[P Es] Scotia Capital Black Berry Direct Push Report
1 Company Comment Wednesday, August 17, 2005Research In Motion Limited (RIM-T C$82.60) (RIMM-O US$69.01)Gus Papageorgiou, MBA, CFA - 416-863-7552 Geoff Darling - email@example.com firstname.lastname@example.orgRating: 1-Sector Outperform Target 1-Yr: C$156.00 ROR 1-Yr: 88.9% Est. NTM Div. $0.00Risk Ranking: Medium 2-Yr: C$172.00 2-Yr: 108.2% Div. (Current) $0.00Valuation: 34x blended probability EPS estimate for F2007. Yield 0.0%Low Cost LeaderEvent■ Heightened concerns over increased competition lately have ignored one very important competitive factor - cost.What It Means■ Cost is #2 concern: Next to security cost is the number two concern for IT managers when considering mobile solutions for their organizations.■ BlackBerry solution offers most affordable middleware and device: The BlackBerry solution from RIM combines the most inexpensive devices with the most affordable middleware solution.■ Microsoft smartphone devices cost ~50% more than BlackBerry: Based on a sample from several global carriers, the average Microsoft smartphone costs substantially more than BlackBerry. In some cases the price difference is more than 50%.Qtly EPS (FD) Q1 Q2 Q3 Q4 Year P/E2004A $0.00 A $0.05 A $0.15 A $0.28 A $0.49 112.482005A $0.36 A $0.45 A $0.58 A $0.71 A $2.10 32.222006E $0.56 A $0.62 $0.68 $0.74 $2.60 26.522007E $0.86 $0.87 $0.88 $1.03 $3.65 18.89(FY-Feb.) 2003A 2004A 2005A 2006E 2007EEarnings/Share $-0.26 $0.49 $2.10 $2.60 $3.65Cash Flow/Share $-0.07 $0.68 $3.06 $2.97 $3.89Price/Earnings n.m. 112.5 32.2 26.5 18.9Relative P/E n.m. 6.0 1.7 1.4 1.0Revenues $307 $595 $1350 $2081 $2918EBITDA $-34 $103 $423 $722 $996Current Ratio 2.7 6.5 2.2 6.3 6.9 SC Online Analyst LinkEBITDA/Int. Exp 3.0 -9.8 -11.4 -13.3 -20.8I/B/E/S Estimates BVPS $12.74 Shares O/S (M) 197.8EPS 2006E: $2.52 ROE 22.8% Float O/S (M) 158.0EPS 2007E: $3.32 Total Value (C$M) 16,338 Float Value (C$M) 13,051Next Reporting Date 28-Sep-05 TSX Weight 1.50%Credit Ratings N/AAll values in US$ unless otherwise indicated.Historical price multiple calculations use FYE prices. Source: Reuters; Company reports; Scotia Capital estimates. For important disclosure information see Appendix A of this report.
2 Company Comment Wednesday, August 17, 2005Low Cost Leader■ Despite rumours to the contrary BlackBerry is the cheapest solution: Next to security, cost is by far the most important criteria for deploying a mobile e-mail solution. Cost for the enterprise encompasses many aspects, not just the handheld device, but the middleware, the monthly plan and the IT effort required to support the application. Also, it is not merely a cost issue for the IT manager but also for the carrier – if a service offering cannot be offered at a price point where the revenue does not exceed cost, it is unlikely to be supported for long.■ BlackBerry offers cheapest devices: On the device side, Exhibit 1 outlines some of the device choices for mobile e-mail. What becomes very apparent is that BlackBerry devices are, by quite a convincing margin, the cheapest devices available. And this trend is maintained across a wide number of carriers across multiple geographies. In the U.S. market BlackBerries are offered at published prices between US$200 to US$350 depending on the model and carrier. Beyond the published prices, some carriers we spoke to were offering additional price discounts. Sprints small business promotion bundled a free BlackBerry Enterprise Server with ten 7250 devices at US$99.00 each. By comparison, Palm Treo devices are priced anywhere from US$330 to US$400 and the Audiovox 6600 series (Microsoft Operating System) is priced between US$354 and US$500. In Europe, BlackBerry device prices range from being free in the U.K. to €429 in the un-subsidized Italian market. In Germany, the BlackBerry 7100v is priced at €8.43. By comparison the Nokia 9500 series devices are priced at between, £120 in the U.K. to €769 in the unsubsidized Italian market making them considerably more expensive than BlackBerry.
3 Company Comment Wednesday, August 17, 2005Exhibit 1 - Advertised Device Prices for Select Global Carriers US UK Germany Italy Verizon Cingular Vodafone mmO2 Vodafone TIM BlackBerry 7250 - BlackBerry 7100g - BlackBerry 7100v - BlackBerry 7100x - BlackBerry 7100v - BlackBerry 7100g - $300 $200 FREE to £100 FREE €8.43 €429 Audiovox XV6600 - BlackBerry 7290 - BlackBerry 7290 - BlackBerry 7290 - BlackBerry 7290 - $400 $250 FREE to £200 FREE €51.29 Palm Treo 650 - €669 Palm Treo 650 - $400 Palm Treo 650 - $400 Nokia 9500 - £120 XDA IIi - £180 Sony P910i - €138 Nokia 9500 - €769 Samsung SCH-i730 - Siemens SX66 - $500 VPA III - £340 Siemens SK65 - $600 (Audiovox) (Audiovox) XDA IIs - £180 €309.91Source: Carrier websites, July 2005.■ BlackBerry is the cheapest middleware: From a middleware perspective RIM also emerges as the most cost-optimal solution. Exhibit 2 below outlines some of the competing solutions and the cost configurations for a small, medium and large deployment. The cost of the monthly plan is not included nor the price for devices. Costs include the price of the software and one-year of maintenance and support. In a small deployment, the BlackBerry solution is at least 34% less expensive than the next best price and 70% less expensive than the most expensive offering. In a medium deployment the BlackBerry solution is 58% less expensive than the next best price and 75% less expensive than the most expensive offering. In a large deployment the BlackBerry offering is 64% less expensive than the next best priced offering and 78% less expensive than the most expensive offering. Granted this comparison does not include offerings that do not require any middleware, such as Microsoft, in which case all of these offerings are expensive. However, we do not believe a secure and scalable offering can
4 Company Comment Wednesday, August 17, 2005 be deployed without the middleware aspect. And remember again, even though cost is an important issue, it ranks second to security. We also note that the prices do not include promotions by the carriers. Sprint for example was offering the BES for free in a recent small business promotion.Exhibit 2 - Middleware Pricing* Extended Good Intellisync JP Mobile RIM Seven Average Median Systems Technology Networks Scenario 1: Small deployment, 1 server $15,000 $15,600 $9,500 $20,993 $6,096 $9,250 $12,740 $12,250 50 clients Scenario 2: Enterprise deployment with 1 $44,400 $60,000 $38,000 $82,493 $14,997 $36,250 $46,023 $41,200 server and 200 clients Scenario 3: Large enterprise, 2 servers $324,000 $504,000 $380,000 $547,493 $115,994 $360,250 $371,956 $370,125 and 2,000 clientsSource: Network Computing, July 21, 2005, pp. 47.* Price does not include monthly plan or cost of devices -- does include 1 year of maintenance and support.■ Carrier monthly fees competitive: The final, and likely largest, aspect of cost for the enterprise is the monthly plan for the service from the carrier. This varies greatly by device and carrier. Exhibit 3 below outlines some of the plans offered by various carriers on BlackBerry devices versus other smartphone devices. In general the plans are competitive. Here we would have assumed that the BlackBerry plan would generally be cheaper since its bandwidth consumption is less than the other solutions. However, based on what we are seeing the carriers appear to be pricing the service on par with, and in some cases higher than alternative solutions. Based on the feedback we received from carriers and other industry participants it appears the Exhibit 3 - Mobile Device Pricing Plans carriers are positioning the solution as a high-end service Data - Voice Plan BlackBerry Smartphone and pricing accordingly. The price of the service does tend Bundles Bundles to fall when a BES is not involved (prosumer offering). In Verizon Data Only - unlimited $49.99 $49.99 this situation carriers, such as T-Mobile, offer all you can Voice: 450 minutes $79.99 $79.99 Voice: 1350 minutes $109.99 $109.99 eat data plans for US$19.99 per month. Voice: 3000 minutes $169.99 $169.99 Cingular Data Only - unlimited $44.99 $45.00■ Least taxing on carrier networks: The final aspect of cost Data Only - 4-5 MB $34.99 $20.00 that warrants discussion is the cost associated with Data Only - 10 MB na $30.00 delivering the data for the carrier. Again, based on our Data Only - 20 MB na $40.00 discussions with carriers, and despite the virtually T- Mobile U.S.A. Data Only - unlimited $39.99 $39.99 inevitable evolution to 3G, bandwidth remains a scarce commodity and all other things being equal, carriers will O2 UK Data Only - 5 MB £15.00 £15.00 seek to promote solutions that are the least taxing in terms Vodafone Germany Data Only - 10 MB na € 10.00 of bandwidth usage. On this front the BlackBerry solution again stands out. Feedback we received from carriers O2 Germany Data Only - 1 MB na € 13.50 continuously supports RIMs claims that its offering is the Data Only - 10 MB na € 19.00 most bandwidth efficient. Exhibit 7 illustrates the T Mobile Germany Data Only - 5 MB na € 15.00 BlackBerrys efficiency versus other solutions. This exhibit Data Only - 30 MB na € 19.00 shows the results of a test conducted using eight different mobile e-mail solutions. Each product was installed on its Source: Company websites. own server using a 1,000 MHz Pentium III processor and 1,024 MB of RAM, with Windows Server 2003 as the
5 Company Comment Wednesday, August 17, 2005 server software and Exchange 2003 as the e-mail platform. To test each solution ClearSight Networks Analyzer 4.0 was used. Three 294-KB word attachments were sent to a mobile device from each gateway and the amount of client-server traffic was measured. In addition three messages with a 57-KB JPEG and 123-KB Excel spreadsheet attachment were also sent. As the exhibit clearly displays RIMs BlackBerry solution clearly stands out in terms of bandwidth efficiency, and is, by a very wide margin, superior to its competition. Images are sent to the device with reduced resolution and any bandwidth intensive graphics are removed. We note that the BES automatically sends out e-mails in 2 kilobit streams so if a user does not want to read the e-mail, in case it happens to be SPAM or an insignificant press release from a news source, the network does not have to waste bandwidth by downloading the entire content of the e-mail. If the user wants to read the entire e-mail or attachment the BES sends it along in 2 kilobit streams until it is completely downloaded. What is important to note here is that Exhibit 4 illustrates how much bandwidth the BlackBerry solution needs to download the entire 294-KB word file, a 57-KB JPEG file and a 123-KB Excel file. So even when a user is downloading the entire file the BlackBerry solution is still more bandwidth efficient making it much more attractive to the carrier.Exhibit 4 - Data Traffic Comparison 1,000 Kilobits sent to client 800 600 400 200 0 W ord Document JPEG and Excel Good Technology Palm Seven Networks Intellisync Extended Systems W indows Mobile JP Mobile RIMSource: Company reports; Scotia Capital estimates.■ A rebuttal to Microsoft: We believe that Microsofts recent analysis of carrier operating margins for its mobile solution versus RIMs, which was presented during the companys July 29, 2005 Analyst Day, was inaccurate and misleading. In its analysis, MSFT broke out a hypothetical carriers cost structure into various categories including customer service, customer acquisition, data transport/delivery, and licensing. MSFTs conclusion was that carriers could get €8 operating margin with their solution versus €4 with RIM, with the difference largely coming from licensing costs. We believe this analysis is inaccurate, misleading and does not represent the true benefits of RIMs solution. Although it is true the BlackBerry solution has a material licensing cost component which MSFT does not, we note that this license cost supports the NOC infrastructure which provides a secure, reliable push- email system, and that there are substantial benefits in each of the other areas. For customer service, RIM provides one-stop technical support for hardware and software - MSFT has yet to meaningfully address how Enterprise customers will be supported when they are using a
6 Company Comment Wednesday, August 17, 2005selection of different hardware and software vendors. In terms of customer acquisition costs,we believe the strong BlackBerry brand strengthens carriers marketing efforts while thelower device costs reduce the need for large device subsidies. Both of these factors boost theoperating margin of BlackBerry in comparison to MSFT. As we have covered earlier, datatransport is an area where RIMs solution truly shines. MSFT estimates that its smartphoneusers consume approximately 5-6 MB of monthly data traffic. In our experience, mostBlackBerry subscribers use less than 2 MB per month. Considering that carrier carefullymonitor bandwidth resources, we believe the bandwidth efficiency of the RIM solution hasbeen and will continue to be extremely compelling to carriers. From a somewhat over-simplified bandwidth consumption viewpoint, a carrier has the potential to support two orthree BlackBerry subscribers for each smartphone based on current data consumption rates.Overall, we believe the reasons discussed above are substantial and significantly discreditMSFTs conclusion regarding operating margins. SC Online Analyst Link
7 Company Comment Wednesday, August 17, 2005Appendix A: Important DisclosuresCompany Ticker Disclosures*Nokia Corporation NOK HResearch In Motion Limited RIM TEach research analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection withsecurities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is, orwill be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.The Research Analysts compensation is based on various performance and market criteria and is charged as an expense to certaindepartments of Scotia Capital Inc., including investment banking.Scotia Capital Inc. and/or its affiliates: expects to receive or intends to seek compensation for investment banking services from issuerscovered in this report within the next three months; and has or seeks a business relationship with the issuers referred to herein whichinvolves providing services, other than securities underwriting or advisory services, for which compensation is or may be received. Thesemay include services relating to lending, cash management, foreign exchange, securities trading, derivatives, structured finance or preciousmetals.This report may include articles or content prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital.For Scotia Capital Research analyst standards and disclosure policies, please visit http://www.scotiacapital.com/disclosures* LegendH The Research Analyst/Associate, in his/her own account or in a related account, owns securities of this issuer under his/her coverage.T The Research Analyst/Associate has visited material operations of this issuer.
8 Company Comment Wednesday, August 17, 2005Definition of Scotia Capital Equity Research Ratings & Risk RankingsWe have a three-tiered rating system, with ratings of 1-Sector Outperform, 2-Sector Perform, and 3-Sector Underperform. Each analystassigns a rating that is relative to his or her coverage universe.Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical andjudgmental factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts,consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director ofResearch and the Supervisory Analyst jointly make the final determination of all risk rankings.Ratings Risk Rankings1-Sector Outperform LowThe stock is expected to outperform the average total return of the Low financial and operational risk, high predictability of financialanalyst’s coverage universe by sector over the next 12 months. results, low stock volatility.2-Sector Perform MediumThe stock is expected to perform approximately in line with the Moderate financial and operational risk, moderate predictability ofaverage total return of the analyst’s coverage universe by sector financial results, moderate stock volatility.over the next 12 months. High3-Sector Underperform High financial and/or operational risk, low predictability of financialThe stock is expected to underperform the average total return of results, high stock volatility.the analyst’s coverage universe by sector over the next 12 months. Caution WarrantedOther Ratings Exceptionally high financial and/or operational risk, exceptionally lowTender – Investors are guided to tender to the terms of the predictability of financial results, exceptionally high stock volatility. For risk-takeover offer. tolerant investors only.Under Review – The rating has been temporarily placed under Venturereview, until sufficient information has been received and Risk and return consistent with Venture Capital. For risk-tolerantassessed by the analyst. investors only.Scotia Capital Equity Research Ratings Distribution*Distribution by Ratings and Equity and Equity-Related Financings* Percentage of companies covered by Scotia Capital Equity Research within each rating category. Percentage of companies within each rating category for which Scotia Capital has undertaken an underwriting liability or has provided advice for a fee within the last 12 months.Source: Scotia Capital.For the purposes of the ratings distribution disclosure the NASD requires members who use a ratings system with terms different than “buy,”“hold/neutral” and “sell,” to equate their own ratings into these categories. Our 1-Sector Outperform, 2-Sector Perform, and 3-SectorUnderperform ratings are based on the criteria above, but for this purpose could be equated to buy, neutral and sell ratings, respectively.
9 Company Comment Wednesday, August 17, 2005DisclaimerThis report has been prepared by SCOTIA CAPITAL INC. (SCI), a subsidiary of the Bank of Nova Scotia. Opinions, estimates and projectionscontained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained hereinhave been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to theiraccuracy or completeness. Neither SCI nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or itscontents. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodityfutures contracts. The securities mentioned in this report may not be suitable for all investors nor eligible for sale in some jurisdictions. Thisresearch and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced inwhole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred towithout the prior express consent of SCI. SCI is authorized and regulated by The Financial Services Authority. U.S. Residents: Scotia Capital(USA) Inc., a wholly owned subsidiary of SCI, accepts responsibility for the contents herein, subject to the terms and limitations set out above.Any U.S. person wishing further information or to effect transactions in any security discussed herein should contact Scotia Capital (USA) Inc.at 212-225-6500.