Another RIM Job?
Shares of Research In Motion Ltd., which have soared over the past two months on a burst of positive sentiment, fell sharply Friday as investors digested a fresh reason to worry about the smartphone maker.I used to work as a sell-side economist at the National Bank Financial. Had to wake up very early to go to dreadfully boring meetings and listen to analysts spew their recommendations, which the salespeople relayed back to the buy-side portfolio managers who would parrot the information at their morning meetings (it's quite comical and sad!).
After gaining momentum with the unveiling of its new BlackBerry 10 device, RIM released earnings on Thursday that contained worrying new details about the company’s service revenue – a key source of much-needed income.
On a conference call with analysts Thursday, RIM management seemed unable to reassure investors worried about declines in RIM’s service revenues. That, combined with bearish analyst notes Friday, send the shares down about 22 per cent in Toronto.
RIM, which has struggled against Apple Inc. and Samsung Electronics Co. Ltd., hauls in roughly one-third of its revenues from wireless operators for BlackBerry access to RIM’s proprietary, secure messaging network. This is usually a per-device fee that ranges from a couple of dollars per month up, depending on how important the carrier is to RIM’s business.
As RIM’s market influence has faded, the company gradually lost the ability to demand steep fees from carriers. Now, even as smaller competitors in the mobile device management field offer ways to securely transmit communications from various smartphones, RIM will begin offering “tiered” pricing for access to its network in a way that analysts fear will reduce a crucial source of revenue.
And RIM’s service revenues are a significant source of cash: In the third quarter, services were 36 per cent of RIM’s $2.7-billion revenues. In the second quarter, service fees added more than $1-billion to RIM’s coffers – a sizable chunk to be at risk.
Kris Thompson at National Bank Financial, the analyst whose bullish note led to RIM’s unexpected 17-per-cent surge on U.S. Thanksgiving in late November, led the bears on Friday by downgrading RIM shares.
In his previous note, Mr. Thompson had raised his price target from $12 to $15, capturing the positive sentiment around a company in the lead-up to the January 2013 launch of RIM’s new BlackBerry 10 phones.
Friday morning, however, Mr. Thompson changed his mind: He downgraded the stock to “underperform” and slashed his price target from $15 to $10 on worries about RIM’s service revenue.
Unique among handset makers, RIM always pulled in extra cash from its proprietary messaging network – and fresh news in Thursday’s results reminded analysts of the risks to RIM’s business model.
“RIM reported decent overall results,” Mr. Thompson wrote in his note. “Then management disclosed that monthly service revenue will undergo a change to a tiered menu. When peppered with questions, management was ill prepared to provide satisfactory answers. We believe investors will punish the stock until service revenue can be better quantified. We do not believe that RIM can sustain profitability with a standalone hardware business.”
Mike Walkley, who follows big handset companies for Canaccord Genuity, reiterated his “sell” rating partially because the migration to the BlackBerry 10 platform – from RIM’s current BlackBerry 7 software – “adversely impacts” service revenues. RIM beat Mr. Walkley’s estimates for the third quarter, but he says his thesis remains unchanged.
“With our analysis indicating increasing competition from iPhone 5, Android and Windows 8 smartphones in Western markets … we expect softer sales of BB7 smartphones in future quarters with persistent pricing and margin pressure,” Mr. Walkley said. “While RIM management remains bullish for its BB10 smartphone launch January 30, we do not believe BB10 devices will turn around its struggling business.”
Still, some analysts saw much to admire in RIM’s third quarter. The company’s new CEO Thorsten Heins took hold of a struggling company that was missing product deadlines and has, to some extent, whipped it into fighting shape. Tom Astle of Byron Capital Markets noted RIM’s strong balance sheet, a new product that is raising eyebrows, a “motivated” global network of wireless operator partners and a “loyal and long-suffering user base” around the world.
“RIM reported what we think was a very well-executed quarter,” he wrote, adding, “for a company with an ancient product line.”
Learned a long time ago that analysts are terrible at predicting future stock price movements. Their reports are read to understand a company's fundamentals but most of these guys and gals don't have a clue of what they're talking about when it comes to timing the entry and exit of a stock. Worse still, they're biased and will never slap a "sell recommendation" fearing it will impact their underwriting business with a company.
This is why I prefer going over the 13F filings of top funds because unlike sell-side analysts, these fund managers actually put their money where their mouth is. In late January, wrote a comment on betting on Blackberry's revival where I commented that Fairfax Financial Holdings Ltd. (FFH), the insurer run by Canadian billionaire investor Prem Watsa, doubled its stake in Research in Motion.
This week, Nasdaq's GuruFocus published an article, Will Prem Watsa Lose Money on Research In Motion?, where they note the following:
Prem Watsa began building a position in the third quarter of 2010 when the stock traded for $50 per share on average. He continued adding as the price continued falling. His largest buy took place in the third quarter of 2012 - he purchased more than 25 million shares at $7 per share.Fairfax Financial Holdings isn't the only top fund that increased its stake in RIM. As you can see below, among the top institutional holders of RIM, you'll find elite hedge funds like Renaissance Technologies and Viking Global Investors (click on image to enlarge):
Fairfax now has a lot riding on the RIM's comeback as the position equals a 9.89% stake in the company, and a full 21% of their investment portfolio.
Unfortunately, Research In Motion's third quarter results were mixed and injected volatility into the stock.
RIM announced a 47% year-over-year decline in revenue to $2.7 billion. Net income was $14 million, compared to $265 million a year previously. The company also bolstered its cash base by $600 million to $2.9 billion.
Earnings were better than expected, as the company forecast a loss last quarter due to a transition to its next generation of BlackBerry and the completion of its cost-reduction plan. Many investors, however, appeared more concerned with the decline in its BlackBerry subscriber base to 79 million users, from 80 million in the second quarter. RIM's share price has dropped 21% since the earnings results announcement.
But Watsa has a more far-sighted and comprehensive view of the company. In an interview with GuruFocus, he cited one big reason: "They have lots of cash, huge cash flows," he said.
Another less-known advantage of RIM is its leading market positions in other countries. RIM currently has a 60% of smart phone market share in Nigeria and 50% in South Africa, according to research from Canalys. South Africa and Indonesia are the company's two biggest markets after the U.S. and the UK.
Asia Pacific in particular is a key market for demand. "Asia Pacific accounted for over 53% of the worldwide smart phone market. China has been a powerful driver behind volumes again for many vendors and the market broke through the 50 million unit barrier this quarter," Canalys said.
On a long-term basis, the company has also been able to increase revenue at a rate of 58.7% over the past ten years, and book value at a rate of 29.1%. Introducing an ambitious new iteration of its once game-changing mobile device that led that growth will, it hopes, revive interest and sales going forward.
The new BlackBerry 10 features a touchscreen virtual keyboard, a "BlackBerry Flow" application grid for real-time multitasking in and out of programs. The BlackBerry "hub" keeps apps and messages together so users can respond to messages from any social networking platform from one place.
BlackBerry COE Thorsten Heins told the BBC in October that it was more than an update of previous phones. "We're not just building a new update of a Blackberry sub - we're building a whole new mobile computing platform. Don't underestimate the dynamic that this platform is going to create in the market," he said.
"What I see, in my markets, in the markets I'm in, outside of the U.S. - huge growth, huge commitment to BlackBerry, and in the U.S., we're going to regain our market share with BlackBerry 10" he added.
The BlackBerry 10 is set to launch on Jan. 30, 2013. The company is expecting that sales of its BlackBerry 7 could slow until then as users hold off purchasing new phones until the new version is available. To compensate, it plans to use pricing initiatives the BlackBerry 7 devices and services fees to maintain its subscriber base. It will also increase marketing spending on the new phone in the fourth quarter. Consequently, RIM said it expects an operating loss for that quarter.
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A little trading note here. All the idiots who missed the run-up and bought RIM shares on Thursday right before the earnings report got their heads handed to them. Never, ever buy a stock right before earnings. Even if it pops, it will settle back a little before moving back up. Top traders always sell into earnings, especially after a huge run-up, and wait till after earnings to buy back. Large institutions and sophisticated investors use option strategies to limit losses.
While the dummies at Zero Edge were proudly proclaiming "RIMberrrr", the stock had more than doubled from its September lows. It's now at an important technical support level where traders will be looking to jump back in (click on image to enlarge):
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I wouldn't be surprised to see another run-up in RIM shares going into the launch of BlackBerry 10 on January 30th. Think RIM is a great stock to trade but I also think the company has a strong future ahead and will give Apple a run for its money (admittedly, I'm in the minority).
I'm eagerly awaiting the launch of the Blackberry 10 but I can tell you one thing I and a few of my friends who still use BlackBerries don't like, the touchscreen virtual keyboard. In fact, while I'm used to it on my iPad, I hate the iPhone for that very reason. The classic BlackBerry keyboard is the best.
The other thing I hate from these new smartphones is that they're heavy and bulky. The beauty of the BlackBerry Curve is that it's light, easy to carry in your pocket and the keyboard is awesome when you need to reply to emails. The traditional keyboard is one feature I truly love.
The BlackBerry "hub" is a great idea as are some of the other features on this new device (see below). Still love BlackBerry Messenger (BBM) and look forward to seeing a better and faster browser, another feature that was weak on BlackBerries.
Below, Vivek Bhardwaj of the BlackBerry 10 product team showcases BlackBerry 10 features live, on stage with Thorsten Heins at BlackBerry Jam Americas.
Bhardwaj recently spoke about the keyboard for BlackBerry 10, saying it's designed to be fast and intuitive. It's built with innovative technology that makes typing on BlackBerry 10 easy -- even with one hand. And it looks like and feels like a BB keyboard. YAY!