RIM's Results Give Reason to Worry - Barron's

It's going to be a chilly winter for Research in Motion (ticker: RIMM).

On Thursday the shares popped 23% after the closing bell as the company announced results that were better than the worst expectations. Those results did little to cheer analysts, though. The fact is, the company is facing a holiday season with no new product as Apple (AAPL), Google (GOOG), Samsung Electronics (005930.Korea), Microsoft (MSFT), Nokia (NOK), and everyone and his brother roll new phones to market.

RIM's next big effort, something called BB10, won't be on new devices until sometime in the first quarter, a deadline that has repeatedly slipped but sounds as if it's more or less on track.

There is a place for The Next Great Smartphone, but RIM's role in providing it, and at what level of profit, remains the question.

Discussion of RIM by Wall Street on Friday morning was peppered with phrases such as "uphill battle." As Michael Genovese, an analyst with boutique brokerage MKM Partners, put it, "RIMM shows signs of life but still faces a difficult road."

The quarter's results themselves were not as encouraging as appeared at first blush. Although the company saw an increase in the number of subscribers using its push e-mail service, a positive surprise, the average revenue per subscriber declined. RIM conceded that it is cutting prices in an effort to reduce the "churn" of subscribers, which doesn't give the impression the service is in high demand.

The other big surprise, a $100 million pop in the cash balance since the prior quarter, was bolstered by a $233 million reduction in inventories, wrote Jim Suva of Citigroup. Cash from operations was lower than some analysts were looking for.

Perhaps most disappointing, a continuing review of financial options that began at the end of May, still has yet to produce any conclusions, much less the licensing of RIM's technology, something the Street has been hoping for. CEO Thorsten Heins, speaking to analysts following the report, said he's had very positive talks with many parties about RIM's technology. But he declined to say where the strategic review was headed, or when any deals might be announced.

Here's my strategic review: With a market value of $3.7 billion and cash on the balance sheet of $2.3 billion, RIM's 80 million subscribers and its patent holdings are valued at just $1.4 billion. That could make the company attractive to a buyer. But it's a gamble whether any entity will step up to the plate as RIM's share of smartphones slips away.

My guess is that as we approach the first quarter of next year, and RIM's plans to roll out BB10 become more precise, the stock could see some lift in anticipation of the positive "news flow" it will engender.

That's not a strategy, per se, but it is a possible trade come the new year.

LAST THURSDAY IN SAN FRANCISCO I moderated a panel on behalf of the Financial Communications Society, an organization that does several mixers during the year and also donates money to charity. As we talked about social networkingâ€" Facebook (FB), Twitter, etc.â€"I was struck by the thought that while all this stuff is real, the reality trails what advertisers are trying to do. That's a problem for Facebook and the rest.

My panelists, representing basically the entire West Coast banking establishment, generally displayed a rather rousing enthusiasm for posting things on Twitter or offering news items on Facebook.

You might not go to Yelp! (YELP), the consumer rankings site that went public this year, for recommendations about a broker, but that's actually becoming more and more a part of the industry's prospecting role, according to Renee Brown, who heads up the social media efforts for Wells Fargo.

And Helen Loh, who is head of content and digital marketing for Charles Schwab, talked about how the firm has tried to "start a conversation." (Schwab is always trying to do that, right?) For example, it has experimented with things such as posting a mathematics brain-teaser on Schwab's Facebook page, something to make the bank stand out and get people involved in a way they wouldn't if you hit them with an ad.

Marketing types like social media, because it is a subtle, gregarious form of being constantly in the faces of customers and prospectives. But I have my doubtsâ€"not about the efforts of these fine folk, but what Facebook offers them.

There seems, from my point of view, precious little actual data so far about "return on investment" from spending on Facebook. Moreover, much of it is brute force, by which I mean, having lots of eager young staffers "posting" and "tweeting" things on behalf of your company. Young people will just about do that for free, so staffing costs I should think are low. But is this really the way to pursue brand-building?

It's hard to say whether banks like Wells and Schwab are actually netting a lot of new customers from this. There was a sense among the panelists that on the one hand, you just can't afford to be a business and not do this social stuff. But on the other hand, it is going to take years for some of these efforts to bear fruit.

Part of the issue is that Wells and others are trying to socialize in the only way one knows on Facebook: chattering. Joel Nathanson, who runs sociability at Bank of the West, remarked that one thing he would really like to see is some form of secure communications inside of Facebook and other venues. He imagines a broker talking in depth with a client about his portfolio in a session on the Facebook site. It's an intriguing idea, but how much is Facebook prepared to add to their already implicit burden of privacy with an explicit mandate to guarantee against financial fraud?

My colleague Andrew Bary last week laid out the viewpoint of this publication, which is that despite $5 billion in projected revenue this year and more than half a billion dollars in projected net income, it is still not clear whether Facebook's growth will meet the loftiest aspirations of its rich stock value.

I would add that there is a lot of good will among the smart folks who will pay to market on Facebook and its ilk. Facebook is not going away precisely because it has become a must-have. At the same time, it's not clear what all the tweeting and posting and such will yield those ad buyers, and therein lies the rub. 

Tiernan Ray can be reached at tiernan.ray@barrons.com or at blogs.barrons.com/techtraderdaily or www.twitter.com/barronstechblog.