Kulbinder Garcha of Credit Suisse is out with a new report titled Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) BB10 losing traction’, The analyst notes that services revenue focal F1Q14 results on June 28th.

BBRY Blackberry Research in Motion

Research In Motion Ltd (BBRY) New BB10 devices

For F1Q14, we are looking for revenues of $3.18bn (+12.9% yoy/+18.6% qoq) with GMs of 41.8% (up 180bps qoq), driving our EPS estimate of $0.13. This compares to consensus estimates of $3.37bn of sales and EPS of $0.05. Despite recent enthusiasm for Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) BB10’s new BB10 devices, we see limited scope for traction in the hyper-competitive smartphone market. Furthermore, we believe that this quarter could continue to highlight the major business model change in services that will result in a significant decline this high margin revenue stream, driving operating losses and potential cash burn.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) Gross Margins

BB10 enthusiasm starts to wane; potential amortization headwind to GM. While the initial launches of BB10 have received decent traction in certain geographies, we question the sustainability of success given competition from recently launched HTC One and Galaxy S4. We currently assume 6.2mn smartphones (+3.3% qoq/-20.5% yoy) in May of which 3.4mn are BB10. In addition, we begin to see pricing pressure on Z10 as a few major U.K. retailers/carriers have started to give discounts 2 months after the launch, while in U.S., Z10 has lost shelf space at both  AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). Further, we believe BB10 GM improvement last qtr. was not all operational but partly benefited from a sudden $100mn drop of intangible amortization expense. This seems one time in nature; we estimate that initial BB10 GM’s are 26% and do not see this as a basis for profitability. For details, please see our note BlackBerry annual filing insights—amortization conundrum.

Business model change, services on an accelerated decline driven by three factors.

1) We believe Blackberry will struggle to drive any meaningful ARPU for the BB10 user base.

2) We see a declining subscriber base as churn increases given the lack of competitiveness of BB7.

3) We see pressure on the existing fees for the BB7 base given the desire from carriers to renegotiate. We see the Services revenue for this quarter at $907mn, dropping to $841mn in Aug. Longer term we see the stream declining to $3.2bn/$2.3bn in FY14/15 from $3.9bn in FY13.