BlackBerry’s Foxconn Deal Spurs Evolution Into Services Company

BlackBerry’s Foxconn Deal Spurs Evolution Into Services Company

BlackBerry Ltd. (BBRY)’s five-year deal to outsource smartphone production to Foxconn Group is jump-starting its transformation into a services provider, pleasing investors who were looking for a smaller, nimbler company. BlackBerry announced plans yesterday for Foxconn to make its phones at plants in Indonesia and Mexico, sending the shares up 16 percent, the biggest one-day gain in more than four years. The move will help the struggling company cut production spending and avoid the kind of inventory gluts that contributed to a $4.6 billion writedown last quarter.Since BlackBerry’s attempt sell itself faltered last month, some investors and analysts have pushed the company to get out of the money-losing business of making handsets. While yesterday’s move doesn’t jettison the operation or guarantee a return to profitability, it helps BlackBerry refocus on services and software — products that earn higher margins and can be sold to customers regardless of what kind of phone they use.

“The hardware business was losing money and was a chokehold,” BlackBerry Chief Executive Officer John Chen said at a press briefing. “I’ve relieved that.”

After years of losing market share to Apple Inc. and Google Inc.’s Android, the company is trying to make a comeback by zeroing in on business customers. Yesterday’s move was the biggest sign yet that the once-dominant smartphone maker is ready for a new role, said Jan Dawson, an analyst with Jackdaw Research in Provo, Utah.

‘A Milestone’

“This is definitely a milestone,” he said. “BlackBerry was always first and foremost a devices company. Now they’re outsourcing a big chunk of that business and focusing more on other things.”

BlackBerry shares climbed to $7.22 in New York, marking the biggest one-day gain since April 2009. Until yesterday’s rally, the stock had declined 47 percent this year.

Thorsten Heins, BlackBerry’s previous CEO, had stressed in 2012 that the company wouldn’t manufacture phones in China because of security concerns. Yesterday’s deal doesn’t change that. Though Foxconn has manufacturing in mainland China, the company is Taiwan-based and the BlackBerry work will be done in other countries. BlackBerry also isn’t licensing technology to Foxconn, signaling that the company isn’t ready yet to get out of the business entirely.

Still, allying with Foxconn — famous for churning out iPhones, PlayStations and personal computers — lets the company offload manufacturing without having to find a buyer for its phone business. BlackBerry sought takeover offers for the entire company earlier this year, only to see a $4.7 billion bid by its largest investor fall apart.

Design Role

As part of the Foxconn deal, the manufacturer will help BlackBerry design phones and then produce lower-end models that will be sold in six to seven main markets, Chen said yesterday. The first phone, codenamed Jakarta, will be a 3G model that comes out around April.

Over time, Foxconn will take over the design of those lower-end phones, letting BlackBerry’s staff in North America focus on pricier models for business customers, Chen said. If the joint venture works out, Foxconn could eventually design and produce all BlackBerry phones, Chen said.

That will free up engineers to create new services that don’t have to run on the BlackBerry platform. The company has already developed software, such as its messaging application, for iPhone and Android devices. It’s also building an enterprise technology center in Washington, D.C., to work with government clients on new software security innovations.

Android Phones

The messaging app has been adopted by more than 40 million Apple and Android users in the past 60 days, BlackBerry said yesterday. More than a dozen makers of Android devices also are preinstalling the software on their hardware.

“This is also the first quarter the company has made more from services than from devices, which is definitely the way forward,” Dawson said.

Services accounted for 53 percent of revenue last quarter, compared with 40 percent for hardware. Even so, total revenue plunged 56 percent from a year earlier and missed estimates. The company posted sales of $1.19 billion for the three-month period ended Nov. 30, compared with the $1.59 billion analysts had projected. BlackBerry posted a loss from continuing operations of 67 cents, wider than the estimated loss of 46 cents.

Chen was hired as CEO last month after the Waterloo, Ontario-based company abandoned its plan to sell itself. He’s credited with reviving software maker Sybase Inc. before it was sold to SAP AG (SAP) and is now trying to execute a similar comeback at BlackBerry. Three weeks after his Nov. 4 start date, BlackBerry’s marketing, finance and operations chiefs left the company. This week Chen appointed former SAP executives as BlackBerry’s new heads of enterprise services, corporate strategy and marketing.

“BlackBerry finally has a leader in charge with a plan,” said Mark McKechnie, an analyst at Evercore Partners in San Francisco who has a neutral rating on the shares.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net