Research In Motion Ltd. has warned earnings will be ugly when it reports first-quarter results after markets close on Thursday. But there will be plenty of interest in what details the Waterloo, Ont.- based company's top executives choose to divulge as the BlackBerry maker's situation continues to grow darker.
There are several main areas that analysts and investors will be watching. First, the company has confirmed it is in the middle of large-scale layoffs as part of a global restructuring aimed at saving $1-billion by the end of the fiscal year, but it isn't clear how many employees are getting let go and when. Kris Thompson, an analyst with National Bank Financial, says that means the remaining employees are left wondering whether they're the next out the door and frantically sending out résumés. "This is the worst way to restructure a company," Mr. Thompson said. "They should rip the band-aid off quickly …and let the remaining staff know they are essential to the company's success."
There is also the issue of whether there will be another inventory writedown – such as the brutal $485-million hit in December related to RIM's weak-selling PlayBook tablet – as unsold batches of RIM's latest BlackBerry 7 devices pile up unsold in warehouses. A greater-than-expected writedown could severely worsen the operating loss that RIM has already warned is very likely.
RIM has hired two investment banks, RBC Dominion Securities and JPMorgan, to help the company's management figure out strategic alternatives, leading many to conclude that the company is now for sale. But with a declining business, dwindling sales, and an unproven turnaround strategy based on a new software platform called BlackBerry 10, analysts see few near-term buyers, and are not expecting any meaningful update in this area. In any case, new options such as licensing the new operating system to hardware rivals are unlikely to have any near-term effect on the company's earnings.
Instead, there will be focus on whether RIM's cash reserves – expected to increase slightly from the $2.1-billion RIM had at the end of the fourth quarter – can carry the company through the transition, since sales are expected to keep dropping even as RIM launches a new set of phones. Analysts, though, have no clear idea when the new phones are expected to launch or whether these devices will make it to market in time for the back-to-school rush – which is unlikely – or the holiday buying season.
Indeed, even though RIM has grown its total number of current BlackBerry users worldwide to 78 million, growth has tapered off in recent quarters.
This means that even as sales decline along with the average price of RIM's devices, the smartphone maker is also likely to see services revenue – brought in via monthly BlackBerry Internet Service fees paid by carriers – begin to fall off, as well.
Part of the problem with predicting RIM's earnings now is that the company has stopped issuing guidance with actual numbers, because of how quickly things have deteriorated. But one thing is quite clear: RIM's next few quarters will be gut-wrenching for investors.
Editor's note: The name of RBC Dominion Securities has been corrected in the online version of this story.