RIM (RIMM) Put Through the Shredder on Service Revenue Worries

December 21, 2012 12:44 PM EST
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Shares of Research In Motion Ltd (NASDAQ: RIMM) are under heavy pressure Friday despite third quarter results that topped tepid analyst expectations. Instead of looking at this quarter, investors turned their focus to declining service revenue with the coming launch of BB10 and were quick to lock in recent gains as expectations for the new operating system may have gotten ahead of itself.

With service revenues accounting for 36 percent of overall sales, it is no surprise that comments from the company that changes are coming with BB10 has investors nervous. The company declined to elaborate on the details or the financial impact of the changes, exacerbating concerns.

Analysts at Deustche Bank believe that the consumer segment will be challenged to extract the same fees as its preceding platforms and enterprise looks to be following suit. As a result, they are now modeling a 20% decline in services revenues in each of the next two years. Without the offset from service revenues, the handset itself will need to demonstrate it can be profitable on a standalone basis, they note. "This will be a challenge," they said.

Others aren't so worried.

Goldman Sachs' analysts said they've already modeled a 22% decline in service revenue into their estimates and believe their is a misunderstanding that as a result of the move to BB10, all of RIM's services revenues are at risk. "Rather, we believe its current installed base (which will still comprise the majority of the subscriber base next year) will not be affected by the different BB10 pricing structure, though it will continue to be impacted by competition," the Goldman analysts said. The firm is positive into BB10 launch given expanding carrier support and RIM's higher cash balance.

In addition to service revenue changes, investors took note that RIM experienced the first decline in its subscriber base in its history, losing roughly 1 million subscribers from last quarter. This was not a surprise, but notable nonetheless.

Given that shares of RIM were up 127 percent from the recent bottom before today, it should be no surprise that given the nervousness some investors are locking in gains.

Shares of RIM last traded at $11.27, down 20.2 percent.

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