Friday, December 16, 2011

Undervalued Blackberry Far From 'Game Over' (subscribers up 35% to 75 million, competition affects US market share)

   RIM is far from game over as implied by cnn's Paul R. Monica, not that he has a track record for giving blackberry credit when appropriate; for instance no mention of the 33% quarter to quarter increase in bb unit sales up to 14.1 million in the 3 months ended November 2011 (from 10.6 million units in the 2nd, 13.2m in the 1st quarter) putting it in record company territory or the 35% increase in subscribers over the last year to 75 million. (Globeandmail: Holding out hope in RIM’s hometown) RIM is also Canada's biggest R&D investor at $1 billion/year, Canada represents 11,000 of it's 17,500 workforce. It still holds a leading market share in Latin America 25.6% (Sept 2011, ahead of Samsung at 24%), Canada 36% (platforms, ahead of iPhone at 30.1%), Indonesia 46% (Sept 2011, 2nd is Android at 29%) & South Africa 70% (where Nokia takes 2nd place); Latin American share was also quoted as 28% in August (Argentina has all but banned iPhone sales however BlackBerries are allowed since RIM now manufactures in the country). In the UK Blackberry was in a virtual tie for 2nd place with Apple in 2011 after claiming 27.7% of the market (8.5M British BB subscribers). Another feature unique to the BlackBerry: alert settings ! Users are given more control over ringtone and volume settings as compared to the iPhone.

Things looking up for PlayBook! PlayBook now has 15% of the Canadian tablet market which is amazingly good considering it was just 5% five months ago. The change is attributable to losses in market share by Apple's iPad (now 68% from 86%) and the PlayBook becoming more affordable ($300 compared to $500 introductory price).  Later, in February 2012 Wordpress released an app that allows users to update/create blog content from the playbook tablet.  RIM still has a lot of work to do. Only about 1% of the global tablet market is held by RIM however the company is in an enviable position, the tablet market will grow by 43% in 2012 and much of the growth will come from the developing world where demand for BlackBerry products continues to be strong; First nine months of 2011 more than half of RIM's revenue came from countries outside the USA, UK and Canada (58% of RIM revenue which is up from 39% in 2010). Graphs, tables and general BlackBerry information can be found at more on BlackBerry In the first week of March 2012 BlackBerry's PlayBook outsold iPad at Canada's leading electronic retailers, Best Buy and Future Shop.

Rim is not Palm since Rim continues to have a definite market presence not only in America but globally with a 30% market share outside the U.S. (international market contributed $3.6 of $5.6 billion or 64% of revenue in the 1q12; that compares to 53% for Google) versus 9.2% within the USA (down from over 20% in 2010). Abroad, blackberry is particularly popular in Thailand (>33%) and Indonesia (46% up from 40%) where market share continues to grow even without the next generation QNX operating system being applied to any of its products as of yet (remember QNX alone is worth more than a third of RIM's market cap at present, the QNX product is unique, cutting edge with its technology already used by spacecraft and car guiding systems); In Indonesia there are 6 million blackberry users making it the most popular brand, in fact its popularity combined with a half price offering on the $540 Bold 9790 to the first 1000 buyers, was enough to cause a stampede in Jakarta in November; the strong showing for such an expensive phone is also exciting given that Rim has traditionally relied on the US market for sales of its higher end devices. Smartphones are on track to account for as much as 49.6% of all mobile device shipments to Thailand by 2015 up from the current rate of 17%, so as long as RIM maintains a top two position in that market it should see a significant boost to sales in the near future. In an effort to stem any erosion of market share RIM introduced its first touchscreen phone, the Curve 9380.

Update: BlackBerry and Java ME were the only operating systems to gain share during the month of December (keep in mind that Java ME was down for the year while BB was not); The figure considers all mobile devices even the ipad and other tablets (smartphones represent only about 25% of mobile devices worldwide).
Apple and Nokia's problems in Western Europe will give BlackBerry more opportunities which is great news for RIM considering it's not that far behind (1st quarter of 2011 RIM shipped 3.5 million blackberries to Western Europe, enough to give it a steady 16.5% market share in smartphones). 2011 saw a lot of new companies enter the handheld device market, that was enough to bring Nokia down from 1st place (40% share) to only a couple percentage points higher than 3rd and 4th place RIM and HTC (16.5% each), unlike Nokia RIM is holding onto its European market share. Android continues to dominate among operating systems, in the 2Q2011 51.9 million units were sold worldwide which represents 48% of the global market; Samsung led Android device makers at 17M.

RIM sold over 14M smartphones in the just ended third quarter which ties its record high of 14.2M in the quarter ended November 2010 (was about 25% lower than iPhone sales). For the year, Apple sold 70 million iPhones, 30 million iPads and 59 million other products. RIM also continues to attract the attention of major investment firms with NY based Omega buying up 1.43 million shares last quarter. In the just released quarter RIM posted earnings of 51 cents per share ($265m overall) and revenue of $5.17 billion in line with analysts expectations of $5.26 billion (with a 27.3% gross revenue margin/36.3% in the nine months). By comparison Motorola Mobility Solutions (mobile devices) with 38% more market cap, lost 10.7 cents per share (still independent Motorola Holdings with twice the market cap posted only 39 cents per share profit) last quarter while Nokia continues to post losses ($68m, $368m last two quarters, respectively). As of Nov. 26, 2011 total assets are $14.037b up 9.0% qoq with current assets accounting for half of all assets (down 3.8% to $7.2b but still up 20% from August 2010). As for Microsoft (the platform that Nokia has anchored itself to) it had trouble keeping even its 5.8% mobile platform market share.

RIM's encryption security, made even better in 2011 with the addition of Near Field Communications features to Java-based BlackBerry 7 Bold 9900, is so advanced the playbook, Blackberry's answer to the iPad, remains the only tablet endorsed for purchase by the US Federal Government (since July 2011). Additionally, blackberries are ten times more efficient than the competition when it comes to bandwidth usage which is one of the reasons they are doing so well in developing countries like Indonesia, where bandwidth is limited. RIM's leading edge security features
November 14, 2011: BlackBerry 7 phones awarded common criteria EAL4+ Certification meaning that the combination of security mechanisms and product design meets the highest level of accreditation. This applies directly to the BlackBerry® Bold™ 9900, BlackBerry® Torch™ 9810, BlackBerry® Torch™ 9860 and BlackBerry® Curve™ 9360. February 2012: Blackberry 7 operating system receives FIPS 140-2 (Federal Information Processing Standard) certification. The FIPS 140-2 certification for BlackBerry 7.0 and 7.1 gives the company bragging rights when it comes to encryption security. Since the award was granted all of BlackBerry's latest smartphones and Playbook tablet are now all certified by the FIPS program. FIPS is an award issued by the Canadian agency 'The National Institute of Standards and Technology (NIST) and Communications Security Establishments of Canada".

Platform diversity makes it easier for Android to compete BUT in the long term it will lead to new problems
Unlike the competition Rim is still betting mostly on its own devices and sotfware. Google is taking a more liberal approach; as long as device markers comply to the Compatibility Definition Document industry standard, they can use just about anything produced by Android. Platform diversity, something that RIM and Apple are more wary of getting into, is already beginning to have negative effects on Android in the form of Android fragmentation; Multiple phone manufacturers with one carriers apiece, simultaneously supporting more than one active version of Android. That has led to more troubleshooting problems and other hardware & software issues that are increasingly difficult to resolve due to there being less consistency across devices. Also a problem: Google can't address an issue as efficiently as say rim can because google doesn't design the mobile devices. As a result carriers are losing as much as $2B a year from phone returns/replacements; In fact during the 4Q2011 Sprint, the #3 US carrier reported a $1.3B loss, it sold 1.8 million iPhones and added 1.3M more net subscribers. There's also the issue of patents. Any patent infringement charged to Android affects all of device manufacturers that use it including market leaders like Samsung, HTC and LG.

Over the years Blackberry has improved battery life (fewer of the less popular apps, though next generation phones could require more power if they run on multi core processors), zooming/scolling (liquid graphics display), operating system speed (BB7 which runs the Torch 9810, Torch 9860 and Bold 9900 is 40% faster than BB6 and 100% faster than BB5) and screen resolution/display brightness. The company spent $369m on research & development an increase of 3.4% vs 3q2010.

For manufacturers relying on another's platform (Samsung/HTC on Android, Nokia on Microsoft) future patent laws could provide major stumbling blocks to growth; For example in late Dec 2011 Apple was granted a patent that can be used to keep HTC from bringing several of its newer Android products to the American market. That could eventually lead to other similarly used patents, severely limiting growth for companies without their own operating systems. (bgr: Apple’s new app-switching patent could be trouble for Android) Considering Rim is a patent rich company (1400 patents comprising at least $4B worth of intellectual property according to Bank of Montreal analyst Tim Long) it is in an enviable position. Google is also limited in how it handles troubleshooting problems since it doesn't design the mobile devices which run its operating system (one of the reasons Android phone replacement/repairs cost carriers over $2B a year that's much higher than at RIM & Apple. Apple update 1Q2012 - As of end of December 2012 Apple is selling iPhones at a rate of 285/minute. The company has $97.6B in cash and a 65% share of the tablet market (down from 90% a year ago). For carriers like Verizon and Sprint, carrying the iPhone is bittersweet; Since Verizon added the iPhone to its repertoire in late 2010 it has seen its ebitda margin decline to 42.2% from 46.4%, but at the same time it added hundreds of thousands of new subscribers (1.3M at Sprint).

My response to some of Paul's criticism;
Paul "There is no sugarcoating RIM's latest earnings report. The company warned that sales and profits for the next quarter will be far below already reduced forecasts."
Me - Nokia's earnings have reached nil and even google has reported reduced earnings (experienced 29% decrease q2q 1q11) proving that the success of a product is not directly related to earnings. Margins ARE being reduced industrywide (why Apple's iphone4S was rejected by the US's 6th largest carrier US Cellular because the product is not profitable, competition has reduced the profit margins significantly over the last year with new companies HTC and Samsung entering the market). Additionally, RIM's latest quarterly earnings of 51c/share also took into account a $485m loss attributable to unsold tablets & $50m loss due to the October outage, meaning smartphones didn't do all that bad (company's smartphone business makes up just over 50% of the market cap compared to just 2% for tablet division). Don't forget about the last of 2011 when Google's $864 million q2q increase in revenue actually translated into an earnings decline of 0.9% or 21M. In the same quarter, Apple's profits which amounted to more than $13 billion, actually exceeded Google's quarterly revenue by 23.4% ! Apple sold more iPhones during the last quarter than over the entire 2010 calendar year (285 iPhones sold per minute).

Paul "We now believe that RIMM needs to adopt an existing ecosystem (Windows Phone) in order to remain a relevant player in the smartphone market"
Me - Blackberry remains neck to neck with Apple in the corporate market with a near 40% market share. That means that blackberry's operating system is one of only two with widespread use in that market.
On Millenial Networks 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. (Millennial: Android usage doubled iOS in Q3, iPad king of tablets with 456% growth). So blackberry's operating system remains a player even without the QNX upgrade. Blackberry continues to be even more relevant than Nokia and that's with Nokia (and Samsung) relying on other companies to provide them with an operating system (even Samsung doesn't run its own operating system - so if android or windows or iOS face encryption problems Samsung and Nokia can't do anything about it - can't downplay encryption security with 90% of US companies hacked in 2010).
Of the top 5 mobile original equipment manufacturers only Apple gained market share in terms of US subscribers in September versus June (10.2% vs 8.9%) proving once again that Rim is not the only company experiencing market share loss in the US (LG and Motorola lost about the same % share as Rim in the OEM category); but because the US smartphone market is still growing in size company sales aren't dropping as fast as market share would indicate. The reason it's taking RIM so long to bring QNX bb10 phones to market is because RIM has to rewrite the Blackberry Enterprise Server so that it's tailor made for QNX. Don't forget that Apple is losing market share quickly in Europe's two largest markets, Germany and France. Apple's situation in Europe is deteriorating quickly with the loss of patent wars in Germany. Though Android is gaining, particularly in the key market of France (nearing 60% market share), Apple's problems in Europe are giving companies like RIM more opportunity to expand.

Paul - Blackberry is irrelevant evidenced by earnings drop/market share drop
Me - That's an overreaction. All smartphone companies are seeing their profit margins squeezed due to higher competition (average blackberry phone price decreased from $362 in 2005 to $308 in 2010). Blackberry's sales stabilized in the 3Q of 2012 fy at $19.8B annualized (according to Brigantine) while sales of the newest Blackberries released November 15 were seen as healthy by Royal Bank of Canada. The market share drop is limited to just the US market which only accounts for 36% of RIM's revenue. Even so, the market share drop shouldn't be a concern given that blackberry sales remain near record high (quarterly) and subscribers are up 35% to 75 million in just the last year. Also to keep in mind the last quarter included $485 million in losses due to unsold tablets and another $50 million from the outage in October.
It also depends on what region you're looking at. Blackberry remains more popular than ever outside of the US, UK & Canada; Outside of that region revenue is up to $8.24B for the first three quarters of 2011 up 48% from $5.57B in the corresponding period of 2010; Meanwhile revenue from the US market was down 44% proving that BlackBerry's future lies beyond the US market. Without taking the non US market into account it's impossible to properly evaluate RIM.
What's more, Google's 1st quarter earnings drop of 29% (quarter to quarter) was not an aberration, profit in the quarter ended December 2011 fell slightly from the previous quarter ($2705m vs $2728m) even though revenue grew by $865 million.

Consider the 3rd Quarter of 2012
*According to ad Impressions RIM was the only company posing significant threat 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.

*Revenue from outside the USA, UK & Canada up 48% to $8.24B in the first nine months of the 2012 fiscal period. That region now accounts for 58% of total revenue up from 39% last year.

*Sales stabilized at $19.8B annualized for 2012. Sales of the newest blackberry models were healthy according to RBC. Sales of the newest phones don't show up until late 3Q/early 4Q meaning previous quarters didn't realize the full impact.
*Blackberry sales still at near record high of around 14m (quarter ended Nov 2011) with the lowest future forecast of 11 million (quarterly) being only about 25% lower than the record high for a quarter (meaning when bb10 comes to market sales are guaranteed to break into new record territory).
*9.2% of all handheld devices in the United States ranked top 4 ahead of Nokia, Motorola (25% of all mobile sales are smartphones)
*18.9% of all subscribers in terms of platform (study by comScore, quarter ended September 2011), Continues to have a piece of the tablet market (only 1% or 150,000 units shipped/160,000 sold last quarter however with the tablet market growing by 42% to 29 million in 2012 holding onto that 1% could mean higher playbook sales). Worldwide tablet sales increasing to as much as 253 million in 2016. The iPad2 is expected to dominate in 2012 with market share estimates ranging from 69% to as high as 90% (the rest residing mostly with Android devices like Amazon's kindle fire). Sales of RIM's playbook have been lackluster not because of a lack of interest from end users but rather because the big three American retailers Sprint, AT&T and Verizon Wireless have yet to carry it, they say the market for tablets is currently too crowded and RIM will have to wait. That has forced RIM to bear the burden of sales and marketing.

*In the three months beginning 2011 64% of RIM's revenue came from outside the US ($3.6B out of $5.6B) so a hit in its US market share doesn't mean nearly as much for RIM as it did for PALM (another reason the comparison is nonsensical). Sales of Bold 9870, Curve 3G make up a healthy fraction of total sales signifying that the high end market in emerging economies is growing.

*As an investor you have to be excited about the $1.1 billion cash on hand and zero total debt. That's basically the same position it was in a year earlier, on November 26, 2011 when the stock was 4.3X higher at $59.20/share (cash was only $300m higher at $1.435b) and its cash isn't necessarily in a downtrend; between the 2nd and 3rd quarters of 2012 fiscal year (Feb->Feb) cash on hand was up 32%. At $13 a share even the most pessimistic observers have to be somewhat curious about the company considering the sum of its parts could be as high as $15-$18/share. You also have to take into consideration the P/E ratio which is remarkably low for a company in an industry where P/E ratio's average around 16X. Neither Motorola Mobility or Nokia have reported any profit for the past couple quarters though their P/E ratios remain seven times higher than RIM's.

*Blackberry has over 75 million subscribers!!!! 35% more than it did a year ago. Its p/e ratio rock bottom at 3.90 is especially ridiculously low when you compare it to Nokia (20.48) and Motorola (20.52); it suggests that RIM has fallen far behind those companies when in fact the opposite is true; it has maintained market share and popularity (and even some earnings) despite not turning to other platform providers (specifically android and windows) when the going gets tough.
Net earnings at $256m in the three months ended November 2011, that's down from $911.11m the previous year (though sales are stable) but remember all smartphone markers are suffering in the earnings department due to profit margins being squeezed industrywide (carriers like US Cellular have rejected the iPhone4 because of profitability issues). RIM is still reporting hundreds of millions of dollars in earnings, in stark contrast to Nokia which has been operating at a loss for over half a year (-68M, -368M profit in the last two quarters respectively). During the 2011 year BlackBerry was one of only three operating systems to gain overall US market share in the mobile device category, what's more during the last month of the year it was the only one of those three (iOS, Android, BBX) to increase its share.

*In Indonesia, the world's 4th most populous nation, Blackberry remains the most popular smartphone brand with an impressive 6 million users. What's even more exciting is that high end models such as the $540 Bold 9790 'Bellagio', are gaining popularity.

Now on to QNX Blackberry 10 smartphone technology (QNX operating system, QNX technology also known as Neutrino)
*Probable that 1st QNX phones will have their own native e-mail since playbook is getting its own native BES compliant e-mail just before Colt launch.
*Next generation phones also compliant with Android apps making the apps difference (6X more at Android than RIM apps world) irrelevant.
*QNX phones will have a more fluid touch screen than even the iphone due to the application of leading edge technology (with better screen resolution). The Liquid Graphics technology utilized in the Java-based blackberry 7 already gives it seamless zooming and scrolling.
*Thinner than the iPhone, same resolution as the tablet (1024 x 600), similar resolution to the iPhone4S (16/9).

key rim stats (Dec.22 data)

* Share Price: 13.50/share (reached $14/share by the end of Friday Dec.23)
* Book Value: 19.45/share
* Cash on hand: 2.49/share
* Analyst EPS Growth Consensus: -2.61%
* Debt: No Debt
Grmike's advice - Even in liquidation mode the company is not overvalued with its intangible patents (worth as much as $5B), QNX division ($2-3B) and other assets including current assets (cash over $1B). At this point it has to be considered a value stock with high reward/little risk. Considering it still has a growing market share internatinally (30%) and that developing economies are adding millions of people yearly to their middle class (Brazil especially with nearly 20 million added last year) the RIM brand could be in for an upswing even though the US market countinues to be a hostile place for it. The smartphone and tablet market is growing in size at a rapid pace and that makes any amount of market share increasingly valuable. Look for trends in call options, when they pick up don't hesitate to buy a couple. The risk is minimal with share price so low but the reward is high and there are many cases in which a high reward would be realized. Don't underestimate the interest RIM garners as a takeover target now that Motorola is off the market, Nokia is expensive, isn't commited to developing its own independent operating system (Symbian has all but been abandoned in favour of Microsoft), is unprofitable and has no tablet. I think it's very telling that one of Research in Motion's biggest investors to date has been Jaguar Financial, a group whose sole purpose is to "invest in underperforming, undervalued or unappreciated companies".

General Commentary - China recently surpassed the US as the biggest smartphone market in terms of unit shipments (not revenue though) and Nokia still leads there (but with rapidly declining share) meaning that there's an opportunity for RIM to capitalize (if Android's Samsung, LG don't take it). Apple's still experiencing problems in Europe (not as bad as Nokia which got its share cut in half in 2011) with the iOS getting dangerously close to 20% in France and Germany meaning it recorded negative 5-10% growth over the last year, the opposite of what's been happening with Android. In Germany, Android holds 3X the market share of Apple which means a lot since Germany is Europe's biggest market. Germany has been a hostile place for Apple (just look up the patent ruling in favor of Motorola) so it could be a while before Apple makes up any of the share losses.
All is not lost for Apple abroad though. The iOS is still at over 30% in the UK (only European country that's over 30%), Japan (38%), Australia (41% and growing) and of course the United States (36% and growing). South Korea is Android dominant (85% share) while Nokia/Symbian still lead in China and Brazil but Nokia is losing market share fast as it transitions out of Symbian and over to Windows.

other info
71.1% of mobile subscribers in the United States used the text messaging services (September, up from 69.6% in June) and 31.1% of them accessed blogs/social networks (up from 29.1%).

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