The Exchange

BlackBerry still struggling but not dead yet

Blackberry CEO Chen poses for a portrait in Toronto
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Blackberry CEO John Chen poses for a portrait in Toronto, March 26, 2014. REUTERS/Mark Blinch

Blackberry (BBRY) CEO John Chen has been pretty clear about his strategy to save the former smartphone giant. Stabilize the business (so Blackberry doesn’t go out of business) by cutting costs, and increase revenue by relying on both old and new products.

Reporting fourth quarter earnings results on Friday, Chen argued the case for his progress so far but investors weren’t biting. Blackberry shares lost an initial gain and slipped almost 2% to $8.90 in afternoon trading.

But Chen has only been on the job since November, and most of his smarter moves will take time to show up on the bottom line of quarterly results. For example, a partnership to outsource device manufacturing – and inventory risk – to Foxconn could be a lifesaver, but Blackberry is still working through a massive inventory of higher-cost phones it made before the deal. New high-end models from Foxconn running upgraded software aren’t due for months.

And turning the popular Blackberry Messaging app (BBM) into a money maker is just getting started, with versions for iOS and Android released only five months ago and sales of virtual goods including emoji stickers about to start.

Worrisome signs

There were some worrisome signs in the latest results, likely the cause of Friday’s stock drop. The number of monthly active users of BBM rose only 6% to 85 million during the quarter despite the new multiplatform app lineup, while competitors such as WhatsApp and Line continue to see impressive growth.

And while Blackberry awaits new high-end devices with an updated operating system dubbed version 12, Chen said on Friday the company would restart production of the Blackberry Bold, an ancient 2011 model, though via Foxconn’s lower-cost manufacturing. That may have sounded more like a desperate ploy for revenue than a smart strategy for the future. Total smartphone sales of 3.3 million consisted mostly of old models sold at discount prices.

Even more worrisome, Blackberry’s lucrative service revenue – money it collects for behind-the-scenes software and management of mobile devices – is dropping at double-digit rates with no sign of improvement. Competition for big corporate contracts remains fierce, with private players including Good and MobileIron on one end and well-funded giants such as Microsoft (MSFT) and VMWare (VMW) at the other.

Chen said anecdotally he’s heard some big customers are holding off canceling until they see the new software updates due later this year. But, pressed by an analyst, Chen and CFO James Yersh stuck with their more pessimistic guidance that service revenue will continue shrinking at double-digit rates next quarter.

The quarter’s numbers were mixed. Revenue dropped more than expected to $976 million, a decrease of almost two-thirds from a year earlier. But the adjusted net loss, with many adjustments, of 8 cents a share was far less than the 57 cent loss analysts expected. And some were impressed with the adjusted gross profit margin rising to 43%.

All that said, it looks like the company has the financial wherewithal to at least get a chance to try Chen’s growth strategies. The company burned through $533 million last quarter, down $300 million from the prior quarter, Yersh said, after figuring in a variety of adjustments. It still has $2.7 billion in the bank, with further asset sales to come.

Chen has previously said he expects Blackberry’s business to turn cash-flow positive in 2015. On Friday Chen mainly stuck to the timetable, saying Blackberry was “on the track and if not, slightly ahead.”

At the current stock price, Blackberry is valued at less than $5 billion – and less than $3 billion net of cash and debt. Off that tiny base, not much more than the value of its patents, it wouldn’t take much for Chen to show progress over the next few quarters that would get the stock moving in the right direction again. Just stabilizing the company and reaching a position to possibly grow could double the stock price this year.

But, as the latest quarterly report makes clear, it sure isn't going to be a smooth ride.