Success Lies in Paradox
1-Company history and business
“Research In Motion Limited (RIM), incorporated on March 7, 1984, is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services, RIM provides platforms and solutions for seamless access to information, including e-mail, voice, instant messaging, short message service (SMS), Internet and intranet-based applications and browsing. RIM technology also enables an array of third party developers and manufacturers to enhance their products and services through software development kits, wireless connectivity to data and third-party support programs. RIM’s portfolio of products, services and embedded technologies are used by thousands of organizations and millions of consumers around the world and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, the BlackBerry PlayBook tablet, software development tools and other software and hardware” sources: Reuters.
1.a-The success story of Research and Motion from 1984 to 2008:
RIM is a great Canadian success story. Mike Lazaridis a giant of Canadian industry, has introduced many technological innovations since he started his business in 1984. The most well-known is certainly the Blackberry, a revolutionary product that enabled people to send email via a small portable device using a small keyboard. Many other features were added to the device over the years, enabling it to be used as a cell phone, web-browser, and much more.
If Mike was the genius in technology, the brains on the business side was Jim Balsillie, a MBA graduate from Harvard with a PHD from Wilfrid Laurier University. Jim joined Research in motion in 1992, and he previously worked at Sutherland and Schultz, a small technology firm where he learned everything about running a company.
The combination of the knowledge and know-how of these two exceptional men has made Research in Motion a world leading brand.
1984- RIM founded by University of Waterloo engineering student Mike Lazaridis
1988- RIM becomes the first wireless data technology developer in North America
1992- Jim Balsillie joins RIM as CO-CEO with Mike Lazaridis
1992- RIM introduces the first Mobitex mobile point-of-sale solution
1996- RIM introduce the Inter@tive Pager and RIM OEM Modem
1997: RIM goes public and is listed on the Toronto Stock Exchange
1997- RIM introduces the RIM wireless PC Card
1999- RIM introduces the BlackBerry wireless email solution
2002- RIM introduces the BlackBerry 5810 with built-in phone
2003- RIM introduces new device with color displays, while maintaining superior battery life
2004- RIM introduces the Award winning Blackberry 7100 series with SureType keyboard technology
2006- RIM introduce the incredibly sleek and stylish BlackBerry Pearl Smartphone World Edition
2008- RIM introduces a variety of next generation smartphones, including the BlackBerry Bold, Black Berry Storm and BlackBerry Curve 8900.
October 2008- RIM named one of Canada's Top 100 Employers
August 18, 2009- Fortune Magazine named RIM as the fastest growing company in the world with a growth of 84% in profits over three years despite a worldwide recession
1.b- 2007-2011: Big challenges, new competition, decline in market share: Management does not seem to recognize the threat and opportunity:
In 2007, Research and motion was at the peak of its popularity. Politicians, celebrities, businessmen and even teenagers around the world were excited by this reliable, efficient and secure product. But unfortunately, the capitalist system being what it is, when success is recognized, it usually doesn’t take too long before a competitor decides to try to emulate and profit off of that success.
In this case, it was Steve Jobs who saw the potential in this market. Jobs pushed the limits of innovation when he introduced the iPhone, a new device able to give to its user even more functions than the Blackberry using what he called “Apps”. The real decline in market share for RIM began in the U.S. when new competitor Google released the new Android smartphone system, grabbing market share at a faster pace than Apple. Although their market shares were declining, the management of RIM kept the focus on the hardware that made them successful. In finance, projecting last month’s growth into the future can lead to really bad decisions, and what made you successful in the past can hinder the ways you think about the future. It’s important to always try to stay one step ahead of the competition, and to not let past successes influence future decisions.
January 2007 - Steve Jobs unveils the iPhone
June 2007 - iPhone1 is released
February 2007- Jim Balsillie on the threat from the iPhone: "[Apple and the iPhone is] kind of one more entrant into an already very busy space with lots of choice for consumers … But in terms of a sort of a sea-change for BlackBerry, I would think that's overstating it ."
April 2007 - Jim Balsillie on the iPhone: "Again, I have said this before and I will say it again; Apple has done the industry an enormous favor because they basically told the world to expect a media player [the iPod] as a software feature on a good smartphone. As the leading smartphone Appliance Company and Platform Company, we could not buy that kind of validation for $100m."
May 2008 - Mike Lazaridis "The most exciting mobile trend is full Qwerty keyboards. I'm sorry, it really is. I'm not making this up."
September 2008 – Android 1.0 is released
January 2009 - Market share of Blackberry begins to decline in the U.S.
April 2010- Mike Lazaridis on the tablet market: "So the question you have to ask yourself is when it comes to tablet, what market or what opportunities, still, it's solving, what problem is it solving, and is it just a replacement laptop? I think that's a difficult one to judge."
September 2010- Mike Lazaridis announces RIM's new tablet, a 7in PlayBook tablet, which doesn't have any apps compared to the thousands of apps available for the 10in iPad.
November 2010- Jim Balsillie On tablet apps versus web apps – where Steve Jobs had publicly reversed his position in 2007 away from web apps to on-device apps: "There may be 300,000 apps for the iPhone and iPad, but the only app you really need is the browser. You don't need an app for the web ... You don't need to go through some kind of SDK ... You can use your web tools ... And you can publish your apps to the BlackBerry without writing any native code."
April 2011: During an interview with the BBC, RIM co-CEO Mike Lazaridis ended the session prematurely when asked a simple question on the recent security issues regarding the Middle East. BBC reporter Rory Cellan-Jones asked Lazaridis about the situation to which he responded: "You implied that we have a security problem; we don't have a security problem ... we've just been singled out, because we're so successful around the world. It's an iconic product, used by business, it's used by leaders, it's used by celebrities, it's used by consumers, it's used by teenagers, we were just singled out."
June 2011, RIM announced its prediction that Q1 2011 revenue will drop for the first time in nine years.
1.c- 2011 Management recognize their mistake, focus on growth in a growing market and more revenue from services and software.
The evidence of the loss of market share, combined with a lot of pessimism about Blackberry and RIM in North America, have probably made management realize that some changes needed to be made, and that they have made a huge mistake not recognizing the potential of their competitors. RIM has decided to focus their energy in the fastest-growing markets: Latin America, Asia, Europe, the Middle East and Africa. They have also tried to change their platform to better respond to consumer trends, and they released a better, more secure Operating System for the Blackberry7. This strategy has been enough to maintain RIM’s diminished position for the time being.
October 12, 2011- The Blackberry Internet Service goes down in North America. "Since launching BlackBerry in 1999, it's been my goal to provide reliable real-time communications around the world. We did not deliver on that goal this week, not even close," says RIM CEO Mike Lazaridis in an online video posted Oct. 13 after service outages occurred in parts of Europe, the Mideast, Africa and North and South America. "You expect better from us, and I expect better from us."
December 2011- Lazaridis and Balsillie both ask to have their salaries reduced to $1 per year, a gesture many observers regard as an acknowledgement of the financial troubles facing RIM.
1.d- 2012 RIM Racing again the clock, time for reorganization, Focus on innovation:
January 2012 began with many drastic changes for RIM. The first, and most notable, was that Balsillie and Lazaridis decided it was best for the business to leave as Co-CEOs, and left their place to new CEO Thorsten Heins a young, talented executive that had been working for RIM since 2007.
The current focus for RIM is to work on the development of their next device, the Blackberry10 BB10, a new smartphone that is supposed to be “revolutionary,” according to Heins. The company also announced the CORE program (Cost Optimization and Resource Efficiency). “The program is focused on delivering operational savings through various initiatives, with financial objectives for the program targeted to drive at least $1 billion in savings by the end of fiscal 2013.” The new direction also delays the release of the BB10 to the first quarter of 2013. With the market share of blackberry declining and revenue decreasing worldwide, investors have reacted to these announcements with a lot of pessimism.
January 2012- RIM names Thorsten Heins CEO. Lazaridis and Basillie resign. Mike Lazaridis: "There comes a time in the growth of every successful company when it’s time for the leaders to pass the baton. Jim and I went to the board and we told them we think the time is now.”
March 3, 2012- RIM ships 11.1 million BlackBerry smartphones, a 21 percent decline from the previous quarter. It is the first decline in the quarter covering Christmas since 2006
June 2012- RIM delays the make-or-break launch of its new BlackBerry phones until 2013 in a devastating setback to the company
1.e- 2012-2013 Outlook what to expect
Here a good resume of what we should expect from RIM in the coming year:
Source RIM Q1 Fiscal Result:
“The Company expects the next several quarters to continue to be very challenging for its business based on the increasing competitive environment, lower handset volumes, potential financial and other impacts from the delay of BlackBerry 10, pressure to reduce RIM’s monthly infrastructure access fees, and the Company’s plans to continue to aggressively drive sales of BlackBerry 7 handheld devices. The Company expects to report an operating loss in the second quarter of fiscal 2013, as RIM continues to invest in marketing programs and continues to work through the transition to BlackBerry 10, as well as the Company’s fixed costs being allocated over a lower volume of shipments. This outlook excludes the impact of charges related to the CORE Program.”
Judging from news reports and popular opinion, many assume that RIM is close to bankruptcy. Although their financial strength has declined considerably from its peak, it’s still not quite as bad as it seems for RIM. To give you an idea, the Z-Altman score of the company is at 3.5, above 2.9 (the limit of the safe zone) and far from 1.1 (the distress zone) that predicts 72% of bankruptcies. The quick ratio is at 1.75, and they have $1.54 billion of cash and no debt. The management is trying to maintain good liquidity in order to avoid further problems. A company that currently has no debt can hardly go bankrupt next year, so I believe that they still have an opportunity to make turn their company around in the wake of the coming release of the Blackberry10.
Although they are not facing imminent financial catastrophe according to their future outlook, with no visible catalysis until next year’s launch of their new smart-phone, there’s a good chance that this condition can deteriorate before the release of the BB10 platform.
Comparison Research in Motion vs Apple.
As we have seen, Balsillie and Lazaridis had a really good track record running RIM until 2008. They created a great product that used to have great success worldwide. They made mistakes, and they recognized them, and in my opinion the best managers are not those who are perfect, but those who are able to recognize their mistakes and improve upon them. They have pushed the limits in their field and tried to avoid the worst-case scenario for their company by recently making a good long-term decision when they realized their mistakes. They have been humble enough to give control of the business to Thorsten Heins in order to produce the greater good for RIM’s shareholders.
Although Lazaridis left his position as CEO, he kept a position on the firm’s Board of Directors, and he is currently one of the biggest shareholders of the company. The case of RIM is different in this regard than many other public companies, and the fact that Lazaridis is the one with the most to lose in this episode means it’s in his best interests to help RIM get back on track.
As we also know, Hamblin Watsa Investment Counsel Ltd. increased their ownership share over time in RIM. Mr. Prem Watsa himself join the Board, having one of the best, if not the best, investors and businessmen of the world on your team is a considerable competitive advantage.
Thorsten Heins, the new CEO, is very optimistic about the future of the company. He seems focused on the long-term viability of the firm, not on the next quarter result, and that’s great, because RIM needs some major re-structuring and a dramatic change in the way they think about their platform in order to stay competitive over the long-term. The Blackberry 10 could be what puts the company back on track.
RIM is currently trading for its liquidation value, in my calculation, this is really an estimate, this is no really scientific method and no deep research as well, i only discount the value of asset of the balance sheet. If you plan to use this number i would invite you to do your own research my number could be too high or too low. I also add 25% of the intangible, since we know that RIM has $3.3 billion in intangible assets, I thought that 25% of that amount, $843 million, was be very conservative valuation considering that they recently paid $770 million to acquire part of the Nortel Patent portfolio. At the current price, I see that buying share exposes you to a low risk of losses and a strong chance of a good return on your investment if the fundamentals improve with the release of the Blackberry10 platform as well as a turnaround of the business in the next 4-5 years.
1-Even if the stock is trading for the liquidation value of its assets, while not owning long-term debt, I see some risk. First, the next quarters are going to be challenging, and we can already expect that their sale could drop at a faster rate than their expenses, so there’s good chance that the liquidation value of the business will diminish, as will your margin of safety, before 2013.
2-The major risk is the release date of Blackberry10. Buying shares of RIM is like betting that BB10 is going to be a success and, most importantly, be released on time. However, even if BB10 fails, investors still have some security in their investment based on the worth of the assets of the business.
3-In the technology sector, new competitors can emerge very quickly, and there’s always the risk that the competition releases a better, more appealing product for customers than the BB10.
In technology business the need for constant innovation and the constant monitoring of opportunity and threat are the key for success over the long-term. I believe that if RIM succeeds in the release of the BB10, there is a good chance that the company will begin a new era stronger, more flexible, more efficient, and more successful, delivering a positive return for their shareholders over time.
The decline in the business profitability combined with the present level of uncertainty has made the price of the share decline significantly. The good news for us, Value investor, is the fact that at the current price, the shares are trading for the value of liquidation of its assets, and this is kind of opportunity is exceedingly rare for a company like RIM. If the release of BB10 is a success, the chance of an impressive return is significantly higher. If not, there is some possibility shareholders will ask for liquidation of the assets in order to avoid losing too much of their investment.
Betting heavily on RIM, given the risk and competition in the field, would be wrong, in my opinion. My personal technique regarding this case would be to allocate a certain amount of your portfolio to that stock, for example x% depending on your confidence level base on the fact from your own analysis, keeping a part of it in cash and to increase you ownership as the margin of safety increase either through fundamental improvements or the stock price decline. This way you will avoid a big loss in case this investment turns to be a value trap.
If we take a look at the past, Value investing have given better result than any other investing technique over time. Buying when people are really pessimistic and selling when people are really optimistic.
As Mike Lazaridis wrote in 1997: "Success Lies in Paradox".
Disclosure: If you consider buying it I would recommend making your own analysis because you need to be confident if you decide to buy it, there’s good chance that the stock price could go lower. I could have been wrong on my analysis or you could have a different way of investing than I do. In the case that the business turnaround the stock could give you a good return in the next four to five years. Even in this case you should understand it yourself in order to plan your exit and to understand the weakness of the business that could affect the underlying value and fundamental of the business.
2008 to 2012: Annual Report, Research In Motion.
2011 to 2012: Quarterly Report Research In Motion.