#$mobl

CEO John Chen expects rapid gains in mobile enterprise software and BlackBerry Messenger in fiscal year 2016. He'd better be right.

by Chris Nolter

While BlackBerry Ltd. (BBRY) executives insist that the smartphone maker-turned-mobile-software group is halfway through a two-year turnaround, getting the rest of the way will be harder than finding a millennial who can identify the company's once-ubiquitous device in an antiques shop.

Having improved profitability, CEO John Chen aims to double software revenue this year. Chen maintains that the Waterloo, Ontario, company can generate $500 million in software sales and another $100 million from BlackBerry messenger in fiscal year 2016, up from about $234 million the prior year.

BlackBerry is moving out of turf dominated by Apple Inc. (AAPL) or Google Inc. (GOOG), and into the domain of companies like mobile security developer MobileIron Inc. (MOBL) and larger tech groups such as IBM Corp. (IBM), SAP AG (SAP), VMware Inc. (VMW), Citrix Systems Inc. (CTXS). "BlackBerry is going to be a just fraction of its former self," HS Global Limited analyst Wayne Lam said. "It's going to be very, very specific in terms of what it can offer, in terms of enterprise security and software."

Software sales rose 20% in BlackBerry's fourth fiscal quarter to $67 million, which does not count BlackBerry Messenger. Chen's target would require sales of about $150 million per quarter. Wells Fargo Securities LLC analyst Maynard Um wrote in a Monday report that the projections involve a "leap of faith" since distribution is "still ramping" and "visibility remains low."

UBS forecasts about $450 million in software sales, though analyst Amitabh Passi wrote in a report that BlackBerry "could get close it its $600m goal." Cowen & Co. projects $500 million in fiscal year 2016 software sales.

Chen has acknowledged industry watchers' skepticism about the targets. The BlackBerry CEO said during the March 27 earnings call that the boost in sales would be more noticeable around the middle of the fiscal year, after the company could develop recent agreements with carriers such as Sprint Nextel Corp. (S). "Give us two quarters that are good because I've got to get the carrier trained," he said.

BlackBerry's recent acquisitions reflect the emphasis on software for corporations and large enterprises. Last September the company purchased Movirtu, which develops software allowing one device to use multiple phone numbers, an issue for businesses that allow workers to use their own phones. Over the Summer BlackBerry purchased Secusmart GmbH, which develops voice and data encryption software.

So the company is not averse to making acquisitions. Good thing, too, because boosting software sales could require making deals. The trick will be to make the right ones. "BlackBerry does have a long history of making strategic acquisitions on the software side," IHS analyst Daniel Gleeson noted. "It also has a long history of making, for want of a better word, very bad acquisitions," he cautioned. "They mainly relate to its consumer device business." For example, BlackBerry purchased cloud services company NewBay for $100 million in 2011 and a year later sold it to Synchronoss Technologies for $55.5 million.

Given the stakes, the company is more likely to focus on strategic partnerships with device makers, Gleeson suggested, "people you would think are actually competitors with BlackBerry." In fact, at the Mobile World Congress in Barcelona earlier this month, BlackBerry announced that it would provide a pair of applications for Samsung's enterprise products. Gleeson predicted that BlackBerry would look to reach more such deals and become the "default security for Android in the enterprise."

Google's Android has 53% of the smartphone market, according to Internet analytics company comScore Inc. Apple's iOS has 42% and BlackBerry commands just 1.8% of the market, reflecting the demise of those once-popular "CrackBerrys." UBS expects BlackBerry to sell fewer than 6.5 million devices in fiscal year 2016 and 6.2 million the year after.

BlackBerry has cut a deal with Foxconn Technology Group to manufacture devices and manage inventory, which reduces the economic pain of manufacturing devices as scale declines. IHS analyst Lam suggested the agreement makes it easier for BlackBerry to keep producing phones. "If they're able to eliminate that supply chain manufacturing overhead and lean on Foxconn as their manufacturing and design house, they don't need to exit," Lam said. The company could continue to make devices through Foxconn as long as there is "a compelling reason" and a market for its devices, servers and e-mail services.

"Once that critical mass dissipates, we do see a future where BlackBerry isn't a hardware company anyone," Lam said. "Once you dip in annual volume below 2 million or 3 million units of handsets, then it really doesn't make much sense for them to continue."

For now, BlackBerry is still trying to compete against Apple, Google and Samsung.  Good luck with that. "The silver lining for BlackBerry, in a way, is that if you look across all device manufacturers in the world, very, very few are making any money," Gleeson said. "It's really only Apple and to an extent Samsung." Cold comfort, indeed.