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RIM's outlook is grim
Research In Motion's stock jumped on news of a settlement in its BlackBerry patent battle. But the lengthy dispute gave competitors a chance to steal business from RIM.
By Robert Walberg
After three long years, Research In Motion's arrogant management team finally put an end to its game of chicken with NTP and settled its patent dispute, agreeing to make a one-time payment of $612.5 million to NTP.
Analysts lined up to applaud the deal and the stock reacted by jumping more than 12% Monday. That's just the kind of reaction I anticipated when I added Research In Motions (RIMM, news, msgs) to my Street Patrol portfolio back in December. With the BlackBerry litigation -- and the threat of an injunction -- behind RIM, Wall Street expects pent up demand to result in renewed growth going forward.
But Im not so sure that managements arrogant behavior didnt give competitors the opportunity to form permanent beachheads that will enable them to slowly steal market share from RIM's BlackBerry.
The deal isn't a big financial hit for RIM. The company will use the $450 million it already had in escrow, plus an additional $162.5 million in cash (to be charged against fourth-quarter earnings), to pay the settlement. RIM ended last quarter with about $1.8 billion in cash and short-term securities.
Wall Street mostly ignored another profit warning by Research In Motion. Citing uncertainty surrounding the patent litigation, management guided fiscal fourth quarter revenues down to $550 to $560 million from an earlier estimate of $590 to $620 million. The company also noted that it added between 620,000 and 630,000 subscribers, well below its previous forecast of 700,000 to 750,000.
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What investors appear to be missing, at their own peril, is the fact that RIM, by refusing to settle for so long, opened the doors to competition -- and Nokia (NOK, news, msgs), Microsoft (MSFT, news, msgs) and Palm (PALM, news, msgs) were more than happy to step in and win over RIM clients. (Microsoft is the publisher of MSN Money.)
The competitive landscape will only get more challenging in several weeks when Motorola (MOT, news, msgs) launches the Qphone, its much-anticipated entry into the PDA market. Word is that the Qphone, also called the razrberry, could be a RIM-killer. We'll see.
Is the mobile e-mail market big enough for multiple players to operate profitably? Sure. But with Research In Motion having lowered guidance on subscriptions for three consecutive quarters -- not to mention three time this quarter alone -- and with the competition heating up, the better question might be how much longer can RIM hold onto its leadership position. According to Gartner Inc., a technology research firm, RIMs share of the North American wireless e-mail market slipped to 70% last year from 81% in 2004.
Encryption advantages and fierce customer loyalty should enable the company to remain the top player at the high-end of the market, where margins tend to be high. But next years profit target of $3.36 a share is open to question.
And once the relief rally wears off, the company will be on a very short leash with Wall Street. There will be no more free passes. Research In Motion must show some big growth numbers in the first few quarters of fiscal 2007, or the stock -- trading at 25 times estimated earnings, will get hammered.
Thats a risk Im not willing to take. With the stock up about 27% since I added it to my portfolio, and with the future still cloudy -- this time because of increased competition -- Ill take my profits and run.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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