Research In Motion Limited (RIMM) recently reported 1Q13 results in which the company saw revenue fell 43% y/y to $2.8 billion and reported a quarterly loss of GAAP $0.99 per diluted share. The company also announced that it plans to reduce its workforce by 5,000 and delay the BlackBerry 10 smartphone launch for Q1 of calendar year 2013.
In the next 12 months, RIM will continue to suffer deteriorating fundamentals due to an aging portfolio of BB7 products and the expected launch of Apple's (AAPL) iPhone 5 later this year. In addition, continued market share loss may push RIM's market share among US smartphone platforms to single digits by the year's end.
Click to enlarge
International market, previously a bright spot for RIM, will also likely to be weak due to the proliferation of low-end Google's (GOOG) Android devices that offer more features, functionality and apps than the current BlackBerry models.
That said, the key question is: What is RIM's worth?
I previously valued RIM using Abnormal Earnings, or Residual Income, approach (See my November 14th note titled "Valuing RIM Using Abnormal Earnings Model") over the traditional valuation method using Discounted Cash Flow because RIM's outlook makes forecasting free cash flow highly unpredictable.
The Abnormal Earnings Method was chosen because the key assumption behind the model, and the market perception, was that RIM should trade around its book value. However, RIM's book value could decline considerably due to a combination of declining ARPU as carriers press the company to cut the carrier fee and subscriber loss, making Abnormal Earnings a less suitable valuation method for RIM.
I am introducing the Sum-of-The-Parts method for RIM because I feel that it is a better indicator of its intrinsic value. The model is as followed:
Key assumptions
Device Business: Contrary to popular opinion, RIM's device business is still attractive in that the product still has a solid base of loyal users. If given a more robust OS, Blackberry devices may still attract users who prefer a phone with an actual keyboard and something that stands out among the crowd (eg. iPhones, HTC, Samsungs). I modeled the device business to worth $500 million, or $1 per share.
Service Business: As a standalone unit, RIM's service business may prove to be valuable for enterprises that frequently transfer sensitive data over the air. However, the service business is currently tied to the ARPU RIM receives from the carriers. As the number of subscribers and the ARPU are likely to decline in the near term, service revenue will decline as well. Under this scenario, I modeled service revenue to decline from $3,152 million in 2013 to close to zero in 2016. Assuming the service business has an annual cash expense of $500 million, cumulative operating profit is estimated to be $4.6 billion, or $9 per share.
Click to enlarge
Patent: RIM paid $779 million for Nortel patents as part of a consortium back in 2011. I assume the value of the patent remains the same, or $1.5 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
