Research in Motion (NASDAQ: RIMM)

Research In Motion Analysis
Prepared by: John R. Pangere February 2012
Research In Motion (NASDAQ: RIMM)

Date of Report: 2/18/2012 Current Price: $15.07 52-week range: $12.45 - $70.54 Average Volume (3-Months): 16.45 Million LTM EPS (Reported): $4.25 LTM P/E: 2.38 Dividend Yield: Index Membership: NASDAQ Shares Outstanding (Millions): 524 Institutional Holdings: 60% Fiscal Year Ends: 26-Feb LTM Net Income (Millions): $2,223 Book Value, as reported (Millions): $10,197 Market Cap. (Millions): $7,900 Price/Book Value: 0.78x Industry: Technology
Business Description: Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. RIM provides platforms and solutions for access to information, including e-mail, voice, instant messaging, short message service (SMS), Internet and intranet-based applications and browsing. RIMs portfolio includes the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools and other software and hardware. The company is headquartered in Waterloo, Ontario, Canada and was founded in 1982.
Investment Thesis There are many reasons for the revulsion of a business; the difficulty is in deciding whether that revulsion is warranted or not. That is the challenge in researching RIM: is the hatred foisted upon the company by investors warranted? When first attacking this question, I sought out to answer the following questions: 1. Is the business unsustainable? What I mean by this question is: Is RIMs business an actual business, or is it something that will never work? My answer is yes, RIM is an actual business that creates a product people use, not a fly-by-night product that can be created with ease (Reference: Groupon (NASDAQ: GRPN) or the internet craze in 1999-2001). I admit, however, that RIM has problems it must overcome, which I will discuss elsewhere in this write-up. 2. What is the condition of the companys balance sheet? Is it indebted to the point it cannot repay those debts through its operations?

Without a doubt, the answer to this question is no. The companys balance sheet is very solid, with zero debt. This should, and will, be monitored in the future. Should the company begin issuing massive amounts of debt to finance operations (or complete share repurchases), then a review of this question is warranted. 3. Is this a cyclical business in a down-cycle? Short answer: no. This mainly applies to commodity-type businesses. 4. Is the market in which the company operates a dying market? Again, the answer is no. The smartphone market is continuing to grow exponentially across the world, according to many independent reports, and is expected to do so for many years. (Again, this will be discussed later in this write-up) Upon answering these questions, I sought to analyze this so-called dying business by going through the negative arguments and building my thesis around those arguments. Dealing with a company in such disarray in the markets is, in my opinion, not so much about a specific multiple, but how much cash the business can generate and what the company will do with that cash. Multiples may provide guidance as to its price relative to other companies, but is not the sole basis for investment. The company is currently priced near its 52-week low. Over the past year, RIM has fallen from a high of $70.54 to its current price of $15.07 per share, a 79% decline. This has been due to a number of factors, including: loss of market share; failed product launches/delays in product launches; failure to introduce new products in the market. The question the fall in the share price beckons is: Is the fall in share price warranted based on the concerns voiced by investors and critics of the company?
The company has a solid balance sheet. For many years, the company has kept a solid balance sheet with zero debt. This is due to the company being able to finance its operations through its sales rather than through borrowing. A look at the cash and equivalents position, and the companys debt position, over the last five fiscal years is as follows:

Cash Debt
2011 $2,121 -
2010 $1,912 -
2009 $1,518 -
2008 $1,605 $7.3
2007 $987 $6.6
*Numbers in millions
As you can see, the only way to describe the financial position of the company is: rock solid. In its most recent quarterly report, for Q3 of Fiscal Year 2012 ended Nov. 26, 2011, the company reported a cash and equivalents position of $1.3 billion and zero debt. While the cash and equivalents position is lower than in previous years, this is due to RIM being a part of a consortium of companies that was successful in acquiring the patents of Nortel Networks; RIMs portion of the patents amounted to $779 million, of which the entire amount was paid for in cash. In addition, with zero debt, the company is not leveraging up in order to attain growth. The company has produced solid cash flows over the past several years. The company has been able to produce billions of dollars in free cash flow (FCF) over the past several years through its operations.
2011 $4,636 $927 $1,039 $1,233 $3,291 2010 $3,402 $616 $1,009 $809 $2,200 2009 $2,722 $328 $833 $908 $1,309 2008 $1,731 $177 $352 $517 $1,039 2007 $807 $126 $254 $227 $452
Operating Cash Flow Plus: Depreciation Less: Capital Expenditures Less: Income Taxes Free Cash Flow
*Numbers in millions
On a last-twelve-months (LTM) basis, FCF is still solid, coming in at approximately $2.5 billion. Yet, when making an adjustment for the non-cash write-down of inventory for RIMs PlayBook tablet, amounting to $485 million (an after tax adjustment of $356 million), FCF comes in at approximately $2.8 billion. The write-down, while reported in the normal course of operations, at this time, should be considered a one-time charge. However, should the company continue to write-down inventory in the future on a more regular basis, each write-down should not be considered one-time in nature, thus becoming a normal operating procedure of the company. A quick note on FCF: There have been many different ways I have come across to calculate this number. Many investors dont include tax in the calculation, but I choose to, so long as that tax figure is positive. Why? Because, in the normal course of operations, unless a business

undergoes heavy losses or is subsidized by its government, that business will pay income taxes. In other words, income taxes are a realized expense of the company, not something the company can avoid unless through accounting conventions such as tax-loss carryforwards.
The company returns capital to shareholders in the form of share repurchases. Over the past 5 years, RIM has spent approximately $2.9 billion on share repurchases, reducing the share count by 58.1 million shares, or 10%, over that time. Currently, the company has a share repurchase program that allows the Board of Directors to authorize the purchase of up to 5% of the outstanding common shares, which expires on July 10, 2012. This represents approximately 26 million shares, and at its current price, would cost approximately $442 million. Share repurchases since FY 2007 are as follows:
2011 37.2 $2,110 $56.72 2010 12.3 $775 $63.01 2009 0 2008 0 2007 9.6 $204 $21.25
Shares Repurchased Total Cost Average Price per Share
*Numbers in millions, except per share data
In addition, while it is my opinion that returning capital to shareholders in the form of share repurchases is a positive when viewing a company, those repurchases must be placed into context. In its previous share repurchase programs, RIM has utilized each program (which are typically 12 months in length) for the most part, to its fullest extent. In that respect, I believe that buying back shares at average prices over the years in the above stated amounts per share have typically been poor capital allocation decisions. So far, over the course of its current fiscal year, RIM has not made any repurchases despite the companys stock trading at a much lower average price per share than in previous years. One potential reason for this may be due to the companys success in acquiring a portion of Nortel Network patents, yet the company has still produced nearly $2 billion in FCF over the course of the first nine months of the current fiscal year. (This figure may not compute when looked at on the surface of the financial statements due to the company accounting for the PlayBook write-down provision, which was largely a non-cash expense.)

In my opinion, it would behoove the Board to recognize that, while its intentions of returning capital to shareholders in the form of share repurchases is commendable, buying back shares at nosebleed prices does little to add to shareholder value than buying back shares at bargain levels. If the company were to utilize a portion of its FCF to repurchase shares at todays price, it may be a wise use of capital and a signal that the company still views share repurchases as a way to return capital to shareholders. Regardless, the fact that RIM has instituted a share repurchase program shows they are sensitive to the fact that the business is owned by its shareholders, rather than by its executives. Investment Risks Declining profit margins Over the past several years, the company has seen a decline in profit margins. Gross margin percentage has decreased from a high of 55% of consolidated net sales in FY 2006 to approximately 38% of consolidated net sales currently. Operating margins have decreased from a high of 30% in FY 2006 to 14.5% in its current state. Net margins have decreased from 21.5% in FY 2008 to its current value of approximately 11%. In addition, FCF margin, as a percentage of net consolidated revenues, has declined from a high of 30% in FY 2005 to approximately 16% currently. There are several reasons for the declines of profit margins, of which the most notable is the mix of devices sold by the company recently being towards the lower end of its product portfolio. This is partially due to the failure to release new products, which are higher in price, and therefore, have higher gross margins on average. Another reason is due to the write-off of the companys PlayBook inventory, which was previously discussed above. Since the company has stated that its new suite of smartphones, the BlackBerry 10 family, is not slated to be released until the latter part of 2012, margins may continue to be lower in the short-term than has been the average over the course of the last several years. On a positive note, comparing these margins to other handset makers, all of which make smartphones, with the exception of Apple (NASDAQ: AAPL), RIMs profit margins are typically above those of its competitors:

Name RIM Apple HTC Motorola Mobility Nokia
Symbol RIMM AAPL TWSE: 2498 MMI NOK
Gross Margin 38% 40.5% 26.8% 25.6% 29.3%
Operating Margin 14.5% 31.2% 14.9% -0.7% -2.8%
Net Margin 11.2% 23.6% 14.3% -1.7% -3.8%
*Margin percentages are based on a LTM basis. HTC trades on the Taiwan Stock Exchange.
As you can see, RIMs profit margins are, for the most part, above or in-line with its competitors, with the exception of Apple. Yet, when looking more closely, RIMs adjusted gross and operating margins, to account for the one-time, non-cash write-off of the PlayBook inventory, are stronger than at first glance. In that light, the gross margin is 40% and the operating margin comes in at 17%. In addition, an added benefit of viewing Nokias most recent filing, in which the company breaks down its contribution from its smartphone segment (which, unfortunately, not all smartphone makers have done), shows the following:
Nokia Smartphone Breakdown Sales Gross Margin Operating Margin $10,820 23.7% -3.8% $14,874 30.8% 9.3%
2011 2010
Devices Sold 77.3 103.6
*Sales are in millions of euros and are for the smartphone segment only. Devices sold are in millions.
When looked at in this light, RIMs operations are much stronger than that of one of its closest competitors. Continued loss of market share It is no secret that RIM has struggled in the North American market over the last two fiscal years. At one point, RIM held a market share of over 50% of the smartphone market and is currently estimated to have a market share of approximately 16.6%, according to comScore1.
____________ 1:http://www.comscore.com/Press_Events/Press_Releases/2011/12/comScore_Reports_November_2011_U.S._Mobile_Subscr iber_Market_Share

At its peak market share percentage, the BlackBerry had little competition from other handset makers, but with the advent of Apples iPhone and additional smartphones utilizing Googles (NASDAQ: GOOG) Android operating system, RIM was knocked from its perch. The conundrum of the market share riddle (as more fully addressed below) has been that, while RIM may continue to lose market share in one market, it may gain market share in another. Potential loss of subscriber base Over the last several quarters, RIM has been losing subscribers in its North American segment. In 2009, RIMs North America operations totaled approximately 71% of total net revenues. Since then, the majority of revenues have shifted to originate from outside of North America, with North American operations accounting for just 31% of net sales. Throughout this time period, the subscriber base in North America has declined, but net new subscribers have increased overall. The decline in North America can be attributed to increased competition and a more comprehensive choice of smartphones for consumers. Indecision of management to guide and direct innovation and R&D Over the past few years, RIM has had a number of missteps in its release of new and upgraded products. This list includes: the BlackBerry PlayBook, software upgrades and other smartphones. In addition, RIM has seemed to rush products to market in order to respond to competition from the likes of Apple. Such products have included the BlackBerry Storm touchscreen smartphone. In reviewing past company conference calls, it was evident that company executives seemed to dismiss its competition as being nothing but a passing fad. Such comments to questions answered by Jim Balsillie, the companys former co-CEO, include the following: FY 2008 Q1 Conference Call Question: Can you talk about your thinking about the touch-screen capabilities thats something is important at some point? Jim Balsillie: My experience is one person may make a baby in nine months, nine people cant make a baby in one month. And beyond that, I cant say I really pay that much attention to all these little dynamics because it doesnt help me help my customers and help channels more and so let it be what it will be. FY 2009 Q1 Conference Call Question: Are you worried about overlap with the Apple customer base?

Jim Balsillie: Once you decide to become a BlackBerry user, you kind of stay there for life. FY 2010 Q4 Conference Call Question: How do you see the expansion of your addressable market? Secondly, do you think RIM is prepared to handle the potential entry of Apples iPhone into Verizon? Jim Balsillie: I am not going to speculate on what other companies are going to do and other carriers We have definitely had competitors come and go If you saw what was going on with the devices, the platforms and the deliverables that you are going to see throughout the fiscal year, you would realize not only are we the strongest competitor and a really established player, but we are strengthening. What do the above comments all have in common? Basically, the former co-CEO of the company wasnt paying attention to his companys own market. The late release of products, as well as failure to develop products which were thought to catch on with consumers, has helped to drag on margins. How so? Through selling an aging product base with lower average selling prices, and therefore, lower margins. This has also led the company to fail to more effectively compete with its competitors, causing depressed sales figures in recent quarters, as well as a loss of subscribers in North America. Loss of visibility in stores Throughout the time I have researched RIM, I have made periodic visits to cellular stores, such as Verizon Wireless (NYSE: VZ) and other carriers, to check on the visibility of the BlackBerry suite of products. The very first store that I walked into did not have one BlackBerry product on display. The theme did not continue at other stores, but I found the visibility of BlackBerry products to be much lower than I had seen in the past. There may be several reasons for this, one being the failure of the company to release new products, as well as the popularity of other smartphones. In fact, in a discussion with the stores manager, I was told the store does carry BlackBerrys, but only if a customer asks for one. She also insisted that while many people claim to love and miss their former BlackBerry, they are seeking a smartphone which has more application capabilities than BlackBerry currently offers. While that is what I have found, and is a very small sampling of the many stores across North America, it is a concern that must be addressed by RIMs new management. Visibility is key to growing the adoption of RIMs products.

Questions to be Answered Throughout my research of RIM, I have come across many questions I have worked to try and answer. Following are those questions I see as pertinent to my thesis regarding an investment in RIM. Is market share a true measure of the companys earnings power? In order to answer this question, we have to view market share in two different contexts: RIMs market share of the smartphone market and the growth rate of the smartphone market and its impact on market share. It is true that RIM has lost a great deal of overall market share due to the rise of the iPhone and the implementation of Googles Android operating system on numerous smartphone platforms. RIM has been unable to retain its once dominant position due to the innovation of other products, but since the smartphone market is expected to grow at double digit rates for several years, RIM can still grow, despite reports to the contrary.
Does market share equate to number of total subscriber growth or loss? As per the previous question, the short answer is no. What is smart phone usage worldwide? According to several independent sources2, mobile phone usage makes up approximately 85% of the world population, with an estimated 6 billion people using mobile phones. However, smartphone usage is just a fraction of this figure at approximately 25% of mobile phone usage What does this mean? With smartphones making up approximately 1.5 billion units of the overall mobile phone market, smartphone adoption will have to double just to equal half of the current worldwide mobile usage. Even if RIM continued to lag behind its competitors, with that type of growth in the overall smartphone market, there is still room for the company to grow substantially.
____________
2: http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats

What is the growth rate of smart phone usage? As has been stated previously, smartphones make up only a fraction of the mobile phone population worldwide, being outnumbered by a factor of 4:1. Adoption rates are expected to increase in the coming years with multiple sources citing various ranges from 49% to 57%, with the smartphone market expected to grow more than four times faster than the general mobile market2. What will be the impact of lower tax rates in Canada? Since RIM is a Canadian company, the impact of tax rates in Canada 3, while not a main part of this thesis, should be considered due to Canadas lowering of its income tax rates. In 2011, Canadas tax rates for corporations were effectively 16.5%, and in 2012, those rates are to be lowered to an effective rate of 15%3. In addition, Provincial tax rates, of which RIM is located in the Ontario province, range from between 4.5% to 11.5% With lower tax rates, any monies gained from paying a lower effective rate could either offset any losses due to lower profit margins, or increase cash flow in the future. Currently, RIMs effective tax rate for the first 9 months of the current fiscal year is approximately 22%, which is approximately 500 basis points (5%) lower than over the same period in FY 2011. What is the purpose and necessity of co-CEOs at this point in time? This question was of concern, until the co-CEOs recently stepped down in favor of promoting the companys COO, Thorsten Heins, to the position of CEO4. Nevertheless, the question proved to be difficult with the honest answer to the question being: I did not know the purpose or necessity of having such a structure. It is my opinion that such a structure was a hindrance to the company and would have continued as such due largely to legacy, meaning both Messrs. Balsillie and Lazaridis have acted in such a capacity through RIMs hyper-growth stage in the mid-to-late 2000s. This leads to the next question:
____________
3: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/rts-eng.html 4: http://www.theglobeandmail.com/report-on-business/at-research-in-motion-a-new-ceo-vows-to-silence-thedoomsayers/article2310968/

What impact will the new CEO and new board members have on the companys future? This is also another difficult question to answer, mainly because I cant predict what sort of strategy the new CEO will implement to help RIM regain its once prominent position. While I view the appointment of Mr. Heins to the position of CEO as a positive, his stated comments of the companys current direction as being on-track leaves little to be desired. However, what I find most interesting about the recent management shake-up is not the stepping down of the co-CEOs (who will remain as directors), but the appointment to the board of Prem Watsa5, the CEO of Fairfax Financial (TSX: FFH.TO), one of the companys largest shareholders who has a track record of investing similar to that of Warren Buffett, and who has recently doubled his investment in RIM6. It is because of his investment style and track record that Mr. Watsa has been dubbed as the Warren Buffet of Canada. What price would the company fetch on the open market? Again, this question is not cut-and-dried as it may seem due mainly to the patents owned by the company, as well as its subscriber base. There are several ways to approach this question, the first being on an enterprise value basis. Currently, RIMs enterprise value is approximately $6.4 billion Another way to view a possible price of the company is through a basic reproduction of RIMs assets if a company were to start-up today and replicate RIMs assets. However, this method requires some assumptions. First, it is assumed that such a company must spend approximately 3 years worth of advertising expenses, SG&A expenses, and R&D expenses. Then, the reproduction cost is reduced by non-interest bearing liabilities and any cash balances, provided the cash balance is larger than an amount equal to the 5-year average of SG&A spend relative to sales. Using this method, an estimation of the reproduction cost of RIM is approximately $16.6 billion, or $31 per share. Using the reproduction method, however, does not account for intangible assets, such as customer relationships/subscriber base and the patent base of the company, and at best, is an estimate.
____________
5: http://www.reuters.com/article/2012/01/25/us-hold-rim-watsa-idUSTRE80O24C20120125 6: http://www.reuters.com/article/2012/01/27/rim-watsa-idUSL4E8CR3R020120127

The issue with such exercises is that they are pure conjecture; only the possible group that would make a bid for the company can assess what they would be willing to pay for RIM shares, but this may provide a basis from which to value the shares of the company in its current state. What would be the impact if the company were to go private? This is a continuation of the above question. The implication would be that there is value in RIM that could be extracted by a group of investors, and this may signal that the price of the company is, in fact, cheap. What is the value of the company per subscriber? (estimated) Since the company no longer provides a number for its subscriber base, this non-GAAP measurement must be estimated. However, by the companys own guidance, there are at least 70 million Blackberry subscribers worldwide as of Q2 in FY 2012. Based off of this number, compared to previous years subscriber counts, I estimate there to be approximately 73.5 million subscribers as of the most recent quarter. On a per subscriber basis, the value of the shares may be viewed in multiple ways. The first is through RIMs subscription revenues, which on a LTM basis is $3.8 billion. This would value the company at a multiple of 2.1x the revenues of RIMs subscriber base alone. Another way to value the company is through what RIMs cost to acquire subscribers has been and compare that to the current share price. This exercise takes the following data:
Year 2008 2009 2010 2011
Advertising Spend 125 719 791 1,100
Subscription Additions 6 11 16 18
Subscriber Cost 20.76 65.36 49.44 61.11
*Advertising Spend and Subscription Additions are in millions. Subscriber cost is on a per subscriber basis (Advertising Spend/Subscription Additions)
While these numbers fluctuate, I will use an approximate cost of $60 per subscriber. Applying that number to the estimated subscriber base values the subscriber base at approximately $4.4 billion, or $8.39 per share. The question then becomes: How much is another company willing to pay to purchase that subscriber base? Further, what is the rest of the business worth to an outside entity?

Again, the inherent problem with this method is trying to place a cost on the subscriber base to the overall value of the company, which is a guess at best. This is especially due to the varying degrees of cost to increase the subscriber base over the history of the company.
What will the impact on Google be from its acquisition of Motorola Mobility, as well as in the overall market? Its no secret that Google has dominated the smartphone market upon introducing its Android operating system. In the past, however, this operating system was given to makers of smartphones at no cost. Now that Google will be a maker of smartphone hardware, through its acquisition of Motorola Mobility, what impact will this have on the smartphone market? Will Googles new competitors (other smartphone makers) continue using the Android operating system, or look for alternatives? These questions will only be answered with time. However, it should be noted that smartphone makers, such as HTC, who utilize Googles Android operating system have failed to produce substantial returns on their investment, compared to RIM and Apple, despite the popularity of Android and subsequent increases in sales of smartphones utilizing the Android operating system.
Potential Catalysts: Release of innovative and new products Investing in a technology company can be difficult. This is due to the ever-changing landscape in many tech markets. Only with releasing new products that will be adopted by current users and penetration to new users will RIM be able to effectively compete with its competitors. Since RIM has not released any product of significance in some time, and since the company will not be releasing a new product until the latter part of this year, we have a chance to buy shares at depressed levels. At the same time, the companys new products must create a stir in the marketplace; otherwise, things may turn grim. This is what is hoped for with RIM implementing its new QNX operating system in its handsets going forward. On a negative note, the company will not be releasing this operating system on its handsets until the latter part of 2012. What I view as a positive, however, is that it seems RIM is taking its time on order to get it right; in other words, rather than rush the new operating system and new products to market, the company is keen to make sure the operating system and new products are implemented successfully upon launch.

Increase in hardware sales in North America Again, this can only come with introducing innovative new products that will allow RIM to keep abreast of the ever-changing tastes of the North American tech consumer. Acquisition by a competitor While this is unlikely at this point in time, it is a potential candidate as a catalyst due to the sharp decline in the companys valuation. Should a company such as Microsoft (NASDAQ: MSFT), Nokia, or even IBM (NYSE: IBM) actively pursue RIM in a takeover bid, it could boost shares from current levels. Restructuring of the operating system This is not a corporate restructuring, or a complete overhaul of its operating system, but a change in the way RIM currently operates to allow developers more ease of use with the BlackBerry operating system. With new leadership, RIM may now have another option to generate additional revenue: licensing its operating system to other smartphone makers. There are both positives and negatives to such a strategy. The positives are that the BlackBerry platform can provide consistency across smartphones, especially in the area of government. Since RIM is still a preferred smartphone operating system of many governments, including the US government, mainly due to its security, licensing its operating system can potentially open doors for many other smartphone makers, as well as another source of revenue for RIM. Having government approval and wide adoption of its products is a competitive advantage for RIM, in part due to the process other smartphone makers must complete to achieve government approval for their operating systems, which is cumbersome and lethargic at best. (Even trying to get approval to build a fence on your property could take months.) It could take many months or years for another smartphone maker to more fully penetrate the government market, which provides RIM with a certain competitive advantage in that marketplace.

Recommendation: My recommendation regarding RIM is that, upon reviewing the companys filings, including annual reports, quarterly reports, conference calls, etc. going back to FY 2007, RIM is a company that does have upside and, in my opinion, is oversold at its current price of $15.07 per share; Intrinsic values tend to change slowly, while prices in the stock market change rapidly and widely. Yes, there are many questions regarding the future of the company due to certain missteps taken by the previous management, but my review of the company required an assessment of the smartphone market and the future prospects of RIMs, and its competitors, products, as well as its financial prospects moving forward. The difficult part with analyzing a technology company is that that technology is constantly changing; this is Moores law in action. Although Moores law, named after Intel (NASDAQ: INTC) founder Gordon Moore, specifically states that the number of transistors on an integrated circuit will double every year, it is my contention that this law applies to many different technological products, smartphones included. As a rephrase of the law to the smartphone, I contend that the following is true: the power, functionality, and efficiency of smartphones will double approximately every two years. That is the inherent complication with investing in technology companies: how can anyone predict the direction of technology, and more specifically, what will smartphone makers release in the future? The answer: no one knows for sure, but it can be guessed that future products will be faster, smarter, and more efficient. Who will the main players in the smartphone market be? Even that question is one that cannot be answered easily, but an educated guess can be formulated based off of current sales leaders and expected trends. The reason I decided to research RIM is simple: the price of the stock fell so far, so fast, it became more and more compelling due to its value in the market and what I perceive to be its intrinsic value. The market today is acting in fear of RIMs operations, fear predicated upon a guess that the company will suffer operating losses despite evidence to the contrary. If a business is doomed to lose money, why continue it? That is what this report all boils down to: will RIM suffer in the coming years so much, that it doesnt make sense to continue the business today? From all that I have researched: no. RIM is a healthy company that is facing more competition than it has in the past and will have to make the necessary adjustments in order to respond to that competition. The fact that the company has a clean and solid balance sheet, produces profit margins above most of its competitors (and even that can be contested since Apple has many different product lines that contribute to its margins), and is still producing billions of dollars in FCF, all despite what the

market perceives to be a failing business, provides investors with an opportunity to buy shares in RIM at bargain basement levels. When it comes down to placing a valuation on RIM, I have estimated its current value at approximately $45 per share. This is due to the companys financial position, the overall prospects of the smartphone market, as well as the potential the company may have despite the estimation of a continued decline in market share. In addition, the FCF generation the company has proven in the past has played a major factor in my estimation of intrinsic value. I have derived my estimation of RIMs intrinsic value through an estimation of the earnings power value (EPV) of RIM. The figures I have used are on a LTM basis:
EBIT Adjsuted Less: Maintenance Capex Adjustment (cost for ongoing operations) Tax Rate Earnings After Tax Plus Depreciation Income As Adjusted
*Numbers in millions, except per share data
$3,357 $255 38% $2,178 $1,019 $3,198
Income As Adjusted Cost of Capital EPV (Income/Cost of Capital) Less: Cash-Debt Adjustment Final EPV Per Share
$3,198 12% $26,647 $163 $26,484 $50.61
I further adjusted the EPV per share down by 10% to account for possible unknowns, which at this time Ill call a new management adjustment. I feel that with the figures Ive used above, I am being fairly conservative, especially with the tax rate and cost of capital rate (or the rate of return in which the company requires to invest its capital). Although, as I stated previously, the addition of Prem Watsa to the board, and his continued investment in RIM, is a major positive, I feel more comfortable adjusting the target price down by 10% to account for the unknowns with the new management rather than leave it as is. I view the companys downside as limited to a price approximately equal to the companys Tangible Asset Value (TAV) of $12 per share. So, the potential gain when compared to potential loss is at a ratio equivalent to 7:1. Further, I would purchase shares only up to a price of $20 per share, which is approximately equal to stated book value. So, to recap, I recommend the following: Buy shares of RIMM up to $20 per share. The time horizon I have set is no less than 3 years, unless the thesis changes or the shares reach intrinsic value of $45 per share.

Appendix Valuation Comparison with Peers

Name RIM Apple HTC Motorola Nokia Symbol RIMM AAPL TWSE: 2498 MMI NOK Current Market LTM EBITDA - EV/EBITDAPrice Cap P/E P/S P/B ROE ROA EV/EBITDA Capex Capex 15.07 7,900 2.38 0.41 0.78 24.43% 17.02% 1.4 3,079 2.07 502.12 468,000 14.29 3.67 5.2 45.58% 24.01% 9.7 41,803 10.67 18.83 39.7 5.49 16,100 7.91 1.81 4.83 34.55% 13.77% 12,000 0.91 2.33 -7.30% -3.13% 20,300 0.36 1.22 -8.87% -3.95% 7.19 40 3.6 1,610 13 2,313 8.26 650 4.71
*Numbers in millions, except current price and ratios. HTC values are based on a Taiwan dollar/US dollar exchange rate of 30.4855 Taiwan dollars/US Dollar.
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Research in Motion (NASDAQ: RIMM)

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Research In Motion Analysis

Prepared by: John R. Pangere February 2012