We previously highlighted Prem Watsa’s questionable investment in Research In Motion (RIMM, Financial) a few months ago and it appears that Mr. Market agrees with our view. Last week RIMM was hammered for 20% after it announced horrific results.
First of all, net income was only $419 million, or 80 cents per share compared to earnings of $797 million or $1.46 per share, in the same quarter the previous year. Analysts expected 90 cents per share. The 62% shortfall in profits shows how quickly a tech company can fall from grace.
More startlingly, BlackBerry shipments during the second quarter were way below expectations. RIMM shipped about 10.6 million units, dramatically below the forecast of 11-12 million units. The Playbook tablet shipments were an absolute disaster at about 200,000 units shipped. Playbook has been an embarrassing product launch for co-CEO Jim Balsillie who called the Playbook a "game changer" a year ago. At the time he said, "I can't think of anything more architecturally game-changing that we've done, other than the launch of the original Blackberry.”
However, other analysts quickly recognized that the RIMM Playbook was a flop.
Watsa tripled his position in the summer months ahead of RIMM’s disastrous results. As of July 1, 2011, RIMM was the fifth largest position at the company and 8% of the portfolio. The bludgeoning of RIMM shares resulted in at least $40 million of paper losses for Watsa and Fairfax Financial.
The investment community is rapidly concerned with RIMM’s cash flow. In other words, how is the company going to convert inventory into cash given that demand for the product is tepid at best?
The core problem is research and development spending. In short, the company must continue to fund billions of R&D to keep up with rivals like Google (GOOG) and Apple (Apple). However, there is hesitation that the R&D will pay off because the brand has been tarnished in recent months.
It is conceivable that the RIMM subscriber base has peaked at 70 million which means that service revenue will be a further drag on profitability in the coming year.
First of all, net income was only $419 million, or 80 cents per share compared to earnings of $797 million or $1.46 per share, in the same quarter the previous year. Analysts expected 90 cents per share. The 62% shortfall in profits shows how quickly a tech company can fall from grace.
More startlingly, BlackBerry shipments during the second quarter were way below expectations. RIMM shipped about 10.6 million units, dramatically below the forecast of 11-12 million units. The Playbook tablet shipments were an absolute disaster at about 200,000 units shipped. Playbook has been an embarrassing product launch for co-CEO Jim Balsillie who called the Playbook a "game changer" a year ago. At the time he said, "I can't think of anything more architecturally game-changing that we've done, other than the launch of the original Blackberry.”
However, other analysts quickly recognized that the RIMM Playbook was a flop.
Watsa tripled his position in the summer months ahead of RIMM’s disastrous results. As of July 1, 2011, RIMM was the fifth largest position at the company and 8% of the portfolio. The bludgeoning of RIMM shares resulted in at least $40 million of paper losses for Watsa and Fairfax Financial.
The investment community is rapidly concerned with RIMM’s cash flow. In other words, how is the company going to convert inventory into cash given that demand for the product is tepid at best?
The core problem is research and development spending. In short, the company must continue to fund billions of R&D to keep up with rivals like Google (GOOG) and Apple (Apple). However, there is hesitation that the R&D will pay off because the brand has been tarnished in recent months.
It is conceivable that the RIMM subscriber base has peaked at 70 million which means that service revenue will be a further drag on profitability in the coming year.
