You Gotta Find Somebody to Love: The Blackberry-Foxconn Hookup

When the Jefferson Airplane sang "Somebody to Love," it's safe to say they weren't thinking about desperate corporate suitors. But hey, they were in the Bay Area and their vibe still permeates.

Blackberry's five year deal with Foxconn presents opportunities to both companies. For Blackberry, it is a lifeline. The company just announced a $4.4 billion loss in the most recent quarter - not year - a large enough deficit to sink most companies in the world.

But this is tech, where the magic happens. And in Foxconn, they have found a deep-pocketed partner with ambitions of its own. Though still dependent on Apple and the others for whom it subcontracts, the company has visions of moving out of the shadows and into the front of the global economy. In Blackberry, they have a well-known brand with a serviceable reputation. The mustiness attached to it can be eliminated with new technology, leadership and a strategy focused on low-cost handsets for the Asian market - like Indonesia, where they will manufacture. The legacy Blackberry business can focus on serving the western corporate market where it still retains good will.

That Blackberry's stock actually skyrocketed on the news suggests that the markets believe this is the first strategic initiative the company has unveiled that may actually make sense - and maybe even offer investors something more than a few cents on the dollar.

Whether this will be a lasting relationship or a short-lived marriage of convenience remains to be seen but it serves the purposes of both and who is gainsay their happiness for the moment? JL

Hugo Miller reports in Bloomberg:

Limiting its risks is different than returning to sales growth.
BlackBerry Ltd. (BBRY) shares soared after the smartphone maker struck a five-year deal to have Foxconn Group manufacture its devices, helping cut production spending and stave off the inventory gluts that have plagued the company.
Foxconn will make phones for BlackBerry at plants in Indonesia and Mexico, according to a statement today. BlackBerry will own all of its intellectual property and handle quality assurance through Foxconn, an Apple Inc. (AAPL) supplier and the world’s largest manufacturer of electronic products. The shares jumped 16 percent after the announcement.
The deal lets BlackBerry offload more of the costs of its unprofitable manufacturing operations, helping it focus on corporate software and services. After years of losing market share to Apple and Google Inc.’s Android, the company is trying to make a comeback by zeroing in on business customers. While Chief Executive Officer John Chen has shrugged off suggestions that the company stop producing phones altogether, he is scaling back ambitions for the once-dominant smartphone maker.
“This is definitely a milestone,” said Jan Dawson, an analyst with Jackdaw Research in Provo, Utah. “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.”

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Stock Jumps

BlackBerry shares climbed to $7.22 in New York, marking the biggest one-day gain since April 2009. The stock had declined 47 percent this year through yesterday.
Thorsten Heins, BlackBerry’s previous CEO, had stressed in 2012 that the company doesn’t manufacture phones in China because of security concerns. Today’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 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 bid by its largest investor fall apart.
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 today on a conference call. The first phone, codenamed Jakarta, will be a 3G model that comes out around April.

Design Role

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.
“I would love to do that,” if the arrangement works out, as it would help “derisk” the company’s handset business, Chen said at a briefing with reporters.
Asked earlier on the conference call whether he expects lower-end BlackBerry phones to make money, Chen said, “I’ll be happy to have a break-even or a low-margin device business and then have that help us to monetize software services.”
The Foxconn deal also will help reduce the risk of future inventory gluts, Chen said. The company said today that it’s taking a charge of $4.6 billion to write down the value of assets, inventory and supply commitments. That follows an inventory writedown of almost $1 billion in the previous quarter.

‘A Chokehold’

“The hardware business was losing money and was a chokehold -- I’ve relieved that today,” said Chen at the briefing. “Now we have to figure out how to fight the fight.”
That means expanding its U.S. sales force to reassure existing clients and win back lost enterprise customers, he said. BlackBerry also is building an enterprise technology center in Washington to work with government clients to come up with new software security innovations.
Even so, there are no guarantees the Foxconn endeavor will be profitable, Chen said. “I don’t think the jury is out,” he said on the call.
Sales in the three-month period ended Nov. 30 fell 56 percent to $1.19 billion, BlackBerry said today. That missed the average estimate of $1.59 billion in a Bloomberg survey of analysts. BlackBerry posted a loss from continuing operations of 67 cents. Analysts had predicted a loss of 46 cents.

Sale Attempt

Chen, who was hired last month after the Waterloo, Ontario-based company abandoned its plan to sell itself, is trying to restore confidence among both investors and customers. The exploration of a sale loomed over most of its fiscal third quarter, having been announced on Aug. 12 before being scrapped on Nov. 4. That may have deterred customers from upgrading.
BlackBerry recognized revenue from 1.9 million smartphones in the quarter, compared with 3.7 million in the previous period. The low sales level makes the Foxconn arrangement more practical, said Andy Perkins, an analyst at Societe Generale (GLE) in London who rates BlackBerry a hold.
“At some point it becomes uneconomic to produce handsets in such small quantities,” he said.
Chen, who is credited with reviving software maker Sybase Inc. before it was sold to SAP AG (SAP), has already begun making big management changes. 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.

Taking Charge

“BlackBerry finally has a leader in charge with a plan,” said Mark McKechnie, an analyst at Evercore Partners in San Francisco who rates the shares the equivalent of hold.
BlackBerry’s share of the global smartphone market tumbled to just 1.7 percent in the third quarter from 4.1 percent a year earlier, according to IDC. Android, the Google operating system used by Samsung Electronics (005930) Co. and others, had an 81 percent share, and Apple’s iOS had 13 percent, IDC said.
That’s left investors skeptical of Chen’s chances of turning BlackBerry around. The stock has fallen 20 percent through yesterday’s close since Nov. 1, the last trading day before he took over. Even after today’s rally, it’s down more than 95 percent below its 2008 high.

Services Revenue

BlackBerry’s success will hinge on wringing more revenue from services, Dawson said. The company is developing software, such as its messaging application, that runs on a range of phones, including the iPhone and Android devices.
“This is also the first quarter the company has made more from services than from devices, which is definitely the way forward,” Dawson said.
The writedown and Foxconn deal show the company “has made meaningful progress in lowering operating expenditure, reducing inventories and purchase commitments,” said Michael Genovese, an analyst at MKM Partners. However, limiting its risks is different than returning to sales growth, said Genovese, who rates BlackBerry the equivalent of a hold.
“The company may be approaching stabilization, but is still a long way from showing positive momentum,” he said.