RIM Gets Downgrade From NBF, PT Increase From BAML

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RIM Gets Downgrade From NBF, PT Increase From BAML

RIM reported decent overall results as shares surged more then 7% in after hours trading. Then management disclosed that monthly services revenue will undergo a change to a tiered menu. When peppered with questions management was ill prepared to provide satisfactory answers, according to many investors, and shares dropped 9% after the conference call.

when asked on the call  how quickly will changes impact service revenue? And will it have an adverse impact in the short-term or a longer-term issue? Management stated that as the company transitions to BlackBerry 10 as a mobile computing platform they will do the same transition in their service environment moving from — services to — services. RIM said they were working hard to make this as easy as possible in terms of the financial impact. However, they stated that right now ‘it is too early to say how that will evolve really in concrete numbers, but we are absolutely confident that we can manage that transition competently and also achieved the objective that we want to achieve intent.’ They then moved on to the next caller.

The focal point this quarter was management’s comments on service revenues, as a new tiering of services is likely to pressure service revenues.  Service revenue was $974 million, and represented approximately 36% of revenue. On a dollar basis, this is down $19 million from Q2, reflecting the pricing pressures and fee reduction activities. Subscribers are now at approximately 79 million compared to 80 million in the second quarter.

On the conference call yesterday, Thorsten Heins – RIM – CEO, stated:

Starting in the fourth quarter, we will begin seeing revenue from BlackBerry 10 devices. With the introduction of the BlackBerry 10 mobile computing platform, we will be transforming our service revenue model to reflect different usage levels of our network infrastructure, and different value-added software security and service packages, so we plan to offer a range of security, mobile device, and application management services, in addition to communication services. We will position BlackBerry Enterprise Service as the leading cross-platform enterprise mobile device management service, and continue to invest and grow its capabilities. Subscribers that require enhanced services, including advanced security, mobile device management, and other services, are expected to continue to generate monthly service revenue. Other subscribers, who do not utilize such services, are expected to generate less or no service revenue. However, I want to be very clear on this. Service revenues are not going away, but our business model and service offerings are going to evolve. Our vision is to position BlackBerry as the clear leader in the enterprise mobility market.

So the mix and level of service fees revenue will change going forward, and will be under pressure over the next year during this transition, but we are targeting to grow service revenue in smartphones, tablets, and embedded applications, for new offerings with new partners, and across platforms other than BlackBerry 10. We are making these changes to meet the competitive dynamics of the marketplace, but more importantly, to allow us to pursue the broader opportunities in mobile computing that BlackBerry 10 and our infrastructure enables us to do. We feel our strategy will help broaden the BlackBerry ecosystem over time, and will allow application developers and other potential partners access to a broader subscriber market. This is an exciting time for our Company. Yes, it is challenging, too, and there are many things we continue to work on in execution, but we believe the Company has stabilized and will turn the corner in the next year.

Heins then went on to discuss the balance sheet of the company.

Some investors suspect that Research In Motion Limited (USA) (NASDAQ:RIMM) (TSE:RIM) is also using lower service pricing as a way to respond to growing market share of competition in the enterprise segment. Technically, BB10 would not use the NOC network as BB7, thereby resulting in erosion in ARPU. Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) provided very limited details on its new service pricing.

Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) ended the quarter with $2.7 billion of cash, up from $2.1 billion last quarter. Revenue of $2.7 billion met consensus as shipments of 6.9 million beat estimates. ASP of $232 exceeded consensus forecasts of $214.

FY13 sales in the US, UK and Canada are tracking to 73%, 46% and 59% declines respectively from peak levels. Sales outside these regions, which were a bright spot in FY12 are on track to a ~40% decline in FY13. These trends could be  difficult to
reverse. RIM is likely to be aggressive with BB10 promos (our sources have hinted at a massive marketing campaign to start shortly), absorbing the bulk of marketing costs, pricing incentives and extra bill of material costs. Nevertheless, with limited apps selection and a poor ecosystem, these actions are may not reverse the early signs of erosion in the subs base.

Kris Thompson, MBA an analyst at NBF, does not believe that RIM can sustain profitability with a stand-alone hardware business. They downgraded the stock to Under-perform and lowered their price target to $10/share from $15/share. NBF slashed its F2014 EPS estimates from $0.35 to just $0.01.

Analysts at BAML differed with NBF analysts. BAML analysts have increased their their FY14 EPS estimate from a loss of $1.59 to a loss of $0.61. They raised their price target from $6 to $7 on an improved balance sheet, but maintain an Underperform recommendation.

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