Success Anything but Assured in RIM's Turnaround Effort

 Research in Motion (RIMM) delivered fourth-quarter results that were slightly below consensus expectations, despite having set an extremely low bar. With few reasons to be optimistic about RIM's ability to rebound from its current uncompetitive positioning, we are maintaining our fair value estimate.

RIM shipped approximately 11.1 million smartphone units during the quarter, representing a 21% sequential decline. Revenue was just $4.2 billion, down 25% year over year as unit shipments tumbled, sale prices declined, and low-end phones accounted for a greater portion of unit shipments. In a sign of how stale and uncompetitive RIM's current phone lineup is, the company took a $267 million inventory write-down and still ended the quarter with inventory 60% higher than the year-ago period.

Of greater consequence than the uninspiring results, however, is what the firm did not say. Management declared it would no longer provide a forward-looking outlook in a quantitative form, citing limited visibility. The next several quarters will be difficult for the firm, with continued deterioration of unit shipments, revenue, and profitability expected. Lacking guidance from management, investors must expect the worst.

The delay in launching a competitive platform is eroding the existing user base and damaging RIM's long-term prospects. In a smartphone market that is growing at more than 50%, without a competitive device RIM is sending users who are entering the smartphone market for the first time straight to the competition. Poaching a smartphone user from a competing platform is significantly more difficult than capturing that user as he or she enters the market for the first time. Every user converted by  Apple (AAPL),  Google's Android (GOOG), or  Microsoft (MSFT) is a lost opportunity for RIM.

BlackBerry's fate remains tied to the success or failure of the BlackBerry 10 devices. New CEO Thorsten Heins did stress that BlackBerry 10 devices are still on track for a launch in late 2012. However, until there is more tangible evidence to support that the BlackBerry 10 devices will be competitive, on time, and supported by an ecosystem of applications and content, we are hesitant to take the leap of faith required to believe in the firm's successful turnaround.

In the meantime, RIM is focused on damage control. Heins is shaking things up and putting his own team in place, with many high-level executives leaving the firm, including the CTO and COO. Additionally, Heins signaled that RIM would keep an open mind to strategic alternatives including licensing, partnership, and possibly even acquisitions, though he maintained that priority one remains putting the firm back on track with the BlackBerry 10 launch. We welcome the open-minded approach, but the introduction of strategic alternatives at this point, without any specifics, raises more questions than it answers.

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