerry's revenue early last year.

Second, services revenue has eroded rapidly as corporate users have migrated away from older BlackBerry devices. BlackBerry's management expects services revenue to continue declining at a double-digit rate sequentially for the time being.

This implies that losses are going to increase again starting this quarter. Even if the release of new, lower-cost BlackBerry smartphones halts the revenue decline by this summer, BlackBerry would be replacing high-margin revenue with very low-margin revenue. This will likely lead to significant losses in the first half of the new fiscal year.

Waiting for new offerings
BlackBerry does have some promising longer-term opportunities. For example, customers seem to be interested in the upcoming BES 12 enterprise mobility management platform. Unlike previous versions of the BlackBerry Enterprise Service, BES 12 will be able to manage devices across all major mobile operating systems, including the older BlackBerry OS as well as BB10, iOS, Android, and Windows Phone 8.

BlackBerry also is starting to pursue monetization of the BBM messaging service. The BBM user base tends to be highly engaged, which makes the service a potentially important marketing tool. BlackBerry also hopes to sell secure messaging services to enterprises. Lastly, BlackBerry is introducing a "classic" phone (the Q20) that brings many of the features that die-hard BlackBerry fans want to a BB10 phone.

However, none of these are going to turn the ship around in the next few quarters. BES 12 and the Q20 phone are expected to arrive around November, so they won't contribute a significant amount of revenue until the last quarter of the new fiscal year (at best). Monetizing BBM in a meaningful way is probably an even longer-term project.

Foolish final thoughts
BlackBerry's new management team continues to stand behind its projection that the company will reach breakeven on a cash flow basis by the end of the current fiscal year, and will be profitable next year. The end of a costly fixed-price licensing arrangement later this year will help on both fronts, but BlackBerry will still need some of its new initiatives to take hold to meet these goals.

If CEO John Chen manages to hit all of his targets, and one or more of BlackBerry's new initiatives takes off, BlackBerry could be a multi-bagger in the making. However, with revenue declines likely to outpace cost cuts for the next few quarters, Chen has hardly any room for error. Any more strategic missteps or execution problems could send BlackBerry into bankruptcy in a hurry.

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