Few fields move as rapidly as technology. Businesses creating outsized profits and returns for shareholders quickly get a bullseye on their back and are targeted by other companies looking to disrupt their products by selling cheaper alternatives that still prove "good enough." Not only that, but even if a company continues to dominate its particular field, other changes in technology can shift spending away from their products. Think about how Microsoft still dominates PCs, but it's pressured by sales shifting to mobile devices like smartphones and tablets.
With that in mind, today we're looking at how Research In Motion
Research and development
Over the past five years, RIM has spent an average of 7% of revenues on R&D. The table below summarizes how RIM's R&D expenditure relative to revenues compares with some of the company's closest peers:
|
Company |
2007 |
2008 |
2009 |
2010 |
|---|---|---|---|---|
| RIM |
6% |
6.2% |
6.5% |
6.8% |
|
Motorola Mobility |
13.7% |
13.7% |
14.1% |
13.6% |
|
Microsoft |
13.9% |
13.5% |
15.4% |
13.9% |
Source: Capital IQ, a division of Standard & Poor's. Dates above are calendar years, while yearly total is for company fiscal years corresponding predominately to that period.
As you can see from the chart above, RIM badly underspends its peers in terms of R&D spend relative to sales. Even in absolute terms, RIM has been outspent by Motorola Mobility's R&D department despite having 66% higher sales in the same period. While RIM's falling behind competitors like Apple, Google, and even Microsoft in terms of mobile user interfaces is often blamed on upper management's inability to grasp changing consumer tastes, the figures above point to a company that's also been underinvesting in its R&D capabilities.
Acquisitions
In technology, some of the best companies have turned growth through acquisitions into an art. IBM has adeptly spun off capital-heavy businesses like hard drives and PCs while it focused on acquiring additional services and software expertise that have transformed its business model.
However, on the opposite end of the spectrum, HP is often criticized for under-investing in research and development to the point that it has to overpay on acquisitions to catch up with competitors.
Investors should remember, most of all, that companies are valued by the cash flow they can bring in for their shareholders over time. If companies need to continue making purchases in perpetuity to keep growing, that amounts to a reduction in cash flows, and investors should treat acquisition spending as a continuing outflow against cash flow.
With that in mind, let's take a look at RIM's free cash flow over the last five years against cash spent on acquisitions:
Source: Capital IQ, a division of Standard & Poor's. Dates above are calendar years, while yearly total is for company fiscal years corresponding predominately to that period.
While RIM makes its fair share of purchases, by technology standards, its cash acquisitions are fairly light. That shows RIM's cash flows are indicative of its organic rate of growth. Since many investors are interested in RIM as a value play (it has a market cap of only $23 billion despite pumping out nearly $3 billion in free cash flow last year), that's a very positive sign. However, in the future, the company may need to get more acquisitive if it wants to keep up with rivals. The past year saw $494 million in cash acquisitions from RIM, including a $200 million purchase of QNX that was the company's largest buyout to date. QNX's operating system is behind the company's recent PlayBook tablet, and company officials have confirmed that the hope is to move QNX into smartphones as well.
Final thoughts
RIM stands as the textbook case of a smartphone player being unable to innovate as rivals outflanked it. The company still has a bedrock of support from business users, but as we've seen today, the company continues to underspend its rivals in internal R&D. While the company recently leaned on acquisitions to catch up -- spending $200 million to grab QNX, time may be running out for RIM to get back in the game. Mobile companies can throw gobs of money at problems by buying start-ups or boosting R&D, but the problem for companies like RIM and HP is that developers are now playing kingmakers of mobile platforms by choosing which ones to develop for.
The outsized level of developer interest behind both Android and Apple's iOS only solidifies their presence as the leading mobile platforms. RIM might try to do an end-around by crudely enabling Android apps on its new tablet offering, but in the end, it needs to not only evolve its phones to consumer tastes, but find a way to get external developers backing its platform as well.
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