When examining the performance of a company, I find it useful to evaluate both the board of directors and the management. The board is responsible for setting the general direction of a company. In RIM's (RIMM) case, they have determined that a rollout of BB10 is the best way to create shareholder value. We will need to see how the BB10 launch goes before being able to pass judgment on this strategy. Management's role is to execute on the board's vision, and for this we can examine RIM's CEO, Thorsten Heins' record to date.
Short sellers must have felt blindsided by the stellar performance of Thorsten Heins these past few quarters. It's lucky for them that Heins is required to inform shareholders of any material changes to the business model, such as his disclosure this quarter that many BB10 phones would produce little or no recurring service fees. I'm sure that short sellers were grateful for the myopic focus of analysts on this point, as it was the only significant piece of 'bad news' in RIM's third quarter and easily allowed them to cover their increasingly dangerous short positions.
Analysts reacted negatively to the service fee adjustment because the service fees are almost pure profit and represent roughly a third of RIM's currently anemic revenue stream. However, I believe that BB10 will allow RIM to have higher, more normalized hardware sales. In this case, service fees will become a smaller percentage of a larger revenue base, as was the case in prior years. All RIM has to do next year is sell the same number of devices shipped in 2012, and any mix of BB10 devices will drive ASP's (average selling prices) higher. Any increase in devices shipped would also add to hardware revenue. Higher hardware sales and margins would have a positive effect on the current share price despite any pressure from reduced service fees. Keep in mind that for all of 2012, RIM was selling old phones running old software while higher end users waited impatiently for BB10.
Another way of looking at the loss of service fees is that a major barrier to rapid BB10 adoption has been removed. The addition of new consumer services and revitalization in the enterprise space may even result in an increase in service revenues in the future. The fact remains that if you have doubts about a successful BB10 launch, then service fees are no reason to buy the stock. In such a case, subscriber losses would accelerate resulting in a poor business outlook for the company. So the case for RIM looking forward still rests solely on BB10 adoption, irrespective of the service fees.
The service issue masked third quarter results which beat on almost every metric except the subscriber base, which was down one million sequentially but up four million from a year ago to 79 million. A small subscriber loss was the tradeoff for strong operating cash flows of $950 million, as discounting hardware further would have negatively impacted cash flow. Revenue and earnings beat expectations and RIM's $600 million cash increase to $2.9 billion positively surprised analysts. Because the stock has been recording losses, it is difficult to perform a fundamental analysis based on recent data. For that, one needs to model what a successful BB10 launch would do to hardware ASP's and volumes.
When Heins took over last January, most believed that RIM would not even make it to a BB10 launch. Heins' goals needed to include milestones to assure the public that his company would survive. There are a few ways a company can do this: they can engage in restructuring to lower costs, be efficient with inventory levels, be cash flow positive, build up a significant cash balance, maintain an existing subscriber base, be extremely transparent about any changes to the business model, replace critical senior leadership positions like the CMO or COO if needed, and build support from carriers, developers, media and early adopters for new products. Heins has delivered on every single one of those milestones, all while enduring "more doubt and scrutiny and outright ridicule than any rookie CEO should have to" according to the Cantech Letter. For his outstanding performance, Heins has been nominated for Tech CEO of the Year by the Cantech letter, and so far he's garnering over 85% of the votes.
Based on Heins' performance this year, any board of directors in their right mind would hire him in a heartbeat. But his experience runs way beyond this last year. Heins earned himself a reputation as a leader who could get things done after he successfully turned around Siemens's struggling optics division in 2002. Shortly after, the unit went on to become the most profitable division of Siemens as they "couldn't build enough of the product". Fortunately for RIM, those skills were a perfect fit as he inherited a company long on innovation but desperately short on execution.
If you believe that RIM has the innovation to make a comeback, than the only remaining question mark becomes execution. By examining Heins' past record, I believe that investors have all the information they need to make up their minds.