Don’t Believe the Bounce in RIM

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Blackberry manufacturer, Research In Motion (NASDAQ: BBRY), beat analysts’ estimates by selling 7.4 million smart phones and 130,000 Blackberry Playbook tablets for the quarter ending 1 September with its subscriber base increasing from 78 to 80 million as the company gained market share in emerging markets. It ended up increasing revenues by 2% over the previous quarter to $2.8 billion and was able to reduce its losses by 54% to $235 million, which also includes more than $92 million as a one-off restructuring charge. However, as compared to a year ago, revenues have fallen by 31%. The company was profitable by $329 million ($0.63/share). The current loss will be its third consecutive at $0.45 per share, down from the loss of $0.99 last quarter.

The increase might be insignificant, beating analysts’ estimates by selling 500,000 more phones. Although the company’s revenues have fallen in all regions as compared to last year its decline has been more severe in the US and Canada.  As a result, the company is now earning more than 70% of its revenues from outside North America.   And this drop is all the technology press in the West cares about.  If you can’t be big in the U.S. then you don’t matter is a dominant theme in our industry, regardless of whether it’s true or not.

Sequential fall in revenues for 6 months ending 1 September:

<table> <tbody> <tr> <td> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>YoY % Change</strong></p> </td> </tr> <tr> <td> <p><strong>Canada</strong></p> </td> <td> <p>678</p> </td> <td> <p>327</p> </td> <td> <p>-51.8%</p> </td> </tr> <tr> <td> <p><strong>US</strong></p> </td> <td> <p>2431</p> </td> <td> <p>1335</p> </td> <td> <p>-45.1%</p> </td> </tr> <tr> <td> <p><strong>UK</strong></p> </td> <td> <p>897</p> </td> <td> <p>596</p> </td> <td> <p>-33.6%</p> </td> </tr> <tr> <td> <p><strong>Other</strong></p> </td> <td> <p>5070</p> </td> <td> <p>3429</p> </td> <td> <p>-32.4%</p> </td> </tr> </tbody> </table>

 

Revenue Contribution by geographic region for 6 months ending 1September:

<table> <tbody> <tr> <td> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>YoY % Change</strong></p> </td> </tr> <tr> <td> <p><strong>Canada</strong></p> </td> <td> <p>7.50%</p> </td> <td> <p>5.70%</p> </td> <td> <p>-24.0%</p> </td> </tr> <tr> <td> <p><strong>US</strong></p> </td> <td> <p>26.70%</p> </td> <td> <p>23.50%</p> </td> <td> <p>-12.0%</p> </td> </tr> <tr> <td> <p><strong>UK</strong></p> </td> <td> <p>9.90%</p> </td> <td> <p>10.50%</p> </td> <td> <p>+6.1%</p> </td> </tr> <tr> <td> <p><strong>Other</strong></p> </td> <td> <p>55.90%</p> </td> <td> <p>60.30%</p> </td> <td> <p>+7.9%</p> </td> </tr> </tbody> </table>

The company’s current strategy is completely devoted towards achieving a successful launch of Blackberry 10. Some of its critics have earlier doubted if it can introduce its new smartphone given its financial constraints. However, the increase in revenues, including the $100 million it added to its reserves during this quarter that has pushed the cash reserves to more than $2 billion, will ensure that Blackberry 10 is coming. Like rival Nokia (NYSE: NOK) the bad news surrounding RIMM was so toxic that any glimmer sparks new hope. 

The cost cutting program that aims to eliminate 5,000 jobs and save $1 billion in the current fiscal year is also on track.  Nokia similarly has to slash its workforce, sell off part of its patent portfolio and restructure whole business units- Nokia/Siemens – to keep from burning all of their cash up in the next 12 months.

The main problem for both of them comes from the dominance of Apple’s (NASDAQ: AAPL) iPhone, Google (NASDAQ: GOOG)’s Android OS and Samsung’s Galaxy in the global smartphone industry in general and the North American market in particular, which has left little room for other manufacturers. RIM is now looking towards the emerging markets, particularly India, Singapore, Indonesia and South Africa. The company’s Chief Marketing Officer Frank Boulben has recently paid a visit to these countries and has held meeting with the local carriers. BB’s image is not as severely hit in the Asia Pacific region as it is in Europe and North America. For instance, Indonesia is one market where BlackBerry dominates over other smartphones. The two leading mobile operators of the country, Telkomsel and Indosat, have 5 million BlackBerry users and are quickly growing while RIM expects this number to touch 9.1 million by 2015. In this part of the world, a BB promotion event attracts hundreds of thousands of visitors and even caused a stampede in 2011.

However, the competition in the smartphone arena is getting tougher and tougher with each passing year. The technology giant Microsoft Corp (NASDAQ: MSFT) is releasing Windows Phone 8 in conjunction with Windows 8 and a reorientation of their entire product line towards their enterprise cloud services.  In that respect, Microsoft could quickly become RiM’s biggest threat to a potential recovery.

The future of RIM is anything but certain. It has become a relatively small company as its shares have tumbled more than 86% since January 2011. It has an enterprise value of ~$6.17 billion which means that there is always the looming M&A rumor, similar to Nokia.  But for both companies, they both have to prove there is a future business to attract a buyer before the chapter 11 papers are filed.

RIM’s hopes are pinned on Blackberry 10 which it claims will be the first new and innovative smartphone after iPhone. The product has so far received highly positive reviews and comes with a record number of apps for any 1st generation platform.  The issue is delivery.  The Playbook failed because the OS didn’t even have functionality of the BlackBerry itself.  With the delivery schedule continuing to be pushed farther into 2013, every day they delay is another day that Microsoft, Apple and Google can extend their hooks into the consumer base.  

The Smartphone market is rapidly becoming mature and as such in difficult economic times the value proposition for a new device or ‘ecosystem’ will have to be extremely high for them to switch.  RIM’s business has always been business and with the iPad seeing heavy adoption at the corporate level and Windows 8 OEM’s specifically designing hybrid devices to cater to that customer set, where is RIM is going to fit in as its market share continues to shrink.  Microsoft is arguably too late to the game with Windows 8.

For investors I would not believe the bounce in the stock’s price, for it is just that, a short-covering bounce.  Like Nokia and other turnaround stories taking a flyer on long-dated out of the money calls may pay handsomely if the company does everything right.   For everyone else, wait through at least another one or two quarters to see where the story goes. 

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PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. 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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