RIMM: CLSA Cuts to Sell; ‘Faustian Bargain’ in Yielding Services Revenue?
Shares of Research in Motion (RIMM) are down $2.31, or 16.4%, at $11.82, reversing gains of 5% or more last night, following the company's fiscal Q3 beat , but also a new strategy for RIM's subscriber business that has plenty of sell-side analysts worried this morning. At issue were remarks by CEO Thorsten Heins last night indicating a new approach to the services business, whereby some customers will not pay any money if they use a more basic selection of RIM's network service with their BlackBerry . What Heins said was, We will position BlackBerry Enterprise Service as the leading cross-platform enterprise mobile device management service, and continue to invest and grow its capabilities. Subscribers that require enhanced services, including advanced security, mobile device management, and other services, are expected to continue to generate monthly service revenue. Other subscribers, who do not utilize such services, are expected to generate less or no service revenue. However, I want to be very clear on this. Service revenues are not going away, but our business model and service offerings are going to evolve. Our vision is to position BlackBerry as the clear leader in the enterprise mobility market. Those remarks, and other comments on the call, are being taken as a new approach the analysts are calling " tiered " services. The concern that such a strategy may lead to erosion of RIM's subscriber revenue, which has been perceived by some as the company's best revenue stream, is presently overshadowing the commercial debut of the new BB10 software for BlackBerry on January 30th . The decline of one million subscribers from Q2 to Q3, from 80 million to 79 million, didn't help, either. The stock got one downgrade, that I can see, from CLSA Asia-Pacific Markets's Avi Silver , who cut his rating to Sell from Underperform, while maintaining an $8.75 price target, writing "the other shoe drops": RIMM’s business model is being challenged by operators that are unwilling to both subsidize devices aggressively and hand over a slice of their data revenue. Significant pressure on its high-margin revenue stream is likely to weigh on earnings and cashflow for an extended period of time, more than offsetting any benefit from selling higher-end devices (to whatever extent they can be successful at $500+ initial ASP) […] We estimate RIMM’s services revenue accounts for 80-90% of its gross profit dollars today (hardware gross profits are roughly breakeven). While management did not address specifics about the potential magnitude and timing of the drop-off in services revenue, the commentary signaled clear caution on this high-margin revenue stream for both the consumer and enterprise markets for BB10 […] For BB10, the impact will be felt most for BIS users (consumer, prosumer, small businesses). BES users (enterprise) will also be impacted to some degree but they tend to represent a smaller percentage of the mix and RIMM may have some success over time in generating revenue from its BES user base directly.
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