RIM is closely following the path of bankrupt 1980s computer manufacturer Osborne Computer

A $485M USD write-down on unsold Playbook inventory in calendar Q4 2011 and a calendar Q1 2012 $267M USD write-down on BlackBerry inventory helped to drive long-profitable Canadian phonemaker Research in Motion, Ltd. (TSE:RIMinto the red cash flow-wise early this year.

I. Customers Shun BlackBerry 7

According to a new report by Bloomberg Businessweek, RIM is expected to shed another 26 percent of its revenue this quarter, falling to $3.64B USD.  At the same time, it's facing growing losses from its stockpile of unsold BlackBerry 7 devices that are piling up.

The IDC Group reports that in Q1 2012 RIM accounted for a mere 6.4 percent of handset sales, compared to 59 percent by Google Inc.'s (GOOG) Android platform and 23 percent by Apple, Inc.'s (AAPL) iOS.  In the U.S., RIM's market share is believed to have dipped beneath 4 percent.

Based on current trends, we estimate RIM's sales will drop to around 4-5 percent globally and 2-3 percent in the U.S. in June.  This plunge is being reflected by surging levels of unsold inventory.  Last quarter RIM's inventory was estimated to grow in value by 18 percent (a bad thing, reflecting unsold product) -- the most of any phonemaker.  To put this in perspective, a somewhat financially unhealthy phonemaker Nokia Oyj. (OMX:NOK1V) only suffered 1 percent value growth, while Apple -- a healthy entrant -- saw an 11 percent inventory decline (on high demand).

RIM's market share continues to burn away. [Image Source: Jason Mick/DailyTech LLC]

Neeraj Monga, an analyst at Veritas Investment Research in Toronto, comments, "Clearly this stuff isn’t selling.  Despite all the write-downs they’re taking on the inventory, these inventory levels are not dropping."

RIM's write-off for Q2 2012 is expected to be in the hundreds of millions of dollars, a number that could drive another earnings miss.  RIM reports its results on June 28.  Analysts are expecting earnings $0.489 USD per share and negative cash flow after inventory write-offs.  That earnings estimate is only a bit over a third of RIM's reported $1.33 USD per share in Q1 2011.

I. RIM -- Things Are Going Great, Don't Panic

RIM has stopped giving estimates given "ongoing weakness" in U.S. sales, but periodically gives financial updates.

The latest update from new CEO Thorsten Heins tried to cast a cheerful spin on the dire financial situation.  He describes his company as making "significant progress on a number of fronts."

RIM CEO Thorsten Heins insists everything is going great. [Image Source: RIM]

He comments:

Our global subscriber base continued to grow this quarter to approximately 78 million, driven primarily by growth in international markets, which is partially offset by high churn in the United States, and our BBM user base has grown to approximately 59 million users globally.

The CEO neglects to mention this represents only 1 million new users -- an anemic growth of 1.3 percent.  In terms of market share that estimates a large loss.

RIM has hired two banks -- the Royal Bank of Canada (TSE:RY) and JPMorgan Chase & Comp. (JPM) -- to "assist the Company and our Board of Directors in reviewing RIM's business and financial performance."

The banks will advise RIM to sellseek a partnership, license its operating system, or maintain its current course.  The current course is to head towards a late 2012 BlackBerry 10 product launch.  While the new operating system is expected to pack a host of improvements and a more modern smartphone interface, it is also expected to land half a year behind schedule.

III. RIM Follows in Osborne Computer Corp.'s Path to Bankruptcy

With respect to BB10 Mr. Heins remarks:

Our annual BlackBerry World conference and BlackBerry 10 Jam took place earlier this month and both were tremendously successful. More than 5,000 developers, partners, carriers and enterprise customers from 115 different countries saw the first glimpses of our next-generation BlackBerry 10 platform and their response was encouraging.

But those "glimpses" coupled with the long gap between the product announcement and product launch may be damaging to RIM.  Analysts are warning that RIM's sales deterioration will worsen based on the phenomena known as the "Osborne Effect", a problem that occurs when companies announce products too early, leading customers to skip upgrades and wait for the new product.  The effect was named after Osborne Computer Corp. -- a company that went bankrupt in 1983 after previewing its next model half a year early.  That early preview window is almost identical to RIM's tease at BlackBerry 10.

The other problem facing RIM besides handset sales is dwindling enterprise support.  RIM long flourished on "ugly duckling" handsets, given the fact that its products were expensive but highly manageable from an enterprise perspective.  But with Google and Apple increasingly providing cheaper, easier to use solutions, enterprises are ditching their BlackBerry infrastructure and RIM's big service fees.  

Most businesses tend to gravitate towards iOS for simple deployments and Android for deployments that require increased security.  While RIM has a strong security track record, Android's open source allows large corporations to compile custom builds of Android with advanced features -- something not possible with RIM or Apple who do not open their sources.  For that reason, many of RIM's key government customers are fleeing to Android.

In its survival bid RIM is expected to announce between 2,000 to 3,000 layoffs.  The company has lost a great deal of executive talent, as top performers have fled to more successful firms.  Meanwhile the company continues to take on dead weight -- executives from failed firms.  A prime example is RIM's new marketing chief Frank Boulben who was a top executive at now-bankrupt LightSquared.

RIM Superheroes
It is unclear what RIM can do to save itself. [Image Source: RIM]

With dwindling sales, enterprise customers, employees, and executive talent, it is unclear what exactly RIM can do to save itself as it continues towards a financial precipice.

Sources: RIM, Bloomberg BusinessWeek

"If they're going to pirate somebody, we want it to be us rather than somebody else." -- Microsoft Business Group President Jeff Raikes

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