Research in Motion booked a huge charge to write down inventories of its unloved PlayBook tablet on Friday, capping a dismal year with a steep profit warning that sent its shares tumbling almost 10 percent.
Waterloo, Ontario-based RIM, the company whose now ubiquitous BlackBerry created the concept of on-the-go email, said it no longer expects to meet its full-year earnings forecast due to weak sales, the PlayBook writedown and a charge related to a damaging service outage in October.
This is a classic falling knife stock, said Eric Jackson of Ironfire Capital, who has previously bet on RIM's share price dropping but does not currently have a position in the stock.
Although people keep wanting to buy into the belief that RIM has found a bottom, I see at least six more months of pain as they keep transitioning their business.
RIM, which Canada's industry minister on Friday described as a Canadian jewel, has fallen out of favor with investors as it struggled to keep pace in a fast-changing smartphone market. In recent years, Apple's iPhone and Google Android devices have gobbled up RIM's once mighty market share.
RIM badly needs the PlayBook, launched to scathing reviews in April, to be a success as it plans next year to launch new smartphones based on the same QNX-based operating system used in the tablet.
PlayBook is a half-baked latecomer to a market segment where Apple's iPad has established an overwhelming dominance. Yet the poor reception it has received is just one of a string of problems facing the one-time technology darling.
The company has infuriated investors with several product missteps and profit warnings and RIM faced an embarrassing global outage in October, when customers were left without email and the popular BlackBerry messaging service for several days.
And if RIM cannot convince developers to build apps for the languishing PlayBook, its new smartphones will struggle to gain traction against the iPhone and Android devices that already boast huge libraries of applications.
Bernstein Research analyst Pierre Ferragu said RIM's latest warning was not a surprise itself. But he was alarmed that management apparently fails to see the writing on the wall for its products and for its corporate structure.
What is more worrying, of course, is the profound denial the tone of the release reflects. Although it appears obvious to us that RIM's current strategy is bound to fail rapidly, the company continues to support it vehemently, he said.
We can only hope that this increasing dissonance will accelerate necessary changes at the top of the company.
An activist shareholder said in October that some 8 percent of RIM investors back his call for RIM's board to replace its co-chief executives and consider a break-up or sale.
PLAYBOOK PRICE CUTS
Seeking to boost anemic PlayBook sales, RIM recently slashed prices on the device and plans to expand the promotion. It sold only about 150,000 tablets in the quarter to November 26, down from 200,000 in the previous quarter - a tiny fraction of the 11 million iPads that Apple sold in its latest quarter.
RIM is continuing to suffer from its Playbook endeavors, said CCS Insight analyst Geoff Blaber. It hurt RIM initially by diverting focus, but muted demand is now becoming clearly visible in the financials.
RIM's Nasdaq-listed shares fell 9.7 percent to $16.77 by the close. In Canada the shares fell 9.2 percent to C$17.08.
The shares have shed some three-quarters of their value since a February peak, a meltdown that has actually prompted some analysts to raise their ratings on RIM. Goldman Sachs said last month that the current valuation already fairly captures the fundamental concerns.
Speculation has also been rife that RIM could be the target of a strategic buyout.
Canada's Industry Minister Christian Paradis declined to comment on that speculation in an interview with Reuters in New York, but he said Canada had to support RIM. Any takeover of a Canadian company of RIM's size can be blocked by the government if it decides the deal would not bring a net benefit to the country.
RIM is a Canadian jewel, Paradis said in the interview, which was conducted in his native French. First of all what I hope for is that RIM be able to be on a path of prosperity. As for speculation (about a takeover), we'd have to see what happened and consider if the law would apply.
FULL YEAR EARNINGS
In its warning, RIM said it no longer expects to meet its full-year earnings forecast of $5.25 to $6 per share because of weaker than expected smartphone shipments, a $360 million after-tax writedown on PlayBook inventories and a $50 million charge related to the October outage.
Excluding the two charges, RIM now expects adjusted earnings in the third-quarter to be at the low to mid-point of its previously forecast $1.20 to $1.40 per share range.
Revenue, excluding the outage charge, is expected to be slightly below the previously forecast range of $5.3 billion to $5.6 billion, in part because of the PlayBook discounting.
RIM, which reports third quarter results on December 15, said it shipped about 14.1 million BlackBerry phones in the quarter, in line with its earlier forecast of between 13.5 and 14.5 million.
It said it was confident the PlayBook promotion will help boost sales and reduce its inventories.
Early results from recent PlayBook promotions indicate a significant increase in demand across most channels, Co-Chief Executive Mike Lazaridis said in a statement.
But RIM also said it expects to ship fewer smartphones in the current quarter than in the recently-ended third quarter, despite having a lineup of updated devices on offer in the traditionally busy Christmas period.
We do not see any sign that RIM's downward spiral is about to bottom out, Nomura analyst Stuart Jeffrey said in a note for clients. The company has a number of new phones on the market, yet guidance for Q4 suggests that their momentum is already starting to stall.
(Additional reporting by Phil Wahba in New York and Tarmo Virki in Helsinki; Editing by Janet Guttsman and Frank McGurty)