During the Battle of the Bulge in December of 1944, American Paratroopers of the 101 Airborne Division were ordered to hold the crossroads of Bastogne against the German offensive. The Germans sent a demand for the Allied troops' complete unconditional surrender and gave them only two hours to carefully consider their response and either surrender or face total annihilation. The acting U.S. commander, Gen. Anthony McAuliffe, immediately replied to the demand with just one word: "Nuts." The Germans, confused by the reply, asked for a translation ... which cannot be printed here.
Ultimately, the American forces, against all odds, held the line and stopped the German offensive in its tracks and effectively assured the beginning of the end for Hitler's plans for global domination.
Thorsten Heins, CEO of Blackberry maker Research In Motion (RIMM), might feel like he's in a similar situation, as his company faces down a host of rivals bent on dominating the smartphone market. Many industry experts have already called for RIM to roll over and surrender, some even going as far as estimating a "sum of the parts" valuation - kind of a last rites - on the company. Last week, in an interview with the German newspaper Die Welt, Heins provided his answer(s) and collectively those answers translated into something that sounded a lot like "Nuts."
Die Welt started out by inferring that the BB10 rollout was a "last chance for the Canadians" (their words, not mine) and asks Heins how relevant RIM was in a world of Android, iOS and even Windows smartphones. Heins fired back with a salvo that included reference to RIM's subscribers base, essentially saying "are you calling 80 million subscribers irrelevant?"
Die Welt pressed: "Blackberry is said to be a working horse for the business world. Did you bet on the wrong horse?
Heins: "Say WHAT?!" - OK he didn't say that - those are my words. But he did counter very effectively with a "perception meets reality" answer.
And so the tone was set and so the interview progressed. Die Welt throwing hardballs high and inside and Heins stepping back in the batters box to crowd the plate. Most of the rest of the interview contained standard questions and answers about RIM's financial health, apps, developer involvement, BYOD, etc. A link to the whole interview is here.
From my perspective, even though it wasn't really news, things started getting a little more interesting with Heins' comments about RIM technology being not just for phones but "also about deployment." I say it's not news because there has been chatter around tech sites and from RIM itself about the potential synergies since RIM acquired QNX in April of 2010. In a statement released by the company at the time the purchase was announced, Mike Lazaridis, then President and Co-CEO said:
"RIM is excited about the planned acquisition of QNX Software Systems and we look forward to ongoing collaboration between Harman, QNX and RIM to further integrate and enhance the user experience between smartphones and in-vehicle audio and infotainment systems. In addition to our interests in expanding the opportunities for QNX in the automotive sector and other markets, we believe the planned acquisition of QNX will also bring other value to RIM in terms of supporting certain unannounced product plans for intelligent peripherals, adding valuable intellectual property to RIM's portfolio and providing long-term synergies for the companies based on the significant and complementary OS expertise that exists within the RIM and QNX teams today." Here is the press release link.
For those who may wonder, QNX and its software have been around for years and is installed in many cars that are on the road today. I could go on about automotive innovations that will be utilizing the QNX platform in the near future, but that's perhaps best left for another time. Suffice it to say, it's difficult to overstate how important QNX is to the future of RIM as it provides access to not only the automotive sector but a whole host of other industries as well, ranging from power stations to airport ticket kiosks, to medical devices. Simply said, QNX is already a part of everyday life. And RIM owns QNX. This gives it a significant advantage as we move toward a more connected world.
How much of an advantage? Well, I found Heins' comment about the possibility of selling the "hardware business" thought-provoking to say the least. One would think that a smart phone company would not consider selling its smart phone business. Would that not be tantamount to corporate suicide? That is, unless you don't see yourself as a smart phone manufacturer anymore, but rather a provider of enterprise solutions to a host of different industries and end users that also just happens to include the smartphone market. Indeed it seems clear that since RIM's acquisition of QNX, Heins and his management team have come a long way towards re-inventing the company that invented the smart phone in the first place. It seems they have come to the point where they can at least envision a future where they no longer may even need to make the phone itself. This might seem like blasphemy to some and the concept prompted Canadian Industry Minister Christian Pardis to say he hopes that RIM will grow "organically" rather than through divestiture. Now, I'm not saying RIM is looking to exit the smartphone market - at least not yet - otherwise why would they even bother with a BB10 rollout, and Heins himself was quick to point out that it was just one aspect of RIM's ongoing strategic review and that "there is no reason for us to rush to decide." Still, it could happen.
Instead of bemoaning that possibility, Pardis should remember the words of another Canadian - Hockey Great Wayne Gretzky who, when asked how he always seemed to be in the right position to score replied, "Some players skate to where the puck is, I skate to where the puck is going." That make sense, and after all, the company is called Research In Motion so is it any surprise they seem intent on growing beyond just phones? Indeed, Heins seemed to be indicating that where the puck is going for RIM is a much bigger arena than just smartphones. As a result, RIM could score and score big. I wouldn't think it's going to be limited to just cars. Sure, think about a smart car where you get feedback on performance, maintenance, engine economy, location, security and all that, as well as the ability to stream music, backseat movies and other data. That's great stuff to be sure, but there are others working on that too (they just don't have QNX already a part of a car's ecosystem), and some of these features are already available. But think bigger. Think about smart prescription pill bottles that order refills and communicate with your healthcare providers. Or smart houses that can be controlled or adjusted based on usage and environment. The possibilities are very real and very big.
Don't believe me? Listen to how Heins responded when asked about a possible failure of the BB10:
Die Welt: "Your market share has declined consistently. Can you afford a failure with Blackberry 10 at all?" (italics mine).
Heins: "Life goes on in any case. But admittedly this is a really deciding moment as well as a milestone for Research In Motion."
"Life goes on?" Really? That's the kind of sanguine comment that someone makes when he knows he as other options.
So in a few years the RIM that we know may look radically different than it does today and derive its revenue from a host of sources that few may be contemplating today. With so many eyes focused on the BB10 rollout and what that might mean for the company in the next quarter or two (where the puck is), Heins and his team are correctly focused on where the company is going to be 3, 5 or 10 years down the road (where the puck is going). The BB10 rollout is important as it will provide enough of a revenue stream for the company to continue its more strategic shift towards being a provider of global connectivity.
In a previous article, which you can access here (link ), I used very generous revenue and earnings assumptions to arrive at $14-$15 as a fully valued price for the stock. Don't take just my word for it - even Goldman Sachs which been a RIM bull as of late, has only a $16 target price. By either measure, at its current price of $17+ RIMM is fully valued and then some.
As a long time and devoted Blackberry user I'm rooting for a successful BB10 rollout. As an investor, I'm concerned that this may be a "sell on the news" event. Traders may take this opportunity to book some very nice gains realized over the course of the past few months.
What Should You Do?
If you are a trader you may want to consider doing the same and look to buy on a pullback. Long-term investors may want to consider a "core and satellite" strategy wherein they keep there "core" long term (and hopefully low basis) holdings in place and trade a small (typically no more than 10% of their core) of their "satellite" holdings, selling into rallies and buy on dips.
Heins may seem to have his back to the wall in this battle for smartphone market share but he's got bigger plans for RIM on the horizon and if he can hold the line here with BB10, RIM is going be a great long-term investment. In the short term, caution is the name of the game for investors at these prices. Take your gains, but don't count RIM out.