| | 12-04-12, 04:39 PM Thread Author #4
Here's the whole article -- I was mobile when I opened the thread and couldn't easily copy & paste.
My take -- it's quite refreshing to see someone pointing out the things BB10 will have going for it, acknowledging the difficulties RIM still faces but without harping on them.
I think my favorite quote is: "If you look at their decisions on software development, developer relations, carrier relations, hardware choices, enterprise initiatives, I don’t think there is one area where I would say — 'That was a bad decision'."
What the Bears are Missing About Research In Motion Eric Jackson
I recently spoke with Gus Papageorgiou who is the long-time Research In Motion(RIMM) analyst for Scotia Capital out of Toronto. He’s seen the company over a number of years — good times and bad.
Back in October, he was one of the first analysts to upgrade the company on the hopes of the coming BB10 phones which will be announced on January 30th. He has a $16 target on the stock.
Below is a transcript of a recent conversation I had with him on his outlook for the company and the stock: 1. You’ve been a longtime RIM analyst covering the company through the glory days, the fall, and now today. What’s different about this company with this management team today compared to the RIM of, say, 2007?
2. Your last two research reports on RIM are a really interesting read. You discuss basically 3 views of the company: (1) the Street’s very pessimistic expectations for next year, (2) your baseline expectations for next year and (3) an upside view on what’s possible next year. Can you walk us through basically how RIM could get it right next year and surprise the overall bearish view of the company?
In 2007 RIM was being run by its founder and another co-CEO. Both men deserve credit for taking a company from essentially nothing and turning it into a $20B/ year global company. However, neither of these two men had ever run a big company before. Today the company is being run by management that has had much more experience in running large global organizations. Decision making has been pushed down through the organization and is no longer concentrated at the top. I think the company is benefitting from some very smart technology acquisitions made in 2010 and 2011 by the previous management team — and a refreshed, more responsive and agile organization led by seasoned veterans.
3. But if Microsoft and Nokia have only garnered a luke-warm response for their critically well-received phones, why will BB10 be more successful in your view?
It really comes down to market acceptance of the BlackBerry 10 (BB 10) devices. But assuming they are well received and looking at what would traditionally occur to the upgrade cycle, ASPs, and channel fill when a successful product is launched, we could be looking at EPS in the $4.00+ range.
4. Execution risk is always a worry with RIM. Is it possible we could see any last minute hiccups before the January launch of BB10?
I think there are 3 things that RIM has as advantages over Microsoft-Nokia: 1) Installed Base: there are 80M Blackberry users globally and there are indications that up to 70% of them plan to upgrade to BB 10. There are very few users of Microsoft’s OS out there and even though there are a lot of Nokia handsets on the old Symbian platform, the issue is that if you buy a new Nokia device that runs the Microsoft OS you will have to re-purchase all of your apps. Whereas if you are a BlackBerry 7 user and you buy a BlackBerry 10 device, all of your apps come with you. 2) Carrier Support: The carriers want another vibrant ecosystem and I think they are impartial to either BlackBerry or Microsoft. However, what we are hearing is that Microsoft is a difficult partner to work with and the Microsoft-Nokia alliance is not as strong as they had hoped — no one single point of contact. Whereas working with RIM is easier, the feedback is that they better understand the carriers’ business, and because RIM controls both the hardware and software there is only one single point of contact. 3)Enterprise: even though RIM is losing some share in the enterprise it still has by far the biggest installed base. We believe the launch of BlackBerry Fusion and the new devices will cause many enterprises to upgrade and re-think using alternative platforms.
5. Although it would be a nice problem to have for RIM longs, what are the chances of RIM having difficulty producing devices if demand is there?
Yes, always possible but so far it looks like everything is on track.
6. What’s your guess on how many of the existing 80 million RIM subscribers will upgrade to BB10 in FY2014 and how many new phones will be sold?
It’s a consideration. I think the big markets will get all the product they need at first but maybe smaller markets will be starved a little.
7. We all hear about the BYOD trend but what percentage of the BB10 upgrade decisions next year will be made by a CIO vs. an end user?
I have seen surveys that suggest 70% will upgrade.
8. We keep seeing these stories in the press about some government agency dumping the BlackBerry for another phone. What’s your estimate of how many of the 80 million subs they lose next year versus new sub ads they get?
Hard to say. I think a lot of people carry a BlackBerry for work and another device for personal reasons. But I believe the new BB 10 devices will give users all the bells and whistles they expect while giving enterprises the control and security they demand. I do believe the BlackBerry Balance option on the devices (allows you to switch the device from work to personal mode) will resonate with both enterprises and consumers.
9. Talk to me about your expectations for gross margins and ASPs for the company next year, again, your baseline view vs. an upside view.
We are looking for net new sub adds of 4M at this stage.
10. The ASPs have steadily been chipped away over the last few years. What makes you confident that they can bounce back so strongly and how sustainable will that bump be?
The baseline view is one that is sceptical and assumes gross margins on the devices of 4%. Our upside view is for gross margins of 15%. It really comes down to whether BB 10 is accepted by consumers or not. If the product is in demand RIM will be able to hold price and the 15% is, we believe, very achievable.
11. We keep hearing that the carriers don’t want a duopoly between Samsung and Apple. Why not? And how are they going to help RIM then? Their help didn’t seem to help Microsoft/Nokia, so why will it help RIM?
Again, it all resides with the success of the BB 10 devices. Strong demand for the product will allow the company to maintain price and keep ASPs high. If the products fall short the ASPs will come under pressure.
12. No one really mentions the TAT acquisition that RIM made a couple of years ago. Any guesses on what they’re up to and how we might see their work manifest itself on RIM devices?
They don’t like the duopoly because those two dictate prices and release dates and consumers are more loyal to those ecosystems than to the carriers. If there was a viable third alternative carriers could allocate marketing and subsidy dollars to push a third platform and put the other 2 in their place. Carrier efforts alone cannot save RIM, but the carriers control how much they subsidize a phone, they control advertising dollars and they control employee compensation — they can use these levers to push one product over another.
13. You’ve mentioned the possibility that RIM could license its BB10 OS. If so, who would be most interested?
TAT was instrumental in developing Cascades, the SDK (software developer kit) for BB 10, and it has received very strong reviews from developers. I think when the final UI comes out you will see a lot of TAT’s influence. I think next to QNX this is the single most important acquisition RIM has ever made.
14. When will we hear something definitive about this risk to RIM’s service fees? What are you assuming will happen to the fees because it greatly impacts EPS as you’ve pointed out?
BB 10 is essentially QNX and that OS is already licensed out to car manufacturers, and medical equipment companies just to name a few. I also think that if it’s successful, players such as Dell and HP may take a look at it. We believe the PC is going to die in the next 5-10 years and everything will get absorbed into the smartphone. Maybe the tablet survives — we will see. That puts guys like Dell in a tough spot. I think BB 10 could be the platform they could use to get into mobility. I also think players like Nokia and HTC may also be interested.
15. How quickly can RIM get out a lower-cost version of BB10 to address the emerging markets?
I think we will start to see something this quarter. But I don’t expect a drastic decline — I think it’s a lever they can use to get the carriers to back them. Its something that they have that the other platforms do not.
16. You had a recent report titled “Ghost in the Machine” where you talk about Hyperconnectivity and Machine to Machine (M2M). RIM thinks it can be a player here with its QNX embedded software and has alluded it to it cryptically in the past year. Why could RIM be successful in that space more than others and when should investors start to pay attention to what RIM’s doing here?
I think you will see a mid-priced device in the summer and a lower end device by the end of 2013.
17. What are the chances – in the upside scenario you discuss – that RIM’s stock is about to go on another run like it saw from late 2002 to late 2004?
Its a big complicated topic. But the crux of our argument is that making M2M happen is hard. You are going to have companies that are not used to dealing with mobile technology, software development, application development, regulatory issues, security, and control, trying to scale an M2M platform on a global basis. What does BMW know about mobile data networks, how do they role out M2M services around the world, how do they deal with app development, what OS should they use, how do you deal with regulations regarding driver distraction in France vs Chile vs Japan vs a thousand other locations? RIM can solve almost all of these problems. By putting QNX in these devices (cars, appliances, industrial equipment), which RIM is already doing, and then placing a mobile connection onto that device and connecting it to RIM’s network infrastructure, RIM can essentially turn that piece of equipment into a BlackBerry and allow IT departments to control, monitor, and secure the device just like they would a BlackBerry smartphone, while also allowing thousands of BlackBerry developers out there to develop for these new end markets.
I will know better in February. But I think RIM is making all the right moves. If you look at their decisions on software development, developer relations, carrier relations, hardware choices, enterprise initiatives, I don’t think there is one area where I would say — “That was a bad decision”. But in the end it will come down to whether or not consumers will want the new devices – I think there is a good chance they will.