Research in Motion

As part of its Core program intended to drive operational efficiency in the organization, the company will be aggressively cutting jobs all year round while continuing to hire for positions that are more suited to its BB10 development. Further, the company has hired advisers to help the board evaluate strategic options in order to salvage or possible sell off parts of its business. (see RIM Shocks Markets With Weak Sales Guidance, Outlook Uncertain)

We have used this guidance provided to revise our price estimate to $14.50, which is about 40% ahead of the current market price. Below we describe the drivers that were most impacted by the grim outlook RIM provided.

1. BlackBerry market share and replacement rate

RIM said that its BB subscriber base increased by only about 1 million subscribers in the quarter, which is only about half as many as last quarter and one-fifth of the year-ago quarter's net additions.

The slow subscriber growth points to two things: market share losses and higher replacement of BlackBerrys with rival handsets by users upgrading their phones. We have increased our market share loss estimates as well as the replacement rates for the full year 2012 as a result.

While the release of the BB10 may reverse some of these losses during the later part of the year, the delayed launch of the product pits it against the iPhone 5 as well as a horde of improved Android and Windows smartphones yet to be released this year. BB10 may therefore not have much of an impact this year but may stem the slide in the coming years as reflected in our estimates below.

2. BlackBerry pricing and gross margin

The BlackBerry maker is looking to international sales for market share support while developed markets such as the U.S. give up on the phone. However, the company is facing heightened pricing pressures from the low-cost Android smartphones flooding the emerging markets. This will cause RIM to slash its BlackBerry prices and take a hit to its margins in order to avoid losing more market share.

We have decreased the BlackBerry ASPs and gross margins in the near-term and improved them slightly in the outer years as RIM gradually finds its footing in the smartphone market with the BB10 and other products.

3. SG&A as a % of gross profits

With RIM executing on its Core program in order to drive operational efficiency by cutting jobs in certain non-core areas, we believe the company will be able to control its expenses to keep pace with falling gross margins.

The company has guided for job cuts all year long and expects to save $1 billion in costs as a result of such initiatives by the end of FY 2013. We have therefore decreased our selling, general & administrative expenses estimates to account for this guidance.

Since we forecast SG&A as a % of gross profits, which are declining as a result of falling sales and gross margins, we reduce our forecasts only slightly to take care of the guidance provided.

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