I wrote regarding Research In Motion (RIMM) back in March 2012 (see here). I have read many articles of a negative nature on S.A., but recently read this positive post by Stock Jackal. It mainly covers the technology aspects of RIMM. This post is about the financials. The latest P&L is below.
|Operating Revenue (Revenue/Sales)||2,814,000||4,190,000||5,169,000||4,168,000|
|Cost of Sales||1,722,000||2,552,000||3,480,000||2,343,000|
|Cost of Sales with Depreciation||2,026,000||2,789,000||3,759,000||2,556,000|
|Gross Operating Profit||1,092,000||1,638,000||1,689,000||1,825,000|
|Research & Development Expense||368,000||386,000||369,000||381,000|
|Selling, Gen. & Administrative Expense||552,000||650,000||567,000||683,000|
|Operating Income b/f Depreciation (EBITDA)||172,000||602,000||753,000||761,000|
|Operating Income After Depreciation||(308,000)||213,000||328,000||407,000|
|Other Income, Net||3,000||5,000||2,000||7,000|
|Other Special Charges||(335,000)||(355,000)||*||*|
|All numbers in thousands|
|Total Income Avail for Interest Expense (EBIT)||(640,000)||(137,000)||330,000||414,000|
|Pre-tax Income (EBT)||(640,000)||(137,000)||330,000||414,000|
|Income before Income Taxes||(640,000)||(137,000)||330,000||414,000|
|Net Income from Continuing Operations||(518,000)||(125,000)||265,000||329,000|
|Net Income from Total Operations||(518,000)||(125,000)||265,000||329,000|
|Total Net Income||(518,000)||(125,000)||265,000||329,000|
|Net Income Available for Common||(518,000)||(125,000)||265,000||329,000|
|Income Statement - Year-to-Date|
|Income Year-to-Date fr. Total Ops.||(518,000)||1,164,000||1,289,000||1,024,000|
Takeaways for me are:
1. Revenue has declined 33%.
2. Cost of sales has deteriorated from 56% to 61% of revenue, in the past year. The reduction in headcount that has been announced will help bring the cost of sales back down to 56%.
3. R&D and administrative expenses are being reduced to offset the falling sales. The company seems to be downsizing to reflect the reduced revenue. This is not positive, but it is realistic. Thorsten Heins is undoubtedly a realist.
4. The company has suggested that it is reorganizing to 3 main sites, which should continue to reduce overhead costs.
I will not reproduce the balance sheet here. It is a simple balance sheet, which has very few clouded areas. The only assets that may need writing down in the future are the intangible assets and inventory. The intangible assets are mainly the patents owned by RIMM, which I would not expect to be written down at all. The present level of inventory is £1018 million, which means that there is still scope for further write downs of inventory from the balance sheet to the P&L. Mr Heins has shown that he is happy to clean up all areas of the balance sheet. Inventory may well be the last remaining area to be hit. If/when this is done, the balance sheet will be very clean and transparent. This is a major plus for me.
The latest cash flow is below:
|PERIOD ENDING||3 Month|
|Cash Flow From Operating Activities|
|Net Income (Loss)||(518,000)||1,164,000||1,289,000||1,024,000|
|Deferred Income Taxes||(16,000)||(5,000)||5,000||17,000|
|(Increase) Decrease in Receivables||693,000||595,000||20,000||82,000|
|(Increase) Decrease in Inventories||11,000||(409,000)||(250,000)||(754,000)|
|(Increase) Decrease in Other Current Assets||(147,000)||(143,000)||(353,000)||(209,000)|
|(Increase) Decrease in Payables||(108,000)||(90,000)||141,000||367,000|
|(Increase) Decrease in Other Curr Liabs.||(280,000)||(314,000)||(270,000)||(284,000)|
|(Increase) Decrease in Other Working Capital||226,000||151,000||83,000||(2,000)|
|Other Non-Cash Items||370,000||440,000||63,000||21,000|
|Net Cash from Continuing Operations||711,000||2,912,000||1,862,000||971,000|
|Net Cash from Operating Activities||711,000||2,912,000||1,862,000||971,000|
|Sale of Long Term Investments||32,000||376,000||366,000||285,000|
|Sale of Short Term Investments||103,000||550,000||462,000||333,000|
|Purchase of Property, Plant, Equipment||(437,000)||(3,119,000)||(1,891,000)||(1,313,000)|
|Purchase of Long Term Investments||(118,000)||(355,000)||(166,000)||(145,000)|
|Purchase of Short Term Investments||(234,000)||(250,000)||(137,000)||(131,000)|
|Other Investing Changes Net||*||*||(779,000)||(778,000)|
|Net Cash from Investing Activities||(759,000)||(3,024,000)||(2,371,000)||(1,879,000)|
|Issuance of Capital Stock||*||9,000||9,000||8,000|
|Repurchase of Capital Stock||*||(156,000)||(150,000)||(37,000)|
|Other Financing Charges, Net||(4,000)||(2,000)||(2,000)||(1,000)|
|Net Cash from Financing Activities||(4,000)||(149,000)||(143,000)||(30,000)|
|Effect of Exchange Rate Changes||(8,000)||(3,000)||(16,000)||(2,000)|
|Net Change in Cash & Cash Equivalents||(60,000)||(264,000)||(668,000)||(940,000)|
|Cash at Beginning of Period||1,527,000||1,791,000||1,791,000||1,791,000|
|Cash at End of Period||1,467,000||1,527,000||1,123,000||851,000|
The takeaways are:
1. The increase in cash of $711m from operating activities includes a contribution of $395 million due to a reduction of working capital. If sales stabilize at this lower level, this is likely to be a one off gain that will not be repeated. Cash flow from operations moving forward will not show the same gain, but will still be positive.
2. The company has stated that the restructuring costs will amount to $350 million and will be incurred by the end of fiscal 2013. This implies $87.5 million per quarter.
3. The base case for cash flow from operating activities, moving forward, is therefore:
711 - 395 - 88 = $228 million.
Still healthy and certainly not in the distressed category. Assuming sales are reasonably constant at this lower level, up to the release of the BB10, the cash position of the company is quite good. Any talk of imminent collapse of the company comes in the "stupid analysis" bracket.
The company has stated that the second quarter will show a loss. I would also expect losses in the third and fourth quarters. However, if the cash management remains stringent, I would expect RIMM to have at least the same cash position 9 months form now, when the new phone is released. This is dependent on sales stabilization at the lower levels, that have just been reported. To be confident of this stabilization, I will need to see the level of sales in the next quarter. I would add that it would be unusual to see a company's sales crash further, once a 33% decline has been reported, but anything is possible. If this assumption is correct, the company will have ample cash to promote and finance the new phone. I also think that delaying the new phone, to ensure that it works well and without hitches, is a good idea. I would however become concerned if the launch were to be delayed further. The old management has clearly been ousted and Thorsten Heins is going about restructuring the business. The ultimate success of the company rides on the new phone, as it has for several months. If the new phone proves to be a doozie, the company will fail. On the other hand, it is clear from the above financial statements that the company will be able to finance the new phone. If it is a good product, it will bring RIMM back to profitability.
There have been several posts regarding the break up and takeover values that RIMM might command. I am not interested in those values. RIMM has had a strong position in the technological side of mobile phones, but has had management that completely lost touch with reality. I have become a shareholder (albeit way too early) as I am hoping that the company still has a good technological basis for their phones and now has a focused and effective management. I originally bought the shares as a turn around position, as I assumed that the launch of the new phone would be in September 2012. As the launch has been delayed, my purchase has proved early and wrong. I am hopeful that this will not prove a fatal mistake.
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
Disclosure: I am long RIMM.