Why RIM should forget being a tech stock and pay a dividend

Following my previous article comparing recent financial results between Nokia and HTC
it would be useful to take a look at those of Research In Motion (RIM), the maker of the Blackberry, and whose share price has fallen 50% since their annual results were announced in February.  In fact RIM’s share price is at a 4 year low point with press scepticism regarding their product roadmap and delays in introducing new products.

RIM’s 2011 annual report shows the following key data

Net Sales  $19,907m

Gross Margin  $8,825m

Operating Profit  $4,636m

And here are some ratios with the numbers for Nokia and HTC shown for comparison.

Operating Profit Margin

RIM 23%

(Nokia 11.3%     HTC 15.5%)

Gross Profit Margin

RIM 44.3%

(Nokia 30%     HTC 30%)

Return on capital employed

RIM 50.2%

(Nokia 10.5%     HTC 59%)

Return on Shareholders fund

Rim 38.1%

(Nokia 8.6%     HTC 56%)

Sales Revenue to capital employed

RIM 2.15

(Nokia 2.15     HTC 3.73)

Sales Revenue per Employee

RIM $1.17m

(Nokia $429k     HTC $1.33m)

Price per earnings (17th June)

RIM 5.56

Nokia 8.32

HTC 16.58

Analysis

RIM’s ratios are significantly healthier than Nokia’s, and better in some cases than HTC. Yet they have the lowest price per earnings. I think this is a good example of how the stock market looks considerably forward in their valuation mentality. RIM is making good margins and return on investment, yet their share price is heavily discounted. The markets clearly don’t see a positive future based on RIM’s product line and the mobile phone competitive landscape RIM finds itself in. Even more bleaker than Nokia it seems.

I think there is also a strong North American bias here. RIM’s international sales doubled in 2010 whereas in North America their platform is viewed by some as having peaked and being under threat from Apple and Android devices.

RIM hasn’t paid a dividend in 3 years. So with earnings per share of over $6 and a share price of $26 at time of writing maybe it is time to change this policy and boost the share price this way.

Financial ratio comparison in mobile phone manufacturers

With the recent issues at Nokia concerning their profits warning and share price plummet http://mobilebeacon.com/blog/2011/06/02/nokias-troubles-and-a-lesson-on-software/ , I wanted to do some financial ratio comparison between Nokia and HTC, one of their leading competitors in the fast growing Smartphone segment. I was interested to see what the ratios look like when comparing an established market leader such as Nokia with a smaller more focussed company such as HTC.

The 2010 annual reports show the following key data

Nokia (Devices & Services Division)*

Net Sales -€29,134m  / $38,165m  **

Operating Profit – €3,299 / $4,321m

HTC

Net Sales – $9,569m

Operating Profit – $1,515m

So we have the following ratios

Operating Profit Margin

Nokia 11.3%     HTC 15.5%

Gross Profit Margin***

Nokia 30%     HTC 30%

Return on capital employed ***

Nokia 10.5%     HTC 59%

Return on Shareholders fund***

Nokia 8.6%     HTC 56%

Sales Revenue to capital employed***

Nokia 2.15     HTC 3.73

Sales Revenue per Employee

Nokia $429k     HTC $1.33m

Analysis

These figures certainly suggest HTC is a healthier business.

HTC Operating profit margins and revenue per employee are significantly higher. Interestingly gross profit margins are identical, so this suggests R&D, sales and marketing, and admin expenses within Nokia are proportionately higher.

Return on capital employed and return on shareholders fund are far higher in HTC’s case. A close look at the balance sheet shows Nokia has long term liabilities of over $5b, HTC has very little. Also Nokia has retained earning of over $13b. Cash in the bank effectively, which is not being used as efficiently as HTC uses its cash. Sales revenue to capital employed ratio bears this out.

So Nokia needs to improve its internal efficiency and use its cash pile to generate more business. Probably familiar issues for all large market leading companies.

Where Nokia is especially vulnerable is the fast moving nature of the high-tech industry it serves. Competitors can come up quickly and bad investment decisions can set you back considerably. This is the reason for Nokia’s recent decision to end investment in its own software platform Symbian and partner with Microsoft. By doing this it will reduce its R&D expenditure and hopefully become more efficient internally.

*Nokia additionally has its Nokia Siemens network division plus Navteq maps division. Total sales across the company was $55,604m. So Devices & Services makes up 70% of the total company sales.

** Converted into dollars for comparison using the exchange rate at the end of 2010 as noted in Nokia accounts.

*** calculated based on all Nokia divisions as a consolidated Income statement and balance sheet was used.

7 Steps to build a successful mobile strategy and brand

This is the first of a serious of articles describing how to extend a brand or service into the world of mobile devices. Here we outline the 7 steps which should be worked through to define your strategy before you launch a mobile service.

1. Understand market trends, past and predicted.

The mobile market is fast moving and notoriously difficult to find good quality, accurate data. So get information from as many sources as possible and bear in mind national characteristics if you want to cover multiple countries.

2. Analyse your current audience and content.

Who uses your services and what you deliver today. This will be the basis of your mobile audience and what you will build on to generate success. But it doesnt have to limit you in terms of the target audience.

3. Create a vision for your mobile audience.

What is it you want your mobile audience to do? What will you provide that adds value to their mobile lifestyle and experiences? How will your mobile offering differentiate your brand or service from others on the market? The answers to these questions will help you create a vision of how you can work within the mobile environment and what you ultimately offer.

4. Define initial objectives.

What do you want to deliver and when? How do you generate revenue from the deliverable? How will what you deliver affect your brand, your current audience, and your business partnerships.

5. Specify an initial deliverable for launch.

What can be delivered as an initial release which is low cost, low risk and will provide you with immediate fedback from the market. This is often the best way to start.

6. Identify alliances and supporters.

Who can help you promote your brand and service on mobile. Business partners may be able to help and the ecosystem of mobile manufacturers and operators can offer a lot if there is value for them.

7. Plan a roadmap beyond launch.

As part of the initial plan have a phase 2 in mind and future activities which can grow your initial success. Be prepared to tune and adjust these plans based on feedback from the initial launch.

The next article in the series will focus on mobile market statistics and trends and review the options for generating revenue from mobile apps and services.

Mergers and Acquisitions – The deal of the century

While reading Robert Frank’s ‘The Return Of The Economic Naturalist – How Economics Helps Make Sense Of Your World” I came across his comments on the AOL/Time Warner merger in January 2000

http://www.robert-h-frank.com/PDFs/NYT.1.11.00.pdf

In Frank’s book he claims its the worst piece he’d ever written. This is probably a sensible statement given that the story proclaims the virtues of the $147 billion merger.

The following story in Dec 2009 brings the curtain down on the whole saga as the companies de-merge with combined total market values of  around $38 billion.

http://www.informationweek.com/news/internet/ebusiness/222001597

The scale of the numbers are staggering. No other words for it. $100 billion of shareholder value lost in the space of 10 years in two companies.

The vast majority of the losses were attributable to AOL. At the time of the merger AOL shareholders held 55% of the combined company giving a market value of $80 billion. When spun off in 2009 AOL was valued at $2.5 billion.

Time Warner at the time of the merger was worth a mere $66 billion and when spun off was valued at $36 billion.

The fallacy around the deal was the dot com bubble of the year 2000. When everything Internet related had turned to gold and there were few concerns about valuations far exceeding the industry norms. The hope was Internet access combined with entertainment content was a one way bet. It turned out it was, except it went the wrong way.

We are now speculating that we have returned to another Internet bubble with incredibly high valuations for technology IPOs and acquisitions.

How do we spot a bubble? I think we just need to look out for the next AOL / Time Warner style merger.

SMART Goals

Goals should be SMART

Specific – Well defined and clear to anyone who has a basic knowledge of the project.

Measurable – Know if the goal is obtainable and how far away completion is.

Attainable – Realistic and achievable.

Relevant – Based on overall project aims.

Time Based – Enough time to achieve, but not too much to adversely affect project performance.

When producing monthly or quarterly goals, I find it helps to have an overall medium term objective for a specific time period such as a year which is clear and simple.

Based on this the shorter terms goals can be established and as progress is made they can be refined or adjusted.

 

Nokia’s troubles and a lesson on software

At the beginning of this week Nokia announced a profit warning. They expect their 2nd quarter results to be substantially below their previously expected range. And, probably more significantly, they do not feel they can confidently make a 2011 annual revenue forecast.

Nokia’s problems come down to one thing. They were unable to build a market leading phone and associated ecosystem to deliver internet services to their mobile customers. In effect they stagnated as a product company over the last 5 to 10 years in this emerging market of Smartphones.

Its interesting to note that this doesnt mean they didnt sell Smartphones in high volume. They did, and had many high selling devices in this category. However their issue was people bought the phones for the reason they had bought previous Nokia phones. They were stylish, good looking, and carried the latest high end features such as cameras.

These were the attributes which differentiated Nokia from the pack in the mid-nineties. An era when mobile phones went from being plain ugly, to a stylish fashion accessory. Nokia excelled here and became the dominant player in the mobile phone market.

But despite huge investment in the Smartphone segment, Nokia failed to deliver devices which encouraged their customers to use new Internet and application based services.

This is a classic business lesson in how difficult it is for companies to change their culture. Nokia found it incredibly difficult to go from a hardware focussed engineering organisation to a company which provides an open software platform for others to deliver compelling services from. But what also stands out here is the understanding of how software can change markets and business dynamics.

Software means new, compelling services can be launched overnight. And platforms such as mobile phones which support these services well will prosper. This is where Nokia fell down. Competitors such as Apple, which also made its name in well designed, stylish consumer electronics also made computers. They helped invent the computing industry. So they understand software and how it can be used to change a market. So when Apple launched the iPhone it was packed with new, software driven features, which attracted users to do new things with their phone.

Nokia has now teamed with Microsoft to launch a new range of Smartphones using Microsoft’s Windows Mobile technology. Microsoft understands software but has struggled in the past to break into the phone market. So on paper it is a good combination. The challenge will be for both companies to show they can lead the mobile industry in new, compelling applications and services.