Research In Motion Ltd. (RIM), the BlackBerry maker whose stock has dropped 95 percent since 2008, is under pressure from mobile phone companies to reduce carrier fees that generate $4.09 billion in annual revenue.
RIM said it faces demands to cut the fees paid by customers such as AT&T Inc. after posting its first loss in a decade last week. The fees account for more than a third of revenue at RIM, which is racing to introduce BlackBerry 10 phones and engineer a turnaround.
"There's definitely negotiations going on right now to reduce" the fees if the company has acknowledged its concern, said Sameet Kanade, a technology analyst at Northern Securities.
Kanade, who rates RIM a sell, estimates revenue from the monthly fee could drop 17 percent to $3.4 billion this year and another 18 percent to $2.8 billion in fiscal 2014 as carriers such as AT&T (T) and Verizon Wireless seek lower fees amid the company's diminishing clout. RIM is the only handset maker to charge such a fee.
RIM levies the fees to carriers for subscriber access to its BlackBerry server infrastructure. As wireless operators face customers' requests for reduced monthly charges, it becomes harder for those carriers to pass on the subscriber fee, said Kanade at Northern Securities in Toronto.
Spokespeople for AT&T and Verizon Wireless, BCE Inc. (BCE) and Rogers Communications Inc. (RCI/B), the two largest carriers in the U.S. and Canada respectively, declined to comment on the nature of any discussions they hold with RIM.
"RIM intends to continue generating a revenue stream from the services we offer," said Nick Manning, a spokesman for Waterloo, Ontario-based RIM. He declined to elaborate on any requests for fee reductions cited by the company in last week's earnings release.
Still Growing
Lower service fees in emerging markets, where RIM is increasingly reliant for growth as U.S. sales tumble, also pose a threat to business margins, said Kanade.
For now, it's still a growing part of the business as RIM's subscriber numbers rise, helped by increasing sales in markets such as Indonesia and South Africa. Revenue from those fees and other services climbed 4.1 percent last quarter from a year earlier as device sales plunged 57 percent. That lifted services' share of total revenue to 36 percent last quarter from 20 percent the year before.
The fee revenue is expected to drop to $2.7 billion in fiscal 2014 and $2.3 billion in fiscal 2015, according to another estimate from Sanford C. Bernstein Ltd. analyst Pierre Ferragu.
While that may still give RIM enough cash to last two years, that doesn't mean the company can afford to burn through its reserves, Kanade said.
Burning Cash
"Devices are definitely burning cash at a rapid rate," said Neeraj Monga, an analyst at Veritas Research in Toronto. "They need to have the services business continue to give them cash so they can maintain their flexibility."
Monga, who rates RIM a sell, said RIM may run out of cash by May if the new phone hasn't launched by then, as hardware losses overwhelm shrinking service revenue.
"April, May of next year could be a time of reckoning for RIM," he said. "It's a race between what comes first: BB10, zero cash balance or an acquisition."
RIM Chief Executive Officer Thorsten Heins said the BlackBerry maker isn't in a "death spiral" as it works to deliver the new phone in 2013.
"The way I would describe it, we're in the middle of a transition," Heins said yesterday in a Canadian Broadcasting Corp. radio interview. "This company is not ignoring the world out there, nor is it in a death spiral."
Delayed Release
RIM plunged 19 percent on June 29 after posting its first loss in a decade, delaying the release of a new phone it's counting on to revive slumping sales and cutting 5,000 jobs. While the company said it had $2.2 billion in cash at the end of last quarter, Chief Financial Officer Brian Bidulka warned that number could drop if the company has to further restructure.
RIM has dropped 95 percent from its mid-2008 peak, cutting its market value to less than $4 billion. That makes the company's cash reserves worth more than half its current market value. The stock fell 1.9 percent to $7.35 in New York yesterday.
'As some pundits write RIM's obituary, the company's global subscriber base continues to grow to more than 78 million people in 175 countries," Heins wrote in an editorial posted yesterday on the Globe and Mail's website. He pointed out that RIM has no debt and more than $2 billion in cash.
"The facts about RIM's business provide reason to believe that we can succeed, even as we take painful but necessary steps to focus our resources and build a lean, nimble organization focused intently on bringing BlackBerry 10 to market."
Hires Bankers
The BlackBerry maker in May hired JPMorgan Chase & Co. (JPM) and RBC Capital Markets to help evaluate options and has not ruled out a sale of the company. In the CBC interview, Heins said the company is "looking into all options. At the end of the day it's about creating long-term shareholder value."
RIM's introduction of BB10 has been delayed by what Heins has said is the volume of software code that needs to be created for the platform that will run future BlackBerrys and its PlayBook tablet. RIM last week postponed the release of the first BB10 phone to the first quarter of 2013, a delay of a year from when the device was first planned to come into the market.
RIM may also need its cash for the BB10 release, which analysts increasingly see as a long-shot to get RIM to compete with Apple Inc. (AAPL)'s iPhone and devices built on Google Inc. (GOOG)'s Android platform. All of that means they can't afford a sizable drop in services revenue, said Anil Doradla, an analyst at William Blair Co. in New York.
The drop over the next two quarters of services revenue "will not be so severe that they just have to stop their phone business," said Doradla, who rates RIM the equivalent of a hold. "But it's not going to be pretty."
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