Research in Stasis: Under the Hood with BlackBerry
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Last week, in a post that or may or may not have been heavily inspired by the slow, obnoxious death of my Bold, I wrote what amounted to a consumer’s takedown of Research in Motion (NASDAQ: BBRY). If you, like me, have ever felt that you somehow made a massive mistake in choosing a Blackberry as your weapon of choice, I suggest you take a gander. Misery loves company.
Of course, and to somewhat eschew the investing model Peter Lynch and his L’eggs loving wife so bravely put forth, there’s more to a stock than how I feel about its products. Take Chipotle: even though I hate their food*, I’d be silly to let that cover my eyes to their sunny future. In the spirit of open-mindedness, then, I took a look under the hood of Research in Motion, in the hopes of finding a pleasant surprise. Suffice it to say:
The prospect of my storming into the Ontario headquarters and burning my Bold right there in the lobby notwithstanding, Research in Motion still has some serious trouble headed their way. Let’s look at the facts:
Revenues are down.
The third quarter of 2011 was painful to RIM to the tune of over $700m in total revenues. More to the point, that meant a drop of over $400m in net income, from $695m in Q2 to $329m in Q3. In other words, they made less than half the money in the last full quarter than they did in the quarter prior. That’s a pretty harrowing development, especially if you consider the $934m that they netted in Q1.
As for FCF? The song remains the same. Cash outflow jumped from $200m in May to $330m in August, primarily as a result of capital expended to acquire its new OS baby, QNX Software Systems. In the long term, RIM can (and does) expect QNS to pave the way for the large-scale integration of BlackBerry technology in automobiles. In the short term, though, the value of QNX is staked largely in the success of its OS for the PlayBook 2.0. This raises a few red flags for me, especially considering that....
The first PlayBook was a dismal failure.
Seriously. As in: RIM is currently selling them at a loss in a desperate attempt to shrink inventories. While the device was, in and of itself, a fairly impressive piece of hardware, its launch fell flat on account of everything from poor marketing to glitchy software to—and you never, ever hear about this with Apple (NASDAQ: AAPL)—undertrained local retailers. Sure, units are moving at an acceptable clip now, but I suspect that has more to do with the aforementioned discount than pure consumer preference.
Speaking of which: consumers are starting to get mighty friendly with the idea of owning a 4G-compatible phone, and while Samsung, Motorola (NYSE: MSI), and HTC all offer accommodating products, Research in Motion does not. Industry insiders expect that to change by mid-2012, at the earliest. With the holiday season coming fast, that spells a lot of missed sales opportunity, and to be brutally frank, opportunity is one thing the company simply cannot afford to miss right now. Especially (and to be super redundant) in light of…
How bad they’ve screwed up in the past two months, and how terrible their management looks.
The much-noted outages and subsequent “coulda-shoulda” apologies have amounted to a collective loss of faith in the BlackBerry brand. A name that was once synonymous with professionalism and reliability now carries undertones of misdirection and decay, and if the BlackBerry had any miracles in the pipeline to reverse their 4.8% YOY loss in smartphone market share going into October, I hope they’ve ordered up a few more since. When it comes to paying a company’s bills, the costumer is always right—and they don’t like shelling out when they get the sense that they’ve been wronged.
Setting aside the sales/subscriber atrophy that they will almost certainly encourage, these service failures, coupled with the botched PlayBook release, point to a serious dearth of managerial know-how. Not exactly a pretty picture for a company that is already losing money and market share on a consistent basis.
I could be wrong. Research in Motion recognizes roughly 45% of their revenue overseas, and with international 3G subscriber usage growing anywhere between 79% (Brazil), 172% (China), and 1,050% (India, for the win!), a steady presence abroad could mean climbing profits for our Canadian friends. Conversely, and keeping in mind their 70m+ subscriber base, if the company keeps up with or accelerates their current regimen of general bungling, a thoughtful buyer could very well step in and salvage what should be a healthy business. In which case the stock would sell at a premium, and the few and the faithful would make a mint.
But I, as you might have guessed, will not be among them. I’m bearish on BlackBerry across the board, and until they give me a single substantive reason to look their way, I’m staying that way.
*That’s right. I said it. Buy why, you ask, why do you hate my beloved purveyor of semi-authentic Mexican??! Simply put: some people just want to watch the world burn.
Lyons George does not hold a position in any of the above-mentioned companies.