BlackBerry's Chen doesn't entirely close door on Android device

BlackBerry (NASDAQ:BBRY) CEO John Chen declined to comment on a recent Reuters report that the company is thinking of using Google's (NASDAQ: GOOG) Android software in an upcoming smartphone for the first time, but he did not entirely foreclose the prospect of doing so in the future.

In an interview with Bloomberg TV following BlackBerry's quarterly earnings announcement yesterday, Chen said that BlackBerry has spent a great deal of time making its security solutions work on multiple platforms, including Android. He said it was still "too early to tell" whether BlackBerry could make an Android-based phone secure enough. He declined to comment directly on the Reuters report, but said that BlackBerry is pondering how to make Android more secure.  

"People asked me, will you ever build one?" Chen said. "And I said, well, if I could make it secure, I will, which is a very honest, true statement. We're looking at it. I can't say that it's conclusive at all right now."

Earlier this month Reuters, citing four unnamed sources familiar with the matter, reported that the shift to using Android would be part of BlackBerry's ongoing transition to focus on software, device management and security under Chen. BlackBerry has also pivoted to focus on the Internet of Things and how it can bring its security heritage to bear in that market.  

Further, the report added that if BlackBerry does launch an Android device, it could come with some of the patented features in its BlackBerry 10 platform. The company aims to show that its BlackBerry Enterprise Service 12 software could securely manage smartphones running other operating systems and convince large customers to adopt BES 12, the report said.

Despite the progress the company made last quarter in software revenue, which shot up 150 percent to $137 million, BlackBerry's hardware business continues to struggle. Hardware revenue fell to about $263 million, down from $379 million in the year-ago period and BlackBerry recognized revenue on only 1.1 million devices.

Chen said in the interview that BlackBerry has "a good shot" at achieving its goal of $500 million in software revenue this fiscal year, which ends in March 2016. Yet he is not giving up on devices.

"Well, it's not clear to me that devices is not going to be profitable," Chen said. He noted that BlackBerry had cut investment in devices and repurposed those resources toward software, security solutions and IoT. BlackBerry also inked joint development and manufacturing agreements with Wistron and Compal Electronics. Chen said the deals will let it make devices more efficiently and improve its supply chain and logistics.

"There are multiple things one has to do," he said. "It is not one thing that's kind of a thing. But I think that over time, with a good set of designs which we said we're going to release at the end of the year, I think all of those will add up, and cumulatively will get our devices back on track."

Chen said he thinks BlackBerry can get back to growing its smartphone business, despite a global market share of less than 1 percent. "I don't want to debate whether it's choppy in the device business or not," he said. "I think [when] new designs come out we will have a shot of building the business back up. The most important thing right now is to make it profitable."

Despite the rosy software figures BlackBerry reported last quarter, Wells Fargo analysts Maynard Um, Munjal Shah and Jason Ng wrote in a research note that the headline software figure was boosted by intellectual property and licensing deals with Cisco Systems and another company, which they think contributed $55 million to the $137 million. Without that, they think software revenue would have been around $74 million, below the Wall Street estimate of $84 million.

Yet they also noted that in BlackBerry's 6-K filing with the Securities and Exchange Commission, the company dropped its expectation of achieving $100 million in revenue this fiscal year from its BlackBerry Messenger service "due to a lower than expected rate of growth." The company said it is focusing on enterprise in developed markets and consumers in developing markets to generate BBM revenue. 

They wrote that the filing "had a number of disappointing outlooks, which we believe will weigh heavily" on the company's current quarter, including an implied revenue declined, a gross margin of around 40 percent and an increase in operating expenses over the next few quarters.  

"We believe BBRY is now in the heart of the transition," the analysts noted. "We continue to believe there is a market opportunity for BBRY (penetrating existing BlackBerry accounts and then driving client access licenses for Android/iOS devices). However, as we've indicated previously, we believe enterprises tend to deploy into pilots first and then small commercial deployments before rolling out on a larger scale. This could hamper revenue growth for another couple of quarters, which is challenging during a time when the company is investing into its software platform."

For more:
- see this Bloomberg article
- see this SEC filing

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