Microsoft tie-up, network sale among RIM options

29 Jun, 2012

Research In Motion Ltd's board is under mounting pressure to consider unpalatable options such as selling its network business or forming an alliance with Microsoft Corp after the Blackberry maker again delayed the release of its next-generation smartphones, said three sources familiar with the situation.

Shares in the Canadian company, which announced a steeper-than-expected quarterly operating loss on Thursday, plunged 18 per cent in extended trading, slashing its market value to $4.1 billion. The stock has fallen about 70 per cent in the past year.

RIM said the launch of BlackBerry 10 mobile devices has been postponed to early 2013 - more than a year later than initially promised - because the development of its new operating system had "proven to be more time-consuming than anticipated."

RIM CEO Thorsten Heins - who replaced long-time co-chief executives Mike Lazaridis and Jim Balsillie in January - kicked off a broad strategic review in March that seeks to tie the fortunes of the company to the success of the new operating system.

But the latest setback has increased pressure on RIM's board to more seriously explore other options, including measures that would amount to an admission that its current strategy is untenable, said the sources, who declined to be identified because the information was confidential.

One of these options is for RIM to abandon its own operating system and adopt Microsoft's upcoming Windows 8. Microsoft CEO Steve Ballmer approached RIM shortly after Balsillie's departure, looking to strike a partnership similar to the one the software giant has with Nokia Oyj, the sources said. Under that partnership, Nokia will use Microsoft's latest Windows operating system on its smartphones.

In such a scenario, RIM could also look for Microsoft to buy a stake in the company and fund marketing and other expenses, the sources said. However, this option is not attractive to RIM because it would mean the end of the Waterloo, Ontario-based company's technology independence, they said.

The RIM board still prefers to see through the efforts to develop the new operating system, according to the sources.

Microsoft could also be interested in RIM's wireless patents, the sources said.

Another option for RIM would be to sell its proprietary network to a private equity firm or a technology company. The buyer could then open up RIM's network operating centers to other smartphone providers, allowing them to also provide highly secured emails and other services to companies and government agencies, the sources said.

In that scenario, however, RIM's device business is seen to have no future, they said, adding that private equity firms have been considering how to separate the hardware business from the network business.

RIM and Microsoft declined to comment.

Separating the network business would be an about-face for RIM after it rejected a similar proposal from Balsillie, who had been in advanced negotiations with wireless carriers to boost revenue by letting them use the RIM network.

The idea was to clearly define the network as an asset that could exist without BlackBerry handsets, which are facing fierce competition from Apple Inc's iPhone and Google Inc's Android phones.

RIM is "going to have to be much more open-minded to the idea that Jim Balsillie was working on before he was ousted of opening their network to third parties," said Eric Jackson, a hedge fund manager at Ironfire Capital in Toronto.

Strategic Review

On Thursday, Heins gave away little in regards to the strategic review, which is being conducted with the help of investment bankers at JPMorgan Chase & Co and Royal Bank of Canada.

But he did reiterate his faith in RIM's integrated model and dismissed a suggestion that the BlackBerry will adopt Google's Android software. He said on a conference call with analysts that he is "convinced that BlackBerry can deliver value as an integrated hardware, software and services offering."

Analysts have said RIM should assess opportunities to license its untested BlackBerry 10 software, make money from its patent portfolio or invite a partnership with another mobile company.

"They need to get to a strategic decision soon. Even though it may cause some near-term pain if you separate the business, it might be the best course of action," said Scott Sutherland, an analyst at Wedbush Securities.

With the delay in the launch of that software now, RIM's working capital is also likely to come under more scrutiny. The company held $2.2 billion in cash at the end of its fiscal 2013 first quarter.

"If you want to rip the company apart for its assets and cash, this is the year to do it because the cash balance increased this quarter, but it's likely they're going to start burning cash as they move into the back half of the year," said Colin Gillis, an analyst at BGC Partners.

On a conference call with analysts, RIM Chief Financial Officer Brian Bidulka said working capital management was one of the areas of focus for the company.

Bidulka said the company also had an unused credit facility and it was "continuing to work with our banks on renewing that facility."

It is also trying to reduce costs by about $1 billion, including by cutting about 5,000 employees.

RIM delays new BlackBerry launch

Research In Motion Ltd delayed the make-or-break launch of its next-generation BlackBerry phones until next year, in a devastating setback to the once-dominant technology company whose sales are crumbling.

Shares of the company, which also announced a steeper-than-expected quarterly operating loss and deep job cuts on Thursday, plunged 14 per cent after it said it would release its revamped BlackBerry 10 devices early in 2013. It conceded the development had "proven to be more time-consuming than anticipated."

The delay in releasing the devices - RIM's last best hope of stemming its eclipse at the hands of Apple Inc's iPhone and phones using Google Inc's Android software - confirmed the worst fears of analysts and investors.

The size of the loss, RIM's first in eight years, and the likelihood that sales keep sliding into 2013, severely reduce the options for the company if it is to survive.

RIM's announcement that it would slash 5,000 jobs, or 30 per cent of its workforce, only reinforced the impression of a company that could be in terminal decline.

"It's like watching a puppy die. It's terrible," said analyst Matthew Thornton of Avian Securities in Boston.

"Wow, what a disaster," said Edward Snyder, managing director of Charter Equity Research in San Francisco.

RIM is now in "a handset death spiral," he said. "From a numbers point of view, it could hardly be worse, and it's going to deteriorate from here," he said.

RIM, which virtually invented mobile email, has fallen from a leadership position to an also-ran in smartphones over a few years filled with delayed and uninspiring products, service outages and other embarrassments.

Now the new BlackBerry line will miss both the back-to-school and Christmas shopping periods, while the competition brings out new phones with more bells and whistles.

Apple is widely expected to unveil an iPhone 5 later this year, while a slew of manufacturers using Android are constantly pushing out new gadgets. Microsoft Corp is also planning to update its Windows software for mobile devices.

"There's really no guarantee that once they come out on the other side of BlackBerry 10 that it's going to be something that people will want," said Eric Jackson, a hedge fund manager at Ironfire Capital in Toronto.

The sharp deterioration may push to RIM into one of the more radical options it is considering with its investment bankers. Licensing, partnerships, a split in the company or its outright sale are all on the table.

Even so, freshman Chief Executive Officer Thorsten Heins gave no indication on a Thursday conference call that he was losing faith in the current tack of cutting costs while waiting for the BlackBerry 10 launch, which is now due more than a year after it was initially promised.

The new devices are now set to land in a slow period when consumers are tapped out after their holiday spending.

"It's akin to launching fireworks underwater," said IDC analyst Kevin Restivo.

Job Cuts

RIM expects the job cuts to cost $350 million in the current fiscal year. It has pledged to slash $1 billion from its operating costs in the year.

RIM now considers that $1 billion target as a minimum it will pursue, given the additional BlackBerry 10 delay. It said it had already cut layers of management, streamlined its supply chain and outsourced repair work.

Analyst Shaw Wu of Sterne Agee in San Francisco said RIM would now have to be very careful.

"Layoffs are not free - there's a use of cash with that," Wu said. "They have to be very careful with their cash balance. It's a matter of survival now."

RIM's cash position - which has become a focus of concern for analysts as the company dips into the red - increased to $2.2 billion by the end of the quarter, and it aims to maintain that level this quarter.

The company conceded that may slip as it pays severance to reduce the workforce, but it declined to estimate the cash position going into 2013.

Shares of RIM, which have dropped about 70 per cent over the past year, were down 14 per cent at $7.86 in after-hours Nasdaq trading. At that price, the market is valuing the company at $4.12 billion, a far cry from its once-lofty market capitalization of about $84 billion.

Operating Loss

RIM had warned it would post an operating loss but did not provide specifics.

Excluding special items, the loss came in at $192 million, or 37 cents a share, for the first quarter ended on June 2. Revenue declined 43 per cent to $2.81 billion.

Analysts on average expected a loss of 7 cents a share on revenue of $3.07 billion, according to an informal Reuters poll.

For the year-earlier quarter, RIM reported a profit of $695 million, or $1.33 a share, on sales of $4.91 billion.

RIM said it expected to post another operating loss in the current quarter, as it ships fewer smartphones.

The company said it had shipped 7.8 million BlackBerry smartphones in the last quarter, only about half of the more than 14 million of two quarters ago. Until now, it had shipped more than 10 million devices every quarter since late in 2009.

RIM sent out 260,000 of its poor-selling PlayBook tablet computers, which it has discounted sharply after initially pricing them at levels comparable with Apple's iPad.

Apple sold more than 11 million iPads last quarter. RIM said last month that it would no longer produce the cheapest model of the PlayBook, which uses the same QNX-based operating system that the company is struggling to integrate into its future phones.