Category Archive

RIMM – Reports better than expected results, but still a sequential slowdown with no new products until Q1 2013.

Revenues, EPS, units, cash flow, and subscribers all better than expected (or feared) this quarter.  This have caused a major after hours spike in the shares as short are forced to cover and opportunistic buyers and value buyers reach for shares.  We have three questions:

1) Was there a material change in the companies trajectory? No, sequentially unit sales still fell, US continues to decline – which puts enterprise ever more at risk.  FCF was still negative, and no new products until Q1 2013.  While we somewhat agree with the need to focus on development of a better phone, all their action is at the mid to low end.  Developing a high end phone with schedule mid and lower tier phones by next fall seems amazingly strange and likely not to work.

2) Were there any updates regarding new products or revenue opportunities?  Not really, one small one relating to licencing.  CEO mentioned positive meetings with other CEOs who said meetings are “very productive” and that RIMM needs to remain a “relevant player in the mobile computing world.”  Fair enough, EVERYONE wants a third player, but that is just lip service at this point.

3) Is there value in the sum-of-the-parts analysis? subjective based on valuation for service business and IP value, but likely higher than $4b in a takeout – assuming an actual takeout, of course.

Bottom line, we continue to see RIMM as a damaged brand and one that is pushing too hard, too late.  They are still fighting the last war – surviving by the scraps left over by Nokia.  Lower cost Android and Chinese made phones will hurt their share in Q4 and 2013.  The shares may certainly rise on short covering and momentum buying – we recommend avoiding the temptation.

RIMM – Research Not in Motion

The trials and tribulations of RIMM are well documented and there is no shortage of  opinions on what will become of the company and its technology.  Despite the recent surge in share price, many feel that RIMM is being outflanked by Apple and Google and is rapidly losing market and mind share (in the US this is true, though they hold a stronger Emerging Market presence at the low end, taking share from Nokia).  Many in the marketplace have strong convictions about what is coming for RIMM…resurgence, 3rd player, acquisition, bankruptcy.  We feel it will be number 3 but only after the fourth option has crossed the minds of investors.  RIMM is a damaged brand that doesn’t understand it is a damaged brand and will continue to lose market share at a rapid pace until it is worth next to nothing, save for its IP, cash, and perhaps to some competitors, its enterprise services capabilities.

Following the sort of issues laid out in The Innovator’s Dilema, RIMM was the innovative force in secure mobile email and keyboard devices.  The success was self reinforcing as customers raved about the service and keyboard functionality.  Enterprise IT departments praised the security, and faced little backlash for choosing RIMM as a) it was secure and b) competitive offerings were not that great.  But as mobile email shifted from business perk to necessity, and consumers became the driving force of innovation and choice in the market – the winds shifted.  The Apple iPhone debuted in 2007 and was the warning shot across the bow for RIMM.  The response from the Canadian company was to keep making “great” RIMM devices, as expected, and they were not too terrible.  But, a funny thing happened in the ensuing product iterations.  As RIMM was forced to consider more and more consumer “features” and design characteristics its hardware, and software became less reliable.  As we crossed from the start of the Curve series to the later iterations the software crashed more often, battery died faster, and the screen resolution and web surfing looked outdated.  At this point, RIMM made one of its more fateful decisions. Instead of doubling down on consumer and enterprise software with touch screens and trying to keep up – they decided the physical keyboard was THE key feature and something consumers would keep coming back for time and again.   Their early and continued success led them to believe they were right.  After all, enterprise renewal rates were near 100% – they must love the devices, right?  Having missed the start of touch screens and then being blindsided (like most) by the App economy, RIMM was now two generations behind and has been flailing in the wind ever since.  Each successive product became a race to match feature sets of current Apple and Android models and they never created a must have new feature.  Seeing dwindling unit numbers (and a majority of business consumers who can’t download apps anyway) the app developers didn’t create anything new either.

With the launch of the Storm and BB05 in late ’08 early ’09, their first all touch-screen phone – it became clear that RIMM’s brand was damaged.  It’s enterprise renewals,  international presence in the value segment and popular Blackberry Messenger  (BBM) product (which avoids SMS text fees) have kept the share price afloat, while solid financial management keeps the street happy.  But this is all beginning to fade.  Market share loses in the US are increasing and lower priced Android devices are popping up in emerging markets.  In addition, the budding trend of “bring your own device” BYOD, where employees use their iPhone or Android phones for personal and work is seeing massive number of Fortune 500 companies testing and deploying solutions that don’t require RIMM.  Lastly, the recently announced BlackberryPlaybook which is the response to the iPad is a complete miss and highlights the current state of the company.  The product is a smaller form factor, is being rushed to market with almost no app support and buggy software AND will not have email native on the device, you will need to tether your existing Blackberry.  The core competitive advantage of RIMM is its secure email and messaging system – how can they not have that as a core feature?

In review:  the brand is damaged, innovation is lacking, relationships with app economy are weak, core enterprise market actively testing and deploying substitutes.  No matter the valuation, these are the components of a value trap stock that will drift lower over time.  The remaining value will be its IP, who’s value is difficult to discern, and the enterprise services business – which is basically its secure on-premise servers and the software that manages them… this is a ~$3-4b/year revenue business.  The valuation range for a services business that serves a declining hardware base is difficult to nail down… a ranger of 0.3 to 2.2x sales could be used.  Clearly I would lean to the lower end for a weakening brand.  At ~$2b in cash, $4b in enterprise services value and IP – its not difficult to view a much lower market value as sales trends begin to accelerate to the downside.

As trends decline, the concept of a buyout is always enticing, but recall that all potential suitors of the hardware business are a) likely working on their own solutions; b) will be wary of buying a damaged brand and c) can wait for lower valuations.

Is a turnaround possible?  Yes, of course, but one of the great and unique aspects of technology is that it is a constant struggle to stay relevant, innovative and profitable all at once.  The technology graveyard is littered with would-be turnaround candidates.  The problem with RIMM is that once the concern reaches the brand level, the hurdle for turnaround scales parabolic.  Missing a product cycle is one thing, a damaged brand is another.  Given their difficulties in launching new products, their existing enterprise contracts and international presence will float the company for a while, but all incremental data shows that marginal movement is ALL Android and iOS, we see this as a terminal situation.  Avoid RIMM indefinitely.