Is This Struggling Tech Company Finally Ready for the Picking?

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BlackBerry (NASDAQ: BBRY) has been in survival mode for a while now, but that mode may be switching to panic among some investors -- perhaps including fund manager Andreas Halvorsen -- as the company posted a very disappointing May quarterly earnings report, just three months after posting a better-than-expected report for the February quarter. It is pretty clear at this point that BlackBerry is at the crossroads in determining its future...if such a thing will even exist much longer.

The rap

After trading at around $14 per share at one point, BlackBerry dipped below $10 a share last week, losing about 30% of its modest market cap in a matter of days. And there was supposedly a lot of pressure on CEO Thorsten Heins this week when he went before shareholders on Tuesday at the company's annual shareholders meeting.

However, a funny thing happened: Heins must have wowed the crowd and said all the right things, because in the hours after the close of the meeting, the price of BlackBerry stock surged 3%. We, at Insider Monkey, do not know the substance of what he said, but whatever it was, seemed to be music to attending investors' ears, because it seemed that more shareholders either jumped on board or increased their stakes in the company.

The plan

So, just when it seems that BlackBerry might have a plan in place to actually survive, there was some news coming from the Wall Street Journal this week that revealed that BlackBerry is slated to announce a new round of major layoffs at the company in the very near future, and that the company has started that process by firing its head of U.S. sales, Richard Piasentin, in late June.

There is no immediate word as to the scope of the layoffs, but the word "massive" has been tossed around. Whether or not "massive" figures can be compared to the 5,000 layoffs the company reported in its previous fiscal year remains to be seen. By comparison, Nokia (NYSE: NOK) laid off 10,000 jobs in 2012, with an additional 1,000 cut earlier this year, while other smartphone competitor Sony laid off 10,000 in its 2012 fiscal year.

Nokia’s layoff decision came on the heels of a worse-than-expected second quarter last year, and by the fourth quarter of 2012, it was able to turn a profit, before beating expectations in Q1 of 2013. While Stephen Elop & Co. certainly have a long way to go—and their near-term fate may rest with Nokia’s rumored "625" phablet—it’s promising that last year’s layoff helped profitability.

So there’s that BlackBerry can stick under its cap. In fact, unless you’re Google (NASDAQ: GOOG) or Apple (ignoring Google’s job cuts at Motorola Mobility), it’s difficult to not expect some sort of labor force slimming. According to comScore, BlackBerry held 4.8% of the smartphone platform market at the end of May, a decrease of 0.6 percentage points from three months earlier. Nokia, meanwhile, still holds 0.4% of the market with its Symbian OS, while it has helped Microsoft attain 3% of the market.

Obviously, all of these bottom-feeders have a lot of ground to make up in comparison to Google’s 52.4% share and Apple’s 39.2% mark, but it’s worth mentioning that Symbian was the No. 1 OS as little as two years ago. There’s still hope for BlackBerry and Nokia, and in Google’s case, it’d be unreasonable to expect any slippage in the near future. Google’s Moto X Phone will be its first release as an OEM (original equipment manufacturer), and is almost guaranteed to have a net positive effect on the company’s market share statistics by as early as the fourth quarter.

Google also has self-driving cars up its sleeve, mobile software dominance, promising mobile ad prospects overseas, and other key factors that can push shares above $1,000, as ardently pointed out by Fool Lennox Yieke.

The questions

Still, the question remains: if these layoffs will happen at BlackBerry, and Heins spoke a good game that caused the stock to rise after he addressed the skittish investors, what could this mean?

Will BlackBerry indeed be moving away from the labor-intensive hardware portion of its smartphones and be focused on its business-oriented mobile software? Will it be narrowing its focus even more than that?

A software focus

Analyst opinions are mixed. According to ex-Apple CEO John Scully (via Bloomberg), BlackBerry’s “clock is running out,” but the company can still “come back if they drop hardware and focus on secure messaging.” It is true that in its latest conference call, many of BlackBerry’s most promising growth opportunities appeared to be from the software side of things, not hardware.

Aside from the eventual adoption of BlackBerry Messenger (BBM) on Apple iPhones and Google Android-operated smartphones, the company is rolling out a capability called Secure Work Space for its BlackBerry Enterprise Services 10 (BES 10) platform.

Like the eventual goal of BBM, this feature allows BES 10’s mobile security to be installed on non-BlackBerry devices by corporate IT managers. Heins himself says it “gives us the opportunity to leverage our product capabilities and revenue opportunities across competing platforms.” The number of companies with BES 10 increased by 50% from May to late-June, and rests at 18,000.

Unfortunately, BlackBerry does not report margins by segment, so we can’t say for sure exactly how much the company would benefit by dropping hardware altogether to concentrate on BBM, BES 10 and future software ventures. Still, the general consensus is that by focusing on software, BlackBerry could boost its margins -- which rest near 34% on a gross basis -- significantly. Nokia’s gross margin is near 29%, while Google’s rests at 57.4%. It’s not unreasonable to think that a software-exclusive BlackBerry could see gross margins double, à la Oracle or Adobe.

Final thoughts

In short, there are a lot of “ifs” for BlackBerry at the moment. If it can follow John Scully’s vision, it seems inevitable that profitability could increase, which in the tech world, is all that investors would need to see before buying in. We’d be watching the company closely, but it’s unlikely that we’ll hear any developments until its next quarterly earnings call in September. Check back here for updates on this situation.


This article is written by David Woodburn and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has long positions in Google and Apple. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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