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The Natives Are Restless

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Research in Motion (NASDAQ: BBRY) reported earnings recently, most people were expecting the numbers to not be pretty. What was not expected, was the announcement that BlackBerry 10 would be delayed until the first quarter of 2013. While the company still has cash in the bank, and is free cash flow positive, the situation is getting worse. When your most staunch supporters start to call out the company for slow execution, it's time to run for the exits. Let's look at what the company reported, and what some hardcore RIM supporters have to say.

Cash & Cash Flow:

The first comment that jumped off the page at me was, “a world leader in the mobile communications market”. I'm sorry but if this is leading, who is following? The company is clearly aware that its financial viability is being questioned since one of the first headline numbers was, “cash and long-term investments increased to $2.2 billion”. The company went further to make sure everyone understands it is cash flow positive, pointing out that cash flow from operations was $710 million. Those numbers in theory should give investors some cause for hope. However, there are two problems. First, the $710 million in cash flow from operations is overstating things a bit. The company reported a $335 million goodwill impairment charge that actually adds this amount to operating cash flow. Without this one time item, operating cash flow would have actually been $376 million. If you subtract the $153 million in capital expenditures, the company's real free cash flow was closer to $223 million. While this result isn't terrible, it's far below the $710 million in operating cash flow that is trumpeted in the report. Here's the sad part, these were the two best numbers in the whole report.

Sales & Income:

When you look at nearly everything else, the numbers spell problems. Revenue was down 43% and the company reported an adjusted net loss of $0.37 per share. The company reported shipments of 7.8 million BlackBerry smartphones and only 260,000 PlayBook tablets. By comparison, Apple (NASDAQ: AAPL) sold 35.1 million iPhones, and 11.8 million iPads in their most recent quarter. You can see that RIM has some serious work to do to even get close to competitive with Apple. Even more difficult would be for RIM to somehow compete with Google's (NASDAQ: GOOG) Android ecosystem. According to a recent article about 900,000 Android devices are being activated per day. Now granted, not all of those activations are phones, but think about the sheer size of activations we are talking about. Even if only 10% of these activations were phones, Google would see more activations in one day than RIM had in three months.

Cost Cutting:

These negative market forces are the cause behind RIM planning on cutting 5,000 jobs, which the company expects will save about $1 billion. There are two problems even with this statistic, first these job cuts aren't expected to be completed until the end of 2013. Second, the company will record a $350 million restructuring charge to pay for these cuts. Additionally, the company is downsizing from 10 external manufacturing sites to 3. This should yield cost savings, but this also shows the company is downsizing its expectations for sales in the future. Cost cuts and downsizing are not the way to compete. These actions are the result of a company that is reacting, rather than bringing the fight to the competition.

BlackBerry 10 Delay:

The announcement that BlackBerry 10 was being delayed until first quarter 2013, was a huge blow even to the most ardent RIM believers. The web site Crackberry.com is, “the most trafficked BlackBerry community site on the net.” This is critical to understand, because in a recent article on Crackberry.com, users appear fed up with RIM. The article specifically talked about the delay of BlackBerry 10, and some of the comments were surprising. Remember these are RIM believers, they are usually die hard BlackBerry users who are willing to give the company the benefit of the doubt. Here is what a few had to say:

  • “We waited 6 months with hope and instead a massive broken promise. I feel like buying a Galaxy S III tonight”

  • “We excused the previous delays as we thought RIM was trying to execute and restructure at the same time, but this tells us RIM is actually running into problems they don't know what to do with.”

  • “The delay to fall of 2012 was supposed to give RIM the time to make it perfect. I've been disappointed too many times. It's time for $2 billion of Canadian capital to be spent on more productive activities. I'm moving on.”

  • “It's clear that outside of the crackberry addicts people just aren't buying 'berrys. RIM needed to execute, not in Q1 2013 but now and it failed. Let's call it for what it is and stop sugarcoating it.”

You can hear the frustration and anger in their voices. When supporters of RIM are getting annoyed with the company to the point of saying “I'm moving on”, investors should take heed.

Conclusion:

In a word, run! If you own shares you need to ask yourself this question: what is BlackBerry 10 going to bring to the table by beginning of 2013 that will be so desirable? Understand that every person activating either an iPhone or Android within a year and a half of first quarter 2013 won't be potential customers yet. With the standard cell phone contract at two years, unless someone is not under contract, there is no way they are going to break their contract just to get the latest BlackBerry device. This means there is a finite user group who will both consider a BlackBerry, and won't be under contract. By the time a large enough user base could switch to BlackBerry 10, what will iOS and Android bring to the table? There is no way that the next six months won't see updates and changes to both operating systems. With Microsoft's Windows 8 operating system expected to be released shortly, that will add another major competitive force to the industry. I understand there are individuals and business people who love their BlackBerry and they won't go away. The point is, there is a difference between delivering a good product, and those die-hard fans being enough to keep a company competitive.


MHenage owns shares of Apple. 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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