BlackBerry Smartphones Now Foxconn’s Problem

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BlackBerry Ltd. (NASDAQ: BBRY) reported fiscal third-quarter results before markets opened on Friday. The smartphone maker reported an adjusted diluted earnings per share (EPS) loss of $0.67 on revenues of $1.19 billion. In the same period a year ago, BlackBerry reported an EPS loss of $0.22 on revenue of $2.73 billion. Third-quarter results also compare to consensus estimates for an EPS loss of $0.45 and $1.59 billion in revenue. As recently as 90 days ago, BlackBerry was expected to post an earnings loss of just $0.16.

The big news, though, is that BlackBerry has reached a five-year strategic partnership with Hon Hai Precision Manufacturing, aka Foxconn, under which the Taiwanese company “will jointly develop and manufacture certain new BlackBerry devices and manage the inventory associated with those devices.”

Despite CEO John Chen’s statement that the partnership “demonstrates BlackBerry’s commitment to the device market for the long-term,” the company clearly is trying to get out of the hardware business. BlackBerry will continue to own its intellectual property, which indicates that Foxconn likely will license the technology at a bargain price. By taking on the hardware part of the business, Foxconn will dramatically lower BlackBerry’s losses and continue the fiction that BlackBerry is making the phones.

The partnership with Foxconn is expected to deliver its first products early next year for “Indonesia and other fast-growing markets.” Translation: cheap phones for emerging markets; BlackBerry and Foxconn are going where the money is. The BlackBerry brand is recognized globally, and Foxconn gets nearly free use of that brand to sell the low-cost phones it will manufacture.

One thing to say about this arrangement is that John Chen just earned his first year’s salary.

On a GAAP basis, the company posted an EPS loss of $8.37, which does not include non-cash, pretax charges of $4.4 billion against long-lived assets and a $1.6 billion primarily non-cash, pretax charge against inventory and supply commitments. BlackBerry also took restructuring and other charges of $266 million. The inventory and asset write-downs should get very much smaller going forward as a result of the Foxconn deal.

BlackBerry said it recognized revenue on 1.9 million smartphones, a drop of nearly 50% from the 3.7 million phones it sold in the second quarter. And, as in the second quarter, most of the revenue was recognized from sales of older smartphones using the BlackBerry 7 operating system. Approximately 4.3 million smartphones were sold through to end-users in the third quarter, down from 5.9 million units in the second quarter. About 3.2 million of those units were BlackBerry 7 devices.

Among its highlights in the third quarter, BlackBerry notes a “new organizational structure to drive greater focus on services and software, while establishing a more efficient model for the Devices business.” In other words, BlackBerry dropped its biggest money losing division and will now jump into the same business as IBM, SAP and HP. Recall that CEO Chen came from SAP, and there is no surprise here either.

Shares were up about 2.4% in premarket trading Friday, at $6.40 in a 52-week range of $5.44 to $18.32. The consensus analyst price target was around $7.00 before the results were announced.