Research in Motion (NASDAQ:RIMM) is set to announce its Q1 FY2012 earnings on June 28th. With CEO Thorstein Heins providing a bleak business update for the current quarter last month, expectations from the earnings are quite low. RIM’s shares have taken a beating, falling to a historic low of $10 following the warning.
The company has warned that it may report an operating loss this quarter as its BlackBerry phones continue to struggle against Apple’s (NASDAQ:AAPL) iPhone and a horde of smartphones running Google’s (NASDAQ:GOOG) Android OS. The new BB10 smartphones, which may steady the boat, aren’t expected to be launched until late this year. Meanwhile, RIM is executing on its CORE program intended to drive operational efficiency and will be aggressively cutting jobs all the year round while continuing to hire resources that are more suited to its BB10 development. While the company hasn’t given up on its turnaround hopes yet, it is also evaluating its strategic options that will help it realign focus and possibly sell off parts of its businesses, and it has hired advisers in this regard. We will look for any such announcements in the earnings release.
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 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 the Playbook and BlackBerry. As of last quarter, its inventory rose to more than $1 billion. BB10 – the smartphone OS which RIM is pinning all its turnaround hopes on – is not scheduled to be launched until late this year, and so we may see the pain last for a few more quarters, at least.
Refocus on enterprise
However, the fact that RIM is seriously evaluating strategic options that will help it re-focus on its core strength – enterprise – 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 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 target specific 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 doing the right thing by realigning its focus on this segment.
We estimate that the services business is the most valuable division for the company currently, accounting for over 40% of our $14.50 price estimate for the stock.