Can Research In Motion Pick Up The Pieces?

| About: BlackBerry Ltd. (BB)
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Over the recent Memorial Day holiday weekend, I was not surprised when I heard that Research in Motion (RIMM) was planning some sort of announcement, perhaps another round of layoffs. Then on that Monday we got more news when another executive left. I covered all of that news in my "Mixed Weekend News" article.

Just hours after my article was published, Research in Motion provided a business update. Call it what you wish, but it was basically a quarterly warning. This is the main part that needs to be read:

"In terms of challenges, as I mentioned on the March financial results conference call, RIM is going through a significant transformation as we move towards the BlackBerry 10 launch, and our financial performance will continue to be challenging for the next few quarters. The on-going competitive environment is impacting our business in the form of lower volumes and highly competitive pricing dynamics in the marketplace, and we expect our Q1 results to reflect this, and likely result in an operating loss for the quarter."

"Likely result in an operating loss" for the quarter is what really troubled investors. The stock, which had closed that day at $11.23, fell below $10 in after hours, but recovered a bit the next day to close at $10.35. That is exactly where we closed today, $10.35. So my question here today is can they pick up the pieces? I'll discuss the current situation and then provide some recommendations.

First, let me discuss where we are now. Thanks to that update, or warning, analysts have taken down their estimates for the quarter and year tremendously. Current expectations call for this quarter's revenues (quarter ended end of May), to plunge by nearly 36%, from $4.91 billion to $3.15 billion. After earning $1.33 in last year's period, current forecasts call for a profit of just one penny. There are a fair amount of analysts expecting a loss.

But the longer term view is on the fiscal year. The table below shows the progression of analyst estimates for this fiscal year (ending February 2013), dating back to September of last year. As you can see, the numbers have gotten worse and worse. There once was a time when analysts expected RIMM to increase earnings per share (from $4.20 in the prior year). Now, analysts aren't even sure that the company will turn a full year profit.

Estimates Revs. Growth EPS Growth
September 19th 8.0% 2.0%
December 15th* -1.8% -7.7%
February 10th** -5.4% -29.3%
March 5th -5.8% -30.6%
May 6th -17.6% -54.3%
June 11th -28.9% -85.7%

Now we all know that the future of this company is dependent on the launch of Blackberry 10, currently scheduled for later this year. This is the last chance that RIMM has to save itself. Should the company not get the BB10 stuff out until sometime in 2013, or perhaps not at all, the company would be in serious trouble. In fact, during that business update, the company announced that they hired JP Morgan and RBC as strategic advisers to review the business. I don't expect the company to be sold pre-BB10, but anything is possible.

So what can this company do to help out its shareholders? Well, here are just a few of the suggestions I would have.

  1. How about just one phone? There is only one Apple (NASDAQ:AAPL) iPhone. Yes, there are different models, but one name, iPhone. Just go to the website of Sprint (NYSE:S) or Verizon (NYSE:VZ), or the like. On those phone sites, we've got the Bold, Curve, Tour, Torch. In Q2 last year, RIMM launched seven new smartphones Do we really need all of them? How about just one phone? The Blackberry. Do you see all of those Sprint commercials telling you to get the iPhone with Sprint's unlimited plans? You don't hear about those in terms of the Blackberry.
  2. Buy back some stock? Does anyone remember that RIMM said it would buy back shares when it reported Q1 last year. In the business update above, they mentioned that they expected to increase their $2.1 billion cash position. What exactly are they using that money for right now? The market cap of RIMM right now is just $5.34 billion. Even buying back a few hundred million worth of shares would go a long way.
  3. Make sure those BB10's are out soon! Apple is expected to launch a new iPhone, perhaps in September or October. The lines to get those phones are going to be huge. The iPhone is going to be this holiday season's hot item. RIMM cannot miss the holiday season, or the company is doomed. RIMM is going to have enough trouble trying to compete with the iPhone, but further delays will create even more problems.
  4. Cut more expenses! In terms of expenses, RIMM's selling, general, and administrative expenses are just too high. The company is currently trying to cut costs, something that is desperately needed. Take a look at the following chart, showing Research in Motion versus Apple in terms of Revenues, SG&A expenses, and the percentage of revenues that SG&A expenses are (in the last three respective fiscal years, numbers in $billions). 13% versus 8% is a huge difference. RIMM keeps boasting about their increasing subscriber base and BBM base. Well, if their brand is so powerful, they shouldn't need to market it that much, right?
RIMM 1 2 3 Total
Revs $18.44 $19.91 $14.95 $53.30
SG&A $2.60 $2.40 $1.91 $6.91
Total 14.13% 12.06% 12.75% 12.97%
AAPL 1 2 3 Total
Revs $108.25 $65.23 $42.91 $216.38
SG&A $7.60 $5.52 $4.15 $17.27
Total 7.02% 8.46% 9.67% 7.98%

So, can Research in Motion pick up the pieces? Well, I guess time will tell. I've provided a few recommendations, but I'm not sure how many of them the company will actually listen to.

In terms of the stock, I still am recommending a short position. A 36% decline in year over year revenues, if it occurs, is going to look terrible on the front pages. A net loss is a likely possibility. Also, nobody knows what the company will say, or if they will even say anything. They stopped providing financial guidance last quarter, so I would be extremely surprised if they started giving it again. Analysts are not expecting much, and neither should you until they get out the BB10's. Until then, this name probably goes lower. The 52-week low of $9.57, set recently, is likely to be taken out again, and I wouldn't be surprised if another terrible earnings report sends the stock towards $8.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.