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It's 4th and 15 -- What's the Play, BlackBerry?

David Eller
April 6, 2014

A man who ran a $1 billion long/short equity portfolio liked to use the phrase "Short Hope" when we discussed investment ideas. It's hard to think of a laconic two-word phrase that is more cynical. He was a good person, and it bothered me for some time -- until it became apparent that it was meant as a reminder to wait until we see revenue turning before committing capital to a position.

If you take the time to do proper due diligence on a company and like the management or the product managers, it's easy to believe they will find a way to turn the business around. BlackBerry's (NASDAQ: BBRY) turnaround is still a hope rather than a certainty, and T-Mobile (NYSE: TMUS) set it back a bit.

Two steps in a turnaround
The key to a turnaround is two-fold:

  1. Once a change has occurred in a company's underlying business, it needs to restructure its operating expenses to meet the new reality of the marketplace.
  2. It needs to focus on its strengths and get the top line growing again. This can take many forms: raising prices on key products that have strong demand, releasing new models of existing products that remain popular, or building out related businesses that are new revenue streams.

BlackBerry has already worked through the first step in its turnaround, as evidenced by the 34% drop in operating expenses in its last quarterly report. This change puts the company in a position for a turnaround to be possible.

BlackBerry is in a good position to grow revenue because it has three ancillary businesses that the new management team is focusing on: enterprise, messaging, and embedded. The company has good raw material to work with outside of the core handset business. However, if the handset business does not stabilize, continued deterioration will prevent revenue from growing, even if the other businesses produce growth.