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 (NYSE:BB) turnaround is still a hope rather than a certainty, and T-Mobile (NASDAQ:TMUS) set it back a bit.
Two steps in a turnaround
The key to a turnaround is two-fold:
- 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.
- 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.
Handset revenue must stabilize
The handset business is in a difficult spot. It's the businessman's phone, and those just aren't fashionable right now. That said, if BlackBerry can find a way to make its handsets even an acceptable substitute and stabilize the business, the company can have a chance. Is the solution a new feature? Could the company leverage its reputation for premium security to make it complimentary to a key fob for auto access, or as a retail payment token? This is a question that investors need to ask.
T-Mobile makes things incrementally more difficult
The T-Mobile move to market a quick and easy way to migrate away from BlackBerry's platform was just a jerk move from the fifth-largest carrier, which is trying to shark its way up in the telecom hierarchy. T-Mobile may not be the largest carrier, but this will directly affect BlackBerry revenue going forward, making a turnaround more difficult.
BlackBerry is showing some spine!
After the ample arrogance displayed by BlackBerry's former management, I didn't expect to feel bad for the company, but this was pretty obnoxious. You have to tip your hat to John Chen for telling T-Mobile to kiss off. A company that needs every subscriber it can get its hands on took the high road and walked away from a bad partnership. Good for them. Neither BlackBerry or T-Mobile really lost much, but it's 4th down and 15, and BlackBerry needs a play.
What do you think Blackberry could offer to regain public favor?