RIM tumbles after downgrade on ‘deteriorating fundamentals’
Mon Jun 25 2012 Josh Rubin Staff Reporter
If struggling BlackBerry maker Research in Motion is to survive, it will need to slash 90 per cent of its staff and become a niche player focusing on die-hard users, according to a grim assessment from an analyst.
“We believe the fundamental story at RIM is essentially broken,” Morgan Stanley analyst Ehud Gelblum wrote in downgrading RIM from “equal weight” to “underweight,” citing what he called “rapidly deteriorating fundamentals.”
Gelblum’s harsh judgment prompted RIM’s stock to tumble almost eight per cent, just days ahead of the company’s fiscal first quarter earnings report, which comes on Thursday.
RIM shares plunged 76 cents to close at $9.36 in trading on the TSX. They earlier fell as low as $9.31, their lowest level since 2003.
“We believe there is a subset of current RIM subscribers that would remain loyal to their BlackBerry devices either for security reasons or simply because of personal preferences. However, we believe this group is relatively small,” said Gelblum, who added that RIM may need to go private in order to restructure itself into a niche player. RIM says it currently has 16,500 employees, but Gelblum believes it would need to trim itself down to roughly 2,000 in order to survive.
The company has previously acknowledged it is targeting a billion dollars in savings by next year, partly through job cuts.
The company’s manufacturing wing is such a money loser at this stage it’s eating up all the profits made by RIM’s lucrative services division, Gelblum adds. And even in the services division, Gelblum argued, there are problems; notably, telecommunications carriers are starting to push back on the monthly fee they pay for each of their subscribers who use RIM’s network.
Gelblum suggested smartphones using RIM’s long-awaited BB10 operating system — expected to hit the market later this year — are “likely too late and fraught with risks.”
Ahead of that launch, many potential customers will hold off buying RIM’s existing models, Gelblum believes.
ScotiaBank analyst Gus Papageorgiou agreed, saying the next few months will be rough for RIM.
“Expect Q2 to be worse ahead of BB10 launch. As we get closer to the launch of BB10, we believe many consumers will hold back for the new device, making Q2 even more challenging,” Papageorgiou wrote in a research note to clients this morning.
RIM has already said it expects to report a quarterly operating loss Thursday. Papageorgiou expects them to report a net quarterly loss of eight cents per share.
Last month, RIM CEO Thorstein Heins acknowledged the company had hired a pair of investment banks to explore strategic options, including licensing its software, strategic investments and possibly a sale.
The company reiterated over the weekend that it still believes sticking with its own plan is the way to go, and played down a report in the Sunday Times that it was considering selling off its manufacturing arm.
“RIM has hired advisers to help the company examine ways to leverage the BlackBerry platform through partnerships, licensing opportunities and strategic business model alternatives. As Thorsten said on the company’s fourth-quarter earnings call, ‘We believe the best way to drive value for our stakeholders is to execute on our plan to turn the company around.’ This remains true,” a RIM spokesman said via e-mail.