RIM shares pounded as concern mounts over service fee changes
Research In Motion Ltd.’s decision to scrap service fees for some users is threatening its most profitable source of revenue, ending the BlackBerry maker’s three-month stock rally.
Subscribers who want enhanced services, including advanced security, will continue to pay a fee, while others who don’t use such services “are expected to generate less or no service revenue,” Chief Executive Officer Thorsten Heins said late Thursday on a conference call. Service fees accounted for about $982 million (U.S.) in sales last quarter, out of a total of $2.73 billion.
The move jeopardizes the company’s services business and casts a pall over its turnaround plan, which centers on the introduction of the BlackBerry 10 early next year.
Investors pounded RIM stock Friday sending it shares down $3.21 (U.S.) or almost 22 per cent, to $10.91 at the close of trading on the Nasdaq.
A shortage of detail on the change is contributing to investor concerns, said Jennifer Fritzsche, an analyst at Wells Fargo & Co. in Chicago.
“By doing this and lacking details, RIM has created a very large cloud of doubt about that high-margin revenue,” she said. “By our estimates, it’s really the only real source of profitability.”
Separately, Nokia Oyj said Friday that RIM had agreed to make one-time and “ongoing” payments as part of a patent-licensing deal that ended all legal disputes between the companies.
RIM is changing its services-fee approach as mobile-phone customers put pressure on wireless carriers to cut their monthly bills. Carriers have traditionally passed on the fees to consumers, something that’s now harder to do.
The BlackBerry operating system has to adapt to trends, Heins said on the conference call.
“We will see pressure on pricing for BB OS-related services in order to make sure we stay relevant in our markets,” he said. “However, I want to be very clear on this: Service revenues are not going away.”
Heins reiterated that view in an interview airing on Bloomberg Television Friday, saying that existing subscribers would help maintain service revenue. He also said the company would return to profitability in the “near future,” aided by a cost-cutting plan.
Under the assumption that RIM has about 15 million enterprise customers and about 60 million consumer users, service-fee revenue could decline by as much as a third, said Kevin Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 40,000 RIM shares.
“It’s going to be a big hit,” he said.
Paul Carpino, RIM’s head of investor relations, said the company will disclose details about the pricing and structure of the new fees when BlackBerry 10 services are introduced.
Kris Thompson, an analyst with National Bank in Toronto, cut his rating on the stock to the equivalent of a sell.
“Management was ill-prepared to provide satisfactory answers,” he said in a note. “Investors will punish the stock until service revenue can be better quantified.”
Avi Silver of Credit Agricole Securities also lowered his recommendation, from an underperform rating to a sell. The company’s business model “is being challenged by operators that are unwilling to both subsidize devices aggressively and hand over a slice of their data revenue,” he said in a note.
Paradigm Capital Inc. dropped its rating to a hold from a buy.
Before Heins made the comments, RIM had pleased investors with yesterday’s third-quarter results, which included an increase in its cash by about $600 million to $2.9 billion (U.S.). The stock had gained almost 10 per cent in after-hours trading following the earnings, only to plunge during the services discussion on the conference call.
Excluding some items, the company posted a third-quarter loss of 22 cents a share, beating the 35-cent loss predicted by analysts. At $2.73 billion, revenue exceeded the $2.66 billion estimate in the period, which ended Dec. 1.
BlackBerry demand in countries like India had been shoring up sales for the company, even while consumers in the U.S. flock to Apple Inc.’s iOS devices and phones running Google Inc.’s Android. Sales by region published in a company filing today, however, show demand falling in emerging markets too.
Sales in the U.S. dropped by 49 per cent last quarter from a year earlier to $520 million and by about the same percentage in the U.K. to $302 million. Revenue from Canada, RIM’s home market, plunged 67 per cent to $127 million. Sales from the rest of the world fell 44 per cent to $1.78 billion.
Early buzz around the BlackBerry 10 had increased optimism that the company could make a comeback. The stock more than doubled in value over the past three months.
More than 150 carriers are preparing to offer the BlackBerry 10 and over 120 companies are testing the new platform, a prelude to the phones going on sale on multiple continents in February.
The company is embracing touch screens with BlackBerry 10, putting less emphasis on the physical keyboards that once defined RIM’s products. New phones will still offer the keyboards, though. Heins said on Bloomberg Television that the ratio of touch devices to keyboard phones may be about 3-to-1.
For now, RIM is still struggling to compete with Apple and Google. The once-dominant smartphone maker is poised to finish 2012 with a 4.7 per cent share of the global market, compared with almost 90 per cent for Apple and Android combined, according to research firm IDC.
Even as RIM’s market share shrank, the company had been maintaining its installed base—until last quarter. The total number of BlackBerry subscribers dropped to 79 million from 80 million during the period. That’s a cause for concern, said Bill Kreher, an analyst at Edward Jones in St. Louis.
To adjust to its smaller stature, RIM is cutting about 5,000 jobs, or a third of its workforce. The company had 13,400 employees at the end of last quarter.
It’s also eliminating manufacturing sites and disposing of one of its business jets. The cost-cutting helped RIM reach a target of $1 billion in annual savings at the end of last quarter, ahead of schedule, Chief Financial Officer Brian Bidulka said on the call yesterday.
The road ahead still won’t be easy, Fritzsche said. The company expects another operating loss this quarter as it readies the new phones.
“It’s going to be very difficult to turn this around, without question,” she said.