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Research In Motion - Stuck In The Doldrums?
In the late 1990’s Research In Motion (RIMM) introduced the BlackBerry, which truly revolutionized the mobile telecommunication industry. Indeed, BlackBerry products and services are currently used by millions of customers worldwide to stay connected to both people and content. In addition, corporate clients became enamored with RIMM’s proprietary email and messaging servers, and the company’s top line certainly reflected this, with revenues going from $294 million in fiscal 2003 to $19.7 billion at the end of fiscal 2011 (year ended February 25, 2012).
However, the competitive landscape has changed quite a lot of late. We believe Research In Motion, which once commanded more than half of the American smartphone market, now accounts for less than 10% of handsets sold. Indeed, the Apple (AAPL) iPhone and Google’s (GOOG) Android software have recently taken a big bite out of RIMM’s market share. Moreover, through the middle of last year, Research In Motion had not rolled out a new Blackberry in almost a year, and customers began to turn away from its seemingly old-school lineup for more consumer-focused offerings. In early August, the company unveiled plans to introduce five new BlackBerry smartphones based on its BlackBerry 7 Operating System, which included its first all-touch device. These phones appear to have failed to garner enough interest from consumers to reverse market share decline.
Separately, the company introduced its PlayBook tablet in early fiscal 2011 and the response has been far from impressive, due to a host of factors, including recent shifts in the competitive dynamics of the tablet market and a delay in the release of the PlayBook OS 2.0 software. Therefore, it came as no surprise when RIMM took a $485 million pretax non-cash charge related to its inventory valuation of the tablet device in the third quarter. Nevertheless, management remains dedicated to the tablet market and has therefore increased promotional activity in an attempt to drive sell-through to end customers.
Most recently, co-chief executives Jim Balsillie and Mike Lazaridis stepped down from their positions in late January, and have turned over the reins to Thorsten Heins, who has been with the company since 2007 and was one of its two chief operating officers. Note that, Mr. Lazaridis will serve as vice chairman and Mr. Balsillie will remain a director. Barbara Stymiest, a board member since 2007, is the new independent board chair going forward.
This was, seemingly, in response to investors calling for a change in leadership, business strategy or possibly, the outright sale of the company. Yet, Wall Street did not seem too enthused with the shake up, and the stock has fallen 20% since the announcement. Despite the change in management, RIMM indicated that it would essentially follow the same strategy that it had been implementing, specifically, revamping its disappointing Playbook tablet and launching a new phone and operating system. What’s more, given their positions and sizable ownership interests, Mr. Balsillie and Mr. Lazaridis are likely to continue to wield considerable power and influence, which could make a significant shift in strategy or an outright sale of the company difficult for Mr. Heins to broker.
Whispers on the street suggest that there are three rather divergent paths the company could take. Clearly, management is hoping for a rather impressive comeback, based on the pending upgrade of its PlayBook operating system (which will now include email, a feature it surprisingly lacked when first introduced), and the roll out the Blackberry 10 OS sometime this year. Conversely, the company could continue to decline, with Apple, Google, and Microsoft (MSFT - Free Microsoft Stock Report) continuing to shave off much of its market share, with only a small dedicated cadre of corporate and government customers remaining loyal, due to RIMM’s security features and physical keyboards. Finally, the company could go the way of the dinosaur, or the pager, and become extinct; only time will tell.
It is important to note, in our view, that Research In Motion is an attractive takeover candidate at the moment. Given the recent drop in its market capitalization, an acquirer could pay a 50% premium and still buy RIMM for a relatively low price-to-earnings multiple than any company in the industry. If a deal was ever consummated, the acquirer would get a smartphone manufacturer with a number of patents that has significant corporate market share and a leadership position in secure mobile email. Additionally, the company certainly has plenty of cash on hand, having ended the last fiscal year with a debt-free balance sheet and $2.1 billion in cash.
Research In Motion is set to release earnings today after the market closes. We believe there is a strong likelihood that RIMM’s handset volume will come in at the low end of guidance and that their near-term outlook will leave much to be desired.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.