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Instant Analysis: BlackBerry Slashes Jobs, Appears to Shift Toward Services

By Jamal Carnette, CFA - Feb 23, 2016 at 12:06PM

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Is it time to reconsider BlackBerry as a hardware/device company?

What Happened?
According to a report from The New York Times, BlackBerry (BB 1.11%) is laying off 200 employees between its headquarters in Ontario and its Florida office. The Times points toward a shift away from the company's signature BlackBerry device as the reason for the layoffs. If so, this continues the company slow retrenchment away from device sales.

New CEO John Chen appears to be following a familiar playbook by remaking BlackBerry as a software and services company. In his prior role of CEO of Sybase, Chen turned the software company around by moving into fast-growing businesses, eliminating redundancies, and by abandoning unprofitable ventures. The longer Chen is head of BlackBerry, the more it looks as if that's his plan for the struggling device manufacturer.

Does it matter?
While the job cuts alone are not a thesis-altering event, the preponderance of changes Chen has undertaken is enough to start to reconsider BlackBerry's investing thesis. While it's true BlackBerry is still a device company with hardware comprising nearly 40 % of the company's total revenue last fiscal quarter, the company's software and services division increased 170% on a year-on-year basis. The reason for this large increase was the bolt-on acquisitions of security-based software companies Good Technology and AtHoc during that timeframe. Simply put: Chen's investing in software in a major way.

Contrasting that is Chen's investment (or lack thereof) in devices. Last year the company introduced the BlackBerry Priv, a model not powered by BlackBerry 10, but rather a model powered by Alphabet's wildly popular Android operating system. Last month, Chen noted he would continue to invest in BlackBerry 10 but stopped short of announcing another BB10-powered device. Chen did announce the company would release another Android-powered model, however.

When added to earlier moves of the company outsourcing the design and distribution of BlackBerry smartphones to Chinese manufacturer Foxconn (NASDAQOTH: FXCNY ), Chen's plan to transition the company away from devices to a high-margin software company leveraging the company's legendary reputation for privacy and security becomes apparent. Investors should continue to watch BlackBerry's moves in software and services closely, as that's where the company is quickly transitioning toward.

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