BlackBerry’s big turnaround

BlackBerry’s big turnaround

When Prem Watsa, CEO of Fairfax Financial, a major BlackBerry shareholder, started thinking about who should lead the venerable tech company, one name stood above the rest: John Chen.

In October 2013, Watsa met Chen, who was living in San Francisco, to see if Chen would be interested in revitalizing BlackBerry. At the time, Chen was famous for having steered one of the tech world’s most significant turnarounds. In 1998, he took the top job at Sybase Inc., a popular database software company that was in deep financial trouble. In 2012, after he returned Sybase to the top of its game, he sold it to the German multinational SAP for US$5.8-billion.

Clearly, Chen was the CEO that BlackBerry needed. However, after years at Sybase, Chen wasn’t angling for a job. Eventually, though, he accepted the offer. “How many business people get a chance to turn around a company as iconic as BlackBerry?” he explains today. “That’s an opportunity that’s not going to come around every day.” Besides, he adds, “I’m a businessman and I like a challenge.”

Chen was officially announced as BlackBerry’s new CEO on November 4, 2013. Investors were so thrilled that by the end of the year, its stock had climbed by nearly 15 per cent. Today, the 59-year-old is orchestrating an all-hands-on-deck push to save the Canadian smartphone maker. It’s a tough process that he predicts will take at least two years. In fact, the typical corporate turnaround requires two or three years to complete.

Things are moving in the right direction. In late-April, Chen announced that BlackBerry’s initial rescue phase was done and that the company’s revenue will begin growing in a year. “I wouldn’t have taken the job if I [hadn’t thought] there was a lot of value in the company that could be unlocked,” Chen explains. “There isn’t any point to putting in this much effort if you don’t truly believe the company has enough potential to justify it.”

Shifting markets

BlackBerry’s rise and fall – and perhaps rise again ‒ shows just how quickly markets change. The Waterloo, Ont. tech icon, once known as Research In Motion, popularized the smartphone, and in 2009 it owned more than half of the U.S. market. However, the iPhone’s rise and the market’s shift to touchscreen eroded BlackBerry’s dominance. In 2008, the company’s share price was $149.90. Today, it hovers around $13.

For years, conventional wisdom said that the only option for BlackBerry was a sale. But last winter, the company turned down a number of takeover offers, choosing to go full steam ahead with a comeback strategy that aimed at refocusing its business on software. Observers in the tech community are now watching carefully. Transitioning its focus from hardware to software won’t be easy , but an about-face never is. If BlackBerry’s plan bears fruit, it will be one of the most dramatic turnaround stories in Canadian – if not global – business history.

A lot of businesses go through ups and downs. New products may not work out, and markets can change. When a company finds itself truly on the decline, the chances it will successfully change course and get back on its feet are not good. Authors Richard Foster and Sarah Kaplan wrote in their 2001 book Creative Destruction that the probability that a failing business will grow appreciably or become profitable again within three years is less than 35 per cent.

With those odds, can this former mobile giant succeed? BlackBerry has plenty on its side. Its on-device encryption still makes it the acknowledged market leader in security. Its e-mail system is still rated higher than its competitors. And it’s in good financial shape, sitting on $3.27-billion in cash and equivalents, the highest in the history of the company. Still, it’s going to take time before the public sees a new, refreshed BlackBerry. “Having done this before, I know first-hand that a turnaround is a marathon, not a sprint,” says Chen.

So far, things are going according to plan. Phase 1 was about stabilizing the business and making it cash-flow positive, which Chen notes happened in the fourth quarter. He also built up cash reserves to ensure that the company had the resources to make “smart investments” in BlackBerry’s future growth.

Phase 2 will aim for growth. “I expect we’ll make progress on stabilizing revenues over the next three quarters,” he says, “and move toward growing revenues by the next fiscal year.”

Turnaround tutorial

If all this sounds too good to be true, it isn’t. Chen knows what he’s doing. The Hong Kong-born executive is credited for saving Sybase from bankruptcy. He took the top job when the firm was in the throes of its fourth straight year of losses. After straightening out its finances, Chen decided to lead it into the new field of mobile technology, which was still untested at the time. By August 2006, Sybase was the largest enterprise software provider in wireless technology and ultimately generated hundreds of millions of dollars in revenue from the shift in direction.

Chen brought his Sybase experience to BlackBerry, starting with one key lesson: listening to criticism. “Your customers will tell you what their pain points are, how you can better serve them. If you are smart, you’ll listen to them.”

It’s also important to inspire your staff, he says. “Knowing where the opportunities lie isn’t enough,” Chen explains. “You’ve got to build a culture that can execute quickly, creating a culture of ‘we’re in this together,’ of cooperation and collaboration within the company.” Every employee and decision, he says, must be focused on finding the most effective way to solve customer challenges.

While Chen has plenty of executive experience, he had no involvement with BlackBerry prior to becoming CEO. That may play a factor in why this turnaround
will work. Peter McCann, author of Turnarounds: Brains, Guts & Stamina, says that it’s often better to bring in a leader from the outside. “They don’t have legacy loyalty and mindsets.They’re not going to say, ‘But we’ve always done it this way.’ If they hadn’t brought in Chen, it’s hard to imagine the radical transformation would have happened.”

Small successes

Two or three years can be a long time to see the fruits of your labour, which is why Chen makes a point of celebrating the small victories, even when shareholders are looking for a home run. For instance, in Q4 2015 (posted March 27), the company showed a surprise profit of four cents per share, turning analysts’ estimates of a four-cent loss upside down. Chen is also not afraid to spend some of that cash he’s saved. In April 2015, he bought WatchDox, an Israeli-American mobile security firm, for an undisclosed amount.

These are all important moments, he says, not only for the company, but also for the people working at BlackBerry.“In the beginning of a turnaround, the most difficult part is keeping the company energized in the face of a lot of immediate challenges in the business,” notes Chen. “The only way to counter that is by focusing on turning out a steady cadence of small successes – and you’ve got to celebrate all of them.”

Of course, the turnaround still has a ways to go. Despite software revenue rising 20 per cent, total revenue in Q4 fell to $660-million, which was below analyst estimates of $786-million. There will likely be more ups and downs before the transformation is complete, but Som Seif, president and CEO of Toronto-based Purpose Investments, is encouraged by the profit increase. It speaks to long-term viability.

“The good thing about profits is, when you make money, you buy yourself time,” he says. “Ultimately, management is recognizing it’s a two-way street. It’s both on the top line and the bottom line where you build a good business.” You can’t focus purely on revenue only, he warns. “Revenue could stay flat and they could still be a healthier business if they moved over to software in a better way.”

BlackBerry’s bold moves

One of Chen’s big moves has been to focus the brand on the business customer, which has always been their bread and butter. On September 24, he launched the BlackBerry Passport, which boasts a large screen and ample keyboard. It’s clearly geared toward executives and employees. He’s also partnering with Samsung Electronics on mobile security – something that would have been unheard of years ago – and that’s helped BlackBerrry win over an increasing number of enterprise clients.

During his last earnings call, Chen announced that BlackBerry landed 2,200 enterprise customers, many of which were already using a competing company’s
services. At the same time, BlackBerry’s software sales grew by 24 per cent quarterover- quarter. Seif thinks the company’s move toward software is smart, largely because it’s a recurring annuity business. This ensures revenues will be more certain year-to-year. Plus, the longer customers stay, the more services they’ll likely use.

He’s also thinks that Blackberry will ultimately deliver its promise to investors, in large part because the company has been consistent with its communications. “They’ve put a plan in place, one that they’ve shared, and they’re executing on that plan,” says Seif. “Whether or not it works out is still to be determined, but they’re not just telling us, ‘Hey, trust us.’ As an investor, this is one where you probably feel more confident in the turnaround.”

There’s another reason to be optimistic: The company is backed by a lot of experienced investors, such as Fairfax Financial. “These are shareholders who’ve been involved in turnarounds before,” says Seif. “When you’ve got people not just [owning] 1 per cent of a company’s stock, but holding major equity in the hundreds of millions of dollars, it means something because they don’t want to lose money, either.”

Chen knows that there will still be a lot of challenging and stressful days ahead. Former turnaround executive Steve Miller, who helped save Chrysler from bankruptcy in 1980s, wrote about the toll turnarounds have taken on his health. It means 12-hour days and constant pressure. It can be “a struggle between work and stress and health,” admits Chen, but with the company officially out of crisis mode, he is finally breathing a little easier.

Nearly two years after that fateful meeting with Watsa, Chen has no regrets. He’s even having fun. “You have to enjoy the challenge, the puzzle of figuring out how to unlock the value that you know is in the business,” he reflects. It takes a lot of time and pressures, but he finds turnarounds “a really fascinating puzzle to solve. There is a lot of satisfaction as you watch the pieces fall into place.”

- Sarah Barmak