BlackBerry Posts Huge Loss on Write-Down and Charges

The stock rose as much as 17 percent after the company announced the five-year partnership with Taiwan's Foxconn Technology Co Ltd, which will initially build low-end devices for sale in Indonesia and other emerging markets. BlackBerry said it hoped to expand the fledgling relationship to its top-of-the-line smartphones.

The deal is unconventional in that BlackBerry will no longer pay upfront for components used in the devices made on its behalf in Foxconn's Indonesian and Mexican factories.

Instead, Foxconn will take a share of profit on each device in return for taking on inventory management, which can result in writedowns if smartphones go unsold. Foxconn will also help with developing, designing and distributing the handsets.

Chief Executive John Chen, who took the helm at BlackBerry last month, said he expected the Foxconn deal to help BlackBerry's handset business turn cash-flow positive, and for the company as a whole to post a profit for the fiscal year that begins in early 2015.

"It's almost like BlackBerry is disposing of its consumer handset business without actually disposing of it," said Jefferies analyst Peter Misek, who likened the deal to what Hewlett-Packard Co and Dell have done with laptops.

The move, which comes a month after BlackBerry said it was giving up on a plan to sell itself, helped take the sting out of the massive, $4.4 billion loss that it posted for the quarter ended November 30, as smartphone sales shriveled.

A new line of devices running on BlackBerry 10 software has failed to gain traction, forcing the company to write off $1.6 billion of inventory and supply commitments for the quarter. The previous quarter it wrote off $934 million for unsold phones.

The Waterloo, Ontario-based company pioneered the concept of on-the-go email, and for years its pagers and phones were must-have devices for political and business leaders. But in recent years it has lost its once-dominant market share to Apple Inc's iPhone and a slew of smartphones powered by Google Inc's Android operating system.

As of Thursday's close, the stock had fallen 47 percent this year. It was last trading up 14 percent on Nasdaq at $7.13.

"The most immediate challenge for the company is how to transition the devices operations to a more profitable business model," said Chen, who is credited with turning around Sybase, a database and mobile software company, before it was sold to German software company SAP AG in 2010.

Chen has said he is counting on strong growth in BlackBerry's service business, which manages smartphone traffic on the internal networks of corporate and government clients.

"Just jettisoning all the stuff and driving on with the part of the business that makes money makes a heck of a lot of sense to me and that is very clearly where Chen is going," said Ross Healy, a portfolio manager at Macnicol & Associates who owns a small number of BlackBerry shares.

Carolina Milanesi, an analyst at Kantar Comtech, said the deal is a good move for Foxconn, the world's largest electronic parts manufacturer and a major partner of Apple Inc.

"This might be the first step for them to try and diversify, and experiment with putting their brand on the products they make," she said.

DEVICES ARE A CHALLENGE

In his first presentation to analysts after the release of BlackBerry's results, Chen struck an upbeat tone tempered with a heavy dose of realism. The mix may have helped soothe nervous investors who had sharply lowered their expectations for BlackBerry after a string of disappointing news.

"It's clear that he's not the old guard, he's not there trying to do what Lazaridis and Thorsten were up to. He's actually been taking some concrete steps," said Mark McKechnie, an analyst at Evercore Partners, referring to BlackBerry's founder Mike Lazaridis and Thorsten Heins, Chen's predecessor.

DealBook: Some Analysts Question Numbers in H.P.'s Write-Down

The “kitchen sink” charge, in which all kinds of write-downs and costs are rolled into one gargantuan number, is something of a ritual in corporate America. The $8.8 billion charge that Hewlett-Packard announced on Tuesday, however, shows why such moves should be scrutinized carefully.

H.P. took the charge in its fourth quarter to reflect the reduced value of Autonomy, the British software firm that it bought last year for about $10 billion. The computing giant said it had discovered “serious accounting improprieties” at Autonomy, including what it said were ruses that inflated revenue and profitability metrics.

H.P. contends that such accounting improprieties were behind more than $5 billion of the $8.8 billion charge. For some analysts, that didn’t add up.

“Out of the $8.8 billion, I’d be very surprised if more than a couple of billion was due to accounting improprieties,” said Aswath Damodaran, a professor of finance at New York University’s Stern School of Business.

In other words, the skeptics say they think H.P. may be overstating the financial effects of the supposed accounting chicanery. They say that H.P.’s management may have wanted to write off as much of Autonomy as possible, and that the accounting allegations allowed it to increase the charge.

This move, of course, hurt H.P’s fourth-quarter earnings. But a big charge has the advantage of cleaning the slate for the next fiscal year for the company’s chief executive, Meg Whitman. With Autonomy now only a small part of H.P.’s balance sheet, there is a much smaller chance that the troubled division will lead to more embarrassing write-downs. The Autonomy acquisition was initiated by H.P.’s previous chief executive, Léo Apotheker.

Evaluating the validity of the charge requires understanding exactly what H.P. was writing down.

When a company accounts for an acquisition, it assesses the value of the target, subtracting its liabilities from its assets. It then compares this so-called fair value with the price it is paying. If it is paying more than the fair value, the difference is recorded as good will on the buyer’s balance sheet. When H.P. acquired Autonomy, it got roughly $4 billion of intangible assets (Autonomy’s expertise, intellectual property and brand recognition) and recorded roughly $6 billion of good will. In the charge announced Tuesday, H.P. slashed the value of both, effectively saying Autonomy was worth 80 percent less than it originally thought.

In some ways, an 80 percent reduction might seem deserved, if Autonomy was in fact cooking its books. But despite their accusations, H.P. executives in a conference call did not seem to present a dire picture of Autonomy. The ruses, if that’s what they were, helped revenue and profits, but probably not enough to account for $5 billion of the charge, said Anup Srivastava, an assistant professor at the Kellogg School of Management at Northwestern University. “I can’t justify it,” he said.

Autonomy’s revenue benefited from one alleged ruse, but only by 10 to 15 percent, according to Hewlett. Catherine A. Lesjak, the H.P. chief financial officer, said Tuesday that without accounting tricks, Autonomy would have appeared less profitable. But it was still making money, according to her figures.

Without the tricks, Ms. Lesjak said, Autonomy probably had operating margins as high as 30 percent, compared with as much as 45 percent with them. And on Tuesday, Ms. Whitman said Autonomy could still be something of a “growth engine” for H.P.

Still, some people think the charge may be reasonable. In assessing the size of an impairment charge, companies focus on projections of cash flows from the affected divisions. If H.P. can show that Autonomy’s cash generation is far below its expectations, and that cooking the books largely hid that, the charge may be sound, said Cynthia Jeffrey, associate professor of accounting at Iowa State University.

“If there’s fraud involved and that wasn’t found during due diligence, the whole thing could be valueless,” she said.

H.P. could argue that the high valuation it placed on Autonomy’s cash flows looks all the more untenable in light of the legerdemain allegations, and that that’s why it had to take the charge.

When asked to comment on the charge, an H.P. spokesman, Michael Kuczkowski, e-mailed a list of what he said were the improper accounting maneuvers at Autonomy.

“Because our investigation into the accounting improprieties and misrepresentations at Autonomy remains ongoing, and given our referral of this matter to regulatory authorities in the U.S. and the U.K., it would not be appropriate for us to provide a more detailed description at this time,” he said.