How BlackBerry's Deal With Amazon Can Aid Its Turnaround

BlackBerry has made a shrewd move by tying up with Amazon. Here's why.

Jun 25, 2014 at 9:00PM

BlackBerry's (NASDAQ:BBRY) stock has soared since the company released its quarterly results. The company has been struggling for quite some time now, but the recent earnings report implies that its turnaround is on track. John Chen, BlackBerry's CEO, has done some excellent work, and the recent deal with Amazon (NASDAQ:AMZN) should further supplement the company's turnaround. 

BlackBerry's bleeding is slowing down
Revenue for the quarter came in at $966 million, slightly lower than $976 million in the previous quarter, but ahead of analysts' estimates of $954 million. On the earnings front, BlackBerry reported a loss of $0.11 per share, which was way ahead of the consensus estimate of a loss of $0.25 per share.

The excellent quarter can be attributed to Chen's cost-cutting initiatives, as under his leadership, BlackBerry's expenses plunged 57% year over year. Most importantly, BlackBerry's cash balance jumped $400 million, sequentially, to $3.1 billion.

Although BlackBerry will not be able to sustain this cost-cutting program forever, investors must remember that every sacked employee had to be paid compensation, and the collective sum of that compensation has been included in the quarterly results. This means that BlackBerry will not have to pay compensation once the cost-cutting drive stops.

Deal with Amazon
Although BlackBerry has shifted its focus from the handset-making business to enterprise software development, the deal with Amazon holds great importance. The majority of naysayers still believe that BlackBerry's handset business defines the company, and even a minor sales boost in this segment will have a considerable effect on the share price.

BlackBerry's smartphone market share currently stands at a measly 1.2%. The company lost its dominant handset business to the likes of Apple and Google, primarily because of the lack of applications, and it is safe to assume that it might never recover. However, investors need to realize that since the handset business isn't BlackBerry's primary revenue driver, the company doesn't need to recover strongly in this area. Even a small improvement in market share will be enough to scare the shorts, which is why the Amazon deal is so important.

By partnering with Amazon, BlackBerry will address the app shortage problem on its BB 10 platform. Even though BlackBerry has tried to sort this problem by incorporating Android apps in earlier versions of BB 10, it failed because of awkward integration.

But with Amazon, BlackBerry will add over 240,000 apps to the 130,000 apps already available. While the count is still less than one-third of what's available in Google's Play Store and Apple's App store, this covers many of the famous apps like Netflix and Candy Crush Saga. This deal will certainly appeal to users who only want basic apps, and may even boost BlackBerry's handset business.

Moreover, this deal also ensures that BlackBerry spends its time and resources on the software enterprise segment, rather than over-indulging in the app shortage problem. In an interview with the Wall Street Journal, Chen said, "I do not have to spend time, energy and money developing apps that Amazon offers. Given I want to financially turn around the company and focus on the enterprise space, this is perfect for us." 

The terms of this partnership haven't been disclosed, but it's safe to assume that BlackBerry will get a percentage of each app sold, thus it's a win-win situation for both companies.

BlackBerry's strategy of outsourcing its app problem to Amazon was a smart one. In doing so, the company can focus on strengthening its enterprise business and cloud applications. At the same time, demand for its handsets might increase in emerging markets. While smartphone growth might not be a big deal for the company now, it will certainly lift investor confidence and lead to better stock price performance.

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Amit Patel has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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Jun 12, 2015 at 5:01PM

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