Category Archives: BlackBerry

BlackBerry Moves the Goalposts and Still Misses on Software

Note: for previous posts on BlackBerry, click here. I’ve specifically addressed some of the same topics in this earlier post

A little over a year ago, BlackBerry CEO John Chen said his goal was to double software revenue at the company from $250 million to $500 million in the company’s 2016 fiscal year, which ended in February. Today, the company reported results for that period, and even though the company moved the goalposts on that goal, it still missed its target. That’s important, because this software line is basically the future of the company, as hardware sales continue to tank, along with service access fees, the other historical mainstay of the company’s business.

Just to recap, the company first set its target for doubling software revenue back in late 2014, and at that point the goal was very much to double classic enterprise software revenue. In a meeting I attended with BlackBerry’s senior management in November 2014, we were told that each of BlackBerry’s roughly 250 sales reps was carrying a quota of $2 million for the year, which of course would add to $500 million if they all hit their quotas. So it was very clear that this target was for the enterprise software business BlackBerry then had.

However, a few months later, BlackBerry announced its first patent license sales, outside the scope of those enterprise software quotas, but nonetheless reported in a new Software and Technology Licensing segment by BlackBerry in its financial results from that point onward (the name has since changed to Software & Services). Ever since then, BlackBerry has referred to this combined number and not the pure enterprise software number in measuring progress on hitting that $500 million goal in FY2016. Hence my comments about shifting the goal posts. In addition, the company has made several acquisitions, including a major one in the form of Good Technology, which have also contributed to the revenues reported in that segment.

Even with all that, the company just reported GAAP Software and Services revenue for the quarter of $494 million, $6 million shy of the $500 million target. In its press release, the only financial document available to analysts before today’s call, it listed only non-GAAP revenue for this segment, which brought the annual total to a little over $500 million and allowed the company to congratulate itself on meeting the goal. (The difference between the two is a fairly small amount of deferred revenue.)

However, if we break down the revenues actually generated over the last five quarters in this segment into the part that represents the business that was originally supposed to hit that $500 million, and separate out the contribution from Good Technology and from patent and other licensing deals, we get a very different picture:BlackBerry Software and Licensing breakdownAs you can see, the portion of revenue that comes from recurring sources has remained roughly flat over that entire period, far from doubling. The company touted 106% growth in Software and Services revenue in Q4 and 113% for the entire fiscal year, but as the chart shows that growth was entirely made up by a combination of non-recurring revenue and revenue from the Good business, while the underlying business grew very little.

The good news here, if there is some, is that for three of the last four quarters, BlackBerry has been able to generate very meaningful non-recurring revenue from licensing and other sales on top of enterprise software sales, which suggests that even if this business isn’t as predictable as recurring revenue, it’s still coming in fairly regularly. But only 70% of the segment’s revenues were recurring in the quarter, which makes future software revenues much less predictable. BlackBerry’s goal in FY2017 is much  more modest than the doubling in revenue it aimed for in FY2016: it only wants to offset the decline in Service Access Fees, likely to be around $120-150 million in the year, but says nothing about offsetting the decline in Hardware, which declined by $90 million in FY2016 and is likely to continue to do so in FY2017.

BlackBerry’s future comes into focus

BlackBerry reported earnings today, and as ever so much of the analysis in the mainstream news media is glossing over some of the most important details. To my mind, the most important thing in the earnings was the revenue the company announced from Software and Technology Licensing this quarter, which jumped significantly. This revenue line is the single most important element of BlackBerry’s business, and the numbers this quarter along with some of the executive commentary on the earnings call lead me to believe that the company might finally be on a trajectory to get where it needs to go to build a sustainable and growing business over time. This echoes an earlier piece I wrote, which outlined BlackBerry’s situation and the challenges it faces as it moves forward.

First, the bad news

So much of that mainstream news coverage stayed at a fairly high level, or picked up on the same old trends we’ve seen now for a couple of years, so let’s cover those at least briefly. Firstly, the hardware business is a shadow of its former self, and continues to decline, although the company has now been profitable at a gross margin level for hardware for the past year. Hardware has always been the core of BlackBerry’s business, but it simply can’t be anymore – the company doesn’t have the broad appeal to be a mass-market devices company. But those devices are still important for two fundamental reasons: BlackBerry is still the device vendor of last resort of the most regulated industries and for governments, and device revenue (and the associated service revenue – more on this below) are critical to its revenues as it works hard to grow its future revenue source: software.

The services revenue line has always been closely tied to devices, and is declining in a very predictable fashion, at around 15% or roughly $50 million per quarter:Screenshot 2015-06-23 10.39.05

The fact is that this decline will continue until there is almost nothing left, since this revenue line is tied to BlackBerry’s dwindling base of devices. Hardware revenue will likely stabilize in the coming months with somewhere around 1 million devices shipped per quarter, so the decline is likely mostly over there at this point.

Software finally gets a boost

My biggest skepticism about BlackBerry’s future has come from the fact that the company set an ambitious goal of $500 million in revenue from software this year, and its run-rate has been nowhere near that, until this quarter. What changed this quarter – and dramatically at that – is that BlackBerry suddenly posted a huge boost in Software and Technology Licensing revenue. The revenue line for this segment is shown below:Software and Tech Licensing Revenue

You can see this line bouncing around with hardly any growth, and with a run-rate much closer to last year’s revenue of around $250 million than to the goal for next year of double that. However, it grew modestly in the February quarter and then it suddenly spiked in the quarter just reported. What’s behind this spike in revenue in this segment? Well, a lot of it came from a technology licensing deal with Cisco, which is the major reason BlackBerry renamed this revenue line from just Software in previous quarters to the new, more expansive moniker. This deal seems to have added an enormous amount to this segment’s revenues in the quarter, and also to BlackBerry’s overall North American revenues, which grew by $80 million quarter on quarter after a fairly steady decline. This deal is clearly good news for the software revenue growth story, although it’s questionable whether this is really the kind of revenue the company was talking about when it set that $500 million goal.

Understanding this deal is an exercise in frustration

The big problem, though, with this deal (and another execs mentioned on the call but haven’t formally announced) is that the economics associated with it are utterly opaque. The earnings call was one of those entertaining ones where analysts try to find any way they can to get more information on a particular data point, largely without success. The deal with Cisco is apparently subject to such tight non-disclosure terms that BlackBerry couldn’t say how much the deal would bring in, whether it was a one-time item or recurring revenue, what exactly was included in the revenue, or anything else of interest. All of this makes it incredibly tough to evaluate the real significance of the Cisco deals and others like it, because it’s almost impossible to tell what it means for the future. John Chen did say on the call that there were more such deals in the pipeline and that they should land later this fiscal year (which ends in February 2016), but he provided no real visibility at all over what the run rate in this business is likely to be, other than to say that the $500 million goal now looks very achievable.

That still feels to me like moving the goalposts on the original goal of growing software revenues (rather than technology licensing revenues) to $500 million, but the larger story is that BlackBerry looks like it might finally have an alternative source of revenue which can in time take the place of its legacy hardware and service revenues, which is the company’s single biggest challenge. As those older revenue streams fall, BlackBerry has struggled to find a new revenue stream that could offset the decline and get the company back to growth. It’s possible that it’s now found that revenue stream, through a combination of fairly modest core enterprise software growth and this new technology licensing stream. The big question is whether that revenue stream is sustainable over time – will it provide recurring revenues each quarter going forward in a way that can mimic its previously very dependable hardware and service revenues? Or will it be a series of, as John Chen said on the earnings call, “lumpy” one-off payments that provide no real certainty over the future of the business?

The revenue mix is changing again

If this Software and Technology Licensing revenue stream really does keep up the momentum, it will mean a second major shift in BlackBerry’s revenue mix. The first was due to the decline of hardware, which once regularly accounted for 70-80% of BlackBerry’s revenues but has now dropped to 40% or so, with Services making up most of the difference. This second shift, though, will see software become first a significant contributor to overall revenue and in time the major contributor to revenue. This quarter was the start, as the chart below shows:Revenue mixThe question is whether BlackBerry can keep this momentum going – it’s not too much of a stretch to suggest the company’s future depends on it.

Quick thoughts: BlackBerry’s announcements

BlackBerry yesterday made a series of announcements around its enterprise software and services strategy and roadmap, and I was able to attend both the event itself and some analyst-only sessions under NDA afterwards. I obviously can’t share the afternoon’s content, but from what we learned in the morning and from other insights I gained yesterday, I wanted to update my recent takes (here and here) on BlackBerry a little.

Focus on regulated industries, ambitions beyond

I’ve praised BlackBerry for their focus on the regulated industries when it comes to devices, because it shows how realistic BlackBerry is being about its prospects in the enterprise today. Especially in the US and other mature markets, BlackBerry is unlikely to sell devices other than in the public sector and other highly regulated industries. However, as I’ve said before, BlackBerry’s future lies in building a business that’s not directly tied to its dwindling device installed base and in going beyond these regulated industries to other businesses.

BlackBerry shared results from a survey yesterday about enterprises’ concerns about security and risk. There were no new findings here and lots of old themes: a vague sense of unease about the management of mobile devices and potential risks their use in the enterprise pose. BlackBerry is hammering away at worn themes here, but it’s hoping that broader awareness of the growing security risks in the enterprise will eventually pay off for them. There’s an element of scaremongering here, and the real challenge will be convincing enterprises beyond the regulated industries that there’s a real threat in mobile security that (a) requires going beyond the standard basic protections available in major operating systems and management systems today and (b) requires a BlackBerry solution rather than one from a competitor.

Fleshing out the cross-platform story

A big part of that story, in turn, has to be fleshing out the cross-platform story BlackBerry has been trying to tell since the announcement of BES 10. The vision has always been there, but it hasn’t been clear why a company would choose BlackBerry to manage non-BlackBerry devices. BES 12 is part of the answer to that, as it finally provides a unified approach to managing all devices, but the Samsung deal is the first concrete step in fleshing out the cross-platform vision. That’s because it’s the first step towards crafting truly optimized solutions built around a very popular device category in the enterprise rather than just focusing on standard APIs and tools. Samsung KNOX hasn’t been a great success yet, and its contribution to Android’s efforts and the BlackBerry partnership are both signs of its weakness and need to gain momentum. But on BlackBerry’s side, it’s also an admission that the generic approach hasn’t resonated, and something more targeted may be needed. There’s more coming as part of the Android for Work initiative too.

Multiple tiers now available on BlackBerry

CEO John Chen started the day’s sessions by talking about BlackBerry’s end-to-end solution for secure mobile communication and productivity. He made much of the multi-layered approach, starting with chips and firmware, the OS, the applications, the BES and the NOC. This is the top tier of the secure solutions BlackBerry offers. But it now arguably offers two other tiers as well: Samsung KNOX as part of the BES and NOC system, and other devices managed through a BES on a more generic basis. This creates a slight awkward situation where BlackBerry devices managed by the BES are the gold standard, with KNOX/BES devices a second tier (silver?) and others a third. I asked BlackBerry executives about this, and specifically how they imagined enterprises using each of these tiers within their companies, and they said they see companies using multiple tiers for different kinds of users based on their security and risk profiles. That makes a certain amount of sense, but the top tier has always been more or less exclusive to BlackBerry: the question is whether it can make inroads in the middle and bottom tiers, which is where the vast majority of devices in use are today.

Selling productivity against the big guys is tough

BlackBerry’s other big story is selling a suite of communications, collaboration and productivity solutions, with its content storage and syncing solutions such as Blend, BBM Meetings announced yesterday, and so on. It believes it’s created the best mobile-first solution for these things and points to the lack of full feature sets on the mobile versions of Lync, Adobe Connect and other similar products. That’s a fascinating value proposition, but I see two major problems with it. Firstly, the others will catch up fast: for example, Microsoft’s rebranding of Lync as Skype for Business is likely to come with an expanded feature set on mobile devices in the near future. Secondly, BlackBerry isn’t known for these things, and once again the challenge will be selling these new products and services beyond the traditional BlackBerry base. With a direct sales force of only a couple of hundred, BlackBerry will be heavily reliant on its indirect sales teams, many of whom also sell competing products. Why will channel partners sell these solutions when awareness is lower, preference for others is stronger, and many companies already have relationships with competitors?

Short-term growth prospects are all in enterprise software

BlackBerry is very aware of the two peaks problem I talked about in an earlier piece – that is, that its traditional business, which was directly tied to its device base, is in decline, and it needs significant new revenues to slow the decline and eventually get back to growth. The company has in the past talked about three potential new sources of revenue: enterprise software and services, BBM and the Internet of Things. However, of these, only enterprise software and services is going to generate any significant amount of revenue in the near term. The company’s target for BBM is $100 million by next financial year, whereas the target for enterprise software and services is $500 million, a doubling year on year. The company’s Internet of Things efforts, meanwhile, are too nascent even to warrant a public revenue target in the near term. That puts a heck of a lot of weight on the enterprise software and service activities, and the success of BES 12 in particular since so much else is dependent on that. The company’s management seems to be extremely realistic about its prospects overall, but this is one area where their goal seems like it’ll be a real stretch.

Overall, I remain somewhat positive on BlackBerry’s short-term prospects: they’ve reduced costs and cash burn to the point where there’s no longer an immediate danger of going under, and revenues are starting to stabilize. The question continues to be whether these new businesses can grow, and importantly grow independently of the device base, sufficiently in the coming years to return the company to significant growth. The next year or so will give us a really good sense of whether that’s possible or not.

BlackBerry earnings: progress on several fronts

Having not written about BlackBerry for months, I’m now doing two posts in one week! Normal service will resume shortly. But I did want to quickly cover BlackBerry’s earnings today, because as usual many of the people covering them are misunderstanding what’s happening and focusing on the headlines instead of the underlying trends.

First off, BlackBerry’s results look horrible on the face of them. It’s losing money, it’s shrinking, it’s hardly selling any devices, and so on and so forth. If you compare them to almost any other handset vendor out there, they come off looking pretty bad. But looking at BlackBerry as just another handset vendor is making the very mistake I warned against in my post earlier in the week. BlackBerry’s future involves devices, to be sure, but it goes well beyond them. So here’s a quick take on what I see by way of underlying trends at BlackBerry.

Device shipments

Since so many people are fixated on device shipments, let’s start there. The headline here is that shipments fell significantly year on year, which is usually the best comparison to make to avoid focusing on seasonal trends. However, when a company is in turnaround mode, it’s worth looking at quarter on quarter trends too. In addition, the real number to focus on is sell through and not shipments, because that reflects what the company is actually selling without the effect of reductions in inventory. The chart below shows three key metrics related to the company’s device sales for the last few quarters:

BlackBerry device salesTaking each of those lines in turn: Continue reading

BlackBerry’s unhappy valley

Today, BlackBerry officially launched its latest handset, the BlackBerry Passport. I attended the launch event, because I was keen to see the new, John Chen-led BlackBerry up close and hear what they had to say first hand. So many of the people who read my work are entirely focused on the devices business, and have long since written BlackBerry off as a company because of the performance of its handset business. But my own view is more nuanced. I’ve written about BlackBerry extensively in the past, mostly while with my former employer, Ovum, although one of my earliest posts on this blog was about BlackBerry. But it’s been quite a while, so I thought I’d give an update on my thoughts on the company, using today’s event as a jumping-off point.

BlackBerry was never just about devices

There’s no doubt that BlackBerry has fallen a long way from its peak.  Beating up on the company on this point is fruitless – it’s a fact that it’s a shadow of its former self when it comes to its handset sales, which formed the core of the company’s business for many years. Revenue from devices made up the majority of the company’s revenues very consistently from 2003 to 2013, and for much of that time it made up well over 70% (and sometimes over 80%) of the company’s revenues. Thus, in many people’s minds, BlackBerry is first and foremost a handset company, and given the decline in its fortunes in that area, they assume that it’s done for. The company’s device revenues peaked at around $16.5 billion annually in 2013 but have fallen to under $2 billion annually.

Were BlackBerry to have been simply a handset sales company like HTC or Kyocera, this decline would have been terminal (no pun intended). But BlackBerry has always been more than just a devices company. Even when its revenues were dominated by handsets, it derived a significant proportion from service fees associated with BlackBerry subscriptions. Those were directly tied to the number of BlackBerry devices sold, in that both revenue streams derived from the same source. So, to the extent that the number of BlackBerry devices has plummeted, its service revenues have fallen too, from a peak of over $4 billion per year to under $2.5 billion – not quite as dramatic, but still a fairly sharp decline. However, that business, and BlackBerry’s broader foothold in the enterprise, has been its salvation even as device sales have fallen off a cliff. Continue reading

What John Chen needs to tell customers (and investors)

Earlier this week, BlackBerry’s CEO John Chen posted a letter to customers. While he provided some sense of his strategy going forward, he unfortunately continues the tradition started by his predecessors of failing to answer the most compelling questions customers (and investors) have:

Is there any reason to believe the atrocious trend in device sales will turn around? If so, what?

Device shipments have now dropped 75% from their peak in 2011, and although it’s possible we’ll see a small blip next quarter from steep discounts on the Z10, the trend is likely to continue downward. Chen needs to explain what, if anything, will cause these same poorly-selling devices to start selling better, or allow any future devices to be more appealing to users. As of right now, there’s no evidence of either of those things, and as such we have to assume shipments will continue dropping, and with them what has historically been the largest chunk of overall revenues.

In the absence of that, is there any reason to believe service revenues won’t follow suit very soon?

Service revenues make up most of the rest of BlackBerry’s overall revenues, which is why some people seem to think it’s the most promising avenue for BlackBerry going forward. But the reality is that these service revenues are directly tied to the installed base of BlackBerry devices, each one of which generates a few dollars every month for the company. But, if device shipments go down dramatically and existing BlackBerry users churn to other platforms, this service revenue will merely lag falling hardware revenues by a few quarters but generally follow the same path. BlackBerry has already stopped reporting subscriber numbers, which started falling late last year, and had dropped from 80 million to 72 million by the time BlackBerry closed the door on that metric.

Continue reading