Dell-RIM Merger In The Cards?

Last week, Research in Motion (RIM) (NASDAQ:RIMM) reported a disappointing quarter that narrowly missed its guidance. While RIM made its entry into top 5 mobile phone vendor list, replacing Motorola, its share in the smartphone market declined slightly as Motorola in turn became one of top 5 smartphone vendors. Apple’s iPhone and Android devices from Motorola and HTC are eating into RIM’s share of the market. Let’s take a closer look.

Andy Hargreaves, analyst at Pacific Crest Securities, is quoted by  Carl Gutierrez on Forbes as saying that “[RIM’s] devices lack an effective browser, especially compared to what Apple and Google’s Android have, and they lack an attractive app environment, and that’s what people want now. E-mail is still a valuable piece, but it’s only one piece and if you don’t have the whole pie you won’t be able to capture any of that high-end share.” I agree with this. RIM has become a one-trick pony, and the company is still banking on its excellent e-mail application. Meanwhile, the game has changed in the smartphone universe with the phone increasingly becoming an important computing device.

RIM has a stronghold in the enterprise space owing to its push e-mail functionality, but the iPhone has been making inroads into the corporate space, report Yukari Iwatani Kane and Ben Worthen on WSJ.com. About 70% of IT departments currently support the BlackBerry, and about 29% of businesses now support the iPhone, up from 17% last year. Apple has been growing at an amazing pace – its smartphone market share has jumped from 10.9% last year to 16.1% in the first quarter of this year. Apple offers more than 225,000 applications for its users while RIM has just 7,000 apps, and its interface is not as smooth as the iPhone’s.

RIM hopes that its new BlackBerry OS6 with touchscreen interface, launched in April, will change this perception. However, according to Colin Gibbs on GigaOM, developers aren’t buying co-CEO Jim Balsillie’s claim that the upcoming BlackBerry OS 6.0 will be a “quantum leap over anything that’s out there.”

RIM has also postponed the launch of its Android-based tablet, BlackPad. Scott Moritz of TheStreet reports that the company has decided to go with its own BlackBerry OS. Recently, HP and Microsoft also stalled their tablet plans. In May, Dell launched Streak, its own version of a tablet that is also a smartphone that runs on the Android OS.

According to IDC, the nascent market for media tablets, fostered by the launch of Apple’s iPad, will grow from 7.6 million units in 2010 to more than 46 million units in 2014, representing a compound annual growth rate (CAGR) of 57.4%. RIM doesn’t look equipped to deal with this trend, since its OS is easily outclassed by Apple’s and Google’s. I am not sure how RIM will compete in the high end without a powerful OS, so a great deal rides on the new one.

Last week, RIM reported a disappointing first quarter. Revenue was $4.24 billion, up 24% on a 43% increase in shipment to 11.2 million devices. It had forecasted revenue of $4.25 billion to $4.45 billion. It added about 4.9 million net new BlackBerry subscriber accounts in the quarter, and the total customer base is about 46 million. Net income was $768.9 million or $1.27 per share versus $643 million, or $1.12 per share last year. Q4 coverage is available here.

RIM said shipments and revenue were affected by the slightly later than expected shipment of the new Bold 9650 and Pearl 3G and the lower than expected device ASP of $300. Gross margin was 45.4% compared to 45.7% in the prior quarter. RIM ended the quarter with a cash balance of $3.27 billion, an increase of $400 million. It bought back shares for about $410 million in the quarter and also announced a share repurchase program to purchase for cancellation of up to 31 million common shares.

For the second quarter of fiscal 2011, RIM expects revenue of $4.4 billion to $4.6 billion, EPS of $1.33 to $1.40, and gross margin of 44%. The stock is trading around $52.23, close to its 52-week low of $52.04, with a market cap of $29.11 billion.

The pressure against RIM is mounting from both Apple and Google’s Android. The iPhone is also rumored to come to the Verizon network, which would only make things harder for RIM.

I increasingly get the feeling that RIM will need to seek a home through an acquisition. HP picked up Palm. For now, Dell seems to be happy going organic, but if RIM delivers an innovative OS, the most likely scenario is a Dell–RIM pairing up.