Risks Abound for Research In Motion: Analyst

NEW YORK ( TheStreet) -- Every once in a while, a bear needs to roar.

Research In Motion ( RIMM) is slated to report its fiscal fourth-quarter results this coming Thursday, and few on Wall Street are expecting much from the troubled BlackBerry maker. Still Citigroup analyst Jim Suva decided to distinguish himself on Friday by detailing a multitude of reasons he believes that things are bound to get worse for the company.

"We believe RIMM's multiple challenges will lead to a combination of share loss in the smartphone market, gross margin compression, higher operating expenses, and EPS that will decline over the next couple of years," he wrote in a note to clients on Friday. "We reiterate our Sell rating. If we are correct with our view that future EPS continues to move lower as time progresses that would imply target prices continue to move lower as time progresses."



Among Suva's chief concerns is that RIM is at risk of missing the back-to-school selling season due to delays in its next QNX-based BlackBerry product launch. On Friday, the company said it plans to distribute prototypes of the BlackBerry 10, its next-generation smartphone, in May but didn't offer any update on when the device would be street ready beyond the prior second half of the year timetable.

"We view this the second-half launch as incremental risk for carrier certification as well as a large new product gap that in our view may cause RIMM to miss back to school selling season in 2012 as products need to be shipped to carriers in July/early August," he wrote.

The company's Playbook tablet product, which has been, to put it mildly, overshadowed by Apple's iPad, is also an albatross, according to Suva, as he believes RIM can't ditch it "because the QNX language is the future of the company which developers & enterprises need to work with."

The Playbook was RIM's first product with an operating system based on the technology it acquired in its deal for QNX Software in 2010. The company was forced to record a pre-tax inventory writedown of $485 million in the third quarter in order to increase promotional activity as it sold just 150,000 Playbooks in the third quarter. For comparison, Apple announced this week that it sold 3 million units of the new iPad in its first weekend of retail availability.

Then there's the competitive pressures in the smartphone space to consider as Suva said the company is missing out on grabbing market share from Nokia ( NOK) with Apple and phones based on Google's ( GOOG) Android system filling the void.

He also said that Apple's iPhone 4S is pressuring RIM's North American business as a more viable alternative for traveling business users than Verizon's ( VZ) CDMA iPhone 4 was, and took a dim view of the company's declining influence: "RIMM is losing carrier support in shelf space, promotion, eagerness for product certification."

Suva also sees risk for Research In Motion from carriers pushing back on monthly subscriber fees following network outages, and questioned the company's decision to embark on a restructuring of its business now when it's facing such heavy competition.

"RIMM is going through a business realignment (restructuring) & will reduce employee count at a time when we believe the company should be hiring to get product out on time versus delays," he said.

Then there's the BYOD bring your own device trend at many corporations, which Suva believes "could severely impact RIMM's subscriber base as many large corporations reassess their carrier data subscription plans on a lagging or annual basis so this could start to be become a material challenge for RIMM in CY2012 but RIMM's net subscriber base is at risk of declining as well as potential carrier monthly revenue price pressure risk ($5-7 for enterprises and $3-5 for consumers)."

So maybe a white knight will ride in and save the day? Suva doesn't see much hope there either.

"We do not believe RIMM is an acquisition target or the company is looking to break itself up for sale (given recent CEO changes)," he said. " MicrosoftTICKER TYPE="EQUITY" SYMBOL="MSFT"/> is working closely with Nokia and the Android ecosystem will have the Motorola patents after the closing of the acquisition of Motorola Mobility by Google. Push email, security, and data compression services are increasing by competitor offerings."

All in all, it's a grim picture. Research In Motion didn't preannounce for this quarter but that's likely just a product of how far it took its outlook down last time around, forecasting earnings of 80 to 95 cents a share on sales of $4.6 billion to $4.9 billion.

Research In Motion shares closed Friday at $13.66, down 5% in 2012 and more than 75% in the past year. Suva, unsurprisingly sees more downside with a price target of $12 and lumped the company in with a gang of tech companies that have endured falls from grace similar to what it believes lies ahead for RIM.

"We've seen this movie before (Motorola, Nokia, Sony-Ericsson, LG, Palm) as the history of wireless is littered with OEMs that had significant product cycle/share gains, but then missed structural market shifts," he said. "Bottom line, we believe RIMM has no short-term fixes to improve product portfolio, brand perception, to reinvigorate share gains, revenue growth & profitability."

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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