When he was brought in to turn around the company in November 2013, many BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) shareholders were pleased with the hiring of John Chen. Before BlackBerry, Chen had spent more than a decade at Sybase, a technology company that was struggling when he stepped into the CEO role. He made the company profitable after years of red ink, moving it into the highly lucrative field of mobile information. The company was acquired by SAP for US$5.8 billion in 2010. It appears that Chen is on a similar path with BlackBerry. He’s leading a move out of the hardware business…
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When he was brought in to turn around the company in November 2013, many BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) shareholders were pleased with the hiring of John Chen.
Before BlackBerry, Chen had spent more than a decade at Sybase, a technology company that was struggling when he stepped into the CEO role. He made the company profitable after years of red ink, moving it into the highly lucrative field of mobile information. The company was acquired by SAP for US$5.8 billion in 2010.
It appears that Chen is on a similar path with BlackBerry. He’s leading a move out of the hardware business into software, making several acquisitions with the company’s cash hoard. This is a great start and should be applauded by shareholders.
Additionally, Chen has been relentlessly cutting costs, including laying off thousands of employees, closing branch offices, and selling unneeded real estate. These moves are also positive for shareholders, getting the company to a point where it regularly posts positive free cash flow. Financial stability is a good thing for any company.
But at the same time, there’s one thing John Chen seemingly refuses to do–a move that would save BlackBerry hundreds of millions per year. This move is such a no-brainer that just about every analyst thinks it’s imminent, yet it never seems to happen.
That move is getting out of the phone business, of course. Here’s why it’s a great idea and why Chen deserves to be ridiculed for not doing it.
One of the problems with the cell phone business is patents.
Companies copy features from competitors all the time, even if that competitor has a patent for a certain piece of technology. Management knows if they ever get sued for copying, they own patents that are also being copied. So nobody does anything.
The solution to this is simple for BlackBerry. If it gets out of the smartphone business, it’s free to go after other companies for using its patents. This can generate millions per year in royalty payments. In fact, according to one analyst, potential profits from making this decision could be US$400 million per year.
That’s a big boost to a company that posted US$155 million in free cash flow during its last fiscal year.
That’s not the only royalty deal available to BlackBerry, either. It could easily licence the BlackBerry brand name to a competitor, making money on a per-phone basis without having to do anything.
Good money after bad
BlackBerry has been trying for years to revive its smartphone business. Nothing has worked.
The company spent billions to develop BlackBerry 10, an operating system that was supposed to be revolutionary. Phones built with it as an operating system didn’t sell well.
The company regrouped and released a number of new models in 2015, including the BlackBerry Classic and Passport. Sales were tepid at best.
Finally, the company went a different direction, releasing the Priv–a phone running Android as its operating system. You can probably guess that sales were below expectations.
And yet BlackBerry apparently isn’t done yet; two new Android-powered phones are rumoured to be released right before Christmas.
When you dig a little deeper into BlackBerry’s numbers, a trend becomes pretty clear. The company has good margins on software. It loses money on hardware. Why would it continue to throw more money towards hardware?
Face the music
BlackBerry shares have performed poorly in 2016, falling nearly 30%.
It seems pretty likely that the company’s equity will continue to struggle as long as it insists on staying in the hardware business.
John Chen seems to know this too, telling investors at the company’s recent annual meeting that he wouldn’t hesitate to pull the plug on hardware when the time comes.
But when is that time going to be? Investors have been clamouring for the company to do so for years now. If John Chen wants the value of BlackBerry shares to go up, he should make the decision. If not, perhaps it’s time for the company to hire a CEO who will.
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Fool contributor Nelson Smith owns shares of BlackBerry.