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Research In Motion: Scrappy RIM Attempts A Comeback

 January 24, 2013 09:59 AM

(By Mani) BlackBerry maker Research In Motion Limited (NASDAQ: RIMM) (TSE:RIM) is expected to launch BlackBerry 10 devices later this month, and it has already unveiled the new Enterprise Service platform. Investor sentiment is turning positive ahead of the launch as shares surged 52 percent year-to-date.

Numerous carriers may promote the device, ensuring some initial unit success, and are expected to sell at an attractive subsidized price of $149. Pre-orders appear concentrated in Canada and the UK.

RIM is expected to launch six BB10 handsets this year. Some are expecting a full touch product first initially, although most operators and distributors seem to be looking for a qwerty model. Nevertheless, normalized earnings are not likely until fiscal 2015.

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While sentiment on RIM is positive at the moment, things can quickly reverse if sell-though data is not favorable or if returns are high.

"Our forecast calls for RIM to ship 500k BB10 units in the Feb-quarter and 10M in CY13. Heavy subsidies and promotions may be required to sustain initially positive trends," RBC Capital Markets analyst Mark Sue said in a client note.

About 10–20 million of RIM's 79 million installed base may upgrade to BB10 over time, although migration to low-cost Android is likely to continue. BB10, which does not entail mandatory service fees, will increase RIM's mix of hardware revenue over time. Sustainable hardware margins have been elusive for many vendors.

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Meanwhile, RIM will have 70k apps at launch, including many popular ones, a far cry from Apple, Inc.'s (NASDAQ: AAPL) and Google, Inc.'s (NASDAQ: GOOG) Android. About 1,600 North America enterprises are testing BB10.

Key differentiators include BBM video calling, enhanced voice recognition, BlackBerry Hub, and work/personal separation. Reviews of the browser remain favorable, but the timing of the launch seems auspicious as Samsung will refresh its Galaxy series in April and Apple's new device won't arrive until June.

However, the true measure of success will be not just units, but also sustainable profitability, and competition is cut-throat with Windows convinced they will be the third mobile OS vendor.

"Heavy upfront spending may be required for the launch and we expect initially $500+ ASP and 10–15% gross margins on BB10 before volumes help margins," Sue noted.

Consumer and enterprise demand for BlackBerry 10 beyond diehard BlackBerry fans is unknown. Over the last several years, RIM has lost significant share in the global smartphone market, which may be challenging to re-capture.

RIM's enterprise users have been more resilient than consumers, but the trend toward bring-your-own-device (BYOD) has opened up the market to iPhone and Android. Within emerging markets, Android is rapidly gaining share with attractively priced entry-level devices.

BlackBerry 10 does not entail mandatory service relay fees from carriers. RIM intends to upsell value-add services to enterprises and consumers on BlackBerry 10 to offset mandatory fees.

RIM's move to cut its high-margin services fees, which it earns via its messaging services for retaining and attracting customers, makes it difficult for the BlackBerry maker to sustain its profitability.

Currently, service revenues account for about 36 percent of RIM's overall sales, and investors and analysts are wondering how this will be impacted by the transition and eventual adoption of BB10.

"BlackBerry 10 service revenue per subscriber, in our view, is likely less than legacy BlackBerry, which may result in a reduced mix of high margin service revenue," Sue said.



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