News

Long live RIM

Thanks to its healthy balance sheet and its focus on security, RIM’s future looks bright.

When, on April 12, Research In Motion co-CEO Mike Lazaridis abruptly ended an interview with BBC technology correspondent Rory Cellan-Jones after the journalist suggested RIM had a security problem in the United Arab Emirates with its BlackBerry devices, the reaction from the tech media was swift, decisive and not entirely unfamiliar.

“Stressed and defensive,” said The Economic Times. A “breakdown,” offered Ryan Vetter, in a column for Business Insider. “One more in a string of embarrassing public displays,” wrote John Paczkowski of All Things Digital.

To a certain class of pundit, Research In Motion is already a dinosaur. The Waterloo tech giant, which made its name by practically inventing the smartphone category, sells products that to some seemed antiquated compared to slicker iPhones, iPads and Android devices. But all is not lost for RIM. Its obsession with making its devices secure now shows extended vision, given recent high-profile security gaffes from industry leader Amazon, Apple and Sony. And RIM is hardly floundering financially; the global mobile player is in outstanding fiscal shape. Marked for extinction by many, RIM itself is preparing for evolution instead.

Research In Motion was once the darling of not only Bay Street, but Wall Street, too. The company, however, has seen moral support dwindle rapidly south of the border. In the week preceding May 3, after warning that Q1 2011 revenue would be on the lower end of previous guidance, RIM was downgraded en masse by U.S. analysts. And cracks have begun to appear north of the 49th parallel; GMP Securities analyst Michael Urlocker downgraded Research In Motion on April 21, saying it “risked becoming a value trap—a stock that looks cheap but isn’t because its prospects are diminishing.” Even longtime supporter Mike Abramsky of RBC Capital downgraded the stock from his Top Pick to Sector Perform.

It’s hard to ignore that RIM’s transformation into an also-ran occurred alongside Apple’s stunning and sustained resurgence. On Jan. 9, 2007, the very day Apple proposed the existence of the iPhone, RIM shares fell nearly 8%, from $47.39 to $43.67 (all figures US$). Between July 11, 2008, when the iPhone 3G preloaded with the Apple App store was released, and Jan. 22, 2011, when the ten-billionth app was downloaded, shares of RIM fell from $109.79 to $61.55.

Comparisons between RIM and Apple are commonplace. Nervy analysts these days are just as likely to set RIM against beleaguered mobile pioneer Palm. Palm’s Palm Pilot popularized the personal digital assistant, or PDA. Released in 1996, the device effectively launched an industry that ultimately morphed into the devices we see today. But for numerous reasons, many related to a seemingly endless string of spinoffs and corporate restructurings, Palm lost its way and failed to jump on the lucrative opportunity of combining an electronic organizer with a cellular phone. Palm’s misstep, at least in part, opened the door for RIM, whose BlackBerry debuted in 1999. Palm was ultimately acquired by HP for a fraction of the value it once commanded.

In a recent interview with Forbes, Rob Enderle of the Enderle Group said RIM “started out as a much-loved enterprise product, but that market has changed to one that is more consumer-driven in that the business line managers are more inclined to make IT decisions.” His conclusion about RIM? “They are trending to be the next Palm.”

Others, however, say the RIM-Palm comparison doesn’t really stand up to examination. Saj Karsan, who operates the popular value investing site BarelKarsan.com, says that Palm’s lack of profitability was its demise, as the company had to constantly finance and dilute its stock to fund R&D. RIM, on the other hand, has no debt, and sits on more than $2 billion of cash. And RIM is not just healthy compared to Palm, it actually betters companies that are currently thriving. In the trailing 12 months, Research In Motion’s average return on equity is 38%. By comparison, Google, Microsoft and Exxon generated returns on equity of just over 20%.

Karsan suspects that Research In Motion has been a victim of a phenomenon he sees often as a value investor: confirmation bias, the tendency to selectively place undue importance on items that confirm one’s original opinion. In this case, he suggests, the market is negative on RIM, so it is focusing on any negative that it can find.

Casual observers might be surprised to learn of the company’s astonishing growth over the past three years. Between fiscal 2008 and 2011, RIM’s top-line revenue more than tripled, from just over $6 billion to nearly $20 billion. Of course, this number is less than a third of the $65 billion that Apple posted in fiscal 2010. But dig a little deeper into the books of both companies and a curious stat stands out. In the most recent fiscal year, Apple spent $1.78 billion on research and development, a number equal to 2.73% of its top line. In contrast, RIM has been much more R&D intensive; the $1.35 billion it spent on R&D in the last fiscal year was 6.78% of its total revenue.

So what is RIM up to with all this spending? Paradigm Capital analyst Barry Richards sees evidence of a sea change at RIM that is punctuated by 14 recent acquisitions, including last year’s snagging of highly regarded QNX Software, which makes operating systems used in “mission critical” environments such as high-speed trains and nuclear power plants. QNX is now expected to become nothing less than the default operating system for all BlackBerry devices.

According to Richards, “the QNX deal is huge. The future of Research In Motion lies in that platform.” Richards says he is particularly encouraged by RIM’s recent moves because they have all focused on areas of “homegrown weaknesses.” Richards’s target price for RIM is $72, or, as he points out just “10 times this year’s earnings per share,” a valuation he calls “ridiculous.”

The acquisition of QNX was another in a series of RIM moves that had tech geeks buzzing. Navneet Alang, a writer for the Techi website, agrees, saying, “Blackberry have suddenly got a lot of talent for creating a successor to their clunky and old-fashioned—if eminently practical—Blackberry OS.” Richards believes RIM’s new PlayBook tablet, which also operates on the QNX architecture, “takes RIM back to its roots in secure data for enterprises.”

Indeed, a growing amount of evidence suggests that mobile security could be the issue that slowly levels the playing field between RIM and the more tony Android and Apple devices. In April, security researchers discovered that the location-based services in Apple’s iOS 4+ devices, including the iPhone, had been collecting comprehensive and detailed information on their users’ location in an unencrypted file. Apple is now facing at least one class-action lawsuit from two men.

Concerns about Apple’s mobile security are popping up with increasing regularity. Daniel Hoffman, chief technology officer at SMobile Systems, says the iPad suffers from the “same weak encryption issues that plagued the iPhone.”

All of this explains why Lazaridis got huffy when the integrity of RIM’s security was challenged. While some say his mid-interview claim that RIM was being “singled out” was mere sour grapes, the idea has more than a little merit, says analyst Carmi Levy of IT Business. “Other vendors—I’m looking at you, Apple—get a free ride,” he says, adding parenthetically, “OK, who are we kidding? Traffic on iPhones and other smartphone platforms is so relatively easy to pick off that it’s safe to assume that governments are already monitoring them.”

In a recent year-end summary, The Wall Street Journal’s Andrew Dowell called 2010 “The Year of the App.” Will security concerns make 2011 “The Year of Mobile Security”? IT-focused Baseline magazine thinks so. Baseline named mobile security as the top tech trend of the year, saying the rise of cloud computing, social networking and mobile computing will converge to bring heightened awareness and spending to the space.

With a strong balance sheet, a robust and powerful new operating system and a global smartphone market that is growing at a frenetic pace, rumours of RIM’s demise may, as Jim Balsillie and Mike Lazaridis insist, be greatly exaggerated. In the meantime, tech investors looking to identify the next killer app might be surprised to find that apps in general are fast being overshadowed by more menacing security concerns. To the great favour of Research In Motion, 2011 will almost certainly be more about encryption, and less about Angry Birds.


Nick Waddell is the founding editor of Cantech Letter, an online magazine focused on Canada’s listed tech stocks.