July 14, 2011

Charlie Wolf cwolf@needhamco.com 212-705-0447

Digital Lifestyle / Consumer

Research in Motion (RIMM) Hold

RIMM: Thinking the Unthinkable. Could RIM Disappear?
The implosion of a once great company raises an inevitable question. Will RIM follow in the footsteps of other great companies that simply disappeared? RIMs inability to respond to the disruption caused by the iPhone has increased the likelihood that it will. But BlackBerrys hold on the enterprise market and BlackBerry Messenger make it unlikely. We continue with a hold rating, but are cutting our fiscal 2012 estimate from $5.15 to $4.35 and our 2013 estimate from $5.35 to $3.35. To say RIMs first quarter results and second quarter guidance were ugly is an understatement. Notwithstanding managements enthusiastic endorsement of BlackBerry OS 7 devices that should arrive by September, its unlikely they will have any material impact on RIMs downward trajectory. RIM is counting on BlackBerries running on its new QNX operating system to eventually save the day. Its an open question whether QNX can do so. The operating system is clearly superior to RIMs antiquated Java-based OS platform. However, as only the plumbing of the OS, QNX does not address RIMs inability to design a user interface in the class of iPhone and Android. RIMs best hope of returning to relevance may be The Astonishing Tribe, a company renowned for its interface designs, which the company acquired last year. But even this might not work if management does not abandon the illusion that it understands the consumer smartphone market and gives TAT a free hand. RIM is not dead. BlackBerry has a lock on the business market where its communications and messaging capabilities still represent the gold standard. And its user base continues to upgrade to new models on a regular basis. But unless the company cracks the code in the consumer market, RIMs likely to become a shadow of its former self.
FY 02/28/11 A Rev. (MM) Growth Op. M ar. EPS: 1Q EPS: 2Q EPS: 3Q EPS: 4Q EPS: Year Growth P/E Ratio $19,907.2 33.1% 23.3% 1.38 1.46 1.74 1.78 6.34 37.7% 9.4x FY 02/28/12 E Old New $20,402.1 $19,118.1 2.5% (4.0%) 15.6% 1.33 1.33A 1.08 0.82 1.33 1.42 5.15 (18.7%) 5.5x 0.98 1.22 4.35 (31.3%) 6.5x FY 02/28/13 E Old New $22,377.5 $17,997.8 9.7% (5.9%) 12.8% 1.34 1.30 1.35 1.36 5.35 3.9% 5.3x 1.00 0.88 0.78 0.69 3.35 (23.0%) 8.4x
Research in Motion Price 07/13/11
70 65 60 55 50 45 40 35 30 25 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

EPS Change
Market Data Price (07/13/11) 12-Month Price Target 52-Week range Shares Out. (MM) Market cap (MM) Avg. daily volume (000) Financial Data Total Debt/Cap. Price/LTM Rev. Tangible BVPS Net Cash Per Share $28.15 N/A $69.86-25.89 524.5 $14,765.4 17,635.8 0.0% 0.7x $13.15 $4.55

Research In Motion Limited (RIM) engages in the design, manufacture, and marketing of wireless solutions for the mobile communication market worldwide.

Volume (000)
120,000 100,000 80,000 60,000 40,000 20,000 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Note: GAAP earnings estimates displayed above.

Disclosures applicable to this security: B, G. Disclosure explanation on the inside back cover of this report.

I. The premise: guilty until proven innocent

The sudden deterioration in RIMs financial performance was caused by the companys tardy and then inept response to the disruption in the smartphone market caused by the iPhone. In its defense, management was most likely seduced by continually rising BlackBerry activations into believing the iPhone posed no threat until it was too late. But it does raise the question whether the company will be able to reverse its downward trajectory. Weve seen this story play out with great companies in the past. Over the past 30 years, seemingly impregnable technology companies misread or ignored a disruptive event to eventually disappear. Think Digital Equipment. The companys management dismissed the personal computer as a fad only to be buried by it. Compaq acquired the company for pennies on the dollar in 1998. Wang was guilty of the same mistake. The personal computer quickly made the companys word processors obsolete. In PC software, it was the story of Lotus Development, Word Perfect and a host of others developers, which were taken out by Microsofts Office Suite. Could the same thing happen to RIM?

In attempting to answer this question, we first look at the trajectories of RIMs key financial metrics. While the company is still profitable, the key financial metrics have all turned negative in the past few quarters. We then tackle the question whether management can reverse these trends. We believe it will be difficult. RIMs management has demonstrated that it has no understanding of the way a consumer smartphone should be designed and marketed. RIMs best shot at returning to relevance in the consumer market may lie with the design team at The Amazing Tribe, a company RIM acquired last year. TAT is best known for its work in interface design. However, TAT can only succeed if RIMs senior management gives the TAT team a free hand. Even then, success is still problematic because it does not solve the application software gap between BlackBerry and the two leaders in the smartphone market, iPhone and Android. II. RIMs financial metrics are deteriorating The metrics measuring RIMs financial performance that we examine include BlackBerrys share of the smartphone market, BlackBerry shipments and their division between net activations and upgrades, the average selling prices of BlackBerry smartphones and BlackBerrys gross margin. We have extended our analysis where applicable to RIMs probable second quarter results, based on company guidance.

BlackBerrys market share

BlackBerrys share of the worldwide smartphone market fell to 13.6% in the first quarter of calendar 2011 from 19.2% a year ago, as shown in Figure 1. But the more interesting story is the changes in BlackBerrys share in the different regions of the globe.

Figure 1

2 An Investment Analysis by Needham & Company, LLC

Worldwide Smartphone Market Shares

60% 50% 40% 30% 20% 10% 0%
07 20 /1 07 20 /2 07 20 /3 07 20 /4 08 20 /1 08 20 /2 08 20 /3 08 20 /4 09 20 /1 09 20 /2 09 20 /3 09 20 /4 10 20 /1 10 20 /2 10 20 /3 10 20 /4 11 /1 20

iPhone BlackBerry Windows Mobile Nokia Android

Quarter

Source: International Data Corporation

Watching BlackBerrys share of the U.S. smartphone market beginning to stall in 2009, Research in Motions management made the strategic decision to offset U.S. share losses through growth in international markets. BlackBerrys loss of share in the U.S. initially reflected Verizons (N/R) decision to switch its hero brand status from BlackBerry to Android. The company had promoted BlackBerry as an alternative to the iPhone, which was an AT&T (N/R) exclusive. Verizon relied on a steady barrage of buy-one, get-one-free (BOGO) promotions to bolster BlackBerry sales. But the strategy backfired because there was no mistaking a BlackBerry for an iPhone. In the second half of 2009, Verizon switched sides and hitched its wagon to Android, reportedly spending over $100 million to build the Verizon Droid brand. No longer in the spotlight, BlackBerrys share at Verizon began to crumble.

As shown in Figure 2, RIMs strategy to expand BlackBerry internationally has been reasonably successful. Since it shifted its focus in the third quarter of 2009, BlackBerrys share of the European market has increased from 12.7% to 17.0%, and its share in Asia Pacific, from 3.0% to 4.6%. BlackBerrys major success has come in the Rest of World regions (Latin America, the Middle East and Africa), where its share has increased from 16.2% to 28.7%. The increase in BlackBerrys share in the Rest of World regions as well as some countries in Asia Pacific resulted from teenagers infatuation with BlackBerry Messenger (BBM), a low-cost text-messaging service. However, these gains have been more than offset by the implosion of BlackBerrys share in the U.S. from 50.1% in the second quarter of 2009 to just 13.8% in March.
BlackBerrys share gains in the emerging markets could be at risk. At its th Worldwide Developers Conference on June 6 , Apple announced that the next version of the iPhones operating system, iOS 5, would include a feature called iMessage that mimics many of the features of BBM. In our view, the iPhone is not a direct threat to BlackBerrys share in emerging markets. But we expect Google to quickly copy iMessage for its Android operating system. Android has over 40 licensees; and many are invading emerging markets, competing solely on price.
An Investment Analysis by Needham & Company, LLC 3

Figure 2

BackBerry's Market Share by Region

60% 50% 40% 30% 20% 10% 0%
07 20 /1 07 20 /2 07 20 /3 07 20 /4 08 20 /1 08 20 /2 08 20 /3 08 20 /4 09 20 /1 09 20 /2 09 20 /3 09 20 /4 10 20 /1 10 20 /2 10 20 /3 10 20 /4 11 /1 20

U.S. Europe Asia Pacific Japan Rest of World

Quarter
Source: IDC

BlackBerry shipments have rolled over

Figure 3

BlackBerry Worldwide Shipments

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
20 07 20 /1 07 20 /2 07 20 /4 08 20 /1 08 20 /2 08 20 /3 08 20 /4 09 20 /1 09 20 /2 09 20 /4 10 20 /1 11 20 /2 11 20 /3 11 20 /4 12 20 /1 12 /2

200%

100% 50% 0% -50%

Year-over-Year Change

150%

Shipments YOY Change

Quarter

Source: Company reports and Needham estimates BlackBerry shipments fell to 13.1 million in its first quarter from a peak of 14.9 million units in the fourth quarter of fiscal 2011. Based on company guidance, year-over-year growth in shipments should turn negative in the
4 An Investment Analysis by Needham & Company, LLC

second quarter. However, the picture shown in Figure 3 masks a more ominous trendthe slowdown in net activations (new activations cancellations of existing subscriptions) of BlackBerries. Much of the platforms recent growth has stemmed from an acceleration in upgrade sales, as shown in Figure 4
As long as net activations are positive, the installed base of BlackBerry users will continue to grow. But it may not be good growth. What the picture in Figure 4 does not reveal is the regional breakdown of net activations. The implosion of BlackBerrys share in the U.S., shown in Figure 2, in combination with a 20% sequential decline in RIMs U.S. revenues strongly suggest that net activations in this country have turned negative and that BlackBerrys installed base in this country is shrinking.

Figure 4
BlackBerry Net Subscriber Additions and Upgrades
12,000 10,000 8,000 6,000 4,000 2,000 0
20 06 /1 20 06 /2 20 06 /3 20 06 /4 20 07 /1 20 07 /2 20 07 /4 20 08 /1 20 08 /2 20 08 /3 20 08 /4 20 09 /1 20 09 /2 20 09 /4 20 10 /1 20 11 /2 20 11 /3 20 11 /4 20 12 /1 20 12 /2

New Acitvations Upgrades

Quarter

Source: Company reports and Needham estimates

BlackBerrys average selling price and gross margin are both imploding
As shown in Figure 5, the average selling price of BlackBerries remained remarkably steady from the first quarter of fiscal 2006 through the second quarter of fiscal 2010. The decline beginning in the third quarter of 2010 reflected RIMs aggressive push into international markets. Prepaid subscription plans characterize most of these markets. In these, subscribers pay the retail price for a smartphone rather than a price subsidized by carriers. As a result, the retail prices of phones are far lower in prepaid markets than in postpaid markets. The average price of BlackBerries fell from $345 in the second quarter of fiscal 2010 to $302 in the fourth quarter of fiscal 2011. With only aging models in its lineup, the average price of Blackberries fell to $267 in the first quarter of fiscal 2012; and it should continue to fall to $250 in the second. Despite the decline in the average price of a BlackBerry, RIMs estimated gross margin on devices remained relatively steady as component cost declines offset the decline in average selling prices. But based on company guidance, the gross margin on BlackBerries could fall from
An Investment Analysis by Needham & Company, LLC 5

35.5% in the first quarter to just 26.0% in the second. In issuing second quarter guidance, RIM noted that it would not introduce new BlackBerries until the end of the quarter so that its portfolio would consist solely of aging, lower margin models for the entire quarter. Figure 5
BlackBerry Average Selling Price
$400 $350 $300 $250 $200 $150 $100 $50 $0
08 /3 10 /1 11 /1 11 /3 08 /1 06 /3 06 /1 07 /1 09 /3 07 /3 09 /1 10 /3 20 20 20 20 20 20 20 20 20 20 20 20 20 12 /1

ASP

Quarter

Source: Company reports and Needham estimates Figure 6

BlackBerry Gross Margin
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
20 06 20 /1 06 20 /2 06 20 /3 06 20 /4 07 20 /1 07 20 /2 07 20 /3 07 20 /4 08 20 /1 08 20 /2 08 20 /3 08 20 /4 09 20 /1 09 20 /2 09 20 /3 09 20 /4 10 20 /1 10 20 /2 10 20 /3 10 20 /4 11 20 /1 11 20 /2 11 20 /3 11 20 /4 12 20 /1 12 /2
GM

Quarter

Source: Company reports and Needham estimates

There is little reason to expect a reversal of these patterns in the third quarter. If anything, the deterioration in RIMs financial metrics could accelerate. RIMs senior management has touted BlackBerry OS 7, the next version of the
6 An Investment Analysis by Needham & Company, LLC

BlackBerry operating system, as the companys near-term savior. In RIMs first quarter conference call Jim Balsilie, RIMs co-CEO said, I think that the BlackBerry 7 products are amazing. The quality, the feel, the industrial design, the user experience, everything has been upgraded, perfected, and Im very, very excited with BlackBerry 7 products. However, other observers have noted that OS 7 appears to be little more than a bug fix of OS 6. And even the arrival of BlackBerries running OS 7 by the end of the quarter is not a certainty. As reported by Jonathan Geller of Boy Genius Report, BlackBerries running on OS 7 are simply not ready. Quoting Mr. Geller, RIM has been making carriers offers they cant refuse.RIM has been strong-arming several carriers, essentially forcing them to approve devices they normally would not move through the Technical Acceptance phase. Here is how it works: once an OS software build has been tested internally at RIM, it moves up to be a Technical Acceptance candidate. The OS is then sent to the carrier to test and approve, or test and reject. If a carrier rejects a build, it can take weeks to get a new build tested and approved, and it can slow down a devices release by months. We have been informed by a very reliable source at a major carrier that RIM has been putting an enormous amount of pressure on carriers to approve the upcoming BlackBerry smartphones like the BlackBerry Bold 9900phones that have to hold RIM over until its next-generation platform launch in 2012and that certain carriers will be approving the devices no matter whatwith bugs and problems. Additionally, RIM is putting huge pressure on its internal engineers to deliver Technical Acceptance bundles even when there are serious problems with the OS. In short, RIM is pushing unfinished OS builds from its engineers to the carriers, and demanding that the carriers approve them. The thing is, this isnt something new, and its part of the reason your BlackBerry is so buggy, reboots randomly, and there are possible signal 1 and connection issues. III. Can QNX save the day? RIM is counting on BlackBerries running on its new QNX operating system to reverse the downward spiral in sales. To replace an antiquated Java-based OS, RIM acquired QNX from Harman International in March 2010 and first deployed it in its Playbook media tablet. The compelling component of QNX is its microkernel, the software that handles most of the tasks of the operating system. QNXs microkernel, called Neutrino, is reportedly only 1% of the size of conventional operating systems, enabling it to simultaneously run multiple applications while maintaining battery life. While QNX may be a necessary condition for RIMs return to relevancy, its not a sufficient one. QNX provides the plumbing in the lower layer of the operating system software stack. But it does not provide the middleware and user interface; and its these latter components, especially the user interface, thats sorely in need of a new look. To underscore how clueless RIM is regarding user interface design, its useful to read the reviews of RIMs previous attempts to emulate the iPhone experience. The first was the BlackBerry Storm, which RIM introduced in November 2008, while the second was the BlackBerry Torch, which the company introduced in 2010. The following reviews make for a tedious read. But we have included them to counter managements assertions that the turnaround will be at hand when the company launches BlackBerries running on QNX.
1

Jonathan Geller, RIM is black-burying carriers with half-baked Blackberries, Boy Genius Report, June 20, 2011.
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The reviews of the Storm were uniformly negative. While reviewers praised the hardware, it was the Storms software that came up short. To cite two reviews, Joshua Topolsky of Engadget wrote: The selling points are easy: the phone is gorgeous to look at and hold, its designed and backed by RIM, and its packed with features that, at first glance, make it seem not only as good as the iPhone, but better. The only hitch in this plan is a major one: its not as easy, enjoyable, or consistent to use as the iPhone, and the one place where everyone is sure they have an upper handthat wow-inducing clickable screenjust isnt all that great. For casual users, the learning curve and complexity of this phone will feel like an instant turn off, and for power users, the lack of a decent typing option and considerable lagginess in software will give them pause. RIM tried to strike some middle ground between form and function, and unfortunately came up short on both.2 The review by David Pogue of The New York Times was harsher. having more than a year to study the iPhone, RIM has failed to exploit the virtues of an on-screen keyboard. A virtual keyboards keys can change, permitting you to switch languages or even alphabet systems within a single sentenceBut not on the Storm. Incredibly, the Storm even muffs simple navigation tasks. When you open a menu, the commands are too close together; even if your finger seems to be squarely on the proper item, your click often winds up activating something else in the list. To scroll a list, youre supposed to flick your finger across the screenBut even this simple act is head-banging frustrating; the phone takes far too long to figure out that youre swiping and not just tapping. It inevitably highlights some random list item when you began to swipe, and then theres a disorienting delay before the scrolling begins.. In short, trying to navigate this thing isnt just an exercise in frustrationits a marathon of frustration.3 RIMs second major effort at mimicking the iPhone was the BlackBerry Torch, which the company introduced in August 2010. The Torch was the first BlackBerry to run BlackBerry OS 6; and it sported both a virtual and a physical keyboard. While the reviews were more positive than the ones for the Storm, the consensus was that the Torch still fell short of the iPhone and Android. Matt Buchanan of Gizmodo captured this in his review. What BlackBerry tends to be good at, and what BlackBerry users love about them clearly exposes those corporate-tinged roots: well-designed hardware keyboards, push email, BlackBerry messenger, communications security and encryption. What its not been good at: basically everything else. After nearly a year of staring at screens packed with pixel counts of at least 800x480, the Torchs low-res 480x360 display is a grisly sight. Its like going back to standard definition after a year of HDLike the display, the Torchs brains are straight out of 2008. It quickly becomes apparent that the 624Mhz processor is too slow. It often hangs and stutters

Joshua Topolsy, BlackBerry Storm review, Engadget, November 19, 2008/ David Pogue, No Keyboard? And You Call This a BlackBerry?, The New York Times, November 27, 2008.
3

8 An Investment Analysis by Needham & Company, LLC

moving from app to app, pinch-zooming in the browser or sometimes moving from app drawer to app drawer on the home screen. If the Torchs dual nature hinted at Blackberrys psychological discord, BlackBerry OS 6 crystallizes it in a mlange of glossy plastic, blue gradients, smoky shading, dull grays and white screenscapes. Its largely a mess. Like Android, BlackBerry OS 6 will ostensibly support phones with and without touchscreens, which means thatits doomed from the outset to a lack of clarity. RIM hasembraced that fact, so a scattershot explosion of choices seems to be the operating principle. Sure, there are a million ways to accomplish any one task, but it means theres no obvious right way to do it either. Its conceptually slippery. The distillationis this: BlackBerry isnt good enough anymore if youre comparing it to other smartphones. What does it do better than the rest? Thats the fundamental question. And the answer is that for most people, in most situations, compared to Android and iPhone, not a whole lotMaybe RIMs too big, too entrenched to build the kind of phone thatll make people want a BlackBerry again. But they couldve at least given 4 the damn thing a better screen. Joshua Topolsky of Engadget was as negative about the Torch as he was about the Storm Its tough to feel really excited about the BlackBerry Torch and OS 6 after heavy testing. We had high hopes coming into this review that the new operating system would be more than a fresh coat of paint on an aging user experiencethat we were going to see substantial changes in the attitude and direction of the company. While there are notable improvements here and much that is laudable, what were ultimately left with at its core is more of the same. For all the improvements in the browser, the more upscale fit-and-finish of the UI, and thoughtful changes in basic functionality, we still feel like this device is a generation behind the marketThe Torch seems sluggish, underpowered and dated from a hardware design standpoint, and BlackBerry 6, despite its new features and polish, still feels woefully behind the curve. To call the Torch the best BlackBerry ever wouldnt be an understatement, but unfortunately for RIM and the faithful, their best isnt nearly good enough.5 Jonathan Geller of Boy Genius Report echoed these concerns. I cant help but think that the Torch goes against everything that a BlackBerry stands for. Or used to stand for. Simple, pick up and go, and focused. With BlackBerry 6, a touch screen, and a sliding form-factor, the Torch is not simple, its not a pickup and go device, and its not focused. While the BlackBerry Torch isnt a compete screw-up, its far from the Apple-killing, Android-slaying device RIM thought it would be. Unfortunately, RIMs next product has to be a home run for them to continue winning the ballgame, or well start to see some strike outs. If they cant manage to excite consumers with the next go-around, RIM will 6 most likely be relegated to a low-to-mid end market player.

Matt Buchanan, BlackBerry Torch Review, Gizmodo, August 4, 2010. Joshua Topolsky, BlackBerry Torch review, Engadget, August 4, 2010 6 Jonathan Geller, BlackBerry Torch 9800 Review, Boy Genius Report, August 11, 2010
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An Investment Analysis by Needham & Company, LLC 9

What the reviews of the BlackBerry Storm and Torch underscore is that RIM does not know how to design user interfaces for consumer-oriented smartphones. Despite its assertions to the contrary, whats a greater sin is that management apparently has no appreciation of this fact. The brunt of the criticism for RIMs implosion has been directed to Jim Bassilie and Mike Lazaridis, RIMs co-CEOs. But the problem goes far deeper. In one of the more perceptive insights, Brian Hall recently wrote on his blog, iOS is a subset of OSX, which goes back 10+ years in Apple, and OSX effectively goes farther back to NeXT in the late 80s and 90s. So iOS had had the benefit of OS engineering that is 20 years old or so and one that has been actively worked on and improved by some of the best software engineering minds in the business. RIM has/had no real computing expertise in terms of modern PC and microcomputer OS creation, deployment, management, maintenance and developer partnerships; and that is key as the modern smartphone is quintessentially a PC with a phone radio. They were an email and messaging company. The jump that they have to make is enormous. In some ways they have no chance against Apple. But they should be faulted for being too slow to recognize the threat. The QNX purchase was a brilliant move.since they got a highly developed and powerful OS but they should have done that purchase in 2007/2008 once iPhone rd started getting 3 party appsand carrier subsidization came into effect. They should have recognized the threat earlier. in the smartphone wars RIM didnt realize that the battlefield had moved to their doorstep till far, far too late. They ceded the high-ground and now have to fight uphill against bigger and smarter forcesan almost impossible task. Then again, Apple has been working on this stuff for years before iPhone was deployed and stole a march on everybody. Look how long it took for Microsoft to get to market with a comparable OSbasically 4 years and the WP7 OS is still immature. The only reason why Google did what they did is because of Sneaky Eric Schmidt, who acted extremely unethically to compete, and still Android is nowhere near as good as iOS7 Mr. Hall correctly points out that it was not just RIM that failed to recognize the disruption the iPhone would have. Microsoft was equally as guilty. At least RIM has the excuse that it did not have a software heritage. This nonetheless does not alter the fact that its far from certain the user interface on QNX BlackBerries will be competitive with the iPhone or Android despite the QNX operating system running the device. IV. However, hope springs eternal. RIMs savior could be The Astonishing Tribe Realizing that it was far behind in the user interface wars, RIM acquired The Astonishing Tribe (TAT) in December 2010. A private company formed in 2002 and located in Malmo, Sweden, TAT is renowned for its stunning user interface designs. TAT designed the interface for the G1, Googles first Android smartphone, providing features such as 3D widgets and gesture navigation. The company has also done design work for Motorola, Samsung and Sony Ericsson (all N/R). TAT recently reported that 20% of all smartphones shipped in 2010 incorporated TATs Cascade UI customizable framework.

7 Brian S. Hall, Apple is a software company. brianshall.com, April 29, 2011.

And $RIMM is screwed.,

10 An Investment Analysis by Needham & Company, LLC

TAT gives RIM a decent shot at coming up with a user interface thats in the same ballpark as iPhone and Android. With Windows Phone 7, Microsoft proved that there were ways to design the user interface that didnt mimic the icon-based metaphor of iPhone and Android. Given its reputation as a designer of off-the-wall mobile user interfaces, TAT could probably come up with an equally unique look. Of course, none of this will occur unless RIMs senior management gives the TAT design team the freedom and resources to work their magic. But its an open question whether they will. Since its latest earnings release, theres been a growing chorus of criticisms and suggestions on what RIM should do to right the ship. A recent email to Messrs Balsilie and Lazaridis, RIMs co-CEOs, from an unidentified senior executive raises the question whether they are up to the task of engineering a turn around. The things the executive touched on in his memo include the following: You have many smart employees, many of them have great ideas for the future, but unfortunately the culture at RIM does not allow us to speak openly without have to worry about the career-limiting effects almost every project is falling further and further behind schedule at a time when we absolutely must deliver great, solid products on time. We really have a great opportunity to build something new and uniquely BlackBerry with the QNX platform. Lets start with an internal innovation revival with teams focused on what users will love instead of chasing feature parity and feature differentiation for no good reason. When was the last time we pushed out a significant new experience or feature that wasnt already on other platforms? We need some heavy hitters at RIM when it comes to software management. Teams still arent talking together properly, no one is making or can make critical decisions,.Just look at who our major competitors are: Apple, Google and Microsoft. These are three of the most talented software companies on the planet. Then take a look at our software leadership teams in terms of what they have delivered and their past experience prior to RIM. It says everything. We cant afford any more initiatives based on carrier requests We simply must stop shipping incomplete products that arent ready for the end user. We urgently need to invest like we never have before in becoming developer friendlyThere is no polite way to say this, but its true BlackBerry smartphone apps suck.Developing for BlackBerry is painful. Our SDK/development platform is like a rundown 1990s Ford Explorer. Then theres Apple, which has a shiny new BMW M3, just such a pleasure to drive. Developers want and need quality tools. If we create great tools, we will see great work. The truth is, no one in RIM dares to 8 tell management how bad our tools still are. Reading these comments, the only conclusion one can reach is that RIM is borderline dysfunctional starting from the top. And that may prevent the TAT team from realizing its full potential. The major risk in the RIM storyand one thats almost impossible to modelis that the companys once virtuous circle could morph into a viscous circle with current subscribers abandoning the platform en masse. The virtuous circle, describes the interplay between the members of a platform (operating system or Jonathan Geller, Open letter to BlackBerry bosses: Senior Rim exec tells all as company crumbles around him., Boy Genius Report, June 30, 2011.
An Investment Analysis by Needham & Company, LLC 11
8

ecosystem) and developers that leads to growth in the platform. Software developers have an incentive to write applications for a platform that is growing. When they do, they enhance the value of the platform for its members. It also encourages more people to hop on the platform. As this happens, the platform grows and attracts even more developers. In short, the interaction between the members of a platform and developers create an upward spiral that can continue indefinitely. The viscous circle is just the opposite. If a platform is shrinking, developers will abandon it in favor of platforms that are growing. As they leave, they reduce the value of the platform for its members, causing an exodus. As the platform shrinks, more developers flee, reducing the value of the platform still further, leading to a downward spiral until the platform disappears. The virtuous/viscous cycle of platform growth or shrinkage only partially explains RIMs current position because BlackBerry has perennially been a desert for developers. BlackBerrys software development tools and SDKs have been described as a nightmare, as underscored in the previous quote This has dampened developers interest in writing programs for the operating system in the first place. However, a viscous circle has nonetheless begun to emerge. As reported by Bloomberg Businessweek, some software developers are beginning to abandon the BlackBerry platform. The developers are stepping back from BlackBerry because they say creating apps is too complex and costly for the size of the market. RIMs devices have different screen sizes, varied operating systems and several ways to navigate, from a physical keyboard to touchscreen to a scroll button.The decision to back away from BlackBerry was made 9 easier by waning user engagement, developers said. Even if TAT-inspired BlackBerries can hold their own against iPhone and Android, the platform still faces a significant competitive disadvantage in its application portfolio. The number of applications running on iPhone and Android continue to grow while those running on BlackBerry are in a state of flux. RIMs strategy of enabling Android apps to run on BlackBerries makes little sense; and it could easily backfire if developers simply abandon BlackBerry for Android. V. RIMs last hope may be the enterprise market Even if it cant reverse its deteriorating position in the consumer market, the company does have the enterprise market to fall back on. We estimate that about a third of RIMs estimated installed base of 66 million subscribers are business users. While some departures are inevitable, the company can still count on the majority continuing to upgrade to newer models. In the first quarter, upgrades accounted for almost 75% of total BlackBerry shipments. This is not to suggest that there is near-term upside in RIMs financial performance and share price. But it does suggest that the company is not going to disappear anytime soon. Its tempting to downgrade RIM to an underperform rating given the hill the company must climb. But we are not going to for two reasons. First, while its a low probability event, TAT could actually deliver a user interface that returns RIM to relevance. Second, even if it does not, RIM is not going to disappear because of its hold on the enterprise market and its annuity-like upgrade stream. VI. Estimating RIMs earningsan exercise in futility The market is telling us that theres a non-zero probability that a viscous circle will emerge that causes RIM to implode. But its difficult to incorporate this into our forecast when its arguably a low probability event. And its equally difficult to
9

RIM Loses Miami Dolphin businessweek.com, June 27, 2011.

Fans

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Software

Developers

Defect

12 An Investment Analysis by Needham & Company, LLC

model a turn around if TAT is truly successful in designing an interface thats not just a pretty face. So the forecast outlined below is stuck in the middle, capturing neither an implosion nor a rebound. In our view, four key metrics will drive RIMs financial performance going forwardnet activations of BlackBerries, upgrade sales, the average price of BlackBerries and the gross margin on BlackBerries. Net activations Net activations equal new activations cancellations. RIM has the ability to measure this because virtually all subscribers sign up for the companys BES and BIS communications services. Weve measure net activations by the year-overyear growth or decline in this metric. This approach has worked well in the past. But it is limited in that net activations cannot turn negative when measured as a percentage increase or decrease. However, the possibility of net activations turning negative is a possibility given the implosion of RIMs financial metrics discussed in Section II. Upgrades of users in BlackBerrys installed base With net activations turning over, upgrade sales, shown in Figure 4, have become an increasing percentage of total BlackBerry sales. Upgrades are measured as a percentage of the installed base of BlackBerry users at the beginning of a quarter that upgrade during the quarter. These upgrade percentages enable the average life of a new BlackBerry to be calculated.10 In the recent past, the average life of new BlackBerries has fluctuated within a relatively narrow range of nine to twelve months. However, the average life importantly depends on the introduction of new models. Theres a risk that upgrade sales could plummet during the second quarter since RIM has no plans to introduce new models until the end of the quarter. In general, upgrade sales have been a dependable source of BlackBerry sales, although they could begin to recede if the installed base of BlackBerry owners shrinks. Average price of BlackBerries and the BlackBerry gross margin These metrics are intertwined. In the absence of component cost declines, changes in the gross margin on BlackBerries should trace changes in their average price. Our forecast Our granular forecast is shown in Figure 7. Were forecasting a significant decline in net subscriber additions. Our forecast has net additions declining 34% in fiscal 2012 and 61% in 2013. But the metric remains positive, indicating that the installed base of BlackBerry subscribers should continue to grow but far more slowly than they did in fiscal 2011. Its indeed likely that net additions have or will soon turn negative in the U.S. But they should continue to remain positive in international markets. The risk in our forecast is they may not. As we noted, Android smartphones are invading the regions where BlackBerry has managed to gain share in past two years. While these phones should be loaded with Googles proprietary applications, they are likely to be sold chiefly on price. Its possible, although unlikely, that BlackBerry net additions could turn negative in these regions as well.

10 Historically, over 15% of BlackBerrys installed base has upgraded each quarter. This implies that 48% (1 0.85 ^ 4) of the installed base at the beginning of a year will upgrade during the year. The average life is defined as the point in time when half of the installed base at the beginning of a year will have upgraded. Its calculated by the formula: ln (0.52)/ln(0.50) = 1.07 years = 12.8 months.

An Investment Analysis by Needham & Company, LLC 13

Upgrades should continue to increasingly fuel BlackBerry sales, although weve assumed that the average life of a new Blackberry progressively lengthens over our forecast period. Weve assumed that average price of a BlackBerry ticks up from an estimated $250 in the second quarter of fiscal 2012 to $260 in the third quarter and to $275 in the fourth with the introduction of BlackBerries running the BlackBerry OS 7 operating system in the third quarter and the QNX operating system in the fourth. Weve forecast that the average price declines in fiscal 2013 to $250 in the fourth quarter in the face of heightened competition from Android phones during the year. In tandem with our average selling price forecast, our gross margin forecast has BlackBerrys gross margin rising to 30% in the fourth quarter of 2012 on the back of new model introductions, but falling throughout 2013 to 22% by the fourth quarter. On an annual basis, BlackBerrys gross margin should fall from 36.7% in fiscal 2011 to 29.8% in 2012 and to 25.2% in 2013. RIMs gross margin should decline more slowly from 44.3% in 2011 to 43.5% in 2012 and to 39.7% in 2013 because the gross margin on services, which will represent an increasing percentage of revenues, should remain constant at an estimated 82%. Figure 7
Research in Motion Granular Model
(subscribers in thousands, revenues in millions) Actual Estimated 2011/1 2011/2 BlackBerry sales Sales to new business users % Business subscriber installed base % % BlackBerry installed base Sales to new consumers % Consumer subscriber installed base % % BlackBerry installed base Net subscriber additions % Subscriber installed base % Upgrade sales % of IB (t-1) % % upgrades Total BlackBerry sales % Revenues BlackBerry % of revenues Average selling price Media tablets (market forecast) Market share Playbook units ASP Revenues Services % of revenues Revenue per subscriber Software % of revenues OEM radios and other % of revenues Total revenues % $693 16.4% $14.49 $88 2.1% $90 2.1% $4,235 23.7% $776 16.8% $14.82 $50 1.1% $150 2.9% $4,621 31.1% $835 15.2% $14.53 $78 1.4% $110 2.0% $5,495 40.0% $889 16.0% $14.50 $72 1.3% $94 1.7% $5,556 36.2% $3,193 16.0% 798 5.0% 17,670 27.1% 36.9% 4,104 35.0% 30,170 89.8% 63.1% 4,902 29.0% 47,840 60.5% 6,312 14.7% 57.8% 56.3% 11,214 43.8% 793 5.0% 18,462 26.0% 35.3% 3,736 22.0% 33,906 78.8% 64.7% 4,529 18.6% 52,369 55.8% 7,463 15.6% 65.9% 62.2% 11,992 44.2% Estimated 2012/2 674 -15.0% 22,154 20.0% 32.3% 1,868 -50.0% 46,455 37.0% 67.7% 2,542 -43.9% 68,609 31.0% 9,580 14.5% 28.4% 79.0% 12,122 1.1%

2011/3 1,139 5.0% 19,602 24.5% 34.1% 3,966 19.0% 37,872 69.9% 65.9% 5,105 15.6% 57,474 51.1% 9,112 17.4% 59.5% 64.1% 14,217 40.3%

2011/4 1,160 2.5% 20,762 23.1% 33.2% 3,961 5.0% 41,833 60.5% 66.8% 5,122 4.4% 62,596 45.8% 9,792 17.0% 75.1% 65.7% 14,913 42.1%

2011 3,891 4.2%

2012/1 718 -10.0% 21,480 21.6% 32.5%

2012/3 969 -15.0% 23,123 18.0% 32.1% 2,379 -40.0% 48,834 28.9% 67.9% 3,348 -34.4% 71,957 25.2% 9,605 14.0% 5.4% 74.2% 12,953 -8.9%

2012/4 986 -15.0% 24,109 16.1% 31.9% 2,575 -35.0% 51,409 22.9% 68.1% 3,561 -30.5% 75,518 20.6% 9,714 13.5% -0.8% 73.2% 13,275 -11.0%

2012 3,347 -14.0%

2013/1 359 -50.0% 24,468 13.9%

2013/2 337 -50.0% 24,805 12.0%

2013/3 484 -50.0% 25,289 9.4%

2013/4 493 -50.0% 25,783 6.9%

2013 1,673 -50.0%

15,767 19.4%

2,753 -32.9% 44,587 47.8% 67.5%

9,576 -39.3%

1,377 -50.0% 52,786 18.4%

747 -60.0% 53,533 15.2%

714 -70.0% 54,247 11.1%

515 -80.0% 54,762 6.5%

3,353 -65.0%

19,658 16.0%

3,472 -29.2% 66,067 38.1%

12,923 -34.3%

1,736 -50.0% 77,254 16.9%

1,084 -57.3% 78,338 14.2% 9,850 12.8% 2.8% 90.1% 10,934 -9.8%

1,198 -64.2% 79,536 10.5% 9,792 12.5% 1.9% 89.1% 10,990 -15.2%

1,008 -71.7% 80,544 6.7% 9,743 12.3% 0.3% 90.6% 10,751 -19.0%

5,026 -61.1%

32,679 76.1% 65.0%

52,337 42.4%

9,734 15.6% 54.2% 73.7% 13205 13,205 17.8%

38,633 61.7% 18.2%

9,817 13.0% 0.9% 85.0% 11,553 -12.5%

39,203 51.9% 1.5%

51,556 -1.5%

44,229 -14.2%

$3,364 79.4% $300

$3,646 78.9% $304

$4,472 81.4% $315

$4,500 81.0% $302

$15,982 80.3% $305

$3,522 71.8% $267 10 3.0% 500 $600 $300 $975 19.9% $14.76 $55 1.2% $55 0.9% $4,908 15.9%

$3,030 68.9% $250 12 3.5% 420 $600 $252 $995 22.6% $14.50 $70 1.6% $50 1.1% $4,397 -4.8%

$3,368 69.7% $260 14 3.5% 490 $600 $294 $1,034 21.4% $14.38 $75 1.6% $60 1.2% $4,831 -12.1%

$3,651 70.2% $275 16 3.5% 560 $600 $336 $1,076 20.7% $14.25 $80 1.5% $60 1.2% $5,203 -6.4%

$13,571 70.2% $263 52 3.8% 1,970 $600 $1,182 $4,081 21.1%

$3,062 65.7% $265 18 3.5% 613 $600 $368 $1,091 23.4% $14.13 $80 1.7% $60 1.3% $4,660 -5.0%

$2,843 63.5% $260 19 3.5% 665 $600 $399 $1,097 24.5% $14.00 $78 1.7% $60 1.3% $4,476 1.8%

$2,803 62.7% $255 21 3.5% 718 $600 $431 $1,104 24.7% $13.88 $75 1.7% $60 1.3% $4,472 -7.4%

$2,688 61.2% $250 22 3.5% 770 $600 $462 $1,107 25.2% $13.75 $73 1.7% $60 1.4% $4,390 -15.6%

$11,395 63.3% $258 79 6.5% 2,765 $600 $1,659 $4,399 24.4%

$288 1.4% $444 2.2% $19,907 33.1%

$280 1.4% $225 1.2% $19,339 -2.9%

$305 1.7% $240 1.3% $17,998 -6.9%

With the input provided by Figure 7, our earnings forecast is shown in Figure 8. RIM should earn $4.35 in 2012 and $3.35 in 2013. The risk is in our 2013 forecast. If net activations were to fall to zero for all of 2013, RIM would still earn $2.55 even assuming operating expenses remained at the level shown in Figure 8.
14 An Investment Analysis by Needham & Company, LLC

But if RIMs viscous circle turns into a route where current BlackBerry owners abandon the platform en masse and net activations turn negative, RIM could earn materially less than this. However, an actual loss is highly unlikely given the annuity stream represented by current owners upgrading to newer models. Figure 8
Research in Motion GAAP Sales/Earnings Model
($ in millions) Actual 2011/1 Sales Cost of sales Gross profits Operating expenses Selling, general & adminsitrative Research & development Patent defense litigation costs Amortization Restructuring charge Litigation expense Total Operating income Interest income Pretax income Taxes Tax rate Net income Earnings per share Shares % change in revenues % of sales Gross margin Selling, general & administrative Research & development Amortization Operating expense Operating income Pretax income Net income $4,235 2,312 $1,923

2011/2 $4,621 2,566 $2,056

2011/3 $5,495 3,101 $2,394

2011/4 $5,556 3,103 $2,453

2011 $19,907 11,082 $8,825

2012/1 $4,908 2,752 $2,156

2012/2 $4,315 2,622 $1,693

2012/3 $4,742 2,885 $1,857

2012/4 $5,153 3,056 $2,097

2012 $19,118 11,315 $7,803

2013/1 $4,660 2,769 $1,891

2013/2 $4,476 2,696 $1,780

2013/3 $4,472 2,750 $1,722

2013/4 $4,390 2,744 $1,646

2013 $17,998 10,959 $7,039

483 288 94

546 323 104

666 357 115

705 383 125

2,400 1,351 0 438 0 $4,189 $4,636 8 $4,644 1,233 26.6% $3,411 $6.34 538 33.1%

704 423 132

593 399 140

621 403 155

670 417 165

2,588 1,643 0 592 0 $4,823 $2,980 25 $3,005 724 24.1% $2,281 $4.35 525 -4.0%

610 419 175

586 403 185

586 402 195

575 395 205

2,358 1,620 0 760 0 $4,738 $2,301 24 $2,325 570 24.5% $1,756 $3.35 525 -5.9%

$865 $1,059 9 $1,068 299 28.0% $769 $1.38 558 23.7%

$974 $1,082 6 $1,088 292 26.8% $797 $1.46 546 31.1%

$1,138 $1,256 (11) $1,245 334 26.8% $911 $1.74 524 40.0%

$1,213 $1,240 3 $1,243 309 24.9% $934 $1.78 524 36.2%

$1,259 $897 7 $904 209 23.1% $695 $1.33 525 15.9%

$1,132 $561 6 $567 139 24.5% $428 $0.82 525 -6.6%

$1,179 $678 6 $684 168 24.5% $516 $0.98 525 -13.7%

$1,252 $845 6 $851 208 24.5% $642 $1.22 525 -7.2%

$1,205 $686 6 $692 170 24.5% $523 $1.00 525 -5.0%

$1,174 $606 6 $612 150 24.5% $462 $0.88 525 3.7%

$1,183 $538 6 $544 133 24.5% $411 $0.78 525 -5.7%

$1,175 $471 6 $477 117 24.5% $360 $0.69 525 -14.8%

45.4% 11.4% 6.8% 2.2% 20.4% 25.0% 25.2% 18.2%

44.5% 11.8% 7.0% 2.3% 21.1% 23.4% 23.6% 17.2%

43.6% 12.1% 6.5% 2.1% 20.7% 22.9% 22.7% 16.6%

44.2% 12.7% 6.9% 2.2% 21.8% 22.3% 22.4% 16.8%

44.3% 12.1% 6.8% 2.2% 21.0% 23.3% 23.3% 17.1%

43.9% 14.3% 8.6% 2.7% 25.7% 18.3% 18.4% 14.2%

39.2% 13.8% 9.3% 3.2% 26.2% 13.0% 13.1% 9.9%

39.2% 13.1% 8.5% 3.3% 24.9% 14.3% 14.4% 10.9%

40.7% 13.0% 8.1% 3.2% 24.3% 16.4% 16.5% 12.5%

40.8% 13.5% 8.6% 3.1% 25.2% 15.6% 15.7% 11.9%

40.6% 13.1% 9.0% 2.1% 25.9% 14.7% 14.9% 11.2%

39.8% 13.1% 9.0% 2.1% 26.2% 13.5% 13.7% 10.3%

38.5% 13.1% 9.0% 2.1% 26.5% 12.0% 12.2% 9.2%

37.5% 13.1% 9.0% 2.1% 26.8% 10.7% 10.9% 8.2%

39.1% 13.1% 9.0% 4.2% 26.3% 12.8% 12.9% 9.8%

An Investment Analysis by Needham & Company, LLC 15

Research in Motion
($ in MM, except per share data)
Fiscal Year Ending February 28 BALANC E SHEET ASSETS Cash & Short-term Investments Receivables Inventory Other C urrent Assets Current Assets Property and Equipment Goodwill and Intangibles Long-term Marketable Securities Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term Debt Long-term Debt Shareholders' Equity Total Liabilities + Shareholders' Equity INCOME STATEMENT Revenue Gross Profit Operating Income Pretax Income Net Income Shares Outstanding CASH FLOW STATEMENT Depreciation and Amortization Cash Flow from Operations Capital Expenditures CASH MANAGEMENT* DSOs Inventory Turns Inventory Days Days Payable Cash Conversion Cycle PROFITABILITY Gross Margin Operating Margin Net Margin Return on Assets* Return on Equity* Total D ebt/C apital PER SHARE DATA Tangible Book Value Cash Net Cash EPS (Pro Forma) EPS (Pro Forma Including Option Expenses) EPS (GAAP) 61.9 12.8 28.4 23.4 66.9 44.0% 22.7% 17.5% 28.6% 38.9% 0.0% 10.36 3.36 3.36 64.9 17.9 20.4 23.8 61.5 44.3% 23.3% 17.1% 29.6% 41.2% 0.0% 12.32 3.94 3.94 59.9 15.3 21.1 24.9 56.1 44.5% 23.4% 17.2% 30.2% 41.9% 0.0% 9.64 2.80 2.80 63.1 16.3 19.2 31.1 51.2 43.6% 22.9% 16.6% 32.4% 47.9% 0.0% 11.93 3.39 3.39 69.8 17.7 18.8 31.2 57.5 44.2% 22.3% 16.8% 29.9% 44.1% 0.0% 12.65 4.05 4.05 78.1 16.0 25.5 28.9 74.7 43.9% 18.3% 14.2% 20.8% 30.0% 0.0% 13.15 4.55 4.55 2,431.8 0.0 0.0 7,602.7 10,204.4 14,953.2 6,584.3 3,401.6 3,430.3 2,620.9 569.7 3,630.0 0.0 0.0 8,938.0 12,875.0 19,907.2 8,825.5 4,636.3 4,644.1 3,410.7 538.3 3,017.8 0.0 0.0 7,213.8 10,439.3 4,621.3 2,055.6 1,082.0 1,088.4 796.7 546.4 3,834.4 0.0 0.0 8,004.4 12,085.4 5,494.5 2,393.6 1,255.6 1,244.8 911.1 524.4 3,630.0 0.0 0.0 8,938.0 12,875.0 5,556.0 2,453.0 1,240.0 1,243.0 934.0 524.3 3,967.0 0.0 0.0 9,588.0 13,842.0 4,908.0 2,156.0 897.0 904.0 695.0 524.5 1,911.5 2,800.1 621.6 479.5 5,812.7 1,956.6 1,701.8 0.0 0.0 10,204.4 2,121.0 4,279.0 618.0 470.0 7,488.0 2,504.0 2,306.0 0.0 0.0 12,875.0 1,531.7 3,364.0 645.3 438.1 5,979.1 2,169.3 1,945.5 0.0 0.0 10,439.3 1,775.7 4,340.4 678.9 504.0 7,299.0 2,343.0 1,748.7 0.0 0.0 12,085.4 2,121.0 4,279.0 618.0 470.0 7,488.0 2,504.0 2,306.0 0.0 0.0 12,875.0 2,389.0 4,235.0 943.0 533.0 8,100.0 2,576.0 2,688.0 0.0 0.0 13,842.0 Annual FY 2/28/2010 FY 2/28/2011 Ending 8/30/2010 Quarterly Ending 11/29/2010 Ending 2/28/2011 Ending 5/30/2011

4.60

6.34

1.46

1.74

1.78

1.33

16 An Investment Analysis by Needham & Company, LLC

ANALYST CERTIFICATION
I, Charlie Wolf, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company (ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

Price, Rating, and Price Target History: Research in Motion (RIMM/NASDAQ) as of 7-13-11
7/16/08 UP
140

10/14/08 H

10/5/09 B : $85.0

12/18/09 B : $90.0

9/17/10 B : $75.0

12/16/10 B : $90.0

5/4/11 H

120

100

80

60

40

20 Jun 08

Sep 08

Dec 08

Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Source: Factset (Prices) / Needham (ratings and target price)

Dis closures a pplicable to this se curity: B, G.

An Investment Analysis by Needham & Company, LLC 17

Price, Rating, and Price Target History: Google, Inc. (GOOG/NASDAQ) as of 7-13-11
10/16/08 B : $525.0
700

10/17/08 B : $575.0

3/11/09 B : $450.0

7/17/09 B : $500.0

10/16/09 B : $600.0

11/30/09 B : $615.0

1/22/10 B : $700.0

7/1/11 RS

650

600

550

500

450

400

350

300

250 Jun 08

Sep 08

Dec 08

Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Source: Factset (Prices) / Needham (ratings and target price)

Dis closures a pplicable to this se curity: B, G.

Price, Rating, and Price Target History: Apple Inc. (AAPL/NASDAQ) as of 7-13-11
1/21/09 SB : $200.0 9/15/09 SB : $235.0 11/17/09 B : $235.0 2/11/10 B : $280.0 8/9/10 B : $375.0 2/7/11 B : $450.0

450

400

350

300

250

200

150

100

50 Jun 08

Sep 08

Dec 08

Mar 09

Jun 09

Sep 09

Dec 09

Mar 10

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Source: Factset (Prices) / Needham (ratings and target price)

Dis closures a pplicable to this se curity: A, B, G.

18 An Investment Analysis by Needham & Company, LLC

Strong Buy Buy Hold Under Perform Rating Suspended Restricted Under Review

% of companies under coverage with this rating 8 58 27 1 5 <1 <1

% for which investment banking services have been provided for in the past 12 months 14 17 7 0 12 50 0

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This report is for informational purposes only and does not constitute a solicitation or an offer to buy or sell any securities mentioned herein. Information contained in this report has been obtained from sources believed to be reliable, but Needham & Company, LLC makes no representation as to its accuracy or completeness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect our judgment as of the date of the materials and are subject to change without notice. The securities discussed in this report may not be suitable for all investors and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own investment decisions based on their financial situations and investment objectives. The value of income from your investment may vary because of changes in interest rates, changes in the financial and operational conditions of the companies and other factors. Investors should be aware that the market price of securities discussed in this report may be volatile. Due to industry, company and overall market risk and volatility, at the securities current price, our investment rating may not correspond to the stated price target. Additional information regarding the securities mentioned in this report is available upon request. Copyright 2011, Needham & Company, LLC, Member FINRA, SIPC.

An Investment Analysis by Needham & Company, LLC 19

Equity Options Disclosure

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20 An Investment Analysis by Needham & Company, LLC