That Little Run-Up in RIMM Stock: Could be an Ugly Head Fake
Encouraged by stronger-than-expected quarterly sales, investors have bid up the share price of cellphone maker Research in Motion (RIMM) more than 10% in recent days. Given continued market-share erosion and no-show Blackberry 10 (BB-10) devices for the key 2012 holiday season, the nagging question remains: Could RIMM continue dangerously on its downward spiral?
An insulated corporate culture combined with failure to innovate – whatever the cause – the market value of RIMM has dropped almost 95%, from a May 2008 peak of $78.3 billion to $4.1 billion. During this period, too, the Canadian-based manufacturer’s share of the global smartphone handset market fell more than half to about 10%, according to IT consultant Gartner.
Acknowledging that delays in new product introductions and intensifying competition were impairing its operating performance, the company recorded a goodwill impairment charge of $335 million in the first quarter of fiscal 2013. RIMM has lost an additional $1.3 billion in market value since it took the write-down.
RIMM posted revenue of $2.9 billion in second-quarter ending September 1, up 2% sequentially. In addition, despite market-share loss, overall Blackberry installed-base grew to a new high of 80 million subscribers. Chief executive Thorsten Heins attributed the performance gains to growing consumer acceptance of entry-level BB-7 (Curve 9220, 9320) smartphones in emerging markets, such as Indonesia, South Africa, and Venezuela.
As of September, markets outside North America and the United Kingdom accounted for 58% of total sales, according to company officials.
The blip in top-line sales, however, obfuscates fundamental challenges facing the company. In a new world order dominated by Apple (APPL) iPhone and Google (GOOG) Android ecosystems, RIMM has been growing its brand by pushing out lower-margin handsets in price-conscious markets. CEO Heins noted on the quarterly conference call with analysts that aggressive discounting is necessary to maintain (or grow) share. However, to compensate for “moving up” to its multimedia smartphones, these customers – in places from Nigeria to India, who cannot afford more than voice and text options – have been discarding higher tier, unlimited calling plans for lower tier or prepay plans.
The company reported that average selling prices (ASP) rose slightly in the quarter. Channel checks, however, suggest mature markets like the U.S. are subsidizing growth in developing ones. For example, handset prices are falling in alleged growth segments. Prices for the Curve 8520 and Curve 9220, two of RIMM’s top-selling brands in India, fell by 20% and 15%, respectively, to ASP of $150 and $185 in the quarter.
As the New York Times reported late last month: "Based on the company’s financial statements, several analysts said they thought RIM was selling BlackBerrys for less than it cost to make the devices. In their analyses, RIM’s operating profit now comes entirely from fees it charges wireless carriers for routing BlackBerry users’ data through its unique network and other services."
No surprise, therefore, to read that in first-half 2013, RIMM’s gross margin fell year-over year from 41.5% to 27%. Net income fell to a loss of $753 million, from a profit of $1.0 billion ($1.95 per share.) Operating metrics, like gross margin and average revenue per user will likely weaken further in the next few quarters, admitted CEO Heins.profit margin doesn't look so good, either.
The company has a cash hoard of $2 billion. Existing capital, plus expected cost-savings of $650 million (by globally outsourcing warranty repairs, headcount reductions and plant consolidations), combined with the anticipated cash flow generated both from sales of cheap handsets and reduced days sales outstanding (which measures how quickly a business collects on outstanding invoices) should keep RIMM’s boat afloat until the launch of the new BB-10 operating system come first quarter of calendar year 2013.
Liquidating receivables will only take you so far. If BB-10 is slow coming out of the gate, the company also has a reported patent portfolio worth between $1.5 billion to $2.5 billion on its balance sheet. Conventional Wall Street wisdom, however, has it that patents “are worth only what buyers are willing to pay for them.” Aside from Microsoft, which is still struggling to break through in mobile markets, there is some doubt as to what and how much of a premium RIMM’s intellectual properties would command these days. Yes – Google paid a significant premium -- $12.5 billion in total – for Motorola Mobility last year. But it needed a hardware manufacturer for its Android operating system. That was then – and this is now.
Let the tech geeks opine on the merits of the new BB-10 operating system. Suffice to say, assuming no additional product delays, with no long-term debt (and associated interest payments) and a current ratio of 2.2 times, RIMM can easily cover short-term liability obligations.
Chief financial officer Brian Bidulka told analysts on the earnings call, too, that the company recently entered into a new one-year secured credit facility totaling $500 million.
Nonetheless, while RIMM fiddles, Rome is burning. Company detractors argue that current delays could prove costly, as many consumers in key (high-margin) markets, like the U.S. and Europe, have already embraced high-end smartphones being offered by the likes of Samsung (Galaxy S III), and Apple (iPhone series 5, which last month already sold more than 5 million units in its first two days – compared with 7.4 million BB-7 units shipped over three months!).
RIMM will also launch after the first round of high-end smartphones operating on Microsoft’s (MSFT) Window’s mobile-8 platform: Taiwan-based HTC announced a November 9 release date for its $650 HTC 8X; and, struggling Finish phone maker Nokia (NOK) is expected to rollout its flagship smartphone, the Lumia 920, in mid-November, too (rumored to cost – unsubsidized –almost $800!).
In addition to the rash of new smartphone competitors, Citigroup (C) analyst Jim Suva presciently noted in a research report last March that RIMM risked “losing carrier support in shelf space and promotion” during the critical 2012 back-to-school and Christmas selling seasons.
Chief executive Heins rambled on the recent earning’s call how feature rich “bells & whistles” of the BB-10 operating system – again, I’ll leave the product reviews to the tech geeks – will win over current and new customers: “We believe that the strength of the BB-10 – we actually can win back market share from other competitors…. Don’t forget that the market today is at 30% of smartphone penetration, on average. So we are pretty confident that if you think about the people moving from feature phones to smartphones – then we can catch a significant share of these because we are really providing with BB-10 a whole new user experience.”
Did he really say “whole new user experience”? Yes.
Granted RIMM has an installed user-base of 80 million. However, how “excited” are current BB-7 owners going to be come 2013, knowing that if they do trade-up, their current Blackberry apps will not run on the BB-10 operating system (especially price-sensitive customers in emerging markets)?
Also, all BB-7 handsets will not receive updates necessary to run the new BB-10 operating system, as RIMM has rebuilt the mobile platform from the foundation up. The company runs the risk that leveraging the current Blackberry platform in a “forced conversion” playbook could backfire – angry customers might choose, instead, to purchase a competitor’s smartphone.
In April 2011, RIMM introduced a purported new user experience when it launched its PlayBook tablet in North America – and re-launched (with a new operating system) in August 2012. Unfortunately, the company’s foray into the tablet market has been, to date, a dismal failure. The company shipped 130,000 units in the most recent quarter, down from 200,000 last year. By comparison, Apple sold 17 million iPad tablets – in just the last three months!
The company sells for just 0.12 times trailing-twelve month sales, a steep discount to Apple and Google, at 3.97 times and 4.99 times, respectively. However, if history be our guide, what is cheap can get cheaper – just ask erstwhile stockholders of Kodak and Palm.
Filed under: Company Analysis