By Allison Martell and Alastair Sharp
TORONTO (Reuters) - BlackBerry Ltd (BB.TO)(BBRY.O) on Friday reported a bigger-than-expected drop in third-quarter revenue, sending shares of the struggling smartphone maker lower, even as it eked out a small adjusted profit and began generating cash flow again.
Revenue fell to $793 million from $1.19 billion a year earlier, falling short of analysts' expectations of $931.5 million.
"It's a number that obviously, to us, is not satisfying,"
Chief Executive Officer John Chen said on a conference call, noting that the focus has been on margins and cash flow. "We achieved that, but now we're going to turn our attention to revenue."
Shares fell 5.4 percent to $9.52 in morning trade.
Chen said hardware sales in the quarter were weaker than expected as production was limited and the company could only fulfill all device orders early in the fourth quarter.
At an analyst conference in San Francisco last month, Chen had said revenue could slide faster than expected as its sales profile changes.
BlackBerry had long made money charging system access fees, but now offers some basic services for free. As older devices are retired, that erodes revenue, but the company is aiming to boost hardware sales with its new Passport and Classic phones, buying time to scale up new premium services, which are not free, in 2015.
Cash flow was positive $43 million in the third quarter, versus negative $36 million in the second quarter. BlackBerry had said it was targeting break-even cash flow by the end of the fiscal year in February 2015.
Colin Gillis, an analyst at BGC Partners in New York, said Chen did a good job controlling expenses.
"The fact that he overachieved by turning cash flow positive this quarter - that's a great milestone," said Gillis. "It gets easier from here."
Excluding a one-time non-cash debenture charge and restructuring charges, the company reported a profit of 1 cent a share. Analysts polled by Thomson Reuters I/B/E/S expected a loss of 5 cents.
The Waterloo, Ontario-based company's net loss narrowed to $148 million, or 28 cents a share, in the quarter ended Nov. 29, from a year-earlier $4.4 billion, or $8.37 a share.
BlackBerry launched its long-awaited Classic smartphone on Wednesday, hoping to help win back market share and woo customers still using older devices with a keyboard. The phone resembles its once wildly popular Bold and Curve handsets.
(With additional reporting by Euan Rocha and Jeffrey Hodgson; Editing by W Simon and J Benkoe)