Thursday's quarterly results from Research in Motion Ltd. showed a final clearing of the decks ahead of the company's all or nothing bet on BlackBerry 10.
Initially, RIM's smaller than expected loss had the stock higher by almost 10 per cent in after hours trading. But later comments by CEO Thorsten Heins during the management conference call caused a sharp sell-off which continued Friday.
Mr. Heins intimated that buyers of the new BlackBerry 10 will be able to pick and choose from a list of potential network services, a departure from the current system where RIM automatically charges service fees for a full suite of services including advanced network security. Analysts, including Nomura's Stuart Jeffrey were stunned:
"RIM's services revenues generate a gross margin of approximately 85 per cent and have proven a stable and consistent source of cash flow. These are now at risk. It seems hard to believe that RIM would do this, yet this is what we believe was implied on yesterday's results call."
Profit margins have been arguably the most important gauge of RIM's financial health. In hindsight, the erosion of gross margins that began in late 2006 was the first hint of the misery ahead for the stock (see this chart). Thursday's results showed stable quarter-over-quarter profitability, but there's a lot going on under the surface. The company achieved a massive rundown of inventories at discounted prices, but a $1-billion cost saving program fully offset the negative effects this would have had on profit margins.
Management has successfully prepared for the launch of BlackBerry 10 by lowering costs, reducing inventory and raising cash to fund a mammoth marketing assault to support the new device. At the same time, it would be charitable to describe Research in Motion's recent history of product development as uneven and analysts remain concerned about the effects of a changing revenue model.
In a perfect world, we would provide some guidance on RIM's profit margins for 2013. Att this point, though, the outlook for the company is basically a coin toss. Investors are likely viewing the January 30 release of Blackberry 10 with more anxiety than excitement.
Scott Barlow