John Chen’s Turnaround Efforts For BlackBerry Ltd (BBRY) Paying Off — Part I

In November 2013, BlackBerry Ltd (NASDAQ:BBRY)(TSE:BB) turned towards John Chen to assume the role of CEO of the company and steer clear of the mess it was in. When he took over the reins of the company, John Chen indicated that there was an equal chance of turning it around. After a gap of 15 months, there is a strong hope that the turnaround is happening ahead of schedule. Chen himself in December upgraded the chances to 99 percent. Most experts in 2013 had written off the company for lack of innovation.

In the first part of this two-part article, we will focus on John Chen and the difficulties he inherited at BlackBerry Ltd (NASDAQ:BBRY).

Turnaround CEOs

There are only few CEOs, who can be regarded as turnaround experts. For instance, Ford Motor Company (NYSE:F) appointed Alan Mulally as its CEO in 2006. The company was in utterly bad shape and had lost big market share when he was handed the difficult task of turning the company around. He did it in style and allowed Ford to even avoid taking a bailout during the financial crisis.

Though the companies are from a different industry and sectors, the theme of the problems had similarities. Both companies were saddled with the perception of retaining the age-old business and the old ways of doing things. The problem was exacerbated by a culture that had elevated in-house talent to the position of CEO. This only resulted in the continuance of same policies and principles without any success. In a nutshell, they failed to think out of the box and the opportunities available outside its core business to explore.

However, when these companies turned towards an outsider, the company also turned around because they did not shy away from hard decisions, which caused their predecessors to hesitate. For instance, Alan Mulally divested most of the loss-making divisions of Ford and cleaned the balance sheet. He skillfully raised funds through debt before the financial crisis making Ford better prepared.  In the same way, John Chen could be considered as a turnaround CEO as far as BlackBerry Ltd (NASDAQ:BBRY) is concerned.

Earlier CEOs

One of the problems that BlackBerry Ltd. (NASDAQ:BBRY) faced was that it never tried to look at talents outside the company. For a long time, the company was managed either by its founder or an early investor or persons who joined the company and worked up the ladder to occupy the CEO position. The net result was that they struggled to keep pace with the development that was happening outside. In a nutshell, they were overconfident about their product simply because it was a leader in the initial stages of smartphone adoption. At that point of time, it was the only smartphone available and they enjoyed a monopoly. They felt too comfortable.

However, once Apple Inc. (NASDAQ:AAPL) unveiled its iPhone with significant features, BlackBerry Ltd. (NASDAQ:BBRY) seemed to have been sitting on ivory towers and never looked at the challenges posed by the likelihood of a more advanced smartphone entering the market. The successive CEOs only thought that the smartphone invention was their baby and that it was their duty to mold it. But the process of molding it failed to match with the rivals features.

John Chen

The bruised and battered smartphone maker turned towards John Chen in November 2013 when it finally realized that an outside talent was needed to challenge internal thinking. This came at a time when Fairfax Financial Holdings was trying to take the company over. However, Fairfax settled on raising additional funds including an investment of about $1 billion, betting on John Chen turning around BlackBerry. The big bet is showing signs of paying off.

John Chen occupied a number of positions in his career started in 1979 with Unisys as a design engineer. He became a VP and GM later on for the Convergent RISC platform segment. He was appointed as CEO and President of Sybase in 1997. Chen was credited for turning around Sybase, which was nearly written off when he entered the scene. The company was valued around $362 million when Chen took the reins. However, it was acquired for about $5.8 billion after 13 years of management by Chen. His move to enter the mobile sector paid off at Sybase and turned out to be a logical one; though it invited criticism from many in the initial stages.

Financial Results

While John Chen took over as CEO of BlackBerry in November 2013, the third quarter also ended the same month, i.e. 2 – 3 weeks after he joined. At that point of time, the company’s revenue dropped 30.44% to $5.84 billion for the nine-month period of the fiscal year 2014 from $8.4 billion. For the third quarter too, it witnessed 24.2% fall in revenue to $1.19 billion from $1.57 billion. The worst thing was that it was spending more on cost of sales than the revenue generation, which meant it was suffering a gross loss.

BlackBerry’s net loss for the nine-month period widened to $5.45 billion from $744 million in the preceding year period. On a per share basis, the loss widened to $10.39 from $1.42 in the same period.

Five-Year Deal

The company also disclosed its five-year tactical alliance with Foxconn while announcing its third quarter results in December 2013. The deal allowed Foxconn to develop and jointly manufacture new BlackBerry gadgets and more importantly for Chen better manage the inventory connected with those devices. Aside from this, the company also started its transition phase with a focus on Enterprise Services, Messaging, devices and QNX embedded business. The road-map to turnaround was drawn then.

The upcoming part two of this article will talk about the turnaround tactics and the road ahead.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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