RIM's Q3 conference call was another train wreck last night. Sure, they hit their reduced guidance numbers (updated December 2nd). Sure, they were profitable and managed to grow their subscriber base. But the bad news just keeps stacking up.
I've paid attention to the feedback from the other articles I've written at CrackBerry, and I know people value a balanced opinion. So I'd like to talk about the good and the bad.
Let's start with the bad ... because I think it's horribly unacceptable, and it far outweighs the good. And I have a feeling this post will be a bit longer than I planned, and I want to make sure the heavy stuff is up front.
The BlackBerry 10 Delay: Smokescreen or Truth?
The big bomb that RIM dropped on us last night came in the form of another product delay. BlackBerry 10 phones, powered by the QNX operating system, won't hit the market until late 2012. Just a couple of months ago, RIM had been promising these would drop in early 2012. Aside from the weak financial guidance, this is the real reason the stock is dropping like a stone again.
Co-CEO Mike Lazaridis explained that the delay is driven by RIM's decision to use a highly integrated LTE chipset. He didn't say what they were previously planning to use, but he talked a lot about the need to have an aggressive industrial design and good power efficiency. I interpret this as RIM saying, "We want the phones to be really thin and have battery life that doesn't suck".
Personally, I'm not buying the story. It doesn't make any sense at all. LTE may sound sexy, but it isn't necessary when we have pretty darn good HSPA+ networks throughout the US market. The chipsets are cheaper, consume less power, and allow for very aggressive industrial designs. Not to mention that high end Android and iOS hardware doesn't require an LTE chipset.
For the last few years, RIM has pretty much missed every planned launch date that I can remember. So if they say BB10 will launch later in 2012, it means they're targeting Black Friday. And they might even miss that if history is any indicator. Not only do we have to hope RIM executes well, but we have to hope the chipset vendor doesn't suffer from a product delay. Chips get delayed all the time. It's a real risk.
I understand RIM's desire to come out strong with an unbelievable product. But in my mind, it's unacceptable for us to be waiting 2.5 years after the acquisition of QNX to see the first smartphone incorporating their OS. I think that either RIM is making a horrible mistake by waiting for this supposedly amazing LTE chipset, or they're covering up the truth.
Severe Weakness in US Market
The second major weakness in RIM's quarterly results came in the form of device sell through. As a reminder, sell through means devices sold to customers from sales channels. Last quarter RIM sold through about 13.7 million devices. At the time this was an impressive number that inspired confidence - at least for me. BlackBerry 7 had only been on the market for a couple of weeks and was looking strong. So how come RIM only managed to sell through 13 million devices in Q3?
The problem seems to be US centric. In fact, hardware sales are up 56% year over year outside of the US, according to management commentary on the call. That's actually pretty darn good! But the US is a disaster.
To counteract this, RIM plans to spend $100 million on advertising campaigns starting in Q4 (that's this quarter), and will maintain that level of spending throughout next year. It sounds like the promotions will be fairly widespread throughout the US market, and quite aggressive.
But you have to wonder - what the hell was RIM thinking previously? Did they think BB7 devices would just sell themselves with absolutely no promotional activity? How can Jim Balsillie wear the hat of Chief Marketing Officer (CMO) and not acknowledge responsibility for this? If the CMO and CEO were different people, surely the CMO would be fired by the CEO for this disastrous result?
The next thing you have to wonder is if marketing will even matter. I mean, obviously marketing will help sales. But how much? Either US consumers will buy BB7 hardware with appropriate marketing, or it won't change a damn thing. I guess we'll find out next quarter.
Where is the Good News?
There are a few things that investors can still look towards as light at the end of the tunnel. Don't misinterpret these as me being bullish. I'm as skeptical as I've ever been on RIM, but I still have to look at both sides of the story.
First, RIM is still profitable. They made $1.27 in adjusted earnings per share and they're expecting to make around $0.90 next quarter after accounting for a heavy marketing boost. Remember that Wall Street sees this as a disaster, which it is. But the stock market is also valuing RIM as if it will not be able to stay profitable. If that proves to be untrue, the stock will have to reflect it. Next quarter we'll have a better idea just how unfixable the situation is in the US market.
Second, international sales are still strong. Hardware revenue up 56% year over year is nothing to scoff at. It seems like the rest of the world actually likes BB7, and the Bold 9900 in particular.
Third, RIM has almost 75 million global users and that number is actually still growing. As long as it's growing it means RIM is gaining global market share in the overall market, not in the so-called "smartphone" market. Remember that the term "smartphone" will die soon. Everything will be a smartphone so we'll stop calling them smart. We don't say "flat panel TV " anymore either. We just call them TVs and we only see tube TVs on garbage day. Gaining ANY share in the overall cellular phone market tells me there is some fight left in the company.
Fourth, Jim and Mike are taking a $1 salary and, I assume, taking the rest of their usual pay in stock. This is a small encouraging sign. And I do mean small. It shows their commitment. But I'm kind of at the point where I don't care if they are committed. I mean, I expect commitment but I care about capability. Taking a $1 salary doesn't change their capabilities one bit. They may have grown the company to $20 billion in annual sales. But they've also stalled it out.
It may not seem like much compared to the huge negatives in the quarter, but it's probably enough to keep me interested in holding my shares for now. I wouldn't say this if the stock wasn't trading within spitting distance of tangible book value.
We'll talk about this in next week's Mobile Nations Stock Talk episode, tentatively schedules for Tuesday afternoon. Grab a Christmas beverage and join us for the discussion. Until then, sound off in the comments.
Disclosures: I own shares of RIM, Apple and Google.
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