Thursday, June 23, 2011

Research In Motion Underappreciated, Underrated & Undervalued (Blackberry, Android compatible QNX phones)

New updated article reflecting the company's position as of December 2011 (including just released last quarter of 2011 which is the 3rd quarter of the company's fiscal year) at Undervalued Blackberry, Research In Motion Far From 'Game Over' (subscribers up 35% to 75 million, competition affects US market share)
The information below only includes company data up to the second quarter (though there's information extending into November).

As of December 22, 2011
* Current Share Price: $14.17/share * Book Value: $20.42/share * Cash: $2.49/share
* Analyst EPS Growth Consensus: -2.61% * Debt: No long term debt AND no total debt

    RIMM continues to lead the way in encryption security (in July 2011 playbook became the first and only tablet endorsed by the US Federal Government for purchase) and with 90% of American companies hacked in 2010 that's got to count for something. (June 23,2011 Survey Finds 90% US Companies Hacked Past Year) Google (oversees Android) is facing an antitrust probe in the USA while Apple is losing patent infringement cases in Germany and that couldn't come at a worse time (in France and Germany Apple is losing market share quickly, in Britain iOS is at 31% up from 21% a year earlier however in continental Europe Apple's products aren't nearly as popular). RIM's earnings continue to be strong despite a boatload of negative publicity (only fell during the quarter ended August to $329M however sales of its newest phones don't show up on the books until the next quarter, prior to the August quarter earnings were strong; the 1st qtr of 2011 down slightly however still up 6.5% when compared to the quarter ended 6 months prior (outside of the United States blackberry sales actually strengthened). The company has zero debt (read that again ZERO) while their cash and cash equivalents are just under $1B (Aug.'11: current assets at $7.32B 22.4% higher than they were exactly one year prior; Nokia's current assets are down). Meanwhile they have yet to implement the highly anticipated/highly recommended QNX operating system (QNX technology has been used in space (space shuttle laser camera)) and shipments of Playbook are over half a million (quarterly, ended May 2011) ranking far behind tablet market leader Apple which sold 9.3 million iPads;

However in the quarter ended August 2011 shipments fell by 60% down to 200,000, a direct result of the popularity of iPad during the quarter which lowered market share for a number of other companies
(rimm's tablet remains one of the top choices however Apple's dominant presence translates into a comparatively small market share for other companies to compete for). (BlackBerrys Said to Get Android Apps as RIM Seeks Sales Boost). Blackberry remains one of only a couple smartphone companies with a share in the mobile employees enterprise market (it and Apple dominate that market with nearly 80% of the share, 32% vs 45% in October). The company introduced two new BlackBerry 7 devices on Nov 15 after affecting the largest new product roll out in RIM history in the summer. Initial sales of those smartphones were seen as “healthy” by RBC Capital Markets.

On November 14th (2011) Goldman Sachs raised awareness of Rim's valuable assets by upgrading the stock, citing "the sum of its parts is bigger than the whole". Within 2 days of that rim released 2 new upgraded blackberry 7 smartphones, the Curve 9380 (1st Curve with a touch display) and the BlackBerry Bold 9790, both of which run on bb7 software. In fact Research In Motion was one of only nine technology companies with multiple analyst upgrades in the month of November 2011 (3 as of November 17) - others were Cisco (4), Nokia (2), Juniper (2), CGI Group (3), F5 network (2), Quality Systems (4), changyou (2), Autodesk (2). RIM was upgraded by 3 investment banks; Northern Securities Nov 15 (price target raised to $26 from $18), Goldman Sachs Nov 16 and Brigantine Advisers on the 17th. Brigantine noted that rim is “well entrenched globally” and that "3rd quarter sales stabilized" after falling in the 2q (fiscal 2012 revenue upped to $19.8B from $19.4B). Commentary - I think RIM has a solid chance of making up ground in the US and maintaining strong growth abroad. RIM's main concern right now has to be keeping its high-end/corporate clients from switching to other brands (the corporate market continues to be the core of their business with rim (32.2%) and apple (45%) maintaining a dominant presence). Getting BBX operating system online and a couple compelling devices to market should keep it at the number 3 position, ahead of Nokia.

During the first quarter of 2011 13.2 million blackberries were sold, 71% as much as Apple's iPhone (18.6 million) while the second quarter had sales of 10.6 million; the record for shipments in a quarter for RIM was 14.2 million recorded in the quarter ended November 2010. ( RIM ships half million in first quarter) Another advantage RIM has is that only it and Apple both manufacture their own devices and run their own operating systems. It's inconceivable that the company is valued less than Nokia (and more recently even Motorola) which lags behind it in nearly every category of significance (according to Millenial, in the 3rd quarter of 2011 Nokia manufactured only 2.41% of all mobiles phones used on Millenial networks, that compares to 11.05% for RIM; 3 of the top 9 handsets in the quarter ran on blackberry OS, combined they represent over 9% of the market just behind Apple iOS at 12.55%).

QNX systems: With a new innovative operating system on hand, RIM's next major smartphone release could be a significant event for the tech industry. The QNX phone release is expected to be in about half a year, just after playbook gets its own native Blackberry Enterprise Server complaint e-mail; That means the first QNX phones (rumoured to be code-named the BlackBerry Colt) most likely will have their own native e-mail, since the server-code for playbook will probably also be tailor made for the QNX OS. Latest reports suggest that the next generation phones will also compatible with Android apps (though the company has only publicly acknowledged the Android compatability with QNX powered playbook) which should eliminate most concerns over the company's future (Android currently runs about six times as many apps as RIM (250,000 vs over 40,000). Making smartphone battery life last longer can be a difficult task, especially if they run on mutli core processors. BBX, the successor blackberry's current platform will support Microsoft's Exchange ActiveSync (meaning it will support most email systems) as well as Blackberry's own enterprise server (BES) which helps the company maintain current IT clients (IT has invested heavily in BES support infrastructure). New BBX based phones will have the same resolution as the tablet (1024x600) which translates into a resolution (16/9) that tops even the iPhone4S.
QNX technology (Neutrino) is already used in many car computer systems and is one of the reasons Playbook's touch screen interface is so fluid.

To those who bring up rimm's earnings per share drop (estimated to 25% by year end) why even bother when competitors Nokia (zero eps, that's not growth that's total quarterly eps down from 18c the previous year) and google (down 29% q2q in the first quarter of 2011, even with about a third of revenue coming from AdSense) are also profiting less because competition is intensifying and prices are dropping in response (US Cellular recently refused to sell the iPhone4s because according to it the lack of profit created too much risk, another took as long as four months to realize any profit from selling iphones). With regards to Amazon's Kindle Fire, the product has had a number of negative reviews with possibly half of all products shipped in the first quarter of release being returned (cnnfn: How Many Kindle Fires Being Returned To Amazon). Problems related to defective internet Wi-Fi connections are the main concern. Factoring in losses from future content sales, it may be a while before Amazon realizes profit from the device.
RIM has an industry low price to earnings ratio of 3.38 (November 10, 2011, down from 4.21 on July 26, 2011; that compares to 24.3 for Motorola (MSI) (July 26, before acquired by google), 28.7 for Nokia (up from 12.06 July 26), 13.90 for Apple (down from 26.7 July 26) & 20.73 for Google (was 23.5 July 26) meaning that RIM's earnings yield is unusually high, however one must also consider the impact on P/E caused by RIM's lowered future earnings growth rate (earnings in the March to May period of 2011 were 9.6% lower than March to May 2010 (compared to a 128% increase for Apple) however that was at a time when Smartphones were more expensive and Android (available at cheap prices) wasn't as widely used). Also consider that Nokia (P/E ratio of 28.7 which is 8.5X higher than Research In Motion) recorded negative net income in the quarter ended June 2011 (-US $366 million compared to a profit of US $745 million it had in the quarter ended December 2010). In the last quarter of 2010, RIM's net income was only $166 million higher than Nokia's, in contrast with the second quarter of 2011 when RIM profited US $1.061 billion more, making Research In Motion's struggles seem mild in comparison. In the 13 weeks ending November 27, 2010 92% of RIM's revenue growth came from outside of the U.S., in the first 9 months of that fiscal year just over $3.6 billion in revenue came from outside of the U.S. compared to under $2 billion from the U.S. Most of the increase came from sales of the more expensive Bold 9780 and Curve 3G meaning that the high end market in emerging economies is growing.
Blackberry has a number of advantages over competitors that have in the past not been given due recognition (playbook supports Adobe Flash, Adobe Mobile AIR and HTML-5) (India: Rim Launches New Playbook, Says Talks With Indian Govt Are On); When/if the media acknowledges that the company's prospects can only go up. One issue that seems to always come up is software applications (apps) for blackberry which haven't been as numerous, cheap or easily accessible as those available on iphones. Though smart phone users on average only use a handful of them regularly (which blackberry in most cases provides) the competition has been hammering away at it, possibly overplaying the problem. In response RIM has been less restrictive when it comes to allowing android uses on blackberry and has put more emphasis on developing apps. Blackberry phones continue to have superior battery life (when compared to alternatives), that could be one of the reasons RIM's devices were late with regards to specific product enhancements (took longer but the outcome is a more efficient product). In the month of August (2011) Research In Motion released new phones for the first time in a year, the newest blackberry smartphones are the Torch 9810, Torch 9860 and Bold 9900 all of which run on the BB 7 operating system, which is 40% faster than the 6 and twice as fast as the 5. Additionally, they utilize Liquid Graphics technology allowing for seamless zooming and scrolling. Though an improvement, these phones are not considered a major part of the company's future; that responsibility lies with the QNX phones to be released in 2012. According RBC's Mike Abramsky, sales of the new blackberry 7 model could top 22 million in fiscal 2011 out of 54 million total units. The average selling price of the Blackberry 7 phone is estimated to be about $292. (RIMM: RBC Sees Wide EPS Range On BlackBerry 7 Sales) For the third quarter of 2011 (Sept-Nov 2011) revenue is expected to be in the range of $5.3B to $5.6B or about 33% greater than second quarter revenue, that's because sales of the newest phones will begin making an impact (weren't released until the tail end of the 2nd quarter).
Update: According to Impressions, in the third quarter of 2011 Research In Motion was the only company that posed significant competition to Google and Apple in the connected device & smartphone mix on Millenial networks, with a 13% overall market share compared to 56% and 28% for iOS and Android, respectively. RIM also had the 3rd (Curve), 7th (Bold) and 9th (Torch) most popular mobile phones which combined to represent 9.03% of the market; out of the top 20 handsets the ones that ran on Apple's operating system represented 12.55% of the market compared to 9.72% for blackberry. As a manufacturer, RIM ranked 4th overall just behind HTC at 11.05% with 4.6X the market share of Nokia. (Millennial: Android usage doubled iOS in Q3, iPad king of tablets with 456% growth) The first week of November 2011 the iPhone4s was rejected by America's 6th leading carrier, US Cellular on the basis of risk and profitability (other carriers have voiced frustration with this, for some it has taken as long as 4-5 months to realize any profit from the partnership with Apple T-Mobile the 4th largest carrier, also has shown little interest in the iphone). AT&T and Verizon remain the only major US cellphone companies that carry the iPhone. (USA Today)

Market share drop should not be as much of a concern as it is given that there are many more players in the smartphone market than there were in 2008 that's why blackberry continues to record net additions in subscribers. The fact is Research In Motion will continue to be a force in the industry as long as it is remains a leader in both the manufacture of handheld devices (Millenial report: rimm has 11.05% of the market, 4.6X Nokia) and operating system use (9.72% of the market compared to Apple at 12.55%); new market leader Samsung continues to rely on google's Android system.
Despite confrontations with the Indian government regarding BlackBerry security features, on June 22, 2011 Research In Motion successfully launched the BlackBerry Playbook Tablet in India. (Report: Blackberry's RIM Launches New Playbook, says talks with Indian Govt are on) Blackberry smartphones remain popular in the emerging markets of Thailand and Indonesia. On August 29, 2011 RIM and Moviestar launched the Blackberry Torch 9860 in Spain.(Business Report Thailand) Update: In the quarter ended August 31, 2011 RIM's earnings were lackluster (down 58% to $329M vs $797M a year earlier, investors reacted by pushing the share price down by 18%) however not surprising given that the company's only new phones were released at the tail end of the quarter meaning the boost in cash flow won't be realized until the next quarter. Revenue remains strong ($4.2 billion compared to $4.6B a year earlier) with revenue estimated at up to $5.6 billion in the next quarter (3rd). Sales of playbook were down 60% to 200,000 (about what Apple sells in two days) which is not great but not really surprising given the popularity of iPad (RIM remains one of only a handful of companies with growth potential in the tablet market). Blackberry sales were 10.6M in the quarter within range of expectations (around 11 million), Android phones continue to be RIM's biggest threat in the smartphone market while Apple's iPad is the poses the most competition in the tablet market. Intense competition from cheaper products rolled out by Apple and Google is the main reason for the drop in earnings which are lower but haven't dropped to nil like Nokia.

Commentary When discussing blackberry's problems with a friend of mine he said "being better at keeping your problems out of the news doesn't make you a better product", I agree with that. Blackberry's problems seem to be getting a lot of attention lately but when you consider that every smartphone marker goes through an awkward phase/growing pains at some point (motorola, nokia, even apple with a few of their product enhacements) singling out one company lets another off the hook.

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