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December 15, 2011

Last night in Waterloo, Ontario, a team of mobile application developers gathered for an event sponsored in part by Research In Motion. The programmers drank subsidized beers and ate chicken wings, and were offered a chance to win one of RIM’s PlayBook tablet.

Like many things in Waterloo these days, this event can be explained by the global technology giant’s big corporate presence in that city.

But app developers at the event took several pot shots at RIM, which has seen its global market share shrink to depressive levels over the past year and its stock price collapse by more than 73 percent.

Is it surprising that they would make fun of RIM? Not really. But it's certainly another tense week for RIM, which reports earnings today after markets close. Earnings that, though likely grim, had much of their potential negative impact deflated by a pre-announcement on Dec. 2.

It was then when RIM said that it was taking a pre-tax hit of $485-million to revalue inventory of its poor-selling PlayBook tablet, and that it would ship less BlackBerrys in the fourth quarter than in the third, when it shipped about 14 million to channel partners, and would not meet previous earnings guidance-– the third downward revision this year.

RIM just hasn’t been able to catch a break recently, including not just a highly embarrassing episode where two drunken executives had to be restrained on an Air Canada flight to Beijing but a serious stampede at a device launch in Indonesia, where numerous people were hospitalized.

The company has also been hounded by calls from Wall Street and wireless industry analysts to radically alter the business, replace the two co-CEOs Mike Lazaridis and Jim Balsillie, or simply break up and sell the business, which still remains profitable, at least for now.

That explains in part the reactions of RIM employees to the playful jabs tossed their way at the Huether Hotel, at times, joking and dismissive at the almost absurd situation in which RIM, once the dominant smartphone player globally, now finds itself.

Or proud and defensive, intimately knowledgeable of the many challenges mounted by Apple's iPhone and smartphones running Google’s Android operating system.

The two co-CEOs talk frequently of the company being in “transition,” that the problems will dissipate once the company shifts to its new BlackBerry 10 operating system – renamed from BBX because of a trademark dispute – and brings out a batch of powerful new smartphones.

But the recent launch of new BlackBerrys, which in August was touted as the biggest global launch in the company’s history, has failed as a stop-gap measure. RIM’s overall market share in the United States, its most valuable market, has shrank to just 9 percent from 24 percent a year earlier.

Though RIM is increasing market share in many emerging markets, such as the Middle East and Africa, it is shrinking elsewhere, such as former strongholds such as Latin America, where cheap Android devices are flooding the market. And it's also shrinking in its own home turf market: Canada.

“We believe the stakes for RIM have never been higher,” UBS analyst Phillip Huang wrote in a recent note to clients, noting that it may be time for the board or directors to look at replacing the co-CEOs who are also co-chairmen of the board, shifting strategy or selling the business entirely before the shares fall further.

Analysts are anticipating RIM’s earnings on Thursday to be in line with the pre-announced results, including revenue coming in “slightly lower” than the $5.3-billion figure the company previously guided. But those numbers were dismal, and several bearish analysts, including Kris Thompson at National Bank Financial, expect further BlackBerry sales declines moving early into 2012. Thompson sees the stock soon at just $10, from yesterday's closing price of $15 and some change. In May of 2004, RIM's stock changed hands at almost $150 a share.

The company’s core corporate clients are also increasingly at risk as the iPhone is allowed into more workplaces, in an era after RIM suffered an embarrassing global service outage in October.

There is also the added risk that RIM is attempting this turnaround while drastically reducing its head count. Many expect recent rounds of layoffs to continue as the company tries to streamline its operations, and one source close to the company said the process has been executed haphazardly.

Meanwhile, RIM needs to maintain morale, retain its valuable employees as Waterloo’s burgeoning tech scene offers more positive workplaces, and maintain some semblance of investor confidence.

In deed, the next quarter could be a make or break quarter for RIM. Some analysts remain skeptical of the numbers that the company will reveal today, and a few are expecting a lot lower results than the street consensus.

In other RIM news

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.

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Source: WNTR

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