On December 5th, three days ago, RIM announced a $485M write-off “related to its inventory valuation of BlackBerry PlayBook tablets”. Wall Street didn’t like the news and dumped the stock, it went down 9.7% in one session. One of the last analysts supporting RIM, Scotia Capital’s Gus Papageorgiou, finally gave up and turned vocally bearish. Others, as in this Reuters summary, grumble and suggest “necessary changes at the top of the company.”
Those are rote comments over an half-expected development: everybody knew PlayBook tablets weren’t selling well and the latest stock movement was but another step in a year-long descent:
But a second look at the numbers and at RIM’s communiqué itself raises more questions, ones I’m surprised analysts didn’t ask. Was it because RIM’s disclosure took place on a Friday, an oft-used maneuver to limit the spread of bad news?
We’ll focus on the $485M number and a look at RIM’s two previous quarters. As the company’s fiscal year starts March 1st, we have Q1 (ending in May 2011) numbers here and Q2 (ending in August 2011) results here.
For Q1 the company claims it sold 500,000 PlayBooks; for Q2, RIM says it sold 200,000 of the same tablets. Sold, in accounting parlance, is a precise term: this isn’t just a shipment, it’s a financial transaction whereby the buyer now owes RIM money, and RIM counts this as revenue and, after costs, profit.
We now turn to the cost of the PlayBook tablet. We know it’s made by Quanta, a reputable Taiwanese ODM, with approximately the same contents as Amazon’s Kindle Fire, also made by Quanta and, reportedly costing around $200 to make. Other reports peg the Playbook’s manufacturing cost around that same $200 number
Accounting rules say inventories are to be valued at the “lowest of cost or market”. If my widget costs $100 to make and sells for more, the accountants will value the inventory at $100 per unit. If, sadly, I can only sell it for $50, the inventory valuation must be $50. And, if an optimistic valuation of $100 was once used, it must now be “written down” to $50, causing a loss, even in the absence of commercial transaction. This is an inventory write-off or write-down. (This type of cashless loss mystifies normal humans who have trouble with the notion you can be profitable and go bankrupt. It’s ‘‘easy”: You make a profit the moment you sell a product for more than it costs. And you go bankrupt if your customers don’t pay but your suppliers insist on being paid. And there’s Uncle Sam to whom you owe tax on your “profit’’.)
Turning back to RIM’s $485M write-off, how many PlayBook tablets does it represent? Using the $200 cost figure as an assumption, we get 2.4 million tablets all written down to zero! This doesn’t quite make sense.
First, why write the inventory down to zero? HP’s TouchPad fire sale demonstrated the existence of demand at the $99 price level. Admittedly, Amazon’s $199 price for its Kindle Fire makes it difficult for RIM to get to that price at this stage of the PlayBook life and tattered reputation.
Second, even if we accept a write-down to zero, 2.4 million tablets is a strange number. How could RIM have accumulated such large inventory? And if the inventory hit is less than $200 per device, this increases the number of tablets in RIM’s cellar: $100 write-off per tablet yields 4.8 million devices. Impossible.
A possible explanation lies in the way ‘‘sales’’ were reported in previous quarters. Perhaps these transactions weren’t totally final, meaning they shouldn’t have been recorded as revenue because the buyer had the right to return Playbooks to RIM. Faulty reporting of revenue could spell trouble with shareholders, the SEC and hungry attorneys.
Still, RIM only reported a total of 700,000 tablets “sold” for the Q1 and Q2, they can’t have all been returned and massive returns would have been disclosed previously, one hopes.
RIM’s Q3 numbers will be released in a week, on December 12th, giving the company an opportunity to explain this strange $485M number. This should be interesting.
There’ll be more to watch, such as the year-to-year change in smartphone sales, the state of relations with applications developers and, crucially, how much cash is left in RIM’s coffers. For the last reported quarter, it was $1.15B, down from $2.1B the previous period. This isn’t much to wage today’s smartphone wars.
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38 Comments
RIM is dead anyway, so those figures don’t really matter. The 3 smartphone players are dead: Windows Mobile, RIM and Nokia. It would be visible if only journalists had not dubbed iPhone a “smartphone”.
What is positively amazing is how those CEOs at RIM, HP, Dell etc decided to enter the tablet market just on the principle that “we also must have one” !
Don’t they know about market research, customer experience, competition etc? Putting together an immature product just for the sake of being there is doomed from the start. It is naive, irresponsible and ridiculous.
Excellent analysis. I hadn’t noticed that their cash on hand was reaching critical.
On the writedown, my first guess was that RIMM might be shoveling capitalized R&D and other (merger) expenses from QNX (as tenuously related to Playbook development) into the writedown as a quiet way of admitting that QNX isn’t the answer. Instead, I think you’ve got it with the revenue issue, and QNX is the proverbial other shoe waiting to drop.
“RIM is dead anyway, so those figures don’t really matter.”
.
Maybe you’re not familiar with “The Producers,” where a flop was sought because nobody would come looking for their money. I’m not saying that’s the intent here, but JLG *is* raising interesting questions about how RIM managed to get into such a deep hole. Perhaps management made some guarantees to Quora to get first in line or there are other issues such as the staff cuts that were bundled in here. Neither of those are especially nefarious but could swell the numbers.
The *me too* reflex is all too frequent in large-scale companies, since they are mostly lead by short-term managers who build their career by hoping from one position to another.
They can’t make any courageous decision, since any reward is likely to happen too late, after they move away. So only short-term expedient are considered. The “me too” is meant to amuse higher corporate decision-makers with a false sense of “courageous challenge”. The illusion must last just enough for the courageous manager to hop to another position, letting the successor deal with the consequences.
Now, for RIM, this is even more nasty : the Co-CEO are just “buying time” with lies and illusions to clunch to their once-in-a-lifetime top position. By doing so, they are increasing the odds to kill RIM in the process.
But then, i guess they don’t see any point in witnessing RIM successfull again into the market if they are not leading it. And probably quite the contrary…
Did the author read either of the earnings releases he links to before writing this? They both clearly say shipments of 500,000 and 200,000 Playbooks, NOT sales. Good way to generate hits I suppose, but it makes him look quite foolish to base an article on such a glaring mistake.
If they were selling the tablets at $500 in Q1 and Q2, then wouldn’t that be the starting valuation and whatever their “selloff” price is (maybe $100 or $200) is the new valuation?
By that reasoning, $485M relates to 1.2M to 1.6M tablets that are being devalued.
As far as I know Jean, you are incorrect as far as stating that RIM says these are sold numbers rather than shipped numbers. I’ve listened to all of their analyst calls for some time now, and they AWAYS state shipped numbers, for their phones, as well as their tablets. In fact, and I forget whether it was the first or second quarter when they were asked specifically what the sold numbers were, and they skirted the law on that one by stating that they didn’t have the numbers with them.
As we know, that call is a legal document, and they stepped around it. No doubt, several weeks after the end of the quarter, they did know the numbers, but likely (deliberately?) didn’t have them on paper with them, so they could make that statement to the rather surprising question.
I haven’t seen any additions to the released numbers that would indicate a real sold number. At the very least, even numbers such as the first quarter’s 500,000, the second’s 200,000 (though I’m seeing an incorrect 250,000 number being used by some writers’), and the 150,000 for the third quarter should be held in suspicion.
@ Greyden: I beg to differ. See RIM’s Q2 financial filing
Page 22 shows .7 million PlayBook tablets “sold” for the two quarters, Q1 + Q2. Earlier, page 13, shows .2 million tablets for Q2 only.
I was as surprised as you are. When I wrote the piece, I noticed the Q1 filing starts, page 1, by claiming 500,000 PlayBooks shipped, not sold.
Then, page 11, RIM says “approximately 500,000 tablet sales”.
Page 10 has a table showing .5 million tablets sold for the quarter.
I was just as mystified as you are: How did “shipments” become sales, especially with the Revenue Recognition policy in the same document restating the usual strict limits on the reality of a sale, as opposed to a shipment. Ah well…
@ melgross: See my reply to @ Greyden. I use RIM’s own filings. They say “sold” and they state their rev rec policy in the same filing. See page 5 of the Q1 filing.
@ Alan: RIM can’t use the $500 sales price to value its inventory, they must use the lowest of (manufacturing) cost or (current) market price. Perhaps they’re stuffing the $485M number with loosely related items, the explanations will be interesting.
Could the write down include future obligations to their suppliers? It’s noted as being “related to” inventory valuation, not “actual” inventory valuation.
Maybe they signed contracts to make or buy parts for millions more Playbooks and now can’t weasel out of them.
Maybe they expect additional costs, say, for the warehousing of the hardware they cannot sell.
Maybe there are software licenses that they pre-paid X for that have recently lowered their price to X/10.
Maybe the figure includes a completely unknown product that they built and killed after they’d made a whole bunch and won’t own up to.
To me this points to a contractual screw-up driven by believing that low sales were an impossibility.
Thanks for the reply JLG, you obviously did do your research before writing this article, my apologies. Perhaps the 500k + 200k “sales” were actual sales, but RIM is giving retailers extra credit on new Playbooks ordered so that retailers will continue to stock the product at the new lower price? If they are giving a $100 credit in kind for new orders, for each old Playbook order that was not sold that could explain it?
There is no future in RIM stock, dump it NOW or lose it all.
Re: “Sales”. Sales in one quarter can be returned in another and revert back to inventory. ATT alone has ~2000 stores, so an initial order of 10 units each store would be 200,000 units. ATT can force those back on RIM now that the product fails. How? Simply withhold payment on Invoices and ship them back.
Re:”Write down to zero”. No doubt the writedown includes accessories and a likely penalty is due to the manufacturer based on minimum contracted production run.
I find the claim of 700K Playbooks sold to be ludicrous (obviously this is RIMM being ludicrous, not our esteemed author here). If they sold those units, where the hell are they. The NPD data that everyone was talking about last week (the famous “Oooh, look there is a market for non-iPad tablets, if we conveniently don’t count the iPad” report) relegates the Playbook to the dreaded “other” group, the collection of third-string wannabes who didn’t even sell 100K units in the US. ( https://www.npd.com/wps/portal/npd/us/news/pressreleases/pr_111122b ).
Is it possible that RIMM sold 700K units and less than 1 in 7 of those was sold in the US? Sure, anything is possible. Is it even remotely likely? No, not a chance. If NPD’s numbers are even close to accurate, there is no way that RIMM broke 300K in sales. No way at all.
@walter: “There is no future in RIM stock, dump it NOW or lose it all.”
I agree that there is no future for RIM. The stock is a different matter though — someone might buy RIM tomorrow — patents, BES licenses, corporate customer base — might be worth something. AFAIK the RIMs market value is low enough that you could buy it, sell off the scraps and turn a profit. Granted, it is just as possible that RIM will slide into bankruptcy before anyone buys it.
Playbook != Kindle Fire.
After that incorrect assumption, everything else just falls apart.
Jean,
You point out that when the value of an item in inventory falls from $500 to $100, the company has to take a write-off of $400.
Doesn’t that mean that this $485m write-off is not related to production costs of the playbooks, only to what they previously declared as the value of the inventory compared to how they now value it?
If they write down the value of their inventory of playbooks from an average of $600, let’s say, to $100, they’d only have to have 900k playbooks in inventory to warrant the write-off.
It also probably means they’re losing much less than $485 million.
this has shareholders’ derivative suit written all over it.
Your article does not properly estimate the cost of a BlackBerry PlayBook. The PlayBook is not a Kindle Fire, it has more storage, Bluetooth, GPS, two HD cameras, more RAM, more storage, and a touch-sensitive bezel (probably more differences, but that’s all off the top of my head). The additional hardware features are all extra cost above the Kindle Fire estimate.
You also do not consider the different PlayBook models with a range of storage capacities: 16GB, 32GB, and 64GB. All three greater than the Fire, and surely more expensive.
Jean-Louis,
Is it possible that RIM signed up retail partners to purchase a set quantity of Playbooks with the contract stipulating that if enough of that purchase by the retail partner did not sell through to customers that the retail partner could sell back (or return) the Playbooks to RIM? This would allow RIM to claim the Playbooks as sold for accounting purposes and also give the retail partners an easy out if stock levels remained high. What I’m not clear on is whether this is the normal tactic employed in manufacturer/retail operations when an item is considered shipped as opposed to sold.
As a follow up, I think Harry hit the nail on the head. Has RIM already written down Playbook valuation (from $500 to $200) or is this the first write-down? If this is the first write-down, then it would presumably be from something around $500+ to as low as $0 meaning inventory levels are much lower.
Will: You make a good point, but possibly an erroneous one. The Fire and the Playbook are definitely built on the same platform. The Playbook has more bells and whistles, but that does not equate to a definite higher cost. Unless both items are cracked open, there is no way to tell the quality or the integration level of the components. RIM is notorious for using bargain-basement RAM chips and GPS chipsets – the Fire could easily cost as much if the silicon inside is of decent quality.
@ All: Accounting, costs, deals with retailers, etc.
1. Revenue Recognition rules demand you do _not_ count as revenue the portion of your sales that are subject to some merchandise return agreement. In other words, if RIM runs regular books, they have a not counted as revenue whatever was subject to “unsold” returns. But they haven’t mentioned any of that. Perhaps they will on Dec 15th when they discuss the quarter just ended.
If you reserve the right amount, nothing happens to your revenue when the retailer returns the product. But your inventory may or may not increase, depending upon the way you accounted for the “at risk” product. Generally, you move a number from the reserve account, now depleted, to the inventory, now larger. There are many other permutations such as keeping title to the machines you ship, they are still yours, in your inventory, but “on consignement” with the retailer. And so on…
@ All: Accointing, costs. etc…
2. The cost of a PlayBook isn’t precisely known, nor is the mix of configurations. I’ve used a published estimate a little above $200, not the Fire, the second number I referred to in the MN. Another estimate is $297. Let’s say $300. That would still make more than 1.6M tablets written down to zero. Not sure it makes sense.
3. Inventory valuation at $500/tablet? No. that’s not permitted. The rule says the lowest of (manufacturing) cost or (current) market price. The later market price is now significantly below $500. If the “street price” goes down to $99, for example, if the cost was $299, you need to take a $200 write-down per unit.
@ Mango: You’re right, the PlayBook shouldn’t be confused with the Fire. One is a success. The other one came out without an email client.
Just kidding. I agree these are two very different products. RIM execs were apparently “blindsided” by the Fire http://j.mp/rIZ70E
How do free Playbooks count? As far as I could see RIM was pretty free with hardware. You just had to claim to be a Flash developer in certain venues to get a free tablet. $200 to manufacture… no revenue and no software development too. That’s a bad formula.
In the quarter RIMM grew cash by “80mm”; I am very interested to see how the did this and how much of the share buyback program they did. If they didnt buy a share back, and mgmt hasn’t bot a share, then I am in a little trouble.
Revenue is recognized when it’s shipped.
Talk about another shoe waiting to drop – how ’bout the gazillion phones that RIM shipped, both before and after the much ballyhooed BB7 O/s debuted?!
Surprise – 2 year commitments to something variously thought to have a 3-9 month “state-of-the-art” status … have been just a tad disappointing.
Many of us lived through Enron, the dot-com bubble, Madoff, etc. I think you almost HAVE TO look for “skullduggery” before a $10B-plus company (of course, the number is even higher if you walk back some number of months) heads toward the pink sheets. I have no idea whether Canada’s version of the S.E.C. is as pathetic as our own, but it’s clear that RIM either incorporated in Delaware or there’s a Canadian equivalent, where Boards can be drinking buddies, being paid who knows what for doing who knows what. Wait – on the latter – I know what! – they do squat!
Anyhow, it’s sad (but not, probably, rising to a winning lawsuit) how cavalier the RIM execs have been in their estimates. You’d think that having said that Apple’s products posed no threat to someone who “knew the business world inside out and backwards,” they’d be just the tiniest bit humble and/or cautious.
But they haven’t, … and it sounds like they’re setting up to do it again on Thursday – looking for the next quarter to fall a little short of the present one sounds like the biggest case of “wishful thinking” I’ve ever heard.
And it’s clear that analysts have – many of them – accepted their predictions, hence those 10% “haircut” days when mgt. fesses up that they were a trifle overly optimistic.
That’s what – I think – REALLY queers an acquisition of RIM – since the company’s “leaders” have demonstrated that they don’t know which end is up, any potential acquiror as to wonder how bad the “rot” is, … and they’re probably wary of under-estimating it, given HP’s experience with Palm.
If design, marketing, etc. look like they’re staffed with monkeys, are you sure the best legal minds took appropriate care of RIM’s IP? Neither of us KNOWS, but acquisitions of a company whose leadership is surely among the 3 contenders for WORST strike me as unlikely. If stock options allow you to hang onto some genuine talent, how do you think RIM is doing in that category?! … People who think that they have “security” on their side must have missed that one-week outage. Looks like an empty box to me, and if that draws a $10 Billion offer, it must be 1999 again. I know it isn’t, and it’s obvious that most people posting here can also tell time!
Peter:
The sad part is that the assorted departments at RIM *aren’t* staffed by monkeys, they are full of smart and creative people. The problem with RIM is that smart and creative ideas get crushed at the management level. The minds at the very top of the company are 100% sure that their way is the best way, all of RIM’s products are best of breed, and the CUSTOMERS are the part of the equation that is out of whack. So why change course? People will come back to their senses and buy products just because they say Blackberry on them Any Day Now. Soon. Really. Have another glass of Flav-R-Aid and sit tight.
I assumed that RIM ordered 2M PBs from Quanta, based upon 500k a quarter. The per unit cost was $242.50, which is in the ballpark. They’re writing down the full value of the device to zero. I expect they’ll eventually throw the PBs in the warehouse into a landfill somewhere, maybe they’ll get recycled, maybe they’ll get refurbed and turned into Kindle Fires, whereupon they may recapture some of that write down.
I thought it was traditional on Wall Street for companies to jam anything they possibly can into a writeoff, get a bunch of costs off the books, and make it easier to declare a “profit” in succeeding quarters based on the reduced operating costs.
For all we know, only a fraction of the writeoff has anything to do with the actual inventory markdown, right? Or was this the whole point you were trying to imply?
Don’t worry my dear fellows. Microsoft will pay top dollar for Black. (Using Android royalties)
@ Peter Reinert: Eloquent! And an interesting insight into possible “leaks” in RIM’s IP assets. Come to think of it, they’ve had to pay $612M to NPD for patent infringement http://j.mp/sswE1t
That was 2006.
In 2009, RIM settled with Visto for $267.5M http://j.mp/t763Em
(And Apple had to pay Nokia a rumored 800M€ plus royalties)
DRAM prices have plunged this year. Did they enter into a supply agreement that made them the owner of way too many parts (or even take delivery) and have to write that down? It’s not uncommon for manufacturers to push inventory risk onto those who have contracts with them.
I did also notice that this number didn’t fit inventory only. It must be something else as they literally say “Related to PlayBook Inventory”.
Related? It is due to inventory or not… but related means a lot of things beside some devices or components on shelves. Was it related to some new tablets in production (other formats?) that didn’t make it through Christmas because completely “has been” or not compatible with what is coming next? Did the company faced major problems with the development of QNX and had to write-off some expenses related to that?
Not sure we’ll get more details next week but for sure, this “big” number is hiding something else and this can be only bad news for RIM and its strategy.
Minus 73% in 12 months for the stock reflects strictly the success RIM had with its transformation… let’s see if they can deliver more successful products before they spend the last 27%. Time and money is running out fast… too fast for this management I’m afraid.
T
good post,thank you share it,i like it very much
If true, it seems RIM copied some of Nortel’s old accounting ‘tricks.’
Probably same fate looms.
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[...] unless they can deliver something unique in a crowded market. The company took a $485 million write-off on the PlayBook in December of 2011, as sales of the hyped tablet were disappointing. Wall Street [...]
[...] unless they can deliver something unique in a crowded market. The company took a $485 million write-off on the PlayBook in December of 2011, as sales of the hyped tablet were disappointing. Wall Street [...]