Research in Motion is a fundamentally broken company that is likely to be split up in parts and may see fiscal year 2014 revenue of about $7 billion, well short of the $12 billion Wall Street currently expects, according to Morgan Stanley.
Morgan Stanley analyst Ehud Gelblum became the latest analyst to ditch any hopes for RIM ahead of what is known to be a fiscal first quarter train wreck. Gelblum downgraded RIM to underweight---a bit late to that party---on the idea that the company won't even be able to hold its book value. Any strategic transformation will require a much smaller RIM that is broken up into parts.
Gelblum's working theory is that the next nine months for RIM will be total hell. First, RIM is going to get crushed in its August quarter amid aging devices, a delay of its BlackBerry 10 launch and a sluggish smartphone market ahead of the iPhone 5 launch. RIM's first quarter of fiscal 2013 will be a mess and the second quarter outlook will be worse.
This nine months of hell could be longer should BlackBerry 10 devices---likely in the back half of 2012---be delayed. In other words, current Wall Street estimates are way off on RIM. Analysts expect RIM to deliver and average of $3 billion in quarterly revenue over the next two years. Gelblum's argument is that RIM's revenue base will nearly be halved.
Gelblum said in a research note:
RIM is likely to significantly miss estimates in its FQ2’13 August quarter as it gets hit with the triple whammy of a quickly aging legacy portfolio of BB7 devices, the standard pause in unit shipments ahead of the launch of its new BB10 phone and the overall swoon in the smartphone market caused by the pause ahead of the anticipated October iPhone 5 launch. Market share loss accelerates in FY14 as risks we have flagged earlier intensify, namely 1) competition increases in emerging markets due to increased availability and lower price points of Android smartphones and 2) BB10 misses back to school and the product flops, particularly because it has no keyboard which we believe is a key feature of Blackberries that is keeping the existing Blackberry faithful strong.
And RIM's best asset---its profitable services business---will be consumed by the money pit that is its device business, said Gelblum.
Add it up and RIM will start to bleed cash starting in the second quarter, which has already started.
How will RIM respond? Gelblum argues that RIM will have to get smaller. How much smaller? RIM will likely deliver 10 million to 20 million devices in the future. To break even on that volume, RIM will need to cut 90 percent of its 16,500 employees to wind up with 2,000 workers. In this scenario, RIM will be a niche device maker focused on high-security markets.
This chart outlines RIM's peak and its possible trough.