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Why RIM will not suffer the same fate as Canadian giant Nortel

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RIM is for many both a great smartphone manufacturer and a source of patriotism. It’s a leader in the ITC (Information and Communications Technology) sector and their executives, especially Jim Balsillie, are quick to point out that it’s a Canadian firm.

This brief description may remind you of another Canadian firm: Nortel. Nortel was also a source of Canadian pride as a prominent, high-technology firm based in Canada.

Both companies, due to their size and influence, have a notable impact on the Toronto Stock Exchange. While RIM occupies about 3% of the TSX, Nortel once accounted for more than one-third of the main TSX index.

Although there are a few similarities in the two companies, they are completely different and it’s safe to say that RIM will not suffer the same fate as Nortel.

Management at Nortel was infamous for receiving millions in incentives that promoted unethical business practices. In 2004, several of its top executives – including former CEO Frank Dunn – were accused of cooking the books to inflate profit numbers, resulting in millions of dollars of bonuses to these individuals. Last year, criminal charges were laid against Dunn and others.

Jim Balsillie got in trouble with the the OSC which alleged the executives backdated and repriced stock options using dates on which the market price of RIM’s shares was relatively low. Handing out options at the lower prices had the effect of improperly enriching the recipients and, the OSC alleged, could have deprived RIM of about C$66 million.

While both companies seem to be involved in some shady practices, they can’t really be compared because they are on completely different scales. The result of the Nortel scandal resulted in billions in losses for shareholders. The result of the RIM and OSC case was that Balsillie paid a penalty of C$5 million ($4.1 million), while Co-Chief Executive Mike Lazaridis paid a C$1.5 million penalty. The two also paid investigation costs to the regulator.

According to Kevin Restivo, a communications technology analyst at IDC Canada, “RIM and Nortel are very different companies,” he said. “Other than the fact that they’re both based in Canada and both publicly traded companies in the ICT sector … the companies’ histories and similarities separate pretty quickly.”

Some point to competition in the telecom industry, coupled with the crippling accounting scandal, resulted in Nortel’s eventual demise. The telecom industry began to see a large number of mergers such as Alcatel-Lucent and Nokia Siemens Networks, which left Nortel at a disadvantage. With the accounting scandal at hand, the company was in no condition to recover and eventually had to be protected from bankruptcy and sold off.

It’s competition that is also the popular topic when discussing the future of RIM. The difference is that competition will actually make RIM stronger in the end. Sure, market share in North America is fluctuating given sales of the iPhone, but can anyone prove that Apple sales have a negative impact on RIM’s growth? The App Store led an evolution in the market that RIM is still generating considerable profits from, having followed the trend with App World. Competition is also increasing the overall number of smartphone users, and this trend is helping to increase sales for RIM. Other smartphone manufacturers may represent competition, but for some reason the Palm Pre is often cited. Remember, Palm only sold 810,000 units last quarter compared to 8.9 million devices for RIM.

So while these two companies represent the talent that Canada possesses in the ICT world, they will have two very different fates.

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RIM stock is up 4.3 per cent as RBC raises price target

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This week has had some positive stock news for RIM as the S&P/TSX composite index rose 142.25 points, or 1.35%, to 10,673.84, as gainers outpaced losers by a ratio of nearly seven-to-one and nine of 10 subindexes closed in positive territory.

Technology stocks, which account for less than 5% of the total index, rose 3.92% as a group, getting a boost from Research in Motion Ltd., up 4.3%, after RBC Capital Markets analyst Mike Abramsky raised his price target on RIM from US$100 to US$150.

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Canaccord Adams analyst upgrades RIM after positive sales and financials

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Canaccord Adams analyst Peter Misek is upgrading RIM’s status to Buy from Hold, as recent channel checks with global carriers and partners suggesting the company had a healthy June. Although share price has lost nearly a quarter of its value since last month, the summer tends to be a slow season for the smartphone market.

That being said, BlackBerry sales with AT&T grew in the double digits month-over-month in June. With the launch of the BlackBerry Tour 9630, as well as the upcoming BlackBerry Gemini 8520, RIM is releasing more devices that has convinced Mr. Misek that RIM isn’t losing any momentum.

Even under lacklustre consumer spending conditions, Peter Misek is more comfortable with the company’s risk/reward profile now that the stock is trading at roughly 14 times Canaccord’s forward 12-month earnings projections.

RIM has demonstrated an ability to grow in very difficult conditions due to its stronghold in the enterprise and strong carrier relationships, the analyst said.

Canaccord’s price target for RIM remains at US$95 per share.

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App World enters French and European market despite legal issues

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Simon picked up the story that RIM VP Jeff McDowell confirmed App World will be hitting France, Germany, Italy, and Spain, this month, with Brazil and India next on the list.

Congratulations to RIM legal for entering the French market, which is a relatively difficult market to enter. The US Commerical Service has echoed this sentiment, and it has portrayed the French market in a way that could be deemed isolationist.

“Enforcement of complex technical standards and lengthy testing procedures sometimes appears to exceed reasonable requirement levels needed to assure proper performance and safety, for example in the areas of electronics, telecommunications equipment, and agriculture phytosanitary standards.”

It takes several months for RIM legal to sort through the legal documents and conditions for App World to enter a new market. It took RIM legal 2 months to get App World to Britain and there are many European countries with more complicated and restrictive laws surrounding content distribution. So while getting App World around the world is a top priority, it could be a couple years before we see global penetration.

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Device margins get smaller in competitive smartphone market

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BlackBerry Storm

On Thursday, RIM will be reporting results for the first quarter of fiscal 2010 after the close of the market. We’re expecting some good news from RIM in light of the current competitive smartphone pricing environment.

With the $99 iPhone and the Palm Pre launch, the smartphone wars have become much more intense. This is forcing RIM and other smartphone manufacturers, who wish to capture more of the consumer market, to lower their prices to increase sales. We have recently seen the Bold and the Curve 8900 drop around $50, and this, along with other carrier promotions, have helped sales tremendously.

Last quarter, RIM managed to beat expectations with sales increasing 84 percent to $3.46 billion compared to the same period a year ago. But gross margin was down to 40 percent from 51.4 percent a year ago, and 45.6 percent sequentially.

The issue therefore, is margins. By reducing device prices, you can increase sales, but profit margins are becoming increasingly slim in this environment.

The BlackBerry Bold costs around $169.41 to manufacture but this price does not include IP and a variety of other costs the carrier needs to pay. This means margins must be tight if AT&T sells the Bold for $199.99. By comparison, the BlackBerry Storm 9530 which carries a combined materials and manufacturing cost of $202.89, sells for $49.99 on Amazon.

RIM has a brilliant team of economists on board so while I’m sure they have assured the profitability of these devices, one can only hope that price wars don’t drive down profits enough to affect R&D and device improvements.

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Listen to RIM’s Q1 2010 fiscal results

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RIM will be reporting results for the first quarter of fiscal 2010 on June 18, 2009 after the close of the market.

A conference call and live webcast will be held beginning at 5 pm ET, which can be accessed by dialing 800-733-7571 or by logging on at RIM.com.

A replay of the conference call will also be available at approximately 7 pm by dialing 416-640-1917 and entering passcode 21289979#. This replay will be available until midnight ET July 2, 2009.