Clarity Comes Too Late To RIMM

By Stephen D. Simpson, CFA | April 04, 2012 AAA

The best thing that can be said about Research In Motion (Nasdaq:RIMM) in the wake of its fiscal fourth quarter results, is that at least new management is no longer pretending that the emperor is fully clothed in regal splendor. Unfortunately, those hanging on in the hopes of a turnaround story should wonder whether management really has a firm grasp on the company's best chances for rebuilding the business.
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Dismal Results
It's hard to call RIMM's fourth quarter results anything other than a wreck. Revenue not only missed expectations, but fell 25% from last year and 19% from the preceding quarter. Handset revenue was bad; down 37% on what looked like a double-digit decline in units. Service revenue was up 26%, but makes up only about one-quarter of total revenue (and is ultimately a byproduct of device sales).

RIMM likewise had ugly profit performance. Operating income dropped to a loss, while gross profit fell about 43%. Notably, the company did not significantly cut R&D or SG&A expenses during the quarter as compared to last year.

SEE: How To Pick The Best Telecom Stocks

If You Can't Beat Them ... Quit?
Judging by management's commentary on the conference call, it looks like RIMM is mostly getting out of the high-end mobile device market. Instead, the company will retrench around "entry level" phones and business-focused products.

On the surface, this makes a lot of sense. Blackberries have always appealed to business IT professionals because they offer a lot more security than comparable consumer devices. What's more, Nokia (NYSE:NOK) has long been able to scrape by on the back of its lower-feature, lower-price phones, even while seeing major losses in high-end share in developed economies.

Unfortunately, it only makes sense on the surface. Nokia may have survived, but the stock price was hammered and much of what passes for optimism on Nokia centers around its venture with Microsoft (Nasdaq:MSFT) to re-emerge as a contender in full-feature smartphones in the U.S. and Europe.

Moreover, I'm not sure the enterprise market is still a real target for RIMM. Numerous companies, including Cisco (Nasdaq:CSCO) and Check Point Software (Nasdaq:CHKP), have rolled out products specifically designed to address enterprise mobile device security issues. While some businesses may indeed try to forgo buying those products and insist that employees use more secure RIMM products, it seems that the "bring your own device" trend is too strong to stop. Moreover, I would ask RIMM longs if they really want to bet against Apple (Nasdaq:AAPL) eventually shoring up security gaps for iPhones and iPads.

SEE: Cell Phone Evolution

Where to Now?
It's all well and good that management at RIMM now seems open to partnership, but the problem is that this may be about two years late. At this point, RIMM's best bet may be a sale of the company, but I think the list of bidders could be small. Amazon (Nasdaq:AMZN) could take a look, and maybe Nokia/Microsoft would consider it, but I'd say that Lenovo (OTCBB:LNVGY) is the most likely bidder, and they're not exactly famous for paying a lot when they buy businesses.

What's intriguing to me now is how much uncertainty swirls around this stock. Sell side analyst estimates after this earnings report run from just above $11 billion to nearly $16 billion in revenue for the next fiscal year - quite a wide spread indeed. What's even more interesting is that the two highest estimates I've seen come from analysts that have "hold" and "sell" ratings.

SEE: Analyst Recommendations

The Bottom Line
With no guidance from management and the likelihood of several more quarters of dismal revenue performance, I wouldn't try to value RIMM on a cash flow basis today. Instead, I'd look to tangible book value, and these shares presently trade at about 10% more than that value. While RIMM management may be able to convince somebody else to buy its technology, I wouldn't be inclined to pay anything over 10 or 15% more than tangible book until I see some sign of stability in the business.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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