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Research in Motion (RIMM): The Bear Case

Research in Motion (RIMM): The Bear Case

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Published by: Max_Margin on Jan 08, 2013
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Research In Motion: The Bear Case
RIMM (Nasdaq)RIM.TO (TSX)Date: December 17, 2012Price: $13.93 (Nasdaq)
 
OVERVIEW
 
RIM is unusual among smartphone manufacturesbecause it not only provides its own proprietaryoperating systems (similar to Apple) but also owns andoperates its own network infrastructure
. Many of RIM’s
iconic services such as push email and BlackBerry
Messenger (BBM), as well as the company’s security
and encryption suite utilize this infrastructure,bypassing carrier networks. RIM receives royaltypayments per BlackBerry user (subscriber) for use of these services. The company subdivides revenue intothe following components:
 
Devices
 
 –
Sales of smartphones and tablets.
 
Service
 
 –
Payments made by carriers on behalf of BlackBerry users (subscribers)
for use of RIM’s
network assets.
 
Software
 
 –
IT software solutions provided by RIM tocorporations for the management of their mobileworkforces.
 
Other
 –
Accessories, non-warranty repairs, BB AppWorld revenue and gains/losses on revenue hedgecontracts.Revenue by segment for the most recent reportedquarter (Q2FY13), filed on Sep 27, 2012:
 
In the last several years, we notice a trend of servicerevenue becoming a more important driver of both topline and bottom line performance. We first take a lookat the absolute trends:
 
As total revenue has decline from
4,078mm
in 4QFY10to
2,873mm
in 2QFY13, service revenue has increasedfrom
641mm
to
1,005mm
in the same timeframe,representing a jump from
16%
to
35%
of total revenue.In other words, the service revenue category hasincreased in importance markedly:
 
As hardware margins are squeezed from increasedcompetition, service revenue has become the maindriver of profitability. Two things influence servicerevenue
 –
total subscribers and Average Revenue PerUnit (ARPU), which is the average monthly fee RIMreceives per subscriber. As the handset marketincreasingly becomes the domain of low costcommodity manufacturers
 , service revenue and consequently subscriber growth rate and ARPU become
the single most important factors for RIM’s long term
viability ( 
more specifically, the viability of the
company’s current business
model).
Market Share Trends
Source: Statista
 
The above chart is a reflection
of the company’s falling
aggregate device sales, coupled with the explosivegrowth of the Smartphone market. Note that tabletshipments are not taken into account, which wouldmake the numbers starker still. The viability of anymobile ecosystem is subject to a feedback mechanism -as market share deteriorates, it becomes increasinglydifficult to attract developers to the platform, leading toincreased sales pressure.
The company’s challenge is to
break this feedback mechanism.
Hardware60%Service35%Software2%Other3%
0200040006000HardwareServiceTotal0%10%20%30%40%
Service Revenue as % of total revenue trendover last 11 quarters
Worldwide
Share of 
Shipments
Q107-Q312
 
 
We next direct your attention to the current state of the
company’s market share in a number of choice markets:
 We note that RIM maintains a foothold in most of thesecountries. In the
UK, where RIM’s BBM service remains
popular among users, the company commands a robust23% market share. However, in what is now the largestsmartphone market by volume, China, RIM is a non-factor.
 
Since current market share is lagging indicator, we turnto current share of sales in these same markets:The current share of sales data paints a darker picturefor the company. This metric is forward looking andoffers
a glimpse of where RIM’s market share is headed
if things continue on their current path. Note that theabove figures are more detailed but offer less scopethan the worldwide share of shipments data on theprevious page. The conclusion to draw is the same,however.
 
Note the difference between the current share of salesand current market share data: US share of sales has dropped to
1.6%
compared tocurrent US market share of 
11%
. In the UK, currently
RIM’s strongest
mature market, share of sales is at
7.9%
 compared to current market share of 
23%
. We predictthis situation to only get worse in the January quarter,due to the announcement of BlackBerry 10 and therelease of the iPhone 5. The fact that the Januaryquarter is also the holiday quarter is further cause forconcern
.
 
Emerging markets have become RIM’s last bastion of 
strength. The Southeast Asia region (especiallyIndonesia), and countries such as South Africa andNigeria provide the bulk of new subscriber additions.Although the company does not disclose sales bygeography in much detail, we can nonetheless infer thetrend:
RIM’s filings in this regard simply offer
confirmation of its shift away from developed markets.
05101520253035404550
Mobile OS market share for 2012
 
AndroidBlackberry OSiOSMicrosoft Windows MobileOthe
0102030405060708090
Mobile OS share of sales, Av of 12 weeks ending Oct 28,2012
 
AndroidBlackberry OSiOSMicrosoft Windows MobileOthe
0510152025
Share of Sales vs. Current Market Share
Share of salesShare of current mobile users
0%20%40%60%80%100%Q2FY13FY12FY11FY10
Revenue mix by region
CanadaUnited StatesUnited KingdomOther

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