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RIMM Selloff: Justified?

 December 21, 2012 10:23 AM

RIMM is getting plastered this morning, although it should be noted that the stock has still nearly doubled from where it was just a few months ago.

The CEO was on CNBC this morning to discuss the quarterly results, and the comment that appears to have caused the sell-off last night was a note that the services model is evolving from a flat per-user fee to one that reflects the services that individual subscribers use.

The question that many analysts appear to be panning the company on is whether this will trash the firm's service revenue.

But those who are going there with this opinion didn't listen to what the firm's CEO said on the call, which I listened to, or for that matter this morning: The company has already begun implementing this change.

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Why is this important?  Because the consequences of the change are already showing up in the firm's economic results.  And those results are rather interesting, particularly in margins.

That was one of the biggest shockers to me in the report: Margins increased.

How's that possible, when the product mix does not have any of the new phones in it as of yet, and the subscriber count went down?

That's simple: The revenue model company-wide is generating more margin than it was before.

You want to short a company's stock that is improving margins by making changes in their service model and is about to roll new product that will have a better margin than their legacy devices? 

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Are you nuts?

What sort of analysis are you doing out there?  Hardware margins aren't improving when you have a legacy product that has its sales volume falling off and incentives are being used to keep the pipeline moving in anticipation of the new product launch! 

Heins looked at the CNBC people like they were idiots this morning in his interview, and with good reason.  He's already implemented the service model change in large part that he was talking about (and he said so quite-clearly) and it not only produced $600 million in additional balance sheet cash it also improved operating margins.

Now you can pan the company for how it generated the increased balance-sheet cash if you wish but you can't argue with margin improvements.  There are two things that tell you more than anything else about the forward prospects of a company: Cash and margins.  If both are going the right direction you're doing it right.

There are times when you have to look at the way the market "reacts" to something and conclude that what's really going on is not an attempt to have an interview and interpret results but rather to defend previous calls that have been ridiculously late and thus not only aren't actionable they do demonstrable harm.  Many analysts were outrageously late in turning bearish on the stock as it started to slide a few years ago, and now they're steadfastly sticking to their call that the company is going under, even though their predictions that (1) the firm would not launch in January and (2) RIMM would run out of cash and customers before it got the new phones to market have both been conclusively disproved.

This marks two quarters sequentially that the company has been able to boost cash on the balance sheet and this quarter they improved margins as well.  Further, Heins said that while he expects to spend a lot of money promoting the launch (of course) he also does not expect cash on the balance sheet to fall under $2 billion; once again destroying the premise that these analysts have proceeded from where the firm would simply blow all it's money and be unable to complete their roll-out.

Cramer is "again" claiming that "everything is bad."  Nonsense; the fee structure change already took place, if you bothered to listen to Heins, and yet the company is able to sell through at a better margin.  If this was a disaster as Cramer and the others are saying margins would be collapsing; they are instead improving!

Folks, read the damned report.  Companies with building cash levels and improving margins do not go bankrupt.  They succeed.

When I started hammering on the company to "Break the Glass" I simply did not believe that RIMM could do this -- build cash and improve margins -- without doing something really outrageous such as fully-opening the platform to GAPPS (allowing unbridled Android application loads.) 

I was wrong; the company is improving margins and is building cash levels and the new phones are not yet on the market!

Can RIMM blow it all to Hell and go down the toilet?  Sure.  The firm's situation is incredibly dynamic at the present time and there is never a guarantee of success.  However, reality on the ground today is that (1) the company is building cash levels and is comfortably able to support the BB10 introduction, (2) margins are improving, not declining, and on the new devices margins will be even better since they're "newest generation", (3) subscriber counts are reasonably stable with the firm having almost 80 million potential converts to BB10 (and if 30-40% of them DO convert within a year or so the firm will hit a Grand Slam homer), (4) carrier feedback thus far is uniformly positive with carriers willing to co-market, push the devices and spend to support the roll-out and (5) the service subscription model has already been modified and will continue to be -- but rather than trash margins it improved them.

The best opportunities come when the "herd" has their head up their back side and is all on one side of the trade trying to defend a previously-held position and either intentionally overlooks facts or starts making things up out of whole cloth despite contrary evidence right under their nose.

This is one of those times.

Disclosure: The author is actively playing in this one and given the volatility can't commit to any particular position in the firm or options on it at any given instant in time.



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