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December 15, 2011

Canadian handset maker and mobile service provider Research In Motion will announce its numbers today, and the company is widely expected to report rapidly diminishing profit margins, greatly reduced global revenue growth and a rapidly shrinking market share from its aging lineup of BlackBerry smartphones and spotty sales of its unpopular PlayBook tablet introduced in April this year.

After recently announcing a big charge on its books related to a very high number of PlayBook tablets that are sitting in the company's warehouses, RIM's after tax profits are expected to erode sharply when the company discloses its latest quarterly earnings after North American markets close today.

"They are still a bit profitable. It's just that their levels of profitability are quickly shrinking," said William Blair & Company analyst Anil Doradla.

The Waterloo, Ont., handset maker is still a revenue producer, with global annual sales of about US $20 billion, and with operations in several countries, but it is facing extremely fierce competition from Apple's very popular iPhone, and Google's well-selling Android smartphone.

For the most part, RIM has been targeting the enterprise market as its main goal over the past several years, since its BlackBerry devices provide secure email communications. In comparison, Apple and Google have been targeting mostly the average consumer, a huge segment of the wireless industry that so far RIM has not capitalized. Most consumers we talked to don't really care if their emails aren't secure since they usually don't have any sensitive information.

As far as investors are concerned, RIM continues to face intense competition from Apple and Android devices and has already lowered the bar at least twice for its third-quarter earnings. RIM's cash flow has dropped about 51 percent from 2010 to this year, and its latest charge on earnings relating to dismal sales of its PlayBook tablet is expected to further erode its current cash flow projections.

"They're still growing a bit, it's just deceleration from here," he said of the slowing pace of sales outside North America, as Google-powered Android smartphones and Apple's iPhone win over more consumers globally. He estimated RIM's international market share at about 30 percent.

There are also rumors that some governments and a few large companies could cancel their BlackBerrys in favor of the iPhone and Android devices. There are already several thousands of employees in hundreds of large companies that bring their own iPhones and iPads to work, with the acceptance of their employers.

"We expect Apple, Google's Android and Samsung to gain considerable smartphone market share from RIM in terms of sell-through during the quarter, and for most of 2012."

Research In Motion has warned investors that it will book a US $485 million charge before tax on the cost of discounting the price of PlayBooks by more than half to help boost sales.

As well, it expects about US $50 million in lost revenues from the massive service outage in October that affected millions of BlackBerry email and text users around the world, and also in the U.S., Canada and South America. Some BlackBerry customers have also launched several class action lawsuits against RIM.

The company has estimated that its adjusted third-quarter revenue, excluding the US $50-million cost related to the BlackBerry service outage, will come in at between US $5.1 billion and US $5.4 billion.

The company estimates its adjusted earnings per share between US $1.10 and US $1.28. "It tells me that it is a company that not only has several issues, but is not able to forecast the level of uncertainty in the business," Doradla said of RIM's revised financial guidance for the quarter.

Average wireless analyst estimates compiled by Thomson Reuters put revenue at $5.26 billion in the third quarter, down 4 percent from the same quarter in 2010. Earnings per share were estimated to be down 34 percent to $1.15 from $1.74.

Further compounding the problem, other than the PlayBook tablet, RIM has very few new products in the marketplace. It launched new versions of the BlackBerry Bold and Torch in the late summer but won't have the new generation of BlackBerrys with a new, updated operating system out until mid-2012.

"The new RIM products didn't have the positive impact on the business model that we had expected and the international business isn't enough either," said BMO Capital Markets analyst Tim Long, which has been bullish for an extended period of time on RIM, but that has since downgraded RIM's stock price expectations several times.

Additionally, Long signalled potential issues with co-CEOs Jim Balsillie and Mike Lazaridis continuing to serve at the helm of RIM, and both chairmen of the company. Activist shareholders have also complained about RIM's management structure. It's quite unusual for a company to have more than one CEO, and those two CEOs are also chairmen at the same time.

"Management credibility is also taking another hit and changes may be needed soon to get a full valuation," he said.

RBC Capital Markets analyst Mike Abramsky said RIM faces a "high bar" for its new generation of BlackBerrys to be competitive with Apple, Android and Amazon applications, content and user experience. Amazon has recently released its highly popular Kindle Fire tablet and has been selling extremely well. At Best Buy, it has in fact surpassed Apple's iPad in sales.

In an effort to reduce the negative impact on earnings, RIM has recently cut about 2,000 jobs, or 11 percent of its workforce. But Abramsky said in a note that the company may have to restructure to reduce its cost structure even further, and cutting even more on its workforce and other related costs.

Today's sales numbers and earnings from RIM are highly anticipated from Wall Street, and it will be interesting to have a fresh look into a company that is less and less relevant in a market that is rapidly getting more and more competitive.

In other mobile market news

Overall sales of Apple's iPhones and Google's Android mobile handsets in the U.S. surpassed all other smartphone platforms in the first three quarters of this year, holding a combined 82 percent of the market share.

Meanwhile, Research In Motion suffered a continued decline during the same period, and the trend appears to be worsening for the next few quarters, as the Waterloo, Ontario-based firm struggles to keep afloat in an extremely competitive market. There's also rumors that many governments might drop the BlackBerry and switch into Apple's extremely popular iPhone.

According to new numbers released yesterday by market research firm NPD Group, the growth seen by Google's Android and Apple's iPhone platforms this year came at the cost of 'used-to-be' smartphone heavyweight, Research In Motion.

Android-based smartphones enjoyed well over half the market with a 52.9 percent share by the end of October, followed closely by Apple's iPhone with 29.2 percent. RIM's BlackBerry managed to hold onto a less than 10.8 percent share, and that number is expected to drop significantly once RIM reports its numbers tomorrow at around 4.30 PM EST.

“The competitive landscape for smartphones, which has been reshaped by Apple and Google, has ultimately forced every major handset provider through a major transition, and the one single company that was the most negatively impacted by this was RIM,” said Ross Rubin, executive director, Connected Intelligence for The NPD Group.

“For many of them, 2012 will be a critical year in assessing how effective their responses have been, and this will quickly determine who is gaining market share and who is loosing.”

Android's and iOS' lead in the mobile OS segment is significant as nearly half of all mobile users in the U.S. now own a smartphone, with the number expected to continue to grow next year and well into 2013.

The Apple/Google duopoly has also caused major shifts within the mobile industry as RIM desperately tries to regain a foothold in the marketplace it helped create, and Microsoft continues to push its Windows Phone 7 platform toward relevance, albeit with mixed success as of late.

Just five short years ago, BlackBerry devices comprised half of all smartphone sales, but have since seen a steep decline while the trend is rapidly getting worse, with the sale of BlackBerries ending the third quarter of this year with just a paltry 7.8 percent market share.

“Few companies have felt the impact of the shift to touch user interfaces and larger screen sizes as negatively as RIM," said NPD executive director of Connected Intelligence Ross Rubin.

RIM's smartphone woes have been further exacerbated this year by multiple service outage issues in the EMEIA region (Europe, Middle East, India and Africa), as well as on its own home turf, Canada, and poor sales of its PlayBook tablet. Faced with rapidly evaporating cash reserves, the struggling Canadian company has been forced to cut its workforce by several thousands, and more cuts are expected soon.

Rubin viewed Nokia's agreement with Microsoft to use Windows Phone 7 on its smartphone devices as one of the biggest news stories of the year. After dropping the Symbian OS in February, Nokia focused on launching its new Windows Phone-based Lumia mobile handsets by the end of the year.

“Nokia and Microsoft must build from scratch to carve out success between the consistency of the iPhone and the flexibility of Android,” Rubin said. And many other wireless industry analysts agree.

And a recent report cast some doubt on the Microsoft-Nokia partnership, saying that the Lumia line of phones failed to innovate and would see only high-end user adoption.

Rubin compared the now defunct Windows Mobile's peak smartphone market share of 50 percent in Q2 2007 with that of Windows Phone 7, which has not surpassed 2 percent since launching late last year. Microsoft recently revealed that it is making some leadership changes in order to take better advantage of Windows Phone 7's potential.

While Nokia remains the top mobile handset vendor in the world, it has suffered a major blow in device sales during the transition from Symbian to Windows Phone, seeing a decline from a 33.4 percent market share in 2010 to just 13.8 percent in 2011.

Overall, Google's Android platform has seen remarkable growth this year, enjoying a 53 percent share of the market between January and October 2011.

Rubin simply pointed out that Google's acquisition of Motorola Mobility in August not only helped save the phone maker's ailing business, but also granted the search giant access to useful telecom patents.

Motorola's presence in the smartphone arena dropped as low as 0.9 percent in the third quarter of 2009, but rose to 16.2 percent in the fourth quarter of 2010 after the company adopted Google's Android operating system. Currently, the Droid RAZR manufacturer holds a 12.2 percent share of the market.

“On average, Android has helped Motorola climb back into the smartphone market. But for now, Google will seek to use Motorola’s patent pool to help protect other Android licensees, and I think that, from the getgo, it was the main reason that Google acquired Motorola Mobility,” Rubin said.

Overall, Android and iOS appear to be both leading the way in smartphone design and usability, leaving competing OEMs to either join up with Google or try to fight the two megaliths for marketshare, as RIM and Microsoft are attempting.

During the three months ending in September, Apple held its title as America's top smartphone maker with a 28.6 percent market share followed by HTC with a 20.3 percent share, according to Nielsen.

Android phones as a whole dominated the market, however, garnering a 42.9 percent market share in the U.S. However, Apple does enjoy the lion's share of the industry's profits. Canaccord Genuity estimates that the company took in more than half of the mobile handset industry's operating profits last quarter with just a 4 percent global market share.

That's a stark contrast from 2007 when Nokia took in 67 percent of operating profits from the industry and Apple had just 4 percent.

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Source: Blair & Company and BMO Capital Markets

    This article was featured on Business 5.0 and on Tech Blog.