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BlackBerry Is Finally Ditching Hardware -- Well, Almost

By Evan Niu, CFA – Sep 28, 2016 at 2:00PM

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The Canadian company will now outsource hardware development.

Android-powered BlackBerry Priv. Image source: BlackBerry.

This day has been a long time coming. BlackBerry (BB 0.46%) has finally thrown in the towel with handset hardware operations, the company said after releasing fiscal second-quarter earnings this morning that fell short of analyst expectations. BlackBerry posted revenue of $352 million, quite a bit shy of the $390 million in sales that analysts were expecting.

BlackBerry will no longer internally design or develop smartphone hardware. The Canadian company has defended this business for years, hoping to get unit sales to a breakeven point that would allow it to continue making its own smartphones without bleeding too much cash. It's been a tough balance, though, as many of BlackBerry's diehard (and vocal) fans have remained loyal due in part to their love of BlackBerry phones, specifically the hardware keyboards. Meanwhile, sales have been sliding for years, and you can only go so far before the financial reality sets in.

BlackBerry was already on this path

Instead, BlackBerry now intends to outsource hardware development to other partners. CEO John Chen says this will reduce the capital requirements of making phones while boosting return on invested capital. This decision is essentially a continuation of the strategic shift that BlackBerry announced in December 2013, when it inked a five-year partnership with Foxconn to handle manufacturing. In that deal, Foxconn was also taking a more active role with development, while absorbing inventory risk as well.

It should come as no surprise that BlackBerry simultaneously announced a new software licensing deal, forming a new joint venture called BB Merah Putih to license its software and services. This venture will target the Indonesian market, and BB Merah Putih will source, distribute, and promote BlackBerry-branded Android devices. BlackBerry is partnering with one of the largest local telecommunications players in Indonesia, PT Tiphone Mobile Indonesia Tbk, to create the joint venture.

It's about time

BlackBerry's internal hardware development operations have been circling the drain for years, with investors constantly questioning if the segment would ever recover and be able to sustain itself. The company has been sending mixed messages for years, too, trying to both satisfy loyal customers while attempting to justify the hardware losses to shareholders.

For what it's worth, investors are evidently digging the new strategic direction, with shares up 4% this morning. Getting out of hardware, which always carries lower margins than software, is definitely a good move. BlackBerry will shift to more of a royalty model, licensing its software and brand name out to other phone manufacturers.

This cost-cutting move should start paying off quite quickly. In an interview with CNBC to discuss the decision, Chen noted that approximately $100 million to $150 million in costs were being allocated (unprofitably) to manufacturing hardware, which will ramp down in short order. Considering what a bad hand Chen was dealt when he took over in 2013, I'd say he's playing it pretty well.

Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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