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Pitching a Tent Under African Skies

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Walking along a dusty, degraded road one hundred miles from the capital city of Nairobi, a Kenyan tradesman takes shelter from the heat under the broad shade of a venerable Meru oak tree. He pulls out his mobile phone and disburses a micro-loan to a cousin who lives near the foothills of Mt. Kenya. After a snack of cold ugali, he orders and pays for a shipment of tea from the coastal city of Mombasa, then buys some vegetables that he will pick up from the grocer in his village when he reaches home in half an hour. He completes all of these transactions via text message, without a bank account to his name.

The service he uses is called M-Pesa, introduced by Kenyan mobile phone network company Safaricom in 2007. M-Pesa allows users to deposit funds with M-Pesa agents (think Western Union), store balances on their mobile phones, and conduct transactions using SMS technology. The service has mushroomed across Kenya and Tanzania, and is a vibrant example of the potential of the mobile phone on a continent in which lack of both infrastructure and access to traditional banking have long stunted economic growth. 

Services like M-Pesa represent a unique opportunity for Research In Motion (NASDAQ: BBRY) maker of the Blackberry. Kenya represents a mobile market RIMM should exploit, given its success in South Africa, Nigeria and other African countries. As of late, the words "success" and "RIMM" have been oxymoronic when within spitting distance of each other. In North America, Blackberry is a dying brand, thrown off its dominance of the market for high end handsets by Apple and Samsung. In Africa, however, patches of Asia and Europe, and countries as diverse as the Philippines and Brazil, Blackberry sales are smoking. 

Blackberry 10 Won't Pull RIMM Out of Its Current Morass

RIMM once dominated as a provider of secure corporate mobile communications, but today it finds itself fighting for its share of a market that has irrevocably changed. U.S. based multinational corporations, veterans of tinkering with enterprise software across huge user bases, are rapidly securing their own phone networks. This has given rise to BYOD (Bring Your Own Device); a communication structure in which employees can choose their own smartphone, and IT does the rest; bypassing RIMM's Blackberry Enterprise Server software. RIMM holds out hope that the upcoming release of its new ecosystem, Blackberry 10, will restore some of their lost footing in this arena. The Enterprise (corporate) software on this launch will provide security irrespective of phone -- it will allow iOS and Android devices to co-exist with Blackberries on a company's Blackberry network. Currently, this capability is only available to corporations as an add-on tool called Mobile Fusion.

But facilitating BYOD will inevitably diminish RIMM's profits: it's a long slide from providing both platform and 100% of the mobile devices to offering primarily the platform, and hoping that some fraction of the devices on the corporate network will remain Blackberries. 

Barring unseen innovation, RIMM does not have the resources to compete in the corporate market. Its most loyal clients are deserting. The U.S. government, once the ultimate symbol of RIMM's bona fides, is untangling itself from RIMM, agency by agency. In an article worth reading, Fool writer Anders Bylund details RIMM's latest loss in this area here

Securing Resources

Having posted trailing twelve month losses of $613 Million, RIMM understands that it needs to stabilize its operations. The company has initiated an aggressive program to cut over $1 Billion in costs per year. Unfortunately, cutting costs while maintaining the current business model is tantamount to simply moving the patient from the hospital to hospice. RIMM does not possess the ready money to market aggressively against Apple (NASDAQ: AAPL) and Samsung --which offers Google's (NASDAQ: GOOG) Andriod phones -- nor does it have the balance sheet strength to fight a multiyear battle to reassert its enterprise security dominance. This is not to say that the cost-cutting efforts are failing: RIMM generated cash flow from operations of $432 million in its most recent quarter. The problem is that RIMM's gross margins are plummeting as it settles into a new normal of reduced quarterly sales. It is pushing the lower margin, entry level Blackberry 7 through its sales channels to grow subscribers until it can release Blackberry 10 in Quarter 1 2013. The following chart illustrates an imminent conflict:

<img src="http://media.ycharts.com/charts/e2255f571f350ecb4a70f1756b2cf8cb.png" />

RIMM Free Cash Flow TTM data by YCharts

The free cash flow generated from consecutive quarters of layoffs and belt-tightening is scheduled to get sucked into a vortex of margin deficits if RIMM maintains the status quo. That's why RIMM may be looking to new markets for 2013 sales.

Prepping a New Itinerary

RIMM's global cachet is an extremely recent phenomenon. In 2010, the U.S., U.K. and Canada accounted for over 72.9% of RIMM's revenue, with the rest of the world making up the balance:

<img src="/media/images/user_13021/rimm-sales-fiscal-year-2010_large.png" />

In three short years, the numbers have flipped. U.S. and Canadian sales have shrunk to just under 40% of total revenue. Six of every ten revenue dollars now come from regions other than the ones RIMM considers its top markets: 
<img src="/media/images/user_13021/rimm-sales-fiscal-year-2012_large.png" />

While North American marketshare for the Blackberry has dwindled, the iconic phone is a hit in countries such as Nigeria, where it is a status symbol among both the elite (who buy the high end Blackberry Bolds and Curves) and the millions aspiring to the middle class (who for now purchase the Blackberry 7 models).

Worldwide, the Blackberry continues to add subscribers, boasting eighty million as of its last reported quarter. Sixty million of these subscribers use the Blackberry social network, also known as BBM (Blackberry Messaging). BBM enables Blackberry owners to communicate with each other via SMS for free -- a vital, value-added feature in nations where landlines are phenomenally expensive for the average person. 

It is estimated that mobile phone penetration in Africa will reach 775 million by the end of this year. RIMM could grow its base at very low margins for several years, while migrating subscribers to higher end phones. The margins will be no where near what RIMM enjoyed in its salad days, but in a stabilization period, meager profits are preferable to losses in the hundreds of millions per quarter.

A Small Clue Regarding The Future

Because RIMM's financial statements disclose the absolute minimum of segment and product information needed to make sense of their business, it's a futile endeavor to try to understand which phones carry a positive margin, or to parse profit and loss by geographical location. Yet one interesting tidbit from RIMM's latest annual report shows that it may be pulling up a few stakes from the American corporate market:

<table> <tbody> <tr> <td>RIMM Change In Assets (Millions)                      </td> <td>2012</td> <td>2011</td> <td>% change</td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td colspan="2">Property, Plant, Equipment, Intangible Assets, Goodwill</td> <td> </td> <td> </td> </tr> <tr> <td>United States</td> <td>555</td> <td>707</td> <td>-21.50%</td> </tr> <tr> <td>Rest of World (Ex. Canada & Uk)</td> <td>364</td> <td>275</td> <td>32.36%</td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>Total Assets</td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>United States</td> <td>2337</td> <td>3390</td> <td>-31.06%</td> </tr> <tr> <td>Rest of World (Ex. Canada & Uk)</td> <td>1147</td> <td>956</td> <td>19.98%</td> </tr> </tbody> </table>

RIMM's growing "Rest of World" sales and paring down of U.S. investment signals that though new CEO Thorsten Heins has publicly re-affirmed RIMM's fidelity to its corporate customers, it is open to resurrecting itself as a retail, customer-oriented company. The Blackberry 10 launch serves more of a purpose in furthering its brand world wide than it does in trying to recover ground against iOS and Android devices in the hallways of American business. Indeed, while RIMM streamlines its manufacturing by reducing its number of contract manufacturers from ten to three in 2013, it is simultaneously expanding its global fulfillment operations, opening facilities in Europe, Africa, Asia and South America. To exhume an ancient crackberry pun, RIMM is paving the way to "push" its phones to local markets more rapidly.

Onto the Southern Hemisphere

Unlike Nokia (NYSE: NOK), another once vaunted brand that has been decimated by rapid change in the industry, RIMM benefits from latent demand around the globe that it could and must tap immediately. RIMM's most humble new customers will grow with the company, and provide a market for future Blackberry ecosystems that as yet reside only on the napkin sketches of its brightest engineers. Africa is an opportune and logical place to start injecting movement back into Research in Motion.

Finosus has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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