Despite the poor press Research in Motion (RIMM) often receives relative to its competitors - the iPhone from Apple (NASDAQ:AAPL) and the Driod from Google (NASDAQ:GOOG) - things aren’t quite as horrible as they seem. In 2010 full year revenue growth was 33%, which was higher than most expected. At the same time, management came out earlier this year saying that Q1 2011 will miss expectations. That obviously didn’t win anyone over to the RIMM camp.
Until RIMM address’s some key concerns we rate the company a PASS no matter what numbers it reports moving forward. These concerns relate to product innovation, the ability to rally 3rd party developers relative to the QNX operating system for 2012, and a couple other topics addressed below. If the company can address these issues, then not only can it regain some investor confidence, but it means it also has a credible game plan to become a much more competitive company again.
Where is The New All-Star?
It’s clear as day the latest BlackBerry can’t go head to head against the iPhone and the Driod handsets. That’s not to say it can’t sell the phone but the only people buying them are on the lower end of the scale. These are people who are interested in having a barebones cell phone where features and applications really aren’t a top priority. RIMM needs to develop an all-star BlackBerry if wants to compete in the high end smartphone arena - otherwise it’s just a matter of time until it gets pushed out.
There is no debate on whether consumers seeking the next-generation smartphone are willing to pay a higher price. The answer is yes they will pay. As well, solid penetration into emerging markets has helped the company on the top line but that just doesn’t address the fact that the company needs a top notch BlackBerry. Its past attempts to “change the subject” have fallen on deaf ears and continue to do so.
If RIMM can convince investors that the next BlackBerry will be able to go toe to toe with other high-end smartphones that’s one point for the company and two points for improving the playbook.
Can RIMM Rally the Troops?
Management was dead wrong thinking apps were a fad. That mindset and conclusion blew up right in front of management’s face before the world. Now given that the next generation BlackBerry for 2012 should have the QNX operating system we want, know that 3rd party developers are following in sufficient numbers behind it. In more basic terms we want to know that RIMM is rallying troops. The last minute decision to let Android applications run on its tablet in our opinion does not resolve the matter.
It’s clear that the company’s competitors have successfully leveraged the fact that the current BlackBerry has a poor and limited base of mobile applications. So if the app developers aren’t fully on board with the program then a new operating system isn’t going to mean that much when trying to compete in the high-end smartphone space. Honestly, the last thing anyone wants to see is a full repeat of a movie they just saw that also includes a bad ending.
Can RIMM Manage The Margins?
The company’s gross margins have been sliding and taking an overall beating since 2006. Increased marketing and R&D for the Playbook tablet have only increased costs. This will likely put continued pressure on margins. For this reason RIMM needs to illustrate that these new costs can be managed while growing revenue at the same time.
The solution needs to be sound tablet sales combined with more high-end smartphone sales. This should help the gross margins stabilize and perhaps even improve. The idea that the PlayBook can hold its own weight relative to increased costs right off the bat seems unlikely given how competitive the tablet space is. This is why it can’t be one or the other and why high-end smartphone sales must improve. After all the accomplishment of good revenue growth is only diminished when the cost is weakening margins.
Can RIMM Walk and Chew Gum at the Same Time?
From our perspective on some level it seems like RIMM entered the tablet market prematurely. RIMM has launched its PlayBook tablet while failing to first bring out a new BlackBerry that can effectively compete with other high-end smartphones. We hope that the launch of this new product wasn’t an act of desperation to head off Apple even though it will be a lucrative space. The idea of being mediocre in two different markets doesn’t sound better than being extremely competitive and very profitable in one.
The company needs to prove that it can simultaneously compete in an effective manner in both markets. In other words RIMM needs to be able to walk and chew gum at the same time without stumbling. It definitely won’t be easy to do all this at once but if RIMM can execute well it means the company will likely surge again.
While we think RIMM is a PASS right now and the company is down, that doesn’t mean we think it is out yet. RIMM could be the comeback kid. We hope to see some strong remarks from management and a clear picture of a PlayBook that addresses all of these concerns. If we do and things are executed well we have little doubt that RIMM could be hot stock again.
(This article was written in advance of Q1 2011 earnings, to be released after Thursday's close.)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.