BlackBerry and Analysts: A Classical Misalignment of Interests

Yesterday BlackBerry, the company formerly known as Research in Motion, called the bluff of analysts who are trying to forecast their earnings and move share prices. However, the analysts’ interests are not at all aligned with BlackBerry’s interests, including goals, business plans and sales channel management. Analysts seek out short term results; a restructuring on the scale of BlackBerry’s requires long term patience. This brings back memories of my initial exposure to analysts twenty years ago.

During my experience on a management team restructuring a NASDAQ-listed company I had a real life baptism into the role of news releases, analysts and stock prices. And it was not pretty.

Background: In the summer of 1994 I was relocated to my employer’s Head Office in Santa Monica, California to participate on an interim management team tasked with the restructuring of a utility software publishing company. The company was experiencing declining revenue and earnings. It had been the leading vendor of utilities for Microsoft’s DOS operating system; two awards in my office can attest to that. Upgrade releases would see up to 60% of users updating their software (in the pre-Internet age of using direct marketing for upgrades).

But the company had also acquired rights to software supporting the emerging Internet. In fact we tried to launch a web browser, based on a license obtained from the University of Illinois. But, due to previous “hard line” intellectual property experiences, we did not understand the culture of the Internet when it comes to beta testing of new software. First to use an online beta program, Netscape took over that market space; later, under the leadership of Alec Saunders (yes, that Alec Saunders who is now Vice-President, Developer Relations at BlackBerry) as Internet Explorer Product Manager, Microsoft offered Internet Explorer as an operating system feature, not a product. With no revenue model left on the table our web browser, while having some features not duplicated in today’s browsers for about ten years, went into decline.

But during that time, as Internet Business Development Director, I had set up partnering agreements with the major Internet Service Providers of the day (PSI Net, UUNet, AT&T, Netcom and others) and had been involved with a press release that actually lifted our stock price by about 12% on the issuance day. Basically we would get a royalty for every user of our software who signed up with one of these ISP’s.

And it’s here that I learned about the fragility of being a public market company and its sometimes unfounded exposure to the whims of analysts.

Within two quarters we had returned the company to profitability; it remained profitable for another four or five quarters. At some point early in that period the press release went out. During that entire period the share price rise was “meteoric”; analysts were looking at every press release issued and rejigging their forecasts. Make an acquisition of a company with no proven revenue stream; issue a press release; the share price went up. Over that year period the share price went from around $5 to over $35 within a year.

While the press release related to my activity mentioned a potential revenue model built into those agreements, we had no real market experience with the model. Some analysts were calling our CFO for more information; beyond forecasts for our expanding line of market-tested utility software products, we had no real data to work on. Any forecast would have been purely speculative; in the long run I think it brought in about $50,000. (The company was eventually sold to Symantec for a product that overcame an intellectual property issue Symantec was having.)

Over that time period I realized that analysts want to jump on any information tidbits to see if they can out-forecast the company’s actual internal projections. We had internal spreadsheets and were tracking our distribution channels weekly for inventory movement of our utility software products through distributors to retailers. For most of those quarters we actually managed our quarter end shipments to meet our goals and left backlog for shipment in the following quarter. There was an element of misalignment between analyst projections and business performance.

We knew exactly how much existing product was moving through the channels. But there was no data upon which to base any forecasts on our new business partnering activities. Yet, analysts put out some reports that were purely speculative as to the revenue impact. Our share price would rise with little basis on the business’s actual performance.

In today’s BlackBerry environment we are seeing its stock price whipped around on every analyst report and news release. When it was announced that the service revenue model was changing over the following couple of years, some analysts wanted to wash out service revenue immediately. In after hours trading share price dropped minute-by-minute as analysts rushed to outdo each other on their spreadsheets during the press conference.  As we saw in the last quarter, service revenue only fell 3% as BlackBerry gradually launches new services while demand for the legacy service is slowly falling away. Subsequently other analysts have come out with new “Buy” recommendations, often based on attempts to forecast BlackBerry 10 revenues.

But here’s what perplexes me. Analysts have no history to run on for BlackBerry 10 sales. Encouragement for sales comes from potential renewal of the 76 million BlackBerry user  contracts over the next two years and having 650 carrier relationships, of which over 200 are now carrying or will soon be carrying BlackBerry Z10 and Q10. It was interesting to learn that 55% of the first month’s sales were coming from previous iPhone and Android users. But there’s no long term history from which any reasonable forecast for BlackBerry 10 units can be generated. Internally BlackBerry will have sales goals but there is no regulatory requirement that they be made public.

So, as a proxy, some analysts run out to their local retailers and try to extrapolate stories from a small number of stores giving feedback. Others will try to get component order information from suppliers. Yet, given BlackBerry management’s track record for turning around the company, tracking sell through on a, say, weekly basis has to be one of the key metrics followed internally. It would be much more accurate than any sampling visits by third parties to retail locations is going to provide. We do know they ramped up production in late February to meet the existing demand.

And then Thursday one analyst who has a history of bearishness puts out a report claiming that returns are higher than sales. And the share price tanks, potentially to the benefit of those holding short positions in the stock. But there is no research published to describe their methodology. And more importantly any revenue forecast by any analyst at this point is purely speculative. What this particular analyst has done is demeaning to the term “research”; to achieve my accreditation as a physicist, I had to provide substantial peer reviewed research backing up my conclusions. The price continued to decline through the day in spite of an early statement from BlackBerry.

Analysts are playing a short term game when BlackBerry is in a long term restructuring and rebranding process. As I have said previously with $2.9 billion in cash, 76 million current users and 650 carrier relationships (their distribution channel), they are in a start up position that most entrepreneurs can only dream about.

In the end it’s about the user experience. Many reviews have been positive. From my own perspective, as one who has sold multi-tasking for a large portion of my career, my summary statement is “Did I say it was fast?” Yes, there are going to be a few who just don’t get its unique features and will want to make a return. BlackBerry’s statement claims their return levels are in line with industry norms. They have, and have acknowledged, some initial teething issues that are gradually being addressed. They have the real time sell through data (or better have it); only BlackBerry’s internally collected numbers give the real picture.

BlackBerry handled the situation beautifully. They need to send a message. That message is simple. I’ll paraphrase it as, “If you have legitimate research, go ahead and publish it. But if you dare manufacture false information to manipulate the stock, we’re going to put the proper authorities on your ass.”

Chris Umiastowski,

Out of all this maybe the analysts need to take a regulator enforced holiday from covering BlackBerry until there are two or three quarters of results to work with. In the meantime, I consider any revenue forecasts to be purely speculative with no basis in fact. At times the stock market becomes a game of speculation whereas shareholders want to be rewarded on their investment for real business performance, based on real numbers.

BlackBerry has certainly had enough of this speculation. And the one report yesterday crossed the line when it comes to being an analyst with any integrity. BlackBerry has finally hit back from a legal perspective. As Chris Umiastowski at says, in What’s really going on with Detwiler’s false accusations, and how BlackBerry is handling it beautifully:

When somebody publishes incredibly negative information on a stock, like Detwiler did, and refuses to discuss their research with the company either ahead of time or after the fact, and that “research” doesn’t even pass the smell test and turns out to be totally wrong, it definitely raises eyebrows.

Good on BlackBerry for going after stuff like this.  Nice to see their new Chief Legal Officer, Steve Zipperstein, taking action.

Read Chris’ post (linked above); it gives an excellent perspective from the viewpoint of a former analyst.

Bottom line: any forecast of BlackBerry revenues will remain speculative for another two or three quarters. Fortunately they have an established customer base and distribution channel to work with. Their new management team has evolved an employee culture that is motivated to succeed. But they still need to not only market heavily; they need more users who can pass along their experiences. By their management’s own admission they are still in the launch phase of delivering not only new smartphone experiences but also integrating into their traditional enterprise base.  And we need to hope there are viral effects for which the outcome cannot be reliably predicted.

Sorry analysts, I’ll continue to be very skeptical of your reports, for any stock, not just BBRY.

Full disclosure: the author has a small holding of BlackBerry shares. But he also has iOS and Android devices in order to experience a cross section of the smartphone and tablet market. These observations are based on publicly available information combined with his own past business experience at senior management levels in high technology markets. His main interest is in seeing several thousand jobs maintained in not only the Canadian economy but also in BlackBerry organizations around the world.

Given that RIM stock has been somewhat volatile for the past few months I can only say check with your investment adviser before taking any action. These posts are for information purposes only.

About Jim Courtney

Bringing over thirty years' experience in the sales, marketing and management of cutting edge technology businesses.


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