A Case Study of RIMM’s Balance Sheet Troubles

Written by

Jae Jun

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Saying RIMM is having a tough time is an understatement. If things continue the way it is, RIMM just may end up just like Eastman Kodak. NOK may be in a slightly better position because of the partnership with Microsoft and the adoption of Windows but it is still behind Android and iOS.

I work at Samsung as an engineer for mobile devices, so I get to see first hand the trends of the mobile industry and how quickly technology changes and witness the extremely competitive landscape. The industry is cut throat and RIMM’s lack of innovation is adding to its own downfall.

In any industry, it is usually dominated by a number one and number two. From numbers three, four and onwards, it’s a death battle and RIMM has found itself in this situation.

Coke and Pepsi, NY Yankees and Boston Red Sox, AT&T and Verizon, and of course Apple and Google. Monsters in their respective industries. You will find it difficult to name a clear #3 and #4.

I’ll hold my thoughts on RIMM’s future here for now because I want to see in a quantitative manner how this transpired.

On a quick note, RIMM dropped another 19% to end June and is now down 50% for the year. Whether the current price factors everything in, I don’t know, but let’s go through a simple balance sheet analysis techniques to see whether RIMM is heading in the right direction.

RIMM Balance Sheet Analysis

I have highlighted inventories below, but there are a few troubling lines.

Receivables do not look too good and I don’t see how intangibles could be that high. More impairments could be on the horizon as mentioned in their latest quarterly report. I would seriously wipe out a minimum of 50% goodwill and intangibles if you are going to adjust the assets for a NCAV or balance sheet reproduction analysis.

I’ve gone over how those are performed so I will move on.

Here is a different look using percentage changes of annual revenues, accounts receivable and inventory found using the intrinsic value spreadsheets.

2007 was the beginning of the peak for RIMM, so from hindsight, the huge increase in accounts receivables and inventory from 2006 is understandable.

On June 29, 2007, the iPhone was released.

Not knowing what the iPhone was capable of, the market continued to love RIMM throughout 2008 and then the financial crisis hit and everything went down with it but RIMM continued to do well as there was still some doubt about whether the iPhone would be a legitimate competitor.

With the ideal scenario being sales increasing at the same rate as inventory, in 2007, finished goods inventory increased 115% and sales closely matched the growth with a 98% increase. On the money.

The iPhone proved itself for sure in 2009 onwards. The first big sign showed up because RIMM was expecting huge sales in 2010 which is evident from the mega increase in raw materials and finished goods in 2009.

The problem was that RIMM needed 2010 sales to be in excess of 100% compared to the previous year to justify the 284% increase in finished goods shown on the 2009 balance sheet.

RIMM needed more than 100% growth and the market was expecting something huge. You can see how a 35% sales increase was a huge disappointment. And so 2010 was the start of the decline.

The important thing to note here is that for the years 2009, 2010 and 2011, total inventory is fairly consistent. By just focusing on the total inventory value, a lot of information is missed as it tends to hide what is really happening deeper down at the operational level.

Following 2010, the 2011 finished goods increase of 450% was another huge warning sign and shows that management must have been in some form of denial.

RIMM’s Balance Sheet Today and Going Forward

Fast forward to today. That denial is still evident with a 134% increase in work in progress and will require some extraordinary work by the new management to handle the inventory. The delaying of products and launches is not helping contain inventory either.

RIMM will have to post sales growth of at least 30% in the next year for the inventory increases to be justified but I don’t want to bet on that.

If I didn’t know the stock price of RIMM and had to judge based on these simple facts, I would stay away.

You could run a whole lot of other valuation techniques and compare ratios, but a quick look at the balance sheet does not inspire much confidence in RIMM.

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6 responses to “A Case Study of RIMM’s Balance Sheet Troubles”

  1. This is a really good analysis and shows us what the company is betting on. It also further signifies that Prem Watsa @ Fairfax Financial is likely betting on an operational turnaround so that he can exit his position rather than liquidation value.

  2. Buck says:

    Jae and Ankit,
    Very interesting work here.

    I took a look at RIMM a few months ago, and saw many of these declining factors. At the tine, I had a bunch of Fairfax Financial (FRFHF) and had been reading all about how Prem Watsa was “the Canadian Warren Buffett”. I watched the stock go up and down a bunch for several months, and kept trying to figure out why an insurance company shoud fluctuate so much. It turns out FRFHF is more of a portfolio for Prem than an insurance company, and he has bet heavily on a turnaround in RIMM, one of his biggest holdings. RIMM looked like too much of a gamble to me, so I sold my FRFHF at a small profit to get out of what could become a mess. I am in investor, not a gambler who likes to “bet on the come,” as they say in Vegas at the craps tables.

    As a side note, I am on my second IPhone, my wife, daughter, and both sons use IPhones, and all my family use Apple products exclusively.

    I think RIMM products are the future Sony Betamax–a good product overwhelmed by a better- marketed and priced alternative, soon to be left on the back shelves of the pawnshop of history.

    Buck Lansford

  3. Jae Jun says:

    @ Ankit,
    That’s an interesting point you make about Fairfax wanting to get out quickly instead of waiting for liquidation or a split up. I didn’t think of it that way.

    @ Buck,
    I agree with you that I don’t see much of a turnaround with RIMM. I had exactly the same thought that they would become just like Sony. Once a great company riding waves of innovation, but their focus on hardware was completely wrong. RIMM basically did the same thing. They focused on hardware and security and didn’t understand that business users are still consumers and that security can also be covered by software applications and methods and not just hardware.

    Some people are willing to bet that it is just too cheap, but it doesn’t scream value at all. So far, even the new management looks to be a continuation of previous management.

  4. Roger Arets says:

    UPDATE 9/23/2013: BlackBerry agreed to be acquired by a Canadian insurance company for $9 a share, in a deal that would total $4.7 billion.

  5. Yes I saw that. I wonder what the reasoning and plan is by Watsa.

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