Canadian technology company BlackBerry announced it will outsource its smartphone development as it reported mixed financial results for its August second quarter report.
The company’s redirection towards software development instead of producing new smartphones is understandable, as its revenues coming from its hardware are falling at a higher rate than its software counterpart.
BlackBerry reported a 30-percent decline in software revenues in its annual 2016 report, while its hardware division reported a towering 40 percent drop in revenues, which were at $887 million in 2016 compared to $1,481 million in 2015. The company also reported a healthy 25 percent reduction in long-term debt from $1,707 million to $1,277 million.
BlackBerry’s software segment was also highly more profitable than its hardware segment during the company’s second quarter, as it reported $29 million in operating income for its software and services division, while its hardware division reported $8 million in operating losses. As such, software represented 44 percent of its total sales last quarter.
“Software and hardware revenues were well below our estimates owing partly to a lack of intellectual property rights licensing revenue and a miss in handsets,” wrote BMO analyst Tim Long in a report regarding BlackBerry’s second-quarter results.
BlackBerry shipped 400,000 smartphones during its second quarter, out of which Long estimates 300,000 were Android-based handsets. These smartphones, like the PRIV and the DTEK50, yielded higher profit margins than BlackBerry’s smartphones running on BBOS, its homegrown operating system, like the Passport or the Classic, which contributed along with software revenues to the company’s record gross margin in its second quarter with a 62 percent profit margin.
Outsourcing hardware development and manufacturing should lead to an increase in BlackBerry’s hardware segment gross margins, according to Long. However, this division should become a significantly smaller part of BlackBerry’s revenues, as he expects its mobility segment revenues to go down 90 percent next year. Regarding the decision, BlackBerry CEO John Chen said in a statement that it would allow the company to largely reduce its investment requirements while enhancing returns on those investments.
BlackBerry struggled to compete with Android manufacturers and Apple ever since the release of the first iPhone in 2007. Licensing its trademark and software to other manufacturers is a definite turnaround for the company, as it has always built its smartphones itself. However, the move, although surprising, somewhat emulates Apple’s reliance on Chinese manufacturer Foxconn to build its iPhone.