No End in Sight: RIM’s Troubles Continue

by Jordan Richardson on November 22, 2011

Optimists have tried to suggest that Waterloo’s Research in Motion may be ready to put the last six months behind it. A few unacceptable quarters, listless sales and trouble transitioning to BBX have all helped RIM’s reputation weaken over the last while, but some glass-half-full folks have argued that the company can and will recover.

The trouble is that the odds seem stacked against RIM.

First, JMP Securities downgraded RIM on Monday, expressing doubt over whether the company can bring new products to market in time. Pricing competition in India is heating up, too, which threatens RIM’s global appeal.

Because of the JMP proclamation, Nasdaq-listed RIM shares were trading down five percent at just $17.24 Monday morning. JMP stated that RIM’s stock is now “market underperform.”

Second to the plate was RBC Capital Markets’ Mike Abramsky. He cut his per share profit estimate to $1.20 from $1.28, setting a share price target of $23 (down from $29). The trouble, according to Abramsky, is in having Apple and Android devices breathing down RIM’s neck.

Since 2008, RIM’s stock has fallen 88 percent from its high of $148.

With analysts scaling back estimates on an almost daily basis, it’s hard to be cheerful about Research in Motion’s fortunes. And to add fuel to the already furious fire, The Globe and Mail’s David Milstead’s report on swelling inventories has raised eyebrows.

Inventory at RIM, much of it comprised of the raw materials needed to make products like BlackBerrys, has doubled in two quarters from $600 million in late February to nearly $1.4 billion in late August. “Finished goods,” products ready to sell but not sold, tripled in the same time frame.

It is suggested in Milstead’s piece that most of the “finished goods” inventory is comprised of PlayBooks. With prices plummeting like Rick Perry’s poll numbers, it’s not hard to see credibility in that suggestion.

Because it is industry practice to book product revenue when items are sold to retailers and carriers (not end user customers), the return of unsold products was generally not included in the mix. But with RIM having such trouble moving units from retailers and carriers, the timeworn equation of simply subtracting an allowance for discounts and miscellaneous incentives no longer works for the company.

RIM has now altered its accounting practices to more closely reflect how many products are actually getting to end user consumers. According to disclosures in securities filings, RIM isn’t recognizing revenue on the PlayBook until it’s sold to the end user.

So with swarming inventory, changes in accounting practices and even more reductions in market and share assessments, it’s hard to stay positive about RIM’s future. To say they can turn things around now requires a great deal of blind faith.

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