Research In Motion Ltd. (RIMM:US) shares fell as much as 13 percent after the BlackBerry maker said it will overhaul the service fees it charges subscribers, threatening a source of revenue that accounts for more than a third of sales.
Subscribers who want enhanced services, including advanced security, will continue to pay a fee, while others who don’t use such services “are expected to generate less or no service revenue,” Chief Executive Officer Thorsten Heins said on a conference call today. Service fees accounted for $982 million in revenue last quarter, out of a total of $2.73 billion.
The move raises concerns that the company’s lucrative services business is in jeopardy, casting a pall over the planned introduction of the BlackBerry 10 early next year. A shortage of detail on the change is contributing to investor anxiety, said Jennifer Fritzsche, an analyst at Wells Fargo & Co. in Chicago.
“By doing this and lacking details, RIM has created a very large cloud of doubt about that high-margin revenue,” she said in an interview on “Bloomberg West.” “By our estimates, it’s really the only real source of profitability.”
RIM fell as low as $12.35 in extended trading (RIMM:US), reversing an earlier gain of almost 10 percent. The stock had initially risen after the company’s third-quarter earnings report, when RIM topped sales estimates and reported a smaller loss than projected.
RIM is changing its services-fee approach as mobile-phone customers put pressure on wireless carriers to cut their monthly bills. Carriers have traditionally passed on the fees to consumers, something that’s now harder to do.
The BlackBerry operating system has to adapt to trends, Heins said on the conference call.
“We will see pressure on pricing for BB OS-related services in order to make sure we stay relevant in our markets,” he said. “However, I want to be very clear on this: Service revenues are not going away.”
Under the assumption that RIM has about 15 million enterprise customers and about 60 million consumer users, service-fee revenue could decline by as much as a third, said Kevin Stadtler, president of Fort Worth, Texas-based Stadtler Capital Management, which owns about 40,000 RIM shares.
“It’s going to be a big hit,” he said.
Paul Carpino, RIM’s head of investor relations, said the company will disclose details about the pricing and structure of the new fees when BlackBerry 10 services are introduced. He declined to say if the change would affect existing subscribers on BlackBerry 7 phones or earlier-generation models.
Before Heins made the comments, RIM had pleased investors with its latest results, which included an increase in its cash holdings by about $600 million to $2.9 billion.
Excluding some items, the company posted a third-quarter loss of 22 cents a share, beating the 35 cent-loss predicted by analysts. At $2.73 billion, revenue exceeded the $2.66 billion estimate in the period, which ended Dec. 1.
BlackBerry demand in countries like India has been shoring up sales for the company, even while consumers in the U.S. flock to Apple Inc. (AAPL:US)’s iOS devices and phones running Google Inc. (GOOG:US)’s Android. Early buzz around the BlackBerry 10 also has increased optimism, fueling a rally that more than doubled (RIMM:US) the value of the stock over the past three months.
More than 150 carriers are preparing to offer the BlackBerry 10 and over 120 companies are testing the new platform, a prelude to the phones going on sale on multiple continents in February.
For now, RIM is still struggling to compete with Apple and Google. The once-dominant smartphone maker is poised to finish 2012 with a 4.7 percent share of the global market, compared with almost 90 percent for Apple and Android combined, according to research firm IDC.
Even as RIM’s market share shrank, the company had been maintaining its installed base -- until last quarter. The total number of BlackBerry subscribers dropped to 79 million from 80 million during the period. That’s a cause for concern, said Bill Kreher, an analyst at Edward Jones in St. Louis.
“The subscriber base has slipped for the first time I can remember and while this is something that people have probably anticipated earlier, it’s beginning to happen,” said Kreher, who has a sell rating on RIM’s stock.
To adjust to its smaller stature, RIM is cutting about 5,000 jobs, or a third of its workforce. The company had 13,400 employees at the end of last quarter.
It’s also eliminating manufacturing sites and disposing of one of its business jets. The cost cutting helped RIM reach a target of $1 billion in annual savings at the end of last quarter, ahead of schedule, Chief Financial Officer Brian Bidulka said on the call.
RIM shipped 6.9 million BlackBerrys last quarter, in line with estimates. Its PlayBook tablet shipments were 255,000, beating the 150,000 predicted by analysts.
The company posted net income (RIMM:US) of $9 million, or 2 cents a share, helped by a $166 million tax settlement. Net income was $265 million, or 51 cents a share, in the year-earlier period.
RIM also said that Chief Information Officer Robin Bienfait will retire at the end of the year, following six years at the company. She will continue working as an advisor to ensure that the BlackBerry 10 introduction goes smoothly, RIM said.
The road ahead won’t be easy, Fritzsche said. The company expects another operating loss this quarter as it readies BB10.
“It’s going to be very difficult to turn this around, without question,” she said.
To contact the reporter on this story: Hugo Miller in Toronto at email@example.com
To contact the editor responsible for this story: Nick Turner at firstname.lastname@example.org