While a short-term stock price surge is nice, what Research In Motion Ltd. investors should really be cheering this week is the company’s return to realism.
The BlackBerry maker reported its fiscal second-quarter results on Thursday, posting a 31-per-cent year-over-year drop in revenue and a $235-million (U.S.) loss in the quarter. For most tech companies, such numbers would not prompt investor approval. But so low are the expectations for RIM, whose stock price has dropped from about $107 to about $7 in the past four years, that its shareholders rewarded the company for not having done even worse. After hours on Thursday, RIM shares surged as much as 20 per cent, and held on to a decent chunk of that gain the next day.
Behind the temporary good news, however, RIM undoubtedly has serious problems. The company is increasing its subscriber base largely through aggressive upgrade programs and lower-margin devices, meaning it is not making much money off the phones it sells. This will almost certainly continue to be the case until RIM introduces its new BlackBerry 10 phones in the first quarter of next year.
Nonetheless, there are signs that the company’s leadership, after years of business-as-usual, is beginning to understand this reality. This week, RIM CEO Thorsten Heins publicly set a goal for his company to become the No. 3 player in the smartphone industry, behind phones powered by Apple and Google software. Mr. Heins has also gone on a serious (and painful) cost-cutting spree, slashing thousands of jobs and talking openly about licensing the BlackBerry software to third-parties – something his predecessors probably never would have done. On the earnings call on Thursday, he made it clear he wants RIM to become a leaner company.
For Mr. Heins, this is a refreshing turnaround. This is the same CEO who, upon taking the top job at the beginning of the year, said he saw no need for radical change at RIM. Today, the man who runs the company at least seems to understand how much trouble that company is in.
Mr. Heins’s battle plan, until the new BB10 devices arrive, is to keep building up RIM’s 80-million-strong subscriber base by selling current BlackBerry 7 devices (even if they’re low-margin phones) while simultaneously cutting costs. Whether the plan works is still uncertain, but at least the strategy acknowledges RIM is no longer the smartphone powerhouse it once was.
But when it comes to the new line of phones, Mr. Heins still projects the same supreme confidence as his predecessors, describing BB10 as a platform that will fundamentally change mobile communications. In a way, he is required to do this by the conventions of the consumer electronics industry, where virtually every phone or tablet that hits the market is described by its manufacturers as revolutionary or magical or game-changing. But when it comes to BB10, there are once again signs of a rift between Mr. Heins’s view of marketplace reality, and that of many RIM observers.
“We remain worried about the company’s turnaround strategy centred on BlackBerry 10,” wrote Pierre Ferragu, senior research analyst with Sanford C. Bernstein Ltd. “We maintain our view that there is no room left for a third smartphone ecosystem, unless it offers genuine breakthroughs, which we do not see in BB10.”
RIM has already showcased some of the BB10 phones’ features. By and large, the new operating system appears to be a vast improvement over the current one. Still, the notion of the new smartphone line suddenly sparking a massive turnaround may be a bit too simplistic.
“I would be trying to plan this business where I have a nice profitable business around those 7-million BlackBerry 7 units that were sold last quarter, not trying for this heroic comeback,” said BGC Financial analyst Colin Gillis.
“There’s so much talk about BlackBerry 10 … But I have kind of low expectations for 10.”