RIM Shocks Markets With Weak Sales Guidance, Outlook Uncertain

May 31st, 2012 by Trefis Team
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RIMM: Research In Motion logo
RIMM
Research In Motion

Research in Motion (NASDAQ:RIMM) delivered some shocking news after the markets closed Tuesday sending its already distressed shares into a tailspin. Giving a business update about the current quarter, RIM CEO Thorstein Heins warned that the company may slip to an operating loss this quarter as its BlackBerry phones continue to struggle against Apple’s (NASDAQ:AAPL) iPhone and the horde of smartphones running Google’s (NASDAQ:GOOG) Android.

As part of its CORE program intended to drive operational efficiency in the organization, the company will be aggressively cutting jobs all the year round while continuing to hire for positions that are more suited to its BB10 development. Further, the company has hired advisers to help the board evaluate strategic options in order to salvage or possible sell off parts of its business. [1]

See our complete analysis for RIM stock here

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BlackBerry sales plummet

The struggling smartphone maker has seen its BlackBerry revenues fall y-o-y for three consecutive quarters, excluding the current quarter. The current quarter’s grim outlook will most likely make that four. The BB7 smartphones that were launched late last year aren’t doing well in developed markets where the company is seeing customers upgrade to rival smartphones such as the iPhone and Android smartphones. And the emerging markets where the entry-level smartphones have sold relatively well are subject to pricing pressures from competitors.

Despite recording a write down of close to $700 million in inventory value over the past few quarters, the company has seen its inventory levels shoot up as customers have largely ignored its Playbooks and BlackBerries. As of last quarter, its inventories had risen to more than $1 billion. With BB10 – the smartphone OS which RIM is pinning all its turnaround hopes on – not scheduled to be launched until late this year, we can be sure to see the pain last for a few more quarters at least.

Refocus on Enterprise

However, the fact that the company is seriously evaluating strategic options that will help it re-focus on its core strength – the enterprise space – gives us reason to believe that the company is on the right path. RIM had said during the last quarter’s earnings call that it will be focusing on the development and promotion of of enterprise-specific products and services such as the Blackberry Mobile Fusion while relying on partnerships to “deliver those consumer features and content that are not central to the BlackBerry valuable position, for example, media consumption applications.” Even in the consumer segment, RIM doesn’t plan to be “all things to all people” but to go after specific target consumers that are more aligned to its enterprise strengths. (see Heins Finally Lays Out A Plan For RIM, But Maybe Too Late)

This, we believe, will help it leverage the security strength of its BlackBerry services that governments and enterprises around the world have come to rely on. We believe that the BlackBerry services, which includes Push Email as well as BBM, are unique value propositions for RIM’s customers and the company is therefore doing the right thing by realigning its focus towards this segment. We estimate that the services business is the most valuable division for the company right now, accounting for close to 40% of our $15.50 price estimate for the stock.

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Notes:
  1. RIM Says Its Going To Have A Loss In Q1, And It Hired Bankers To Explore ‘Options’, BusinessInsider, May 29th, 2012 [↩]