Still Waiting For the Sunshine

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Last month, Research In Motion Limited (NASDAQ: BBRY) posted mixed 3Q13 results. However, I couldn't find anything surprising in its results which would have compelled me to take a long position on this stock. The company reported revenue of ~$2.73 billion that was down by a massive ~47% from the last year. This was mainly due to its disappointing performance in the US that contributes ~19% to the company’s sales. Another factor which contributed to its decline was the decrease in the subscriber base by 1 million to 79 million units. Even though the company is gaining new subscribers in the emerging markets, the global shrinkage as a whole still remains a point of contention. Looking at a few positives, the most important was its CORE restructuring program. The company has already achieved the target of ~$1 billion for its annualized savings that is one quarter ahead of its schedule. This was driven by its headcount reductions which contributed ~75% to the savings. The restructuring charges are expected to be ~$250 million against the earlier expectation of ~$350 million with just ~$59 million remaining to be achieved for its 4Q13.

What Lies Ahead?

  1. BB10 Launch – RIM is on track with the launch of its most awaited BlackBerry 10 on  January 30. The company will be launching its first two devices under this platform which would be shortly available after the launch. Though, RIM is pinning down all its hopes on the BB10 to turnaround things in 2013, I am a bit uncertain over the impact of this launch. With the flurry of Smartphones in the market, customers have already moved away from RIM and I don’t think they will be making a switch back. BB10 needs to have some really classy edge as well as amazing apps/features against prevailing smartphones to gain back its lost legacy which I don’t currently see in the Z10’s. Also the company’s advertising efforts for the BB10 seems to be ordinary. 
  2. Services Revenue - Another concern area for the company is its service revenue. The service segment is a ~80% gross margin business and contributes around one-third of the company's earnings. During its third quarter results, RIM announced its plans to transform its service revenue model. Under the new model, the company will adopt different tiered service packages for different customers and the enterprises. Some of them will continue to pay the same fees for their services, while others might end up paying less or no fees at all. The customers also might have to pay extra for certain enhanced services. I feel this new model will create a downward pressure on the services revenue of the company. In this highly competitive environment, I really doubt whether customers would be ready to pay extra for some services. And, this might lead to further loss in RIM's subscribers’ base. I expect this transitioning to cost a drop of ~30% in ARPU in FY14 to the company. 

Rising Competition

The ever rising popularity of Apple (NASDAQ: AAPL) and Google's (NASDAQ: GOOG) Android Smartphones raises big questions for the stability of RIM. Both Apple and Android together hold around 85% of the worldwide market of Smartphones. No doubt that the RIM's BB10 operating system is coming up with a smoother interface offering some very useful features. However, it still has to compete with the big players that have significantly more developed ecosystems.

Apple has seen a phenomenal success with its iPhone 5 in 2012 and is all set to continue the trend with new Smartphones in 2013. By mid of 2013, Apple is expected to launch iPhone 6 or iPhone 5S which would further boost its market share. The next iPhone can have more choices for the customers such as color patterns and screen sizes. These different screen sizes would help Apple to venture into multiple price points and compete better with Samsung which is its biggest rival currently. Android Smartphones now dominate the place which was previously reserved for RIM's BlackBerry. Android is used by a slew of manufactures such as Samsung, HTC, LG etc. which gives it a vast default user base. Among these, Samsung no doubt, is the undisputed leader. With Samsung coming up with its Galaxy S4 in the mid of 2013, it would be interesting to see how BB10 bids against it.

To sum it up, I believe at this point that there is too much of skepticism in RIM's outlook, whether it is for the BB10 launch or its new service revenue model. And, this overall uncertainty will certainly cast a shadow over the company's stock price. All the hopes are on its most important new innovation which is less than a month away. Until I get more clarity on the outcome of BB10, I would not suggest making a position in this stock. 

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

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