I think the time has come to call the end of RIM, although it might take a while to come to pass.
It’s not just the continuing losses in their core business; plenty of companies have had periods of decline, only to reinvigorate themselves and roar again.
It’s the delay to BlackBerry 10.
RIM is subject to an existential threat, and they know it. At current run-rates, they’ve got about a few years of runway left before these losses overcome them (although with only $1.5B in cash and $500M a quarter in losses, one wonders). Given their belief that BB10 represents their survival, the repeated delays speak to a deep inability to execute – even the threat of extinction can’t help them deliver to announced dates. The bar, too, is incredibly high – Apple and Google’s platforms are large, profitable and growing, and that growth is funding investment. To take back a spot on the podium, RIM needs to not only match those platforms but dramatically surpass them, all the while funding that investment from retained earnings, rather than profit.
According to Reuters data, the analysts don’t think (in aggregate) there’s growth in RIM’s top line even once BB10 lands. The mean estimate has their sales gently falling away over the next two years; the low estimate has it collapsing by two-thirds. There’s a lot of momentum in their business – RIM’s “fortress enterprise” customer-base is very resistant to change – but that’s not going to last forever, nor restore profitability.
RIM’s responding to this by slashing costs. Heins announced a program to reduce $1B p.a. of cost by cutting 5000 staff, about a third of RIM’s current workforce. Given the enormity of the task ahead of them, one struggles to imagine how they’re going to cut that many people without compromising the key development resources they’re going to need to deliver BB10, or the marketing and sales forces to sell them. This is already starting to appear; the Q1 release this week showed declines in research and development expense of about 13% in the last nine months.
Delving further into the numbers we got this week, gross margin was down about 35% in nine months (from 43% to 28%); revenue down about 43%, against a nearly constant cost of sales. More tellingly, EBIT went from a $900M profit in May 2011 to a $640M loss last quarter, an astonishing $1.5B collapse in profitability. Even after recent write-downs, RIM is still carrying $1B in inventory, which will only decline in value (particularly after BB10 is released, if it is), putting further pressure on profit. RIM’s also carrying accounts receivable worth all of last quarter’s revenue, which seems concerning to me. They’ve still got about $9B of equity (of which $7B is retained earnings), but there’s a full $6B of PPE and intangibles on their books, and that $1B of inventory.
Given all this, it’s plausible that RIM won’t be with us, in its current form at least, five years from now. If this were Nokia or Sony, that wouldn’t be a huge cause for enterprise concern. RIM, though, put their servers on the network path for every interaction between a BlackBerry device and its mailbox. We’ve already seen what happens when these servers fail – last year’s extraordinary outage seems to have been part of the catalyst for the co-CEOs’ resignations – imagine now that they become uneconomic to a new owner of the assets, or that RIM’s eventual administrators can’t afford to run them.
What’s your plan to reduce your dependence on RIM? Given how slow large organisations can be to change, to say nothing of governments, we should probably start disinvesting now. If we do, RIM’s eventual failure might become a self-fulfilling prophecy.