Sunday, December 23, 2012

RIM's new services model to pressure margins: analysts

(Reuters) - BlackBerry maker Research In Motion Ltd's plan to revamp its services revenue model will pressure its high-margin services business, which accounts for about a third of the struggling company's revenue, analysts said.

RIM's Nasdaq-listed shares fell more than 12 percent in early trade after declining subscriber numbers and news of a plan to charge advanced users more for services overshadowed stronger-than-expected fiscal third-quarter earnings.

RIM, which reported its results on Thursday, is making the changes in conjunction with the launch of its long-awaited BlackBerry 10 products, expected on January 30.

The success of these products will be crucial to the future of the company, which has lost out heavily to rivals such as Apple Inc and Samsung Electronics in the last several years.

RIM Chief Executive Thorsten Heins tried to reassure investors in a television interview with CNBC on Friday.

Heins said RIM's "service revenue isn't going away" and he added: "We're not stopping, we're not halting, we're transitioning."

The executive said RIM expects to ship millions of its new BlackBerry 10 devices. He cautioned that this will require heavy investments, which will reduce RIM's cash position in the fourth and first quarters.

However, he said RIM's cash balance, which was $2.9 billion in the third quarter, will not go below $2 billion.

Still, some brokerages cut their price targets on RIM's Nasdaq-listed stock after the earnings report.

Some analysts said there was a danger that RIM would become just another handset company without a service ecosystem.

RIM will not be able to sustain profitability by relying on its hardware business alone, said National Bank Financial analyst Kris Thompson, who is rated the top analyst by Thomson Reuters StarMine for the accuracy of his RIM earnings estimates.

Thompson downgraded RIM's stock to "underperform" from "sector perform" and cut his price target to $10 from $15.

RIM's U.S. shares fell to $12.36 in early trade on Friday after closing at $14.12 on Nasdaq.

"RIM's fortunes will in all likelihood rise or fall on the relative success of BlackBerry 10, its long-awaited upgrade of the BlackBerry family," Needham analyst Charlie Wolf said.

He also said the BlackBerry 10 will have to be observed as meaningfully superior to its competitors for a comeback.

Canaccord Genuity analyst Michael Walkley said there was a very low probability that the market would support RIM's new mobile computing ecosystem, and he remained skeptical about the company's ability to survive on its own.

"... We believe RIM will eventually need to sell the company," said Walkley, who cut his price target on RIM's stock to $9 from $10.

Baird Equity Research analysts said BlackBerry 10 faced a daunting uphill battle against products from Apple, as well as those using Google Inc's Android operating system and, increasingly, phones using Microsoft Corp's Windows 8 operating system.

Baird maintained its "underperform" rating on the stock, while Paradigm Capital downgraded the stock to "hold" from "buy" on uncertainty around the expected change in RIM's services revenue model with BlackBerry 10.

"RIM has gone from having one major aspect of uncertainty ? BlackBerry 10 adoption ? to two given an uncertain floor on services revenue," William Blair analyst Anil Doradla said.

RIM is counting on the new line to claw back market share lost in recent years to the likes of Apple's iPhone and a slew of devices powered by Google's Android.

RIM will have to discount BlackBerry 10 devices significantly to maintain demand, Bernstein analyst Pierre Ferragu said.

Consumers and corporate customers have abandoned the BlackBerry in droves, even though the devices offer security features that rivals have been unable to match.

Credit Suisse maintained its "neutral" rating on the stock, but not because it expected BlackBerry 10 to be a big success.

"Only the potential for an outright sale of the company or a break-up keeps us at a neutral," Credit Suisse analysts said.

Positive early feedback on BlackBerry 10 devices has helped RIM's stock more than double in value over the last three months. RIM shares fell about 9 percent after the bell on Thursday.

(Reporting by Chandni Doulatramani in Bangalore and Sinead Carew in New York; Editing by Roshni Menon, Ted Kerr and Dale Hudson)


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