On the eve of today’s expected gloomy quarterly financial report from Research In Motion, an investment firm has issued a report predicting the Canadian smart phone maker will be sold.
“We believe RIM management will need to sell the company, as we do not believe [upcoming] BB10 devices will turn around its struggling business,” Michael Walkley of Canaccord Genuity said in a report to investors.
BlackBerry 10 is the next-generation operating system around which new handsets will be built. RIM has promised the first will be released before the end of the year.
An early version was previewed last month at BlackBerry World to good reviews, but Walkley argues weak sales of existing BlackBerrys and the expected launch of an LTE version of Apple Inc.’s iPhone before BB10 devices hit the market mean RIM’s prospect of remaining an independent company is dim.
RIM CEO Thorsten Heins has already warned that the company will report an operating loss for the quarter ending June 2 (the first quarter of RIM’s fiscal year) and that its financial performance “will continue to be challenging for the next few quarters.”
Already RIM [TSX: RIM ] has begun to cut staff to keep up with declining revenue, part of a goal to cut $1 billion in operating costs. As part of that RIM is trimming its suppliers, including is partnership with Toronto electronics manufacturer Celestica Inc. Celestica, which described itself as a “high-performing” RIM supplier, said last week that over the next three to six months it will wind down manufacturing operations.
Analysts will be watching the financial results, to be released after 4 p.m. Eastern time, to see how badly sales have fallen and in which markets. It is already known that RIM sales are down in the U.S., but that is balanced to some degree by rising sales in Africa and South America.
RIM says its subscriber base is now 78 million.
On the other hand, as a sign of how seriously it takes the situation, it has hired J.P. Morgan Securities LLC and RBC Capital Markets to advise it on all options, including selling all or parts of the company.
In his report Walkley noted that Canaccord’s research shows BlackBerry sales have been “very soft” for several months and it is holding “high levels” of unsold handsets and PlayBook tablets. He anticipates RIM will need to write down inventory again, as it has done in other recent quarters.
In fact, he calculates RIM will announce today it sold 6.9 million BlackBerrys in Q1 and estimates that will drop to 5.5 million in the current quarter.
“Given our belief BB10 smartphones will struggle to gain traction in the highly competitive smartphone market, we believe RIM may eventually sell assets, sell the entire company, or materially change its business model to a smaller niche supplier,” Walkley wrote.
“Further, we believe RIM will struggle to generate positive earnings with its current business model and investors will mainly focus on a sum-of-the-parts analysis” – that is, its breakup value.
Some think that RIM should get out of the hardware business and concentrate on its operating system and services. But Walkley says it will prove difficult to split the company. RIM will have to continue making smart phones to maintain subscribers, he said.
But he does suggest RIM’s 20 million enterprise users and the company’s network operations centres (NOC), which oversee its secure messaging service, could be attractive to buyers.
Microsoft Corp. or a competitor with an Android operating system would run a virtualized version of the BlackBerry operating system on their smart phones to keep those business customers and use the NOC to migrate them over to Windows Mobile or Android.
The remaining 58 million consumer subscribers wouldn’t be of much interest to a buyer, Walkley writes, because it is already at risk from competing low-cost Android and iPhone 3GS/4 smart phones.
