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Tuesday, April 23, 2013

RIM Unwraps Risky Phone Plan

TORONTO—Research In Motion Ltd. reported its second consecutive quarterly profit and decent sales for its new flagship phone Thursday, but perhaps the biggest revelation from its chief executive was a risky strategy to revive the company.

The plan: Roll out a portfolio of mixed-price phones to help shore up the company's dwindling smartphone-market share and the expected declines in service-fee revenue.

Bloomberg News At a mall in Jakarta, customers purchase the new BlackBerry Z10 on March 15, the first day it was available.

With cost cutting and layoffs mostly done, RIM CEO Thorsten Heins said he has been encouraged so far with the rollout of the BlackBerry Z10, the first phone running off RIM's new operating system.

With only a month of sales from a limited number of markets, it is still far from clear that launch is a success.

See a side-by-side comparison of the specifications of recent phones, including the BlackBerry Z10.

But Mr. Heins said he is already turning his attention to a series of new, as-yet-unseen products due out later in RIM's fiscal year—signaling he is eager to go after several different markets with low- and midprice versions of the new phones.

The shift, which Mr. Heins has alluded to in the past, appears to be an acknowledgment that no matter how big a hit the Z10 may prove, the BlackBerry isn't likely to compete in the same league any time soon with market leaders Apple Inc. and Samsung Electronics Co.

"I don't think anyone expects BlackBerry to dominate like they once did," said Al Hilwa, an analyst at industry consultancy IDC. "But the company can survive and even prosper with a microbrew of a platform, with 5% to 10% market share, if it can execute well and at the right scale."

Investors are looking for more proof. RIM's shares closed down 0.8% to $14.45 on Thursday after rising as much as 10% immediately after the earnings release in the morning.

See a timeline of Research In Motion.

RIM's strategy comes with risks. By touting future rollouts in the midst of a just-begun Z10 launch, Mr. Heins is gambling that RIM can play in many different markets at once, something it has done with only limited success in the past.

And Thursday's earnings underscored some of the big challenges still facing RIM.

BlackBerry subscribers world-wide fell by about three million to 76 million, the steepest three-month drop for RIM.

The company attributed the subscriber fall largely to declines in Europe, the Middle East and Africa, though it didn't provide details.

European Pressphoto Agency CEO Thorsten Heins unveiled the new BlackBerry Z10 smartphone for the German market in Cologne in February.

Mr. Heins gave few details about the new products he envisioned, but said he expected more rollouts in the company's current fiscal year, which began earlier this month.

"We're building a portfolio in this fiscal year, so you will see us getting into the market with various products," Mr. Heins said on a conference call with analysts Thursday.

Aside from selling phones, one of RIM's key sources of cash in recent years has been service fees generated by BlackBerry users and carriers. Mr. Heins said those fees, which represent more than one-third of RIM's revenue, fell in the "single digits" in the quarter.

Mr. Heins said he expected the service fees to decline as the company works with carriers, who are eager to reduce those payments now that RIM's command of the smartphone market—once a dominant one—has crumbled.

On Thursday, Mr. Heins hinted at some new possibilities for generating service revenue, including leveraging the company's popular BlackBerry messenger service and its security- and business-focused offerings. But he stopped short of any specifics.

"The composition of our services revenue model is evolving, and you will hear more about these services as they are introduced," Mr. Heins said. "But make no mistake about it. We plan to stay in the services business, and we're actively building and implementing strategies to support these initiatives in the future."

The push for new products and service fees comes as RIM shows some early signs of success with its latest device, the first phone to run off its new operating system.

Since the launch of the Z10 a month ago in markets like the U.K., Canada and India, RIM has been running a conservative inventory management strategy for the phone. The company says it is selling through up to three quarters of the phones it is shipped. That is boosted cash flow, but it has also led to lack of product in some markets, and forced RIM to ramp up production to meet demand.

RIM said it shipped six million smartphones during the quarter, including about one million Z10s.

That is a number that didn't blow analysts away but was respectable enough amid the staggered launch to suggest the phone—which has been repeatedly delayed—may be well received after all.

The Z10 came late to the U.S.—it launched at AT&T Inc. stores last week and only became available on Verizon Wireless' network Thursday—and marketing support from carriers has been spotty. The U.S. launch came too late to be included on Thursday's earnings.

RIM says its own U.S. ad campaign, and campaigns from the carriers in support of the phone, are just now ramping up. It said it expects marketing spending to ratchet up 50% in the current quarter.

The next phone to be rolled out is the Q10, a keyboard-equipped phone that RIM says is on track for an April launch in some markets and is winding its way through the carrier testing process in 20 countries. The phone is expected in the U.S. in May.

RIM also said Thursday that one of its founders and its former, longtime co-chief executive, Mike Lazaridis, would step down from the board. That ends Mr. Lazaridis' formal ties to RIM, which go back about 30 years to when he started the company with a loan from his parents.

Mr. Lazaridis said, however, he had no plans to sell down his sizable RIM holdings, which amounts to about 5.7% of the company's shares.

Write to Will Connors at william.connors@wsj.com

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