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What’s Wrong with Research in Motion? The Answer is Not Apple’s iPhone

By Jim Fink on June 22, 2011

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Booming demand for web-enabled smartphones and an uptick in enterprise spending should power years of earnings growth for well-placed technology firms. 

– Elliott Gue, Personal Finance 

Smartphone manufacturer Research in Motion (NasdaqGS: RIMM) is one of the great corporate success stories of our time. In less than six years, the Canadian company’s stock rose more than 1000%, from a low price of $1.39 in October 2002 to a high price of $148.13 in June 2008. In 2009, Fortune Magazine crowned RIMM the fastest-growing company in the world.

In the world of smartphones, however, times change fast. On June 16th, the company released a disastrous first-quarter financial report and over the next two days its shares plunged 27% down to less than $26 per share, 83% below its all-time high three years ago. On the face of it, the report wasn’t so bad:

  • Total revenue up 16% year-over-year to $4.9 billion
  • International revenue up 67% year-over year
  • Handset shipments up 18% year-over-year to 13.2 million
  • PlayBook tablet shipments 500,000 in their first quarter of availability

Research in Motion is Imploding

The problem is that the growth in year-over-year numbers occurred mostly in the first half of the year; the second half of the year has seen a sharp decline in performance. For example, first-quarter 2011 revenues of $4.9 million were lower than fourth-quarter 2010 revenues of $5.6 million, which is the first time sequential quarterly revenues have fallen since 2007! In retrospect, a warning sign was given back in September 2010 when Edel Ebbs, RIMM’s vice president of investor relations, announced that the company would no longer provide average selling prices (ASPs) for its Blackberry smartphones. The reason for RIMM’s new-found secretiveness has now become clear: ASPs are coming down – way down – in the face of competition from Apple’s iPhone and Google’s Android-powered smartphones. 

RIMM’s management continues to lower revenue and earnings guidance. Back in March, the earnings per share guidance was $1.47 to $1.55 for Q1 2011 and “in excess of” $7.50 for the full year. Then in April, the guidance was lowered to $1.30 to $1.37 for Q1 and “approximately” $7.50 for the year.  In the June release, the actual Q1 EPS of $1.33 was below the midpoint of the lowered $1.30 to $1.37 guidance. Even worse, full-year EPS guidance was dramatically lowered from $7.50 to between $5.25 and $6.00. And second-quarter revenues were projected at only between $4.2 and $4.8 billion, lower than Q1 and which will mark the second consecutive quarter of sequential revenue decline, which is almost unprecedented.

Outdated Smartphone Operating System

Perhaps worst of all, co-CEO Jim Balsillie announced that new product introductions will be delayed until the very end of August, which means that RIMM’s long-awaited new versions of its Torch and Bold mobile handsets will not be available in time for the critically-important “back to school” selling season.

Here’s the deal: RIMM is transitioning its Blackberry handsets from an old and outdated operating system to QNX, which is great technology, but which probably won’t be introduced into handsets until next year (it’s already in the playbook tablet). Without QNX, Blackberry’s phones can’t provide the 4G broadband services or the “all-touch” navigation currently available on Apple and Android devices. Consumers like touch navigation because it makes it much easier to surf the Internet than is the case with scroll bars. 

The most recent smartphone numbers from comScore clearly demonstrate that RIMM is losing significant market share rapidly:

Market Share of Smartphone Subscribers

Company

November 2010

January 2011

February 2011

April 2011

Google

26.0%

31.2%

33.0%

36.4%

RIMM

33.5%

30.4%

28.9%

25.7%

Apple

25.0%

24.7%

25.2%

26.0%

Microsoft

9.0%

8.0%

7.7%

6.7%

Hewlett Packard (Palm)

3.9%

3.2%

2.8%

2.6%

Apple’s iPhone is Not the Cause of RIMM’s Problems

Two things should scream at your from the above table. First, in April Apple overtook RIMM in market share to become No. 2 for the first time. Second, Apple’s market share has stayed virtually flat since November, making its ascension to No. 2 primarily a result of RIMM’s collapse and not Apple’s success. The real success story is Google’s Android, which has increased its smartphone market share by 40% since last November. Wow.

Google’s success has Apple so worried that it decided to delay its introduction of the iPhone 5 until September 7th. Ever since the iPhone was introduced in 2007, Apple has introduced a new version in June at its World Developers Conference – until this year. Analysts are speculating that the delay is to give Apple a chance to create some breakthrough application that will make it clearly better than Android. But it’s a desperate move that won’t change the long-term picture. As I wrote last year in Apple iPhone Ditching AT&T Exclusivity, Android continues to match Apple feature-by-feature and Android’s main advantage is its availability on a multitude of different handset manufacturers, which is enabling it to expand its “network effect” to the point where it is becoming the world standard for smartphones.

Apple is making the same mistake with the iPhone that it made in the 1990s with its Macintosh computer. Proprietary bundles of software and hardware severely limit expansion. Software is where the power resides. Refusing to license its Macintosh operating system to other computer vendors enabled IBM’s PC architecture to take over the world.

RIMM Still Has Valuable Technology

Getting back to RIMM, the company is in a boatload of trouble, but its Blackberry technology remains superior in several respects. First, it remains the smartphone of choice for the corporate market. Its Blackberry Enterprise Solution (BES) provides industrial-strength security that neither iPhone nor Android can match. In fact, BES is in such demand that RIMM has announced that it will provide a version of the technology to other smartphone vendors. A smart idea that will help create a “network effect” for BES. Second, RIMM’s “push” technology automatically synchronizes its smartphone Some other smartphones are slowly beginning to offer a similar syncing feature, but they typically require that the synchronizing software always be running in the background, which requires users to incur costly data usage fees. In contrast, RIMM’s technology does not require continual data transfers but only activates at the server level once an update is needed. This allows Blackberry customers to incur only one-third the data fees other smartphones require. It also allows Blackberries to provide much longer battery life without the need for a recharge. Third, Blackberries offer the best instant messaging (BBM) and email services.

RIMM is a Takeover Target

In the long run, RIMM may ditch hardware altogether and focus on providing its best-of-class BES and BBM software services to other hardware vendors. The transition will be painful, but RIMM will survive and could actually thrive. I see the stock potentially falling in the near term down to $20-$22, but even at its current price it is so cheap – a P/E of 4.7 – that it is a prime takeover target.

The Best Tech Stocks Can Be Found in Personal Finance

Personal Finance is composed of an all-star team of analysts that beats the market by providing penetrating bottom-up analysis of public financial information as well as top-down analysis of industry trends.

In Personal Finance, Elliott’s “Growth Portfolio” currently includes a select number of carefully-vetted tech stocks. To find out the specific names of the tech stocks Elliott likes best now, give Personal Finance a try today!

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