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Hard Questions Remain on BlackBerry’s Turnaround

Hard Questions Remain on BlackBerry’s Turnaround

DAN GALLAGHER

June 19, 2014 2:54 p.m. ET

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BlackBerry BB.T +9.33% may no longer be doomed, but what it will look like in a year remains up in the air.

BlackBerry wants to shed its dependence on selling smartphones in favor of software and services mainly for enterprises to manage their fleets of mobile devices. Thursday’s quarterly results offered several encouraging signs for this effort. Adjusting for one-time items, BlackBerry’s loss of 11 cents a share was less than half what analysts expected. And service revenue came in 9% above Wall Street’s estimates. The stock duly jumped on Thursday.

But that owed at least something to the high proportion of BlackBerry’s shares sold short. And one quarter does not a turnaround make. BlackBerry says it is at the “tail end” of restructuring efforts that have effectively been under way for more than two years. It must now demonstrate that it can be a profitable services company.

Yet hardware will remain part of the picture, which should give even investors pause. On Thursday’s conference call, Chief Executive John Chen said BlackBerry plans to hold an event in September to showcase devices planned for the current fiscal year. These will include the Passport and the Classic, both of which are expected to feature the physical keypad that is popular with BlackBerry loyalists.

BlackBerry struck a deal with Foxconn 2354.TW +0.29% Technology late last year, making the Chinese manufacturer a partner in its handset business. But Mr. Chen noted Thursday that the deal doesn’t shield BlackBerry from the need to invest in device launches: “So it will still cost us money, and we have to spend it judiciously.”

As for the software-and-services end of the business, the full picture has yet to emerge. The firm launched the EZ Pass program in March to switch over business customers to its BlackBerry Enterprise Service 10 offering for free, including new customers coming from rivals. BlackBerry said Thursday more than 2,600 customers have registered under the program. But they won’t begin paying support fees until January 2016, so it will take time to gauge whether the effort has paid off.

BlackBerry trades at only about 1.3 times forward sales. That might look cheap given the potential for the turnaround to gain traction. Given the competitive pressure that continues to squeeze BlackBerry, though, more evidence is needed before buying in.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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