Research in Motion's Bumper Harvest


By Amy Tsao With revenues up and budgets more flush than those of a year ago, Corporate America has been inching its way toward renewing its spending on technology. The big difference between now and the heyday of the dot-com boom is that those expenditures are being watched and monitored a lot more closely.

That's where Research in Motion (RIMM), maker of BlackBerry wireless e-mail devices and software, enters the picture. Corporate customers can't seem to get enough of the outfit's wares, which send and receive e-mail via mobile gadgets. As the dominant player and leading choice of "enterprise" users, RIM has benefited handsomely. In fiscal 2004, which ended Feb. 28, revenues jumped 94%, to $594.6 million, from $306.7 million in fiscal 2003. Earnings per share grew from a loss of 95 cents in fiscal 2003 to a profit of 31 cents in fiscal 2004.

UPBEAT PROJECTIONS. As a result, investors have bid up the stock sixfold since its low of $10 in July, 2003, to a high of $62 in early June. Lately, that rocket ride has taken a slight pause because of uncertainty surrounding a high-profile dispute over patents and worries over increasing competition.

The stock's break -- it closed at $59.53 on June 18 -- could be just that. Concerns about the impact of litigation should fade, while competitive pressures, though rising, don't seem to be making any serious trouble for RIM. With a price-earnings ratio of 39.7 times consensus earnings of $1.50 per share for the current fiscal year, RIM's valuation is certainly heady, but many analysts still see reason to buy.

"We continue to feel that RIM has a very strong competitive advantage that is sustainable, since it addresses a certain market niche -- the high-end enterprise user," says Michael Abramsky, analyst at Cannacord Capital. He rates the stock a buy and expects it to rise 29%, to $75, over the next 12 months. (Abramsky doesn't own shares, but his firm has had a banking relationship with RIM.)

LEGAL WRANGLE. In the near-term, there seems to be no reason why Waterloo (Ont.)-based RIM shouldn't continue to see robust growth. Standard & Poor's analyst Ken Leon thinks the subscriber base could hit 2 million by March, 2005, double what it is today, and he predicts revenues will see a similar increase, to upwards of $1 billion. Analysts, on average, see earnings per share rising by 213%, to $1.50, on a revenue jump of 98% for the year ending February, 2005.

That dramatic growth is likely to become more muted in fiscal 2006, when the consensus expects earnings to rise by 25% on a 32% climb in revenues. (Leon doesn't own the stock, and S&P has no business relationship with RIM.) Yes, that represents a decline, but such growth would still be nothing to sneeze at.

Many observers believe RIM's patents dispute with NTP, an Arlington (Va.) radio-communications outfit, is the darkest cloud. That fight, which involves five wireless e-mailing patents, has been nasty. However, it looks like the battle may not have the dire impact some feared. "The NTP suit is not a RIM killer," says Kevin Burden, program manager of mobile devices at IDC, a technology-market researcher and consultant. He figures NTP stands to gain more in royalties if it strikes a deal with market leader RIM than by trying to put it out of business.

FRESH PLAYERS? No matter the outcome of the case, RIM should be adequately prepared, says Leon, who notes that it has been setting aside reserves to take the pain out of litigation-related losses. As of the end of February, RIM listed more than $1 billion on its balance sheet.

Looking further ahead, the market for smart, multifunction devices like BlackBerry is in its infancy. IDC figures that total worldwide sales of combined devices (voice and data) will rise this year to 21 million and reach 39 million in 2005, up from a worldwide total of 9.4 million in 2003, when Nokia (NOK) dominated the field. RIM, with most of its sales to corporate customers, came in fourth. But that same corporate market is what has device makers salivating. "For now, there really aren't that many devices out there that are great at the kind of mobile e-mail access that BlackBerry is very good at," says Ross Rubin, analyst at technology market researcher NPD Group.

One concern centers on the way in which wireless e-mail technology might change, perhaps hurting RIM's product lines. Many other potential players are now eyeing the wireless e-mail market, both for consumers and corporate users, with Microsoft (MSFT) looking at software and Dell (DELL) tackling the hardware. Neither outfit is willing to see RIM gain too much share in either field.

SOFTWARE AND DEALS. Smaller players also are angling for a piece of the action. Danny Shader, CEO of privately held Good Technology, which makes wireless e-mail software that competes with BlackBerry, says the competitive pressure on RIM will soon start to build. "I don't think anyone is willing to bet against them in the short run," he says. However, in a year or so, Dell will sell its own handheld device powered by Good software. Shader says he's steering well clear of the hardware side of the equation, in which RIM remains heavily invested.

How can RIM counter these incursions? Over time, analysts say it will have to license BlackBerry software to other manufacturers -- and indeed, this is already happening, with PalmSource (PSRC) being the first to sign up. And later this year, Nokia will begin to sell BlackBerry-enabled phones. IDC's Burden is optimistic this transition will succeed, saying: "I think RIM wants to be a solutions enabler as opposed to a hardware player."

No doubt, RIM will have to adjust its strategy as the market becomes more heated. For now, as long as the economy cooperates and corporate IT budget planners see the value of its offering, RIM's reputation, and its stock, appear likely to prosper. Tsao covers the markets for BusinessWeek Online and writes for the Street Wise column


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