RIM Doom and Gloom

As a Canadian businessman, I feel bad- gut wrenching bad- when business successes start turning bad- like RIM. It’s awful that RIM has gone from $2-billion (U.S.) to $20-billion in sales in five years and just dropped over $15 Billion in Market capitalization in the last four months and their stock price has plummeted by over 40%. You think they will recover and you hope for the best and sometimes I hope for even mystical resuscitation. But the reality is that the bad seems to get even worse when you’re in free fall. Over the last year, things haven’t been looking good for RIM and in April, the company cautioned that the upcoming quarterly revenue may not meet expectations.

Here’s the reality- the company announced on Thursday less than stellar Q1 results. They were even worse than expected, and their Q2 guidance is unfortunately very low. RIM expects revenue to be almost $1 billion below consensus this quarter and there are plans to lay people off to "streamline operations across the organization." Translation- RIM's turnaround is going slower than expected, and product delays are leading to low device shipments and revenue.

Naysayers have been calling for the founders’ heads. In the past several weeks, a number of analysts, including Northern Securities’ Sameet Kanade, have openly called for a management transition at RIM. Back in March, Research in Motion’s then chief marketing officer, Keith Pardy, resigned for personal reasons and Jim Balsillie, co-CEO of RIM, took over the top marketer spot, becoming Chief Marketing Officer while maintaining his co-CEO role. Fast forward to the present and UBS analyst Amitabh Passi recently described RIM’s co-CEO structure as “suboptimal.” And without firm dates for a new Bold smartphone, and with Torch and Storm upgrades still just rumours, investors are growing more and more nervous.

“We believe RIM has now squandered nearly every opportunity and competitive advantage it enjoyed through ineffective R&D resource management, delayed product launches and misreads of the competitive environment,” Morgan Stanley analyst Ehud Gelblum wrote in a note to clients.

Unfortunately, the doom and gloom is hitting them hard in the Tablet space. The iPad sold 2 million in its first two months – and Android-based Xoom from Motorola sold 250,000 Xoom tablets in its first month. RIM said it shipped about 500,000 PlayBook tablets in the last three months but doesn't specify how many were sold to end users. This is the doom and gloom- when you try to hide the actual sales compared to your competition, you’re really not telling the whole truth. And when you don’t tell the truth, more bad things tend to happen. Tablets are the new frontier in mobility and RIM needs to be there.

Everyone agrees that the stock is cheap, trading at 5.7-times trailing earnings and the company itself is still profitable. But with competition from Android and Apple phones and tablets on the rise, investors are growing increasingly skittish that RIM will be able to maintain its once-solid earnings growth. It’s the decreased shipment in Blackberries and Tablets and the uncertainty in RIM’s forecasting that is indicating hard times are happening to the Waterloo darling. Co-founder Balsillie, in explaining RIM’s predicament, said they were at the “tail end of a significant transition in business”. I wouldn’t bet your RRSPs on this one for the next little while. Maybe the ‘changing of the guards’ will happen sooner than later after all.