RIM executives have been manfully insisting that the tide will turn once the long awaited BlackBerry 10 operating system is released. But now the beleaguered firm has delayed the new OS again, until the first quarter of 2013, while posting a first quarter loss that was five times bigger than some analysts had predicted.
The firm’s shares nosedived by as much as 22% on the news, intensifying speculation that the BlackBerry maker would soon seek an acquirer, or split off the more valuable back office and IPR businesses from the handsets and OS. The Q1 loss was $518m, or 99 cents a share (37 cents excluding items), reversing last year’s $695m profit, while revenue fell sharply to $2.8bn, down 43% year-on-year. Analysts had expected $3.05bn. RIM shipped 7.8m BlackBerrys during the quarter, well below the already reduced Wall Street forecast of 9m, though it claimed market share in its heartland US market was ‘stabilizing’.
Right up until the announcement, RIM executives had been talking up the transformative effect that BlackBerry 10 would have. It would usher in such a new and superior user experience, went the official line, that it would shift the industry on its axis and put RIM back on the road to leadership. But this increasingly sounded like talk of a pot of gold over the rainbow, rather than real world solutions ‘ and with BB10 delayed once again, it is just delusional.
CEO Thorsten Heins was also bringing back worrying memories of his predecessors, co-chiefs Mike Lazaridis and Jim Balsillie, who became well known for their ability not to face up to RIM’s difficulties. As critics wondered how RIM could reverse nosediving device sales without any new product to offer, he insisted the firm was not in a ‘death spiral’, but was merely in a transition ‘ difficult yes, but one which would end in turnaround.
He admitted in an interview with CBC Radio that RIM was “very, very challenged at the moment – specifically in the US market’, but argued that sales in other regions were robust. And he continued with the company line that BB10 would provide a completely new way to handle mobile computing.
That might possibly be true, but the claim carries little weight if the company cannot get the platform into the hands of users. Heins is not focusing sufficiently on generating greater return from the assets RIM actually does have in its hands right now ‘ the corporate base for its back end services, notably the new Mobile Fusion offering, and its patents. And he sounded almost as deep in denial as his forerunners when he said in the interview: “There’s nothing wrong with the company as it exists right now.’ He added: “I’m not talking about the company as I … took it over six months ago. I’m talking about the company in the state it’s in right now.”
Such assertions sounded hollow when they were quickly followed by Heins’ confirmation that RIM would have to cut about 5,000 jobs as it seeks a turnaround strategy, and that the cornerstone of that strategy ‘ in RIM’s mind at least, though investors have been increasingly sceptical ‘ is delayed, perhaps fatally. BlackBerry 10, already delayed, has now been postponed until the first quarter of 2013, by which time Windows Phone 8, Windows 8 RT and upgrades of Android and iOS will be available, and RIM will have missed another holiday quarter for device sales.
Sources told Bloomberg that the company’s managers had been waiting to see the response to BlackBerry 10, on its original fall launch schedule, before making key decisions on the future, notably whether it would be necessary to seek a buyer. Now that hunt may begin earlier. ‘They either sell, break up the company or die,’ said Matt Thornton of Avian Securities, echoing the consensus view. ‘It is just a question of when.’ Earlier this year, RIM hired JP Morgan and RBC Capital Markets to explore strategic options, though Heins insisted selling the firm was not the goal.
One of the options was seen to be a licensing program for BlackBerry 10, but that route will clearly be closed down for 2012 now.
And just to make things worse, RIM is under pressure to reduce the service fees it charges to operators. According to a research note from Northern Securities, negotiations are ongoing and could further hurt the beleaguered vendor’s financial performance. As reported by Bloomberg, the note points out that no other handset supplier charges carriers for providing services to consumers ‘ even though the once-unique BlackBerry email and messaging offerings are now emulated by most rival phonemakers.
The analysts argue that operators used to think the fees were a price well worth paying when BlackBerry was seen as a premium offering, especially one that was kind on their networks and could generate additional ARPU. But that is no longer true as high value customers defect to iOS or Android, even in the enterprise space, where BYOD (bring your own device) policies are increasingly common.
A reduction ‘ and eventual loss ‘ of the service fees would be salt in RIM’s deepening wounds. According to its results for the quarter to June 2 2012, about 36% of sales, or around $1bn, were from its services business. These revenues are already being eroded by the shift of its user base towards emerging markets and by ARPU pressures in the US, and a weakened position with cellcos would accelerate that decline.
RIM is trying to save $1bn in annual operating costs by reducing the workforce and streamlining manufacturing sites. The effort so far has saved RIM $300m, said CFO Brian Bidulka, while cash investments rose to $2.2bn last quarter, from $2.1bn in the previous three months, though much of that pile will now go on the costcutting program.
Brian Blair, an analyst at Wedge Partners, told Bloomberg: ‘My view is that things get so bad this year and in early 2013 that they get forced into a sale. It gets worse and worse for the next six months, guaranteed.’ But it is increasingly hard to identify who might buy RIM, though suitors as diverse as Microsoft, Samsung and Amazon have been named. With the BB10 delay looking like the last nail in the coffin, any bidder is sure to be waiting for an even lower price.