Research In Motion Not Likely to Spend $1.2B on Share Repurchase Program

On November 5, Research In Motion (RIMM) announced a buyback of up to $1.2B in shares starting November 9 and lasting for up to a year. When I read this announcement, I pounced on the stock the minute pre-market trading opened. This was quite a mental exercise for me because I had just closed out the last of my puts on RIMM the prior week. However, given that part of my rationale was that RIMM appeared over-extended on the downside, I figured that positive news like this could pop the “over-stretched rubber band” back to the upside.

Much to my disappointment, RIMM opened for trading at my purchase price and within 45 minutes printed a fresh low on the day. That move punted me from the position with a very small loss. Two days and counting, the response to RIMM’s buyback announcement remains relatively tepid. It is as if the market is skeptical that RIMM’s share repurchases will amount to much. After reviewing RIMM’s balance sheet, I became skeptical of RIMM’s ability to spend the full $1.2B allocated for the buyback.

A quick review of RIMM’s balance sheet (data from Gridstone Research, Inc.) shows as of the quarter ending August, 2009, RIMM had $1.1B in cash and equivalents and $581M in short-term investments. Cash is down 5% both from the previous quarter and year-over-year. Short-term investments are down 6% from the previous quarter but up 38% year-over-year. Total current assets are $5.2B (total current assets include things like inventory and receivables), total current liabilities are $2.2B, and RIMM has no long-term debt. RIMM’s buyback would consume all of its existing cash or 71% of its total liquid holdings.

I find it hard to believe that RIMM would execute such a large drawdown of its stash of cash in just 12 months in a slow growth economy that remains borderline recessionary; the company lost cash in the past year, and boosting cash levels may prove extremely difficult in the coming year. Granted, with cash earning next to nothing these days, management need only believe in modest appreciation of the company’s shares to justify a massive repurchase program.

Cisco (CSCO) provides a great contrast. On November 4, CSCO’s board of directors authorized up to $10 billion in additional repurchases of its common stock with no fixed date for termination, bringing the total authorization up to $13.1B. CSCO’s balance sheet is flush with liquidity: $4.8B in cash and cash equivalents, $30.6B in short-term investments. Total current assets are worth $44.7B. While RIMM’s buyback consumes the majority of its liquid assets, CSCO’s buyback consumes about 37% of its liquid assets. I have very little trouble believing CSCO can handle its announced buyback under the current economic conditions.

My note of caution comes from watching Joy Global (JOYG) back away from its buyback program in March as its already limited cash and liquid holdings dwindled further into the depth of the recession. In September, 2008, JOYG boosted a $1B buyback to $2B with just $307M in cash in hand.

A TheStreet.com article “Not Every Share-Buyback Shows Confidence” also strikes a chord of caution when it comes to announced buybacks. The author reminds us that attempts to boost a company’s stock price through buybacks also benefits employees who hold stock as part of their compensation – management typically holds the vast majority of those shares.

In RIMM’s case, stock-based compensation has increased over the years: $38.1M at the end of fiscal year ending Feb, 2009, up from $33.7M the prior year. Stock options are detailed in the annual report. The last report was for 2008. Options outstanding dropped from 9.1M to 7.3M from March, 2007 to March, 2008. The annual report also states

as of March 1, 2008, there was $133.6 million of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which, on a weighted-average basis, results in a period of approximately 2.5 years.

That end-period just happens to coincide with the expiration of RIMM’s announced buyback. If this is more than just a huge coincidence, it at least shows that RIMM is highly motivated to execute this buyback – even if it cannot deliver the full $1.2B.

RIMM’s management is surely motivated to take action given the continued bleeding in the stock since its September earnings report which sent the stock down 17% in one day. From a technical standpoint, last week’s plunge below the 200 day-moving average threw up a huge red flag (see chart below). A similar breakdown last occurred September 3, 2008. Three months later, RIMM lost 66% of its value (of course, the entire stock market crumbled in that period). If RIMM’s buyback fails to prop up the stock in the short-term, there is very little price support until April’s up-gap is filled around $49. (Click here for a more detailed technical analysis of RIMM from ino.com.).

RIMM Buyback Comes At A Critical Technical Juncture for the Stock

*Chart created using TeleChart

Be careful out there.

Disclosure: no positions

Comments

[lucky lenny:]

Duru, I’ve learned to ignore the stock price; which could be based on many factors. RIMM can easily pull off the buyback; and then some. RIMM is making about $550 mill/qtr; or about $2.2 bill/year + RIMM is sitting on about $2.4 bill in cash & invesmtnts. Provided RIMM’s profits continue at this rate, the stock buyback is only about 6 months of income and can very easily take place.

Nov 08 07:35 AM

[JamesApple:]

1. Potential double digit % drops in blackberry sales
2. Huge payroll and operating expenses
3. Negative shareholder sentiment over dividend loss
4. Next to zero cash - cashflows vulnerability
5. Huge depreciation of unsold inventory
6. Weak investor support
7. Unknown continuation of the Recession

Under these pressures, Rim's buyback is next to suicidal, but perhaps necessary. The weight on downward pressure on Rim share price will only increase as iPhone and Android continue to take away blackberry sales. Apple is increasingly taking away Rim's remaining advantages such as the ability to PIN between blackberrys as Apple builds up network operation centers. Apple and Google have close to $70 billion in cash to compete with Rim's $1 billion making any Rim buyback insignificant.

Nov 08 08:20 AM

[heh:]

what a useless article, nobody cares how your loosing money

Nov 08 08:38 AM

[lucky lenny:]

James, i believe RIMM's sales are growing; albeit not as fast as apple's. From a personal level, I don’t know of too many people whose companies have switched from Blackberry to the iphone, android, or any thing else. In most companies I know, IT & everyone insist that security is #1 priority. BB does it all & is the most secure; so we're not switching. So I have to believe your premise of dropping sales is just wishful thinking; however, if u know BB's sales are really dropping, kindly post your source.

Nov 08 09:30 AM

[nurul:]

Blackberry is the best phone, If you want application may be iphone most of the application is useless anyway. Clear picture great reception overall best phone in market. so called experts are trying to finish such a great company with all negetive speculaion. Try Blackberry Storm 2 and play with it you will know what i am talking about. great Innovation and great technology.

Nov 08 10:54 AM

[vpwinner:]

Problem with buyback is that most investors really want RIMM to use that money to develop more and better products. RIMM is falling behind in their product area and is facing more and better competition. Buying back their own stock is almost like surrendering and admitting they no longer have the spark that propelled them to early success. Stock buybacks could be viewed as positive if they were in an older more established product area. They are not and their move, even if just a ploy, was not a positive event. Don't get me wrong. I think their stock is undervalued but that move does not give me confidence they can return to their old glory days. By the way, I do hold RIMM. Will likely sell it once the undervalued state is corrected.

Nov 08 12:24 PM

[JamesApple:]

Rim blackberrys are long in the tooth now, I do not see Rim making anything significant or new in the future. The Rim blackberrys 10 years from now would still be similar to the blackberrys today. So perhaps Rim figures it may as well use its cash to save its falling stocks. It does seem that way. Blackberrys are fine for office phones but anybody who wants email message phone would also want it to have something like 100000 apps and be cool like the iPhone, and that's exactly what's happening because the expensive blackberrys cost about the same as iPhone and the new Droid, value concise consumers go for the iPhone, and consumers are far more numerous than business users.

We will see how much iPhone would increase its 30% from 2% before as blackberrys fell from 52% to 40%. the smartphone market is really up to Apple to lose. If the analysts were right iPhone should be up around 70% by next year because the real battleground is not the corporations and business users, but the 300 millions consumers who want the best all purpose smartphone in the world, that is the iPhone, not blackberrys.

I will tabulate companies that ditched blackberrys for either the iPhone or another make that's not from Rim.

Nov 08 02:08 PM

[JamesApple:]

Apple is a great company. IBM is a great company. Rim is not great company, it is way too volatile and shaky.

Nov 08 02:14 PM

[Dr. Duru:]

Just a quick point of clarification, as this issue came up in an email exchange I had. I purposely excluded counting long-term investments on the balance sheet. *Typically*, long-term investments are not considered liquid. Unless the monies were specifically set aside for future repurchase programs, a drawdown of these funds for such a purpose could be considered a red flag about the financial health of a company.

Nov 08 02:54 PM

[JamesApple:]

Apple, Google, Microsoft, HP and Dell have over $150 Billion cash to go into 4G WiMax led by brand new devices like Apple iTablet. 2010 will unveil brand new eras of all purpose gadgets making smartphones obsolete. Apple iTablet size of a small notepad capable of every need you can think of but indefinitely more powerful than anything currently available.

Smartphones will be obsolete.

Nov 08 02:57 PM

[cowlady:]

Kids like a zillion apps. It's like satellite TV. How many friggin channels can you watch in a lifetime? When asked why I have basic cable, I tell em that I can barely stand the channels I have. I don't watch most of em so why would I want more? Same with apps. Different phones suit different folks with differing priorities. I think RIMM is definitely undervalued and they can perfect what their niche wants most and but also cater to a group that may not want to pay for a gazillion apps they know they will never use. To each his own. I personally don't like touch-screen keyboards. Too easy to make mistakes. To each his own!

Nov 08 05:45 PM

[User 493712:]

Hi JamesApple,
I have a lot of friends having both BB and Iphone. This huge market can support more than 2 major players. I understand you are a big fan of Apple. But please don't discount RIMM by using those nonsense comments. I don't see BB will disappear from the market anytime soon. Meanwhile, I noticed that most of Iphone users are young people, who is looking for cool thing. However, the main driver of the economy is business users and those wealthy professionals, who have made enough money to pursue classic product (BB). Same thing happens in the computer too. Mac is cooler than most of the laptop like IBM, Toshiba or dell. But most of the business users are still using IBM, Toshiba and dell. It will not change anytime soon.

Nov 08 08:24 PM

[JamesApple:]

After seeing remarks made by pro BB people I see one pattern. These BB fanatics would only stop BBs if and only if Apple buys out Rim using the $34 billion cash Apple has; once Apple owns Rim these BB fanatics would switch to Nokia and stop buying BB. It's basically a thinly veiled hatred of Apple these pro BB people have towards iPhone. One particular point I wish to make is, although Rim makes the Storm which is like the iPhone in hardware and usage, you will never see any BB user say a bad word against the Storm but they badmouth the iPhone all the same, even though the Storm can't even run most of the available blackberry apps!!

The prejudice and dreads of BB fanatics toward the iPhone are painfully clear barely hidden by stubborn irrational hatred. This kind of animalistic animosity is stereotype BB user mentality.

Nov 08 10:16 PM

[JamesApple:]

BB are simply out of date overtaken by many. It's simple folly to say it's OK to use out of date BB. It's just irrational denial some people are using to stall change. American corporates are moving to iPhones in time. The American consumers are already sold to iPhone. BB are on the way out as Rim continues to deteriorate overtaken by competition.

Nov 08 10:32 PM

[nking006:]

Dear JamesApple,

I see your postings all over the internet. All they do is bash Blackberry. What is so wrong with Blackberry? They provide such an enormous amount of security and trust that the President of The United States of America uses one, Barack Obama. Let me repeat that. The President of the United States of America uses a Blackberry. In addition, he has been quoted numerous times about how he loves it. Do you think the President of the most powerful country in the entire world would be using an outdated, unusable, slow, or insecure device? I don't believe so and I would most likely guess that the rest of the country would agree. Except, maybe for some teenagers and young adults between the ages of 16-25. I hope you enjoy your hate spree. Cheers.

Nov 08 10:35 PM

[rich168:]

My take on RIMM is on the global mobile industry.
RIMM is strong in the US and CANADA.
not much anywhere else.

RIMMs bread and butter is email delivery.
Yes they are secure, yes the US president uses it made even more secure.

In most parts of the word. its SMS (short messaging system)that rules. Which USA took a very long time to embrace albeit understand.

Would you think ASIANs and EUROPE, LatAMs. would suddenly embrace RIMMs push email? That's a paradigm shift which has a very very nil chance.

Nov 08 11:04 PM

[RiskCapital:]

I wish I had enough money to get something else. I hate my iphone. The glitches are not worth the apps. I am hoping that if I take it in again, they will just let me get another phone. It may seem cool, but it is a POS.

Nov 09 09:17 AM

[User 493712:]

Hi Rich168,
I partially agree with you that BB is strong in US and Canada but it is not "not much" in anywhere else. It is doing pretty good in Europe as well. You are right it is not much in Asia and LatAms. I am glad that you did not mention "Africa". My point is there are reasons for BB having no significant presence in those area. Asia and LatAms have majority population in developing country stage (even though some of them are rich). There are a lot of growth room still can be found in cell phone industry. Why those carriers wants to jump in Smart Phone and facing uncertainty about whether the general population can afford those expensive toys? That is why MOT is doing great in those place but fighting for survival in north america. However, as the ecomony conitnue to grow in Asia and LatAm, finally they will adpot the Smartphone. And RIMM will be a big player as it is here.

Nov 09 09:49 AM

[Wireless Wiz:]

100% wrong here. What if you own US Treasuries due in 13-24 months? Certainly very liquid. The true cash balance is about $2.5B for RIMM and they generate $200-400 mln per quarter depneding on capex, IP purchases, acquisitions, etc. This is the smart move - buy shares when everyone hates your stock. It will be loved once again when the tailwainds from smartphone growth helps all of the major players, their APSs increase due to a better mix, and margins at least stay put.


On Nov 08 02:54 PM Dr. Duru wrote:

> Just a quick point of clarification, as this issue came up in an
> email exchange I had. I purposely excluded counting long-term investments
> on the balance sheet. *Typically*, long-term investments are not
> considered liquid. Unless the monies were specifically set aside
> for future repurchase programs, a drawdown of these funds for such
> a purpose could be considered a red flag about the financial health
> of a company.

Nov 09 09:57 AM

[Wireless Wiz:]

Interesting (if true) because all the iPhone lovers would have you believe that it's the only phone out there and the best thing ever. Personal choice trumps all else. Just ask JamesApple - he truly believes that 100% of poeple will only buy iPhones - and he continues to be absolutely wrong (but unable to see the light behind all the hatred).


On Nov 09 09:17 AM RiskCapital wrote:

> I wish I had enough money to get something else. I hate my iphone.
> The glitches are not worth the apps. I am hoping that if I take it
> in again, they will just let me get another phone. It may seem cool,
> but it is a POS.

Nov 09 09:59 AM

[Wireless Wiz:]

FACT: Yet 80% of new subscriptions are to the consumer.


On Nov 08 10:32 PM JamesApple wrote:

> BB are simply out of date overtaken by many. It's simple folly to
> say it's OK to use out of date BB. It's just irrational denial some
> people are using to stall change. American corporates are moving
> to iPhones in time. The American consumers are already sold to iPhone.
> BB are on the way out as Rim continues to deteriorate overtaken by
> competition.

Nov 09 10:02 AM

[Wireless Wiz:]

Laughable post here. Storm1 was garbage. Storm2 IS much better. I own an iPhone, Storm1, Storm2, am open to whatever device fits my needs, and I use the Storm2 as my only device now. Personal choice matters, James. Oh, and before you bash away, I own 3 Macs, AppleTV, 3 or 4 iPods, and many other Apple products, so don't say that BB lovers hate Apple - that is simply not true and a dsiplay of your hatred. Please don't project your hatred on others.


On Nov 08 10:16 PM JamesApple wrote:

> After seeing remarks made by pro BB people I see one pattern. These
> BB fanatics would only stop BBs if and only if Apple buys out Rim
> using the $34 billion cash Apple has; once Apple owns Rim these BB
> fanatics would switch to Nokia and stop buying BB. It's basically
> a thinly veiled hatred of Apple these pro BB people have towards
> iPhone. One particular point I wish to make is, although Rim makes
> the Storm which is like the iPhone in hardware and usage, you will
> never see any BB user say a bad word against the Storm but they badmouth
> the iPhone all the same, even though the Storm can't even run most
> of the available blackberry apps!!
>
> The prejudice and dreads of BB fanatics toward the iPhone are painfully
> clear barely hidden by stubborn irrational hatred. This kind of animalistic
> animosity is stereotype BB user mentality.

Nov 09 10:06 AM

[Wireless Wiz:]

Dividend loss??? What are you talking about. They have NEVER had a dividend.

Drop in BB sales? Except that they guided to the highest ever device sales this quarter.

Zero cash?? I think $2.5B > 0 (math fans please check my math here)

BB sales have actually GROWN through the recession.

James this is CLEAR proof you are a troll pure and simple.


On Nov 08 08:20 AM JamesApple wrote:

> 1. Potential double digit % drops in blackberry sales
> 2. Huge payroll and operating expenses
> 3. Negative shareholder sentiment over dividend loss
> 4. Next to zero cash - cashflows vulnerability
> 5. Huge depreciation of unsold inventory
> 6. Weak investor support
> 7. Unknown continuation of the Recession
>
> Under these pressures, Rim's buyback is next to suicidal, but perhaps
> necessary. The weight on downward pressure on Rim share price will
> only increase as iPhone and Android continue to take away blackberry
> sales. Apple is increasingly taking away Rim's remaining advantages
> such as the ability to PIN between blackberrys as Apple builds up
> network operation centers. Apple and Google have close to $70 billion
> in cash to compete with Rim's $1 billion making any Rim buyback insignificant.

Nov 09 10:11 AM

[rich168:]

Yes smartphones will be growth as wealth grows over ASIA, LatAM.
But people buying smartphones won't buy one for Push email which is RIMMs bread and butter.

They are used to SMS. Push emails are useful for Managers, CEO, CFO. But for consumers. SMS is enough.
I still don't see a paradigm shift.

In Europe which is GSM. SMS still out paces email push.

smartphones will offer services such as mobile internet, search, location/navigation(GPS), social networking.
In other words more than just push email.

Recently RIMM acquired a software company making a mobile web browser. I think they have realized their weakness.


On Nov 09 09:49 AM User 493712 wrote:

> Hi Rich168,
> I partially agree with you that BB is strong in US and Canada but
> it is not "not much" in anywhere else. It is doing pretty good in
> Europe as well. You are right it is not much in Asia and LatAms.
> I am glad that you did not mention "Africa". My point is there are
> reasons for BB having no significant presence in those area. Asia
> and LatAms have majority population in developing country stage (even
> though some of them are rich). There are a lot of growth room still
> can be found in cell phone industry. Why those carriers wants to
> jump in Smart Phone and facing uncertainty about whether the general
> population can afford those expensive toys? That is why MOT is doing
> great in those place but fighting for survival in north america.
> However, as the ecomony conitnue to grow in Asia and LatAm, finally
> they will adpot the Smartphone. And RIMM will be a big player as
> it is here.

Nov 09 10:14 AM

[RiskCapital:]

Its true wireless wiz. I dont plan on owning a BB. I got the iphone for valentines day. I have had to take it in twice because it locks up. I have to take the battery out to get it to work again. Does it all the time. I shouldnt have to take the battery out at all. It should just work. I really dont know what I want. I need to start looking. Does anyone else have this problem? My daughter says she told my wife not to get it because of problems. The way you talk about it makes it sound like most people like it.

Nov 09 11:33 AM

[jafijafa of...:]

what's target price on RIMM?


On Nov 08 02:54 PM Dr. Duru wrote:

> Just a quick point of clarification, as this issue came up in an
> email exchange I had. I purposely excluded counting long-term investments
> on the balance sheet. *Typically*, long-term investments are not
> considered liquid. Unless the monies were specifically set aside
> for future repurchase programs, a drawdown of these funds for such
> a purpose could be considered a red flag about the financial health
> of a company.

Nov 09 05:04 PM

[jafijafa of...:]

What's your target price for RIMM in the next few months?

Nov 09 05:05 PM