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  BlackBerry not yet dead on the vine

BENJ GALLANDER and BEN STADELMANN

Saturday, December 21, 2012

Usually, stock analysts are a bit like an older, kindly uncle, somewhat dull but not a cross word to say about anyone. The closest they come to slagging a company is a mild suggestion that it is facing headwinds and might underperform for a while.

However, when it comes to Research in Motion, they gleefully use the acerbic wit of a late-night talk show comedian to tear the enterprise to shreds.

"RIM is not only late to the party, the party has moved to a different location and RIM is showing up at the wrong house," writes a guffawing Brian Blair of Wedge Partners.

"We believe BB10 is likely to be DOA," Pacific Crest's James Faucette says with a jab. Keeping with the death theme, Jan Dawson of Ovum suggested that RIM could be "stone-dead by Christmas."

But while the critics pile on, RIM's reaction has been a plucky Pythonesque "I'm not dead yet!" The RIM doubters are fixated on the dismal share of the U.S. smartphone market held by the BlackBerry, which has dwindled to an estimated 1.6 percent.

America's corporate and government elite were among the first wave of "CrackBerry" aficionados, and they were critical to the company's early success, but RIM has since moved on. BlackBerry is No. 1 in Africa, and has a solid presence in Southeast Asia and South America. The corporation's future is not in Philadelphia, but in the Philippines, where, on average, citizens send an incredible 120 texts daily.

Though it would be unwise to write off the American market, the teeming megacities of the emerging world offer a tremendous opportunity. In places where landlines and desktop computers are not the norm, a smartphone offers the potential to vault into the 21st century.

And while RIM's ability to use networks more efficiently is meaningless in countries with marvellous telecom infrastructures such as South Korea, it's a distinct advantage where carrier service is thin and creaky.

RIM reported results for the third quarter Thursday. The ensuing after-hours trading was a fascinating microcosm of the war of sentiment that has played out over the past few months. After closing at $13.95, the stock zoomed to $15.50 by 5 p.m., then promptly crashed to $12.35 about an hour later. Nearly 12 million shares traded overnight.

Why is the market behaving like a nervous jackrabbit? The answer is that CEO Thorsten Heins's report provided plenty of fodder for the hardened opinions on both sides of the debate. Optimists were delighted to learn that RIM's adjusted loss was far lower than the consensus estimate, and on a bottom-line basis, actually eked out a net profit of $9 million.

Doubts about not having enough cash to launch BB10 were quelled as the war chest swelled to $2.9 billion. And Mr. Heins assured shareholders of a terrific early response to BB10 from carriers around the globe, and significantly, that they are ready to spend their own money on marketing campaigns.

Mr. Heins also handed two key victories to detractors. Analysts have said for years that RIM's service-fee model was unsustainable and something had to give. That has now been acknowledged with a new tiered model aimed at keeping customers in the fold rather than maximizing revenue. Second, the steady curve of increasing subscriber counts has finally been cracked, down to 79 million from 80 million last quarter.

The thing to remember in this debate is that most of the folks pounding the table, both pro and con, are "talking their book." This includes yours truly, as RIM was purchased for the Vice-President's portfolio in November at $8.26. However, where the view here differs markedly from both sides is with the notion that RIM's bet on BB10 will have a binary outcome — i.e., it will either be the final nail in the coffin or return RIM to its glory days. Both of these results seem extreme; the balance of the probabilities suggest a more middling result.

The advance reviews of the BB10 have been strong as app developers have signed on, and the crucial support from carriers is there. It is unlikely that BB10 will change the minds of many Apple fanboys in the U.S., but overseas, it will help cement RIM's status as a top dog. The key issue there is affordability; people might fervently desire a flashy new BlackBerry, but that wish is difficult to fill for those with low disposable incomes.

Rather than a flop, or a gusher of revenue, a gradual uptake of the new hardware over many quarters seems reasonable. Now that Mr. Heins has turned RIM into a much leaner and more efficient enterprise, the belief here is that the corporation is not at death's door, but getting better. The positive fundamentals can over time move the stock to a target range of $22 to $25.


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