Amidst more losses, BlackBerry's Foxconn play may be a wise move

Jake O'Donnell

Massive third quarter financial losses for BlackBerry made headlines last week, but a new deal with a device manufacturer could be a sign of where the company is heading in 2014 and beyond.

BlackBerry reported a huge loss for its fiscal year 2014 third quarter to the tune of $4.4 billion. However, along with the bad financial details came news of a five-year partnership with Foxconn to manufacture some of BlackBerry's devices.

The only way you make any profit on low-cost devices is to have a low cost for manufacturing.

Jack Gold, mobile analyst, J. Gold Associates

Under the agreement with Foxconn, a supplier for Apple, Inc., the two companies will jointly develop and manufacture certain BlackBerry devices. Their first venture will be for a smartphone aimed at Indonesia and "other fast-growing markets."

This could be the first step for BlackBerry in moving away from making mobile devices to focus on software and services for enterprise.

"People are just not buying [BlackBerrys] in the numbers they used to," said Chris Hazelton, a mobile analyst and research director at 451 Research in Boston. "The revenue from that business has fallen dramatically and that is a division that has the highest cost."

BlackBerry financials get uglier

The once-mighty Canadian company said its revenue was down for the three-month period to $1.2 billion, a 24% drop from the previous quarter and a whopping 56% from the same period in fiscal year 2013.

Of that $1.2 billion, 53% of the revenue came from services, 40% from hardware and just 7% from software and other revenue. That software includes BlackBerry Enterprise Service 10 (BES 10), which the company touted above most of its other features in a recent letter from new interim CEO John Chen.

The company sold approximately 1.9 million BlackBerry devices during the quarter, down from approximately 3.7 million the previous quarter. BlackBerry admitted that "most" of the Q3 devices were BlackBerry 7 devices, not their most recent BlackBerry 10 models.

Under the Foxconn deal, BlackBerry had an opportunity to farm out the manufacturing and some design aspects on some of their lower-end, older-model devices which still have popularity in foreign markets, according to Jack Gold, principal analyst and founder of J. Gold Associates in Northborough, Mass.

"Because they are selling so many lower-cost devices, they had to [make this deal]," Gold said. "The only way you make any profit on low-cost devices is to have a low cost for manufacturing."

Hazelton called the Foxconn deal a "shrewd" move for BlackBerry that will allow the company to focus on areas where it hasn't lagged behind competitors, including enterprise services.

"There is an opportunity to get a ton of cash to help maintain the business and to restructure and re-strategize to move to a device-agnostic strategy," Hazelton said.

BlackBerry still has $3.2 billion in cash on hand, they've added 40 million BlackBerry Messenger registrations for Android and iOS users in the last two months and reported its BES 10 installations are up to 30,000 commercial and test servers from 25,000 in September.

It's unclear how the financials are impacted by the BES 10 installations but that's an area of the business Gold believes BlackBerry needs to beef up to survive.

"A lot of those [BES 10 installations] are free and they've got to get people to actually pay for them," Gold said. " There's a real significant upside potential in BES 10 for them but how much they can actually generate revenue-wise, I don't know."

For the time being, BlackBerry still has a number of key customers that can continue to provide lifeblood to the hardware side of their business, in particular in government, financial and health care markets, according to Eric Klein, senior mobile analyst at VDC Research in Natick, Mass.

"There is still a large enough of a population of customers there that they're going to need to refresh in the hopes of keeping them once their business turns more toward software-orientation," Klein said.

Chen became CEO earlier this year as BlackBerry pulled itself off the market after months looking for a buyer. Fairfax Financial Holdings Limited agreed to inject $1 billion in cash and former interim CEO Thorsten Heins was removed after a difficult tenure.

There've been numerous other shakeups at BlackBerry since Chen's arrival, including on November 25 when the company's chief operating officer, chief financial officer, and chief marketing officer were ousted along with the resignation of a board member. A new head of global enterprise services, John Sims, was introduced last week.

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