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RIMM: Research in Demotion

By MATTHEW INDYKE and BRIAN ZEN

Research In Motion (RIMM) once revolutionized the mobile industry with the BlackBerry phone. It was the first mobile phone to utilize email on the go. But it didn’t take long for other technology companies to catch on and launch a similar product that would refine and improve upon the BlackBerry’s features while making mobile communication devices more user-friendly. RIM, through the years, failed to keep up with the changing technology. The once-successful mobile communications company is now sinking like a stone. We, as value hunters, are left to ask: Should we stay away from RIM or is there a future for them?

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What factors threaten RIM’s future?

· Obsolete products with lots of malfunction headaches associated with upgrades

· Lack of focus on innovation and diversification of products/product lines

· Competitors advancing far ahead in development of mobile products

· Management has not plotted the company’s future

RIM’s failure to innovate and diversify

RIM’s biggest undoing was its inability to adapt to change. The company was unwilling to change and missed opportunities to attract new customers who were demanding productivity and entertainment apps for handheld devices. They failed to supply a platform that allowed for the creation of apps. Competitors, as a result, were able to take market share from RIM and make the Blackberry a second-tier product.

RIM has been trying hard to cater extensively to the retail consumer segment but has failed to do so as its software remains uncompetitive with respect to application friendly features. And there are 22 different BlackBerry models listed for the U.S. alone. That’s too many variations for wireless providers and developers to keep straight. And it’s confusing for individuals trying to choose a smart phone. After all, it’s about quality, not quantity. RIM’s products have lots of malfunction problems.

Financial statistics

RIM’s stock is currently trading at $13.34, having suffered a 75% drop-off in the last year. Here are some key statistics:

P/E 6.01

Price/Book 0.69

ROE 12%

ROA 9%

Current Ratio 2.08

Quick Ratio 1.77

Change in Inventory (’11-’12) +409

Change in EBIT (’11-’12) - $3,133 Million

Notes on the financials:

· Revenue and net income plummeted in the fourth quarter of 2012, triggering its grim future financial outlook and causing the stock price to reach its trough.

· Inventory increased 60% from the prior year and that included a $725 million write-down to inventory.

· Market capitalization has fallen from $27.54 billion to $6.53 billion during the last 12 months.

· RIM still carries $1.79 billion in cash.

From motion to demotion

Former CEO Jim Balsillie, at one time, was instrumental in putting Canada back on the map in the global tech industry. He helped create what was one of the most beloved consumer products in the BlackBerry. Balsillie, outside the office, was also an avid hockey fan. That may have contributed to his downfall, as Balsillie’s quest to own an NHL team is thought to have been part of RIM’s downfall. It likely proved to be a distraction during the crucial moments when RIM needed to compete with companies like Apple (AAPL) and Google (GOOG). Balsillie’s plan, most recently, was to double RIM’s service revenue by allowing carriers to use its messaging services on all smart-phones. But the board expressed concerns about cost and fears that the company’s phones could lose market share if the BlackBerry Messenger chat system was available on other devices. The downward trajectory led to Balsillie stepping down as CEO. Next in line to succeed Balsillie was COO Thorsten Heins.

Current CEO Thorsten Heins recently stated the company would no longer be issuing forward guidance. This information is a very troubling sign of the company's loss of direction. Here are some other reasons to be concerned about RIM:

· A RIM executive admitted that he wasn’t even sure how many different models of the BlackBerry smart phone RIM is currently producing.

· Management has not done the necessary research needed to move the company forward.

· The company has no idea what its next good idea will be.

RIM has hired law firm Milbank, Tweed, Hadley & McCloy LLP to work out a restructuring plan that could include selling assets, seeking joint ventures or licensing patents.

Is there hope for RIM?

RIM still has assets it could use to its advantage if they want to stage a turnaround. The BlackBerry phone, believe it or not, continues to sell well into the prepaid and entry-level markets. Recognizing that, RIM has planned the launch of the BlackBerry 10, a model specifically designed to compete with the iPhone and Android. A redesigned BlackBerry with more updated functionality could improve the company’s image significantly but what we don’t know is whether the product will become popular with consumers and whether malfunctions would persist. We are still waiting for that game-changing product, software or hardware, which can turn the tide in favor of RIM, and the BlackBerry 10 could be it.

The BlackBerry business network is perhaps the company’s biggest remaining asset because it offers security and management tools CIOs crave, according to Clint Boulton, staff reporter of the Wall Street Journal. “Most CIOs we’ve spoken with love the security and manageability of RIM’s secure network and enterprise software.”

An extensive focus on mobile security and marketing to CIOs could be a step in the right direction for RIM. The mobile company has also expanded the capabilities of the BlackBerry Enterprise Server (BES) to incorporate iOS and Android devices as well. Its massive customer base of businesses already relies on BES and it can leverage its position to become a de facto leader in the emerging mobile device management market.

Why RIM may never catch its competitors

RIM’s biggest competitors include Microsoft (MSFT), Apple and Google. All have taken their internal operations and products to the next level while RIM has stood pat the whole time. The following are reasons why RIM is unlikely to match its competitors:

· Consumers prefer iPhones or Android devices with large and handsome touch screens.

· RIM’s operating systems are inferior to the platforms used by Microsoft, Apple, and the Android devices. Even if the company made the switch to an Android or Windows platform, RIM might have difficulty differentiating itself from the competition.

· Blackberry's email and IM capabilities offer no competitive edge.

· RIMM’s R&D and marketing budgets are much weaker than competitors.

· Every sale lost to its competitors is a customer who will most likely never buy a BlackBerry device.

Many experts don't see a lot to be optimistic about going forward. Analysts don't believe the company can overcome its uncompetitive position with a flagship product that is becoming more obsolete each day.

Richard Saintvilus on TheStreet.com has this to say about RIM: “I remain unimpressed by any perceived value that may be hidden within the stock. I really don't see a scenario where the stock will not drop into the single digits at some point this year unless it gets acquired by another firm.” Saintvilus suggests that RIM has become more of a takeover target and less of a rebound candidate.

What do you think? How do you feel about the Blackberry in your hands? Please let us know. Email: Superinvestor.net (at) gmail.com

(Disclosure: Authors have no position in RIMM.)

About the author:

Zenway Investing
SUPERINVESTOR.net is an investment research co-op for next-generation super investors, analysts, and advisors.

Visit Zenway Investing's Website


Rating: 3.7/5 (15 votes)

Comments

ajohnson
Ajohnson - 1 year ago
There's a heading "The possibility of bankruptcy" with no content following regarding bankruptcy. Is part of the article missing? I'm interested in that piece as there is no way their balance sheet would indicate any chance of bankruptcy.
SUPERINVESTOR.net
SUPERINVESTOR.net - 1 year ago
Sorry, that was a typo. There are people on the web talking about bankruptcy, but with no long-term debt and plenty of cash flow, that speculation seems off the mark.
kfh227
Kfh227 premium member - 1 year ago


FCF is near $2B.

In many markets outside the US, RIMM products are doing quite well.

RIMM is loosing market share. This means they are sellign less over time relative to Android and iOS devices. What this does not mean is that they are selling fewer phoens. They are actualyl selling more phones!

Here's the problem in the US. Everyone is talkign about the RIMM death march. now, what analyst is going to go to his boss and say everyone else is wrong? If an analyst tells his boss that RIMM is dead, there is no risk since the firm will not invest in RIMM. He keeps his job even if RIMM's market cap breaks $100B. But if he screams buy, and RIMM dies, he looses his job. Group think is the value investors friend. Everyone I talk to says that RIMM is dieing. It's hard to convince people that rely on US authored articles.

I should write a glowing article on RIMM. Alot rests on the BB10. But seeing how the BB10 phones will run many android apps (A 10 minute process for a developer to go through), it is hard to say that RIMM is dead. Apps that need GPS for example are not portable, but many apps are.

I will add, that until RIMM releases the BB10 it will not do well in the US. They are not going to advertise their current phones now. They will go through a media blitz in the US when the BB10 is released.

Knowns about BB10:

It will not have a keyboard. It will be 100% touchscreen

It will have a very attractive GUI. The old stale grey keyboard of droid? Nope. It will be nice.

It will have a retina display (this is knwon because some realized that the recent Porsche demo car they are towing around has a BB10 prototype for the dashes clock.

Quite frankly, I have a droid. There are only a few apps I use. And if those were avaialble on the BB10 and I were ready to upgrade, I would get it in a heartbeat.
kfh227
Kfh227 premium member - 1 year ago
I should add. The BB10 screen is not small. It is as big as any competitors.
paulwitt
Paulwitt premium member - 1 year ago
You guys better hope RIMM doesn't turn into another Apple........

You know the story, the one about a struggling smallcap that winds up bigger than ExxonMobil.....LOL

Disclosure: No position in RIMM

BrianZen
BrianZen premium member - 1 year ago
Some say the new RIMM models have mulfunction problems. Users starts to hate the brand. With their limited R&D, how can they come up with a functioning BB10? We don't know if BB10 can stop the long slide? Hope? How many dying tech turn into Apple? One out of 3000? What RIMM doesn't have is a Steve Jobs. When you see a Steve Jobs, you have years to recognize, even if he is not there any more.
paulwitt
Paulwitt premium member - 1 year ago
Mr. Zen, I don't think I liked the article title which came off as a big negative.

I did however, once I got past the headline, enjoy reading your article.

Thanks,

paulwitt


Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
Regarding the bankruptcy, we usually calculate Piotroski F-Score and Altman Z-Score to determine if the company is at risk of bankruptcy in the near future, which is 4 (moderate probability of bankruptcy) and 3.95 (meanssafe; bankruptcy unlikely) for RIM respectively. Guru Focus also reports the same results.

kfh227
Kfh227 premium member - 1 year ago


Brian,

Your article is well done. Better than most RIMM articles.

The BB10 might have issues. We just don't know yet. As you know (I assume), the Playbook is essentially the BB10 OS. Just an early version of it.

And it does have its issues. So does my Droid. I have had to pull the battery 3 times in the past year. Let the phone sit for 5 minutes. Then put the battey back in. All this just to reboot it. Co-workers have had similar issues. So don't treat crashes as a RIMM only issue.

For a company that is acutally growing and loved in many countries other than the US, it is hard to fathom your assumptions. For a "hated OS that crashes", word of mouth doesn't seem to be spreading that fact much. I personally don't care if RIMM takes off in the US. It would be nice but I understand that there is a world market out there. China and India are two growing markets and RIMM has a good foothold there.
BrianZen
BrianZen premium member - 1 year ago
Thanks, guys, for the insightful inputs. I am actually debating with myself about RIMM. RIMM sales forces are facing tremendous headwind from Apple, with a lot more money. It could be a shrinking dollar selling for 60 cents?

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