Friday morning, BlackBerry (BB -1.43%) reported earnings that were far ahead of what the Street was expecting, on an adjusted basis. But bigger concerns about the viability of the company kept the share price from taking off. The results were a good start to the turnaround under John Chen, and while a few more things need to happen before we can say that the turnaround is sustainable, it seems much more likely today.
Apple (AAPL -1.22%) is the clear handset leader for consumers interested in having a tech ecosystem with an integrated handset and home entertainment. Meanwhile, Google's (GOOGL -1.23%) Android development community allows companies like Samsung to capture the bulk of the point product opportunity. For now, BlackBerry is stuck in the middle, trying to find a new place for itself. However, this is reflected in the share price.
BlackBerry's financials look ugly
The top line is shrinking, the company is losing money, and it seems like there is a negative article in the press every day. However, that doesn't mean there isn't value in BlackBerry, and this quarter's results may mark the start of the real turnaround. Revenue of $976 million is down 64% from a year ago, and the loss of $0.80 -- as BlackBerry racked up one-time restructuring expenses -- was ugly. More important, cash and marketable securities of $2.7 billion is down from $3.2 billion in the prior quarter, leaving net cash minus debt obligations at roughly 1.5 billion.
But all that is looking at the past.
Look beyond the quarter
Sell-side analysts back out the one-time expenses, and this leaves a loss of only $0.08 and a much more manageable expense structure. Chen is simply cutting expenses and channel inventory faster than most sell-side analysts expected. This doesn't increase revenue, which is the next step in the turnaround. But it does create the foundation to make a turnaround possible.
Generals fighting the last war
On the call, the same analysts that touted the stock as undervalued in the $30s two years ago seemed to be looking for problems with the numbers today. That's the nature of a turnaround. The old management team refused to admit it made a mistake and was unable to make the hard choices in cutting costs. A new team is brought in that slashes and burns the expenses down to a manageable level for the business, as opposed to the vision.
That's where we are today. An increase in revenue can now fall to the bottom line, forcing those backward-looking analysts to raise EPS estimates and ratings, driving the stock higher. Only after that will sell-siders jump on board and increase ratings.
BlackBerry isn't Research in Motion
BlackBerry handsets are a long way from cool, and the company is actively trying to court the business community while trying to evolve from its handset roots. The handset business remains the core today, but Chen is trying to develop its other businesses independently.
This flows through to the cost side as well. Where RIM kept everything in house -- from design to production -- BlackBerry is collaborating with partners on design and outsourcing manufacturing, using its brand and distribution channels to partner with Foxconn.
What's needed now is top-line growth, and that can come from a number of different places. BlackBerry has four divisions: handsets, enterprise, messaging, and embedded, or QNX. Now that costs are more closely aligned with market opportunity, if the new CEO can find ways of reaccelerating revenue growth, the bottom line will grow faster than expected, driving ratings and price-target changes. No doubt, this is a difficult challenge, but it's one that is possible now under the smaller expense structure.
