Research In Motion shares tumbled more than 10 percent on Thursday after the company reported the first ever decline in its subscriber numbers and outlined plans to transform the way it charges for its BlackBerry services.
RIM, which hopes to revive its fortunes and reinvent itself via the launch of a brand new line of BlackBerry 10 devices next month, caught investors off-guard on its quarterly conference call, when it said it plans to alter its service revenue model - a move that will pressure the high-margin business that accounts for about a third of RIM's sales.
"RIM provided few details regarding the economics of these changes, thus adding a large cloud of uncertainty to the primary driver of its profitability, which we view as especially worrisome given risks already surrounding the firm's massive BlackBerry 10 transition," said Morningstar analyst Brian Colello.
Those subscribers who need enhanced services like advanced security will pay for these services, while those who do not use such services will generate much lower to no service revenue, RIM Chief Executive Thorsten Heins told analysts and investors on a conference call on Thursday.
"I want to be very clear on this. Service revenues are not going away, but our business model and service offerings are going to evolve ... The mix in level of service fees revenue will change going forward and will be under pressure over the next year," cautioned Heins.
The news startled investors, who had earlier in the evening pushed RIM's stock more than 7 percent higher in post-market trading, after the company reported a narrower-than-expected quarterly loss and said it boosted its cash cushion ahead of next month's crucial launch of the BlackBerry 10 smartphone.
RIM's shares have for weeks been on a tear as optimism around BB10 has grown. Following RIM's surprise announcement on service revenues, however, the stock ended 9 percent lower at $12.85 in trading after the closing bell.
Analysts also expressed concern about the decline in RIM's subscriber base.
"The early reaction was probably just 'Hey, numbers looked OK, better loss, the cash flow was good' but if you know the company, you're looking at the subscriber base falling off," said Mark McKechnie at Evercore Partners in San Francisco.
One reason the shares rose earlier was RIM managed to build up its cash cushion to $2.9 billion from $2.3 billion in the previous quarter.
Analysts have been keeping a sharp eye on the size of RIM's cash pile, as RIM will need the funds to manufacture and effectively promote BlackBerry 10 in a crowded market.
RIM is counting on the new line to claw back market share lost in recent years to the likes of Apple Inc's iPhone and a slew of devices powered by Google Inc's Android operating system.
"They've done a great job at generating cash," said Raymond James analyst Tavis McCourt in Nashville. "They're certainly in a much better position than they were three or four quarters ago."
The Waterloo, Ontario-based company said it is now testing its BB10 devices with more than 150 carriers - up from about 50 carriers as of the end of October. RIM expects more carriers to come on board ahead of the formal launch of BB10 on January 30.
Positive feedback from developers and carriers around RIM's new BlackBerry 10 devices has buoyed the stock in the last three months. Despite the plunge in RIM's share price on Thursday, the stock has more than doubled in value the last three months.
On an operating basis, RIM fared a little better than Wall Street had expected. It reported a loss of $114 million or 22 cents a share, excluding one-time items. Analysts, on average, had forecast a loss of 35 cents a share, according to Thomson Reuters I/B/E/S.
RIM also reported a surprise net profit of $9 million, or 2 cents a share, for its fiscal third quarter ended December 1, on the back of a one-time income tax related gain. That compared with a year-ago profit of $265 million, or 51 cents.
RIM said it shipped 6.9 million smartphones in the quarter, even as its subscriber base fell to about 79 million in the quarter from about 80 million in the period ended September 1.
In recent years, RIM's user base has grown, even as the BlackBerry lost ground in North America and Europe, boosted by gains in emerging markets. While eye opening, the shrinkage was not as bad as some observers expected during the last quarter before the BB10 launch.
"We're encouraged that the subscriber base only declined slightly during a very public transition, and BlackBerry sales were about what we expected," said Morningstar's Colello, who is based in Chicago.
(Reporting by Euan Rocha; Additional reporting by Alastair Sharp, Cameron French, Allison Martell and John Tilak in Toronto; Editing by Janet Guttsman, Frank McGurty, Jan Paschal and Chris Gallagher)