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RIM Stuffs Its Distribution Channel To Pump Up Sales

Research in Motion (RIMM) gets no respect these days from many pundits. After all, Apple (AAPL) iPhones and handsets running Google (GOOG) Android have raced ahead in popularity. RIM's latest earnings show growing unit sales, which snaps the easy narrative of falling beneath the swords of its competitors. However, there is no reason for the company to be comfortable. Examine some of the details, and you see how difficult its future will likely be. And one of the most disturbing aspects is how RIM seems to have loaded up inventory at its resellers, which count as sales for the company.

Historic unit sales

RIM's Q3 earnings in historic context don't show immediate signs of the company being pushed out of the market. Here's a table I've put together from filings of both RIM and Apple. (Google's announced numbers of Android activations are too sporadic to compare this closely.)
RIM Quarters RIM Apple
2008Q2

3

1.1

2008Q3

3.9

2.3

2008Q4

4.4

1.7

2009Q1

5.4

0.72

2009Q2

6.1

6.9

2009Q3

6.7

4.4

2009Q4

7.8

3.8

2010Q1

7.8

5.2

2010Q2

8.3

7.4

2010Q3

10.1

8.7

2010Q4

10.5

8.8

2011Q1

11.2

8.4

2011Q2

12.1

14.1

2011Q3

14.2

Because RIM and Apple define their fiscal years differently, it's impossible to get a perfect quarter-to-quarter comparison. So I took each quarter from RIM and compared it to the Apple quarter that ended the month after the RIM quarter closed. In other words, if a RIM quarter ended in August, I'd compare the Apple quarter that ended in September. However, these are comparisons of smartphone sales only. Here's a graph of unit movement by quarter:

Pumping up inventory

Clearly the BlackBerry has not rolled over and died. And yet, remarks by co-CEO Jim Balsillie during the conference call suggest a fair amount that RIM must be concerned about, record quarter or not. The company did get a sales bump from the release of the Torch and BlackBerry 6, but nowhere near as much as Apple and Google seem to profit from new version introductions. Furthermore the Torch is riding on some pretty significant price promotions. There was the $99 price from AT&T (T), which made it significantly cheaper than competing products. Verizon (VZ), also, heavily promoted. Right now, the BlackBerry Style is in a buy one, get one promotion from Sprint (S). (No wonder the model represents a third of the carrier's BlackBerry sales.)

That ties into the question of inventory. According to CFO Brian Bidulka, channel inventory increase by the end of the quarter, "both on an absolute and on week's basis due to timing of shipments in the quarter." Yes, the distribution channel needs to get ahead on inventory to have product to sell during the holiday season. However, it also means that RIM partly robs the current quarter (ending in January) to subsidize the last one, because shipments to carriers count as the company's sales. And when there's a lot of inventory, carriers, like other retailers, have to do something to get the units off their shelves, which partly explains the many price promotions.

But did RIM have to pump up channel inventory during the quarter? No. Look at the transcript from the same quarter earnings call from last year and Bidulka's remarks about inventory then:

We estimate that four weeks of channel inventory at the end of Q3 were slightly lower than Q2, and we expect channel inventory in Q4 to be similar to Q3.
It certainly seems as though RIM stuffed the channel, as it's called, to make its numbers look better than they otherwise would. Why? Because it was a last attempt to make RIM still seem like a smartphone leader. And, in fact, the difference between inventory build-up and sell-through to customers was 1.9 million units. Subtract that from the 14.2 million RIM claimed and you've got 12.3 million units that you could call real. That clearly puts RIM into third place. We might just see all this come out in next quarter's earnings, because retailers won't perpetually stuff channels to make a vendor happy. Occasionally? Yes. On a continuing basis? They can't afford it.

Other financial wheezing

Additionally, analyst questions brought out some other points:
  • Sales, general and administrative, was up substantially more than the company had previously forecast.
  • R&D and marketing have been rising over a few years as percentages of revenue, and yet sales growth has remained fairly steady and not ramped up.
  • RIM seems dependent on foreign sales to drive growth. Apple and Google are seeing good growth both domestically and internationally.
These are the financial equivalent of hearing labored breathing as someone walks up the stairs. It has become increasingly difficult for RIM to keep up the sales front. Channel stuffing is generally one of the last steps before things fall apart.

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