Research in Motion (RIMM) has seen its sales diminish over the last few quarters. As the company looks towards the BB10 to revive its fortunes, margins are consistently going down. RIMM has announced that it will invest in a developer's forum, but considering the established forums of Android and the iOS, this news may be too late in coming. Since our last update on RIMM, the stock price has fallen by 8%. In our opinion, investors looking to invest in a technology turnaround stock this fall should look at Nokia (NOK). The Windows 8 Lumia, combined with Nokia's third-world popularity, seems to be a better bet. We advise investors to short RIMM on rallies.
Research in Motion is the company behind the BlackBerry handsets, and related services. BlackBerry, not long ago, was the choice handset for business executives and professionals around the world. However, the company's management failed to react to the rise of Apple's (AAPL) iPhone. This inability to adapt to changing market dynamics has left the smartphone giant in tatters. RIMM was trading at approximately $150 in 2008 and is now trading at 5% of its 2008 value. The management has pegged its hopes on the BB10 platform to bring about a change in fortunes.
The release of the BB10 was delayed last quarter; according to company disclosures, development time was much longer than had been anticipated. This release can be expected in 1Q2013. Loyal BB fans are still optimistic about a BB10 fueled revival for RIMM; the same cannot be said for the rest of the market. There is much more hype surrounding Microsoft's (MSFT) Windows 8 and Apple's iPhone releases. The company is consistently losing sales and lowering its profit margins. This decline in sales combined with increased capital requirements for next year's BB10 launch raises concerns about the company's financial health.
Revenues and FCF Trend
The table shows the past trend and estimates for both sales and free cash flows uptil 2015. As can be seen from the table, both FCF and sales are gradually dimishing. From a high of $2.4 billion, FCF are expected to decline to $63 million in 2013 and $-91 million by 2015. Graph 2 shows this diminshing trend for both sales and FCF. Little cash from CFO could create the need for additional financing as early as 2013.
Table: FCF and Sales
Source: Qineqt's Database.
Graph: FCF and Sales Graph
It is common for tech companies to experience a sharp hike in capital expenditure prior to major product launches. The significance of the BB10 platform for RIMM is no secret. The company will need to invest in pre-launch activities, which can be a major area of concern, as the company is not generating enough cash from operations. There will also be major investments in marketing and promotions for new BB10 products. It remains to be seen how much trust carriers show in the BB10 and how much promotional investments that they are willing to make. High capital expenditures and diminishing CFO would force the company to raise funds from debt or equity markets. However, poor performance of operations and an even poorer stock performance can limit financing options available to RIMM.
Table: Cash from Operations and CapEX (Qineqt Estimates)
Cash Flow from Operations
If we look at Table 3, we can see that the company will not generate enough cash from operations to sustain its capital expenditure. The high capital expenditure in 2013 can be associated with pre-launch and promotional activities regarding the BB10. The net of CFO and Capex is negative in 4Q2013. A lot depends on the performance of the BB10 with regards to the increasing CFO in 2013 and onwards.
Free Cash Flow Yield
Free cash flow yield is an important metric in determining the attractiveness of an investment. It is a good way to judge if a business can survive; by asking if a business can survive without access to capital tomorrow. The lower the free cash flow yield, the less attractive the stock. In essence, buying a high FCF yield stock means investors are paying less for more cash. Using the current market cap, we can calculate estimates for the FCF yield.
Table: FCF Yield
As can be seen from the table, the FCF yield for the stock is reducing every year; in 2013 and 2015, the FCF will be negative. A drastic decrease in the 2013 FCF yield, as compared to 2012, is a major area of concern for stakeholders.
Ratios can be used to analyze the impact on company's solvency in the long run. The operating cash flow ratio shows the ability to pay current liabilities by generating cash from operations. If we look at Table 5 and Graph 6, we can see that the ability of RIMM to pay its cash flow through operations is decreasing, and is the lowest at 46% in 2015. The cash flow margin has diminished since 2012, but is hovering around the 16%-18% mark till 2015. CFO, as a percentage of total liabilities, is also an important indicator of changes in future insolvency. The value for CFO/TL is consistently decreasing to 46% in 2015 from 117% in 2010. The industry average for quick ratio is 1.62. Under current estimates, the company remains above the industry average in future forecasts. The current ratio, however, falls slightly below the industry average of 1.93 in 2015.
Table: Ratio Analysis
Operating Cash Flow Ratio
Cash Flow Margin
Cash Flow from Operations/Average Total Liabilities
Graph: Ratio Plots
RIMM's investors are looking at Asian economies like China and India to rescue diminishing BB sales. The BB is still widely used in these regions. However, the iPhone and Android phones have been more successful and are showing tremendous growth in these economies. A trend of BB's market share in the Smartphone Industry of these economies can be a better metric for an analysis. Graph 7 analyzes the trend in RIMM's market share in Asia/Pacific and Latin America. The share in Asia/Pacific is diminishing, contrary to common belief. The market share in Latin America is more erratic, but is showing a downward trend as well.
Graph: Market Share in Latin America and Asia/Pacific (Gartner Data)
RIMM's market share in the Middle East and North Africa was on the rise, but has started to decline since 2Q2011. As shown in Graph 8, the share in Western Europe is showing a consistent downward trend.
Graph: Market Share in Middle East & Africa and Western Europe (Gartner Data)
BB's market share is consistently diminishing. The management is looking towards the BB10 to bring about a miraculous transformation in the company's fortunes. With the current hold of the iOS and Android, saying that BB10 will have a tough time would be an understatement. RIMM will have to woo the market, much like the iPhone did back in 2007. There is still no evidence of the BB10 accomplishing this task.
The company has announced that it plans to invest in a developer's forum. It might be already too late, considering the huge developer base for iOS and the Android. Any acquisitions or major asset sales will not be approved by the executive management until after the BB10 comes out next year. Rumors of any acquisition or asset sales, for now, are therefore meaningless. The company will soon face cash flow problems, as our analysis shows. Therefore, we maintain a short position on RIMM and suggest that RIMM be shorted on rallies.