NYC Trader's  Instablog

Jack Welch once said “Change your own destiny or someone else will.”  Perhaps the message never reached the management team at Research in Motion (RIMM).   The Company’s stock value has been under a severe attack since hitting their 52-week high of $70.54 in February, due to extremely weak data and a poor strategy provided by the BlackBerry maker.   The stock is most recently trading at $27.42, down 59% from the high, following the disastrous earnings call.

Some of the highlights from last night’s call were as follows:

• ·         Shipped approximately 13.2 million smartphones in first quarter for $4.9 billion revenue.
• ·         Lower than expected sell-through in US and LatAm.  Shortfall is primarily related to age of BlackBerry product portfolio and the delays of new product introductions.
• ·         Challenges are continuing into the August quarter.
• ·         Headcount reductions and reallocation of resources expected.
• ·         Playbook: 500,000 units sold.
• ·         BlackBerry 7 OS to feature upgraded changes.
• ·         QNX Software for PlayBook.
• ·         Share repurchase program to begin July 10^th, 2011.

Guidance

• ·         Will not meet full year outlook of $7.50/share.
• ·         Total Q2 revenue range $4.2B-$4.8B; between 11m and 12.5 million unit BB shipments.
• ·         Skewed towards existing products.
• ·         New BB7 products to be shipped out later in the quarter.

Not only did most of these items miss expectations (some by wide margins), but after the duo-CEOs destroyed $22 billion of shareholder value (59%) in only 5 months, they went on to defend themselves.

Jim Balsillie:

Mike and I have been partners in this business for almost 20 years and over that time RIM has grown to $20 billion in annual revenue and has successfully navigated through many challenging times. We’re currently approaching the tail-end of a significant transition in our business and frankly a few companies would have been able to survive, but we have, and I believe, and I think Mike would agree, that neither of us could have taken the Company this far alone and that completing the transition and taking the Company to the next level of success and growth is also something neither of us can do alone. It’s something that would be incredibly challenging for someone from outside the Company to manage successfully at this critical time in RIM’s development.

In a response to Jim’s message, I would like to offer my complete shock and disagreement with his response.  My suggestion echoed by many analysts is as follows:

Find a replacement for yourself and Mike immediately!  While your leadership might have worked in the previous decade, you’ve been destroying your investors’ portfolios, producing inferior products for your consumers, and most importantly, you let down your employees through your failed leadership as you are now beginning headcount reductions. 

Your investors weren’t expecting you to be Steve Jobs as you have clearly proven that you cannot steer the company as has the CEO from Apple.  But you can’t even seem to follow the leaders.  All this while having not one underachieving CEO, but two.  The two also continue to receive substantial incentives packages (over $5 million each FY2011) while they observe Wall Street analysts as they continue to downgrade the stock further (even with a 4x+ P/E vs. Industry Avg of 18x).

Though perhaps new leadership would be “incredibly challenging for someone outside the Company to manage successfully,” Jim and Mike are currently the worst case scenario.  Though RIM’s revenues have increased to $20 billion in FY2011, the CEOs forgot to mention that current sales have stagnated as they continue to ignore analysts, tech experts, and industry leaders in an incredibly fast-paced industry.  The company currently trades at an enormous discount to comps because of failed leadership, irresponsibility, and misguidance (4.3x vs 18x)

My suggestions for the company going forward are as follows:

Management

Replace the CEOs immediately for the aforementioned reasons.  The new CEO (only 1 this time please) should be a seasoned and well-known tech leader, who is up for the challenge of cleaning up a very messy situation that Jim and Mike have created. 

US sales have slumped because the CEOs appear to be extremely out of touch with US interests.  My opinion here is that the new US product should be very different than anything that BlackBerry has ever produced in the past.  The brand is beginning to be seen by many as a failure as they are the current laggard in apps, design, and technology in the US (hint for RIM: build on the iPhone or Droid X, not the BlackBerry).

Location

I’ve said this before and I know this sentiment is echoed by others.  I believe the new headquarters should be moved to the San Francisco area where the Company can attract far better talent from competing firms.   There is an enormous difference between the strategic talent in California versus the strategic talent in Waterloo!

New Products and Marketing

Create the same type of buzz for new products that Steve Jobs has created at Apple.  His new products are often featured as the top stories on the leading news stations! 

I am not familiar with RIM’s testing procedures, but the PlayBook appeared to have gotten off to an extremely mediocre start.  A far more rigorous outside user testing approach should be taken prior to launch. 

In terms of strategy, my opinion is that it’s important to build a dynasty around your products.  In addition to creating separate effective products for business and  general consumers, the Company should also take Jobs’ lead in creating product links.  What Apple has done extremely well is its ability to build multiple layers of connected products.  Although RIM has recently caught on with the idea through their PlayBook launch, they came to the party extremely late in the game.

Another way to create a successful new layer of revenue is through an innovative product that will be the leader in the industry (not the follower), a connected product that perhaps Apple, Google, or Motorola haven’t yet launched.

Is Research in Motion Broken?

My opinion is that while RIM is currently in extremely horrible shape, if the above steps are followed, the Company will revive their failed image.  Let’s not forget, only recently, the introduction of Ron Johnson as the new CEO of JC Penney helped tremendously strengthen investor confidence in that company. 

RIM needs to make every effort to strengthen their current multiple.  While headcount reductions might help EPS, it will not save the company from being the most hated stock on Wall Street.   The only way to revive that multiple to even half of the industry average is through timely new products/successful marketing of those products, effective new leadership, and the right headquarters. If Jim and Mike truly care about their shareholders, employees, and consumers more than they care about themselves and their self-image, perhaps they will respect our wishes and begin looking for replacements.