Why doesn’t RIM pay a dividend to boost share price?

This is a follow-up to my previous post

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

which was written in June this year and commented on the fact that Research in Motion (RIM), had healthy financial ratios yet the share price was at a four year low because of lack of confidence in the product roadmap.

In the intervening 6 months things have got steadily worse for the RIM share price.

Today the share price stands at $12.52, a 7 year low.

The market value of the company stands at $6.56 billion (Reuters),

This is less than the book value of the company’s assets less liabilities which stand at $9.24 billion (Morning Star)

Yet RIM can show consistent growth in operating income before taxes :-

2007 – $857m

2008 – $1,818m

2009 – $2,800m

2010 – $3,267m

2011 – $4,644m

RIM clearly has income challenges. In the current financial year it returned an operating income of $265m in the third fiscal quarter. This is compared to $911m in the previous financial year third quarter.

However Rim reports exceptional items in the third quarter such as payments due to service outage and a write down of inventory relating to their unsuccessful tablet device, the Playbook.

Excluding these items gives an adjusted income figure of $667m for the quarter.

Also revenue increased by 24% from the previous quarter and subscriber count was up 35% year over year to 75 million.

(RIM Q3 press release)

So RIM’s business is growing and generating significant cash. But as the Playbook write down shows they still have problems with their product roadmap.

However their perilous market financial position is attracting attention from potential buyers such as Amazon, who could see the company as a bargain in its current state.

So my question is, could RIM change investor outlook and boost their share price by announcing a commitment to a dividend program?

High technology companies in their growth stage typically have not paid a dividend because the thinking is that they can re-invest their earnings to boost the growth of the company. So the money is better invested in the business than giving it to the shareholders.

This thinking is reversed in sectors such as utilities and telecommunications. Here the thinking is that the companies are unlikely to be able to invest in growth projects and so the money is better returned to the shareholders who can then choose to invest in separate growth businesses.

My contention is that RIM should now view itself as a utility company and adopt a dividend policy.

This is consistent with RIM’s business model which is based on signing up subscribers to it’s hosted email service which is the basis of the RIM Blackberry smartphones.

So how much could a regular dividend affect the RIM share price?

Acadamic theory suggests (Watson & Head, Corporate Finance Principles & Practice) that for a company which pays a regular dividend D, and with investor requirements of r% return on the equity market, a companies share price is equal to D/r.

If we take a value of 10% for the acceptable investor return (plausible given the current low interest rate economy), and a dividend per share of $3, we get a share price of $30. (3/0.1)

A dividend per share of $3 would cost RIM $1,572m (524m shares outstanding).

This represents a payout ratio of 46% based on 2011 net income available for distribution.

So this model suggests that if RIM can convince the investment community that it can commit to paying $3 per share in dividend each year the share price would rise from the current $12.52 to $30.

The investment community clearly have no confidence in RIM’s current product roadmap strategy. So they are in the position of the Utility sector, where they are generating cash, and it might be better to return this to the shareholders. This would boost the share price and restore some confidence in the markets by focussing on a hard cash return instead of potential future growth as a tech stock.

The company would still have product roadmap issues to contend with. But for public companies these are easier to deal with if you have the support of the investment community. Which RIM currently does not.

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The 7 P’s of the Mobile Marketing Mix

The Marketing Mix

The marketing mix, or the elements available to the marketing manager are commonly known as the 4 P’s – Product, Price, Promotion, Place.

Also, with the move towards more and more service based offerings, there are the additional elements to consider – People, Processes, Physical Evidence. 7 P’s in total.

This post takes a brief  look at these in the context of Mobile Marketing and shows how mobile technology can add significant elements to a marketing plan based on the 7 P’s. Further posts will look at each of these in more detail.

Product

Mobile technology provides a  platform for the delivery of a new product to complement existing products in the market or even develop a new line of business. The product can take the shape of a mobile optimised website or a mobile app, or a service delivered through the mobile phone such as SMS text based voting.

Price

Prices for mobile products typically come in at under £5. Premium and exclusive products can charge more. Many mobile apps are free and sell add-ons within the app (in-app purchasing). Many mobile apps use only banner advertising within the app to generate revenue. Rates such as £1 per 1,000 page impressions can be achieved and so popular free apps with millions of impressions can generate thousands of pounds per month.

Promotion

Mobile provides many promotion opportunities. Mobile users interact with text messages, MMS messages,  mobile internet sites, mobile email, and mobile apps. Opt-in text messaging currently commands most of the mobile advertising budgets but banner ads within mobile web sites and mobile apps is a fast growing business.

Place

Mobile provides a new place to interact with your customers. Your mobile products can be discovered in the mobile phone manufacturer app stores such as Apples’s iTunes or the Android Marketplace and mobile commerce from mobile websites is growing in popularity.

People

Mobile can change the dynamic around the people involved in delivering a service. Mobile apps can remove the need to make a phone call and talk with someone for example.

Process

When delivering a service the process the customer is expected to follow is key. Mobile offers alternatives which can be very personalised based on knowledge of the customer.

Physical Evidence

Mobile can be used to provide additional substitutes for physical evidence of delivering a service. Examples include mobile ticketing where an SMS message, bar code or QR code can be provided to the mobile phone of the customer.

Conclusions

In the last few years the use of mobile phones for more than just making calls and sending text messages has dramatically increased. The above examples shows a wide range of options for integrating the marketing 7 P’s into the world of the customer’s mobile phone experience.

Each of the above P’s will examined in more detail in future posts and the benefits explored further.

 

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Smartphone Market Share 2011

Very useful infographic on mobile device market share from Vision Mobile, The Clash of Ecosystems report.



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Mobile Devices – Market statistics and generating revenue

This is a follow up post to my earlier piece on  7 steps to build a successful mobile strategy and brand

Here we take a detailed look at mobile Smartphone market shares across a number of countries in order to identify the priority Smartphone platforms for development.

From the beginning of mobile applications, the device market has always been fragmented. Developers have always had to choose where they put their investments and spend their time. Since the iPhone and the launch of the iPhone App Store this decision has been made easier because most people now start with iPhone.  And some go no further than this. However the success of Android devices over the last two years has made Android a compelling application platform.

And where do the long running platforms such as Blackberry, Symbian and Windows Mobile now stand?

Recent figures shown in Figure 1. below from Kantar Worldwide provide a very good picture of recent Smartphone sales.

These number show Smartphone sales as percentage of the total in each of the countries shown, measured over 12 weeks up to 4th September via consumer surveys.

In the UK we can see that Android has 48.3% of smartphone sales, up from 26.9% in last 12 months. iPhone has 20.8% down from 29.4% in last 12 months. However that doesnt mean that iPhone sales are falling. Because the smartphone market is growing fast. In fact Kantar also suggest that 67% of all mobile phone sales in the UK are smartphones.

So developing an application for iPhone and Android gives an addressable market of just under 50% of all new mobile phones in the UK.

In terms of other platforms RIM’s Blackberry devices show 21.2% of Smartphone sales in the UK and increasing their share over 12 months. So roughly 10% of recent phones sold in UK are Blackberry. However the Blackberry share in the US has plummeted from 21% to 6.2% in the course of 12 months. Symbian market share has dropped across all countries in light of Nokia’s announcements early this year to move to Windows Mobile 7 as their strategic smartphone platform. However Windows Mobile 7 is only showing a significant rise in market share in Germany, up to 5.6% from zero.

So developer choices seem to come down to iPhone and Android currently with possibly Blackberry in some European countries and wait and see on what impact Windows Mobile 7 makes when Nokia launches their first phones.

In terms of generating revenue and building an audience around a mobile phone platform we need to take a look at some of the statistics from the app stores. WebpageFX provide a nice summary. This shows :-

Paid Apps vs Free

iPhone 71% paid

Android 41% paid

Blackberry 75% paid

Apps per phone

iPhone 48

Android 35

Blackberry 15

Average price of Top 100 paid apps

iPhone $2.14

Android $4.57

Blackberry $5.61

The above suggests iPhone and Blackberry users are more likely to purchase paid for apps and overall an iPhone user will likely download more apps than the others. But the iPhone App Store is very competitive so driving down prices.

Figure 1.

 

 

 

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Grand planning versus expedients in business strategy

The phrase “no plan survives first contact with the enemy” is often quoted in the context of business strategy. The source of this quote is often not identified correctly. It was actually Helmuth von Moltke the Elder, a Prussian General who came to prominence in the Franco Prussian war of 1870-1871. (Often confused with his nephew of the same name who was a Field Marshall in World War 1).

He actually said “No plan of operations extends with certainty beyond the first encounter with the enemy’s main strength” and went on to say “Strategy is a system of expedients”.
His point is you can only plan up to a certain point. After that, typically an initial engagement, you have to look at the situation and the options you have available.
Where von Moltke excelled was in analysing and preparing for all possible options. This approach is left out of a lot of business thinking. The focus is on the plan and not on the potential deviations from the plan. And what options are available when the plan doesnt work out.

An interesting example of this theme is shown in “The Honda Effect“, (Pascale, California Management Review, 1996). This compares how Honda’s management team described their approach to entering the US motorbike market in 1960 versus a subsequent analysis by the Boston Consulting Group.

Looking back on the outcome, the Boston Consulting Group, paints a picture of a strategy driven by low pricing and economies of scale leading to market dominance.

In reality the management team describe how they were short on resources, hitting initial problems, and then making expedient decisions based on current situations.

The implication here is that the chances of success are increased by being prepared on how you can respond to multiple options once that initial engagement takes place.

And being receptive to information and events at the point of engagement is crucial.

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Google buys Motorola Mobility

On 15th August Google announced it would buy Motorola Mobility for $12.5bn.

Motorola Mobility was the mobile phone arm of Motorola and was spun off from the parent company at the beginning of 2011.

Motorola Mobility’s 2010 annual report showed revenues of $11.46bn, net earning loss of $79k, and total assets of $6.2bn. Before Google’s announcement the market capitalisation of Motorola Mobility was around $7.3bn

The general consensus is that the acquisition is driven by the mobile technology patents which Motorola Mobility holds.

http://moconews.net/article/419-the-audacity-of-fear-patent-neglect-forced-googles-drastic-motorola-bid/

Mobile technology patents are becoming more significant as the Smartphone vendors compete with each other in terms of innovation and new capabilities. Patents could ultimately determine which mobile phone technologies and suppliers will dominate the market. Google’s interest lies in ensuring the success of it’s Android mobile phone operating system.

The figures show Google values these patents at around $5bn. Interestingly, Motorola Mobility’s 2010 annual report mentions the fact that it holds 17,000 granted payments but they are not valued on the balance sheet. In fact ‘Other assets’ are only valued at $697m.

Other companies which are sitting on these type of patents are having their values reviewed. Nokia’s share price has risen after this announcement from $5.35 to over $6, increasing market valuation by almost $3bn.

Unfortunately for Google, their share price has fallen from $564 to $539 since the announcement was made. This reduces the market capitalisation of Google by around $8bn. Their shareholders don’t seem to appreciate the value of the Motorola Mobility purchase.

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Zynga IPO

Zynga, the online games provider within Facebook, recently filed for a forthcoming IPO.
Share price has not been announced but it is anticipated that they will attempt to raise $1 billion with a company valuation of $15 -$20 billion.

A valuation of $16 billion gives a 33 times revenue multiple.
By comparison the Linkedin IPO in May gave Linkedin a valuation of 17 times revenue, about half that forecast for Zynga.

Comparing Zynga to Linkedin shows Zynga in a much stronger financial position with a larger user base.

Zynga 2010 revenue was $597m compared to $243m with Linkedin.
Zynga 2010 income from operations was $125m compared to $3.4m with Linkedin.
And Zynga report 116m monthly unique users of their service at end of 2010 compared to 46m monthly unique users of the Linkedin service.

So Zynga is a far more profitable operation than Linkedin and more than double the revenues and user numbers.

So we can expect to see a larger valuation for Zynga than $16 billion.

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Myspace – the rise and fall.

News Corp has recently agreed to sell Myspace for $35 million. Myspace, the leading social network before the dominance of Facebook, was purchased by News Corp in 2005 for $580 million.
At time of acquisition Myspace was the 5th most popular web site world-wide. Less than one year later it was the 2nd most popular site and News Corp was claiming in Fortune magazine that Myspace represented the biggest growth opportunity the company had. A Multi-billion dollar valuation was speculated.
Five years down the line and the fast moving nature of the Internet, and in particular the rise of Facebook, has destroyed that value.
Interestingly Myspace has not actually declined in terms of user numbers. It Currently reports 34.9 million users per month. In 2005 at the time of the News Corp acquisition that number stood at 27 million users. So Myspace has been growing, but not as fast as needed to keep pace with the Market it was in.
By contrast Facebook Has recently reported 750 million monthly users. In 2005 at the time of the News Corp Myspace acquisition Facebook’s monthly user number stood at 5.5 million.
So Myspace was 5 times the size of Facebook but News Corp could not keep pace with the subsequent growth of it’s competitor.
It seems like rate of growth is the key indicator for high speculative valuation. But it’s increasingly hard to drive further increases in valuation when the growth starts to slow or even plateau. So can Facebook maintain it’s dominance when it’s user numbers start to plateau (they can’t keep on rising forever). Or will it go the way of Myspace?

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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.

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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.

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