After delivering another quarter that beat the street’s expectations yesterday, Research in Motion (TSX:RIM) spiked as much as 10% in the after-market. Then, suddenly, a complete reversal took place, sending shares the other way.
The culprit was CEO Thorsten Heins admission on the conference call following the earnings call that RIM was going to make changes to its services revenue fees.
Forbes writer Eric Savitz gathered reactions from some analysts who were clearly blindsided by the change.
Citigroup’s Jim Suva said: “As the earnings call progressed it became clear that RIMM is going to receive much lower rates on its highly profitable services (on the new BB10 products) causing the stock to drop [as much as] 12% after hours. While this was a major focus for the Q&A during the call, RIMM was unable to quantify the risk.”
Tavis McCourt of Raymond James said: “We believe this eventually shrinks RIM’s revenue opportunity as not every enterprise customer opts for the highest level of security. On the consumer side, while RIM currently generates services revenues from every consumer (even in emerging markets), the consumer revenue opportunity becomes limited to only those consumers that bring their own BB to work and is connected to the [BlackBerry Enterprise Server].”
Byron Capital’s Tom Astle says he was a little surprised by the market’s reaction. Astle says he has been aware of this concern for some time now, and was already modelling a 30% Year-over-year decline in services margin. He says predicting what will happen to RIM’s high margin service fees is and has been nearly impossible. Some BlackBerry 10 consumers, he says, may use less services, but this may be offset somewhat by new management features for corporate users.
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The Byron Capital analyst says that while the easy call on RIM has been made, the company’s risk to reward ration remains extraordinarily compelling. In a research update to clients this morning, Astle maintained his BUY rating and $14.00 target price. He says the market’s reaction today gives investors a chance to establish a position at lower levels.
Astle says he believes RIM’s services revenue will fall from the $3.89-billion he is modelling for fiscal 2013, to $3.1-billion in 2014, and then $2.8-billion in fiscal 2015. The rollout of BlackBerry 10 devices, he says, will provide the margin RIM is missing with the current money losing proposition of selling old BB7 phones. He thinks RIM will sell 23-million BlackBerry 10 devices in 2014 and then 31-million the following year.
While he doesn’t believe RIM will be able to command the 35% margins it used to, Astle pegs BB10 margins at 19% in fiscal 2014 and 20% in fiscal 2015. He arrives at his target of $14 by applying a multiple of 9x to RIM’s fiscal 2015 earnings, which he expects to total $1.58.
At press time, shares of RIM on the TSX were down 21.3% to $10.98.