[T]he best thing that [Research in Motion co-CEO's] Balsillie and Lazaridis could do for RIMM stockholders is to quit. Immediately. With the company's current market cap around $14 billion, their resignation would likely create close to a billion dollars in shareholder value. Instantly. That's all you need to know about RIM's current management, and all you need to know to stay well clear of this stock.
I wrote the above paragraph back in September, after Research in Motion (RIMM) had once again reported "downright ugly" quarterly results. The stock fell 18% the following day, closing at $23.93, and fell another 29% in the following four months, closing Friday at $17.00.
On Sunday evening, RIM's co-CEOs -- founder Mike Lazaridis, and long-time partner Jim Balsillie -- finally stepped down, to be replaced by COO Thorsten Heins, a five-year veteran of the struggling smartphone manufacturer. Lazaridis will remain as vice chair, where, according to RIM, he will "work closely with Mr. Heins to offer strategic counsel, provide a smooth transition and continue to promote the BlackBerry brand worldwide." Balsillie will remain a director, but in a non-executive position.
The question for RIMM investors is whether the change in leadership will amount to a change in strategy. Shares in RIMM are down 88% from its all-time high of $148.42, reached in June 2008 before turning downward in conjunction with the broad market. 2011 saw the stock simply collapse, as the "leadership" of Balsillie and Lazaridis, included the following series of missteps:
- Open letters to the executives published in BGR in June 2011, begging the executives to "stop shipping incomplete products" and "change the culture to deliver or move on and get out." Weeks later, sales of the RIM Playbook tablet disappoint -- after numerous complaints that the device shipped without a native e-mail program.
- The company's vaunted update to the "QNX" operating system, originally scheduled for 2011, was delayed repeatedly. In its Q3 conference call, the company pushed back an expected early 2012 release to later in the year, claiming that the chipset required for the software launch would not be available for development until then.
- Fourth quarter earnings again disappoint as holiday shipments miss estimates and fall year-over-year as the company's Blackberry 7 line disappoint. The earnings report marks the fourth consecutive miss for the company, though the stock falls just 7%, well below the double-digit falls precipitated by the three previous quarterly reports.
The question now for RIMM investors is whether Heins -- hired and groomed by Balsillie and Lazaridis -- has the intent to move RIM in a new direction, and, more importantly, whether he has the power to do so. As the Globe and Mail, which first broke the story of the co-CEOs resignation, noted:
The official line is they stepped aside. It's not clear, though, what lay behind their decision and how much power they will retain in their continuing roles at the company.
With Lazaridis -- who, not that long ago, notoriously claimed that "there will never be a Blackberry with an MP3 player or a camera" -- staying on as vice chair and providing "strategic counsel", will RIM truly change its direction? Heins' initial comments should not give investors much confidence. "There's no need for me to shake this company up or turn it upside down," Heins told the Globe and Mail. "We are not at a point where we try to define a strategy. That's done." In a separate interview, he discussed the Playbook's new operating system. "I love this system," he said.
Is Heins being diplomatic, and avoiding dancing on the grave of his former bosses so soon after assuming their corporate suite? Or is he as convinced of the Blackberry's eventual success as Jim and Mike were? The former is an obvious possibility; it would be impolite, at best, for Heins to bash his former bosses -- and current directors -- immediately after his promotion. But his comments are still troubling. RIM most definitely needs a shakeup, precisely because the company has had no strategy. Its most significant response to the multi-year rise of Apple's (AAPL) iPhone has been to create its own music service. The Playbook has been a epic disaster, which caused a $485 million inventory writedown in the third quarter. Heins' claim that he loves the Playbook OS echoes the insistence of Balsillie and Lazaridis that the Blackberry operating system -- and the delayed QNX system -- were technically superior to those of its rivals. It may be true; but it is immaterial. Consumers want ease of use and access to applications. The Playbook -- and the Blackberry 7 series -- failed on both fronts.
It seems likely that, in Monday's trading, RIMM stock will jump on the news of Heins' promotion -- or more accurately, Balsillie and Lazaridis' removal. I admit to erring in my original forecast of the benefit of the co-CEOs resignation; now that the company's market capitalization has dropped below $9 billion, Sunday night's news will likely only create half a billion or so in shareholder value, rather than the nearly $1 billion I estimated back in September. But beyond that short-term bump is the key question: what plans does Heins have? Is he truly considering licensing the Blackberry software? Does he understand the failure of the Playbook, and the fact that a radical overhaul is needed to even consider challenging Apple's iPad, let alone Amazon's (AMZN) loss-leading Kindle Fire?
Given the fundamentals of RIMM stock -- $2.49/share in net cash, a P/E just above 4 -- a turn-around in the company's business could make the stock a steal at current levels. But when RIMM bulls compare the stock to Apple or IBM (IBM) -- both stocks that crashed, only to rise to even higher levels -- they miss a key difference between the companies. Apple and IBM made radical changes in their strategy. In his initial comments, new RIM CEO Thorsten Heins has shown no such intent. Yes, the fundamentals look outstanding; but yearly revenue declines, continuing earnings misses, and a significant cash burn in 2011 have driven the multiple compression and the stock price collapse. For RIMM to turn around, new management must charter a new course. It remains to be seen whether Heins plans to do so -- or if his hiring will simply put a new face on the company's same, failed strategies.