BlackBerry to outsource smartphone manufacturing from now on

Smartphone maker reports 31.8% drop in 2nd-quarter revenue, swings to net loss from year-earlier profit

BlackBerry will stop manufacturing the hardware for its smartphones and instead outsource that to partners, the Waterloo, Ont.-based company said on Wednesday as it reported another loss and sharp drop in revenue.

Shares of BlackBerry gained more than five per cent on the Toronto Stock Exchange following the announcement.

The net loss came to $372 million US, or 71 cents a share, on revenue of $334 million, as the company booked $147 million in charges from its reorganization. Second-quarter revenue fell 31.8 per cent from a year earlier.

A year ago, it reported a profit of $51 million, or 24 cents a share, on revenue of $490 million.

'BlackBerry is no longer just about the smartphone, but the smart in the phone.' - BlackBerry's John Chen

Excluding one-time items, the company said it broke even. On that basis, analysts had on average expected an adjusted loss of five cents a share on revenue of $393.75 million, according to Thomson Reuters.

But beyond the numbers, the real news was the company announcing plans to stop building its own hardware devices, and instead focus on making the software that goes into them.

"The company plans to end all internal hardware development and will outsource that function to partners," BlackBerry said.

That means the company plans to work with other technology manufacturers to build devices that are branded as BlackBerrys and come with all the company's software and internal workings.

The company announced its first such partnership in a separate release Wednesday, working with one of Indonesia's largest telecom companies on a joint venture to make smartphones for that market.

"BlackBerry is no longer just about the smartphone, but the smart in the phone," chief executive John Chen said, adding that the company is currently in late-stage discussions for a similar deal in China and working on several similar initiatives in India.

"This is an entirely sensible decision and probably an overdue one," said IDC technology analyst John Jackson. "Software revenue and the margin profile associated with that is where the focus should have been, and now can be."

Ross Healy, chair of Strategic Analysis Corporation and a longtime BlackBerry investor, agrees that the move is a savvy one.

"I could never figure out what they were bothering to do in the hardware business," he said in an interview. The company's lucrative software patents are "the right hook and left jab of the company" and should be where BlackBerry leads from, not the phone business, which Healy says has "peaked."

"Far better to stick with your strength and let somebody else get into the phone business," Healy said.

It's an extension of an existing strategy at the company, which already works with partners to make a couple of phones. But by next February, the end of the company's fiscal year, BlackBerry will have completely exited the hardware business.

The company raised its forecast for the year, saying it now expects to lose between five cents per share, or maybe break even. That compares with an earlier forecast of a 15 cent loss per share, after refinancing its debt and as margins improved.