Here's Why BlackBerry's Turnaround Looks Realistic

After failed attempts in the past, BlackBerry's turnaround finally gets some teeth.

May 1, 2014 at 10:05AM

For BlackBerry (NASDAQ:BBRY), 2014 has been a stable year so far. The shares haven't seen a bloodbath like last year, and there are signs that the company is finally repositioning itself to deliver better results in the long run. Just recently, Oppenheimer upgraded BlackBerry to a "perform" rating from "underperform," citing its meaningful cost reductions and a reasonable valuation.

Moreover, Oppenheimer expects that BlackBerry's upcoming devices such as the Z3 and the Q20 Classic would lift its smartphone sales and make it competitive once again against the likes of Apple (NASDAQ:AAPL). But, should investors still bet on BlackBerry, considering that the company has failed to deliver in the past?

Turnaround in progress
BlackBerry's cost-control moves have yielded good results as its adjusted fourth-quarter gross margin was 43%, up from 34% in the prior quarter. In addition, its adjusted loss per share in the fourth-quarter declined to just $0.08, compared to $0.67 in the preceding quarter. The company was able to achieve these impressive numbers despite a drop of 18% in revenue from the third quarter to the fourth quarter. 

BlackBerry's efforts at streamlining and rationalizing sales channels have helped bring down the channel inventory down by one-third. The company has been strengthening its distributor relationships, and it has updated all its distributors regarding contracts, marketing plans, pricing, go-to-market strategies, and various elements that are crucial for long-term growth.

Moreover, the company is looking to improve its product portfolio as well. BlackBerry's BES 12 announcement at the Mobile World Congress, and its related migration program called the EZ Pass, generated significant interest from enterprise customers globally. BlackBerry is also working hard to make its handset business profitable, so it is working on supply chains with the likes of Foxconn, Wistron, and other suppliers across the world.

In addition, BlackBerry is focusing on its core strengths of security and productivity in communication. The company will continue to invest in reducing expenses and streamlining operations to generate positive cash flow and return to profitability.

The road ahead
The next focus area for BlackBerry is achieving well-paced growth, most of which is believed to come from software and services, messaging like BBM, and embedded software like QNX. BlackBerry is building new features and value-added services into BES 12 such as compatibility, backward compatibility, and cross-platform support. The company is trying to create a robust BBM monetization plan by simplifying pricing to address critical needs for customers. 

Further, it is looking to expand into non-traditional channels such as e-commerce, like shopBerry and BlackBerry.com. Customers can now buy unlocked versions of the Z10, Z30, Q10, and Q5 phones on the site. The company is also starting a new production run with Wistron on the BB OS device for worldwide distribution. 

In the long run, BlackBerry believes that there is a lot of opportunity to capitalize on end-to-end mobile solutions and connected cloud solutions. As a result, it is focusing on the device strategy for handsets and other devices, along with a messaging strategy, server strategy, and an embedded software strategy.

On the enterprise side, BlackBerry claims to be the first, and only, mobile solutions provider to achieve a full operational capability certification to run on the U.S. Department of Defense network. This means that the government can now use the BlackBerry 10 smartphone, managed by the BES 10 platform, and can securely assess email, data, apps, and other DOD network resources. 

Focus on emerging markets
Meanwhile, BlackBerry's user base in Indonesia is positioned for growth in the emerging markets with attractively priced offerings under $300. Later this year, the company plans to expand the Z3 to other regions in South East Asia such as Thailand and India.

So, BlackBerry is doing the right thing by trying to engineer a turnaround from different angles. The company is not trying to make a big comeback in highly competitive smartphone markets where the likes of Apple already hold good sway. Apple had sold 51 million iPhones in the last quarter of 2013, coming in below highly optimistic estimates of 57 million. However, it looks like sales of the iPhone are peaking after growing just 7% on a year-over-year basis in the quarter that ended in December. 

It's necessary to take the holiday quarter into consideration because Apple's iPhone sales were at their highest during this time, as pointed out by Digital Trends. Given the relatively pricey nature of Apple's iPhone, the company has found it difficult to crack lower-budget markets. Even the plastic-clad iPhone 5c was a failure. This is where BlackBerry can do better than Apple and turn its business around. 

Bottom line
BlackBerry is going down the right path. The company is gradually working on a turnaround, focusing on cost-reductions and product introductions in emerging markets. Moreover, its enterprise segment is also doing well and should provide good support to the overall business going forward. Hence, it can be said that this time, BlackBerry's turnaround looks realistic.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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