Stephen’s Posterous

BlackBerry Partners Fund’s investment in email management start-up Xobni Corp. could pave the way for a new product that helps organize email on the BlackBerry.

The $150 million fund, created last May 2008 to bankroll software applications for mobile devices made by Research in Motion Ltd., invested $3.2 million in Xobni, it was announced today. That’s the fund’s first investment out of five that doesn’t involve a company with a mobile product.

Xobni, which moved its product from beta to full-release Wednesday, March 25, 2009, offers a plug-in for Microsoft Outlook that helps people organize and manage their email on the desktop. But the company has not released any mobile software and it declined to discuss any plans it has for such products, though the financing by Blackberry Partners Fund points toward that in the future.

“Our users are professional business users and Outlook users, and we’re not oblivious to the fact that they’re mobile users,” said Matt Brezina, co-founder of Xobni. “We’re not announcing plans to develop a mobile product, but this is an area that is interesting and goes with us understanding our users.”

Instead, Brezina discussed how Blackberry Fund’s strategic investors, which include RIM, Thomson Reuters and RBC Bank of Canada, would help Xobni sell its product to enterprise customers. The partners, especially RIM, have expertise in selling Blackberry products to businesses. The BlackBerry Partners fund is managed by RBC Venture Partners and JLA Ventures.

While the $150 million Blackberry Partners Fund is a mobile-targeted fund, the partners use that definition broadly, with the belief that the smart phone will become the next computer, the next wallet and the next “leisure lifestyle device,” said Kevin Talbot, co-managing partner of the fund.

“We fundamentally believe in the value proposition of Xobni and we obviously see that capability in the palm of your hand,” Talbot said. “There should be no reason to go back to the [desktop] computer and do a Xobni search.”

Xobni, which offers a free product, plans to release a premium paid product this summer, Brezina said. The company raised $7 million earlier this year from Atomico, Baseline Ventures, First Round Capital and Khosla Ventures.

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Even though Caris & Co. estimates are well below consensus, and they expect tight and reduced enterprise information-technology budgets and weak consumer spending to sharply slow Research in Motion's (RIMM) year-over-year growth in handsets and subscriber additions in calendar 2009, i.e., Caris & Co. sees BlackBerry continuing to post solid organic growth as one of the best-positioned platforms in smartphones, increasing share of the cell-phone pie.

Caris & Co. believes Apple's (AAPL) iPhone is actually the new gold standard, but with Research in Motion's stock more than 70% off its highs and trading at just about 12 times our calendar 2009 estimated earnings-per-share forecast of $3.26, combined with a solid balance sheet with net cash of more than $4 per share, they initiate coverage at Buy and see about 50% upside to a $60 target.

Although global handset units may shrink about 15% in calendar 2009 to 1.0 billion, Caris & Co. estimates smartphones grow from less than 12% to 15% of the mix, with their model that Research in Motion gains 3-4 more percentage points of smartphone share to about 20%, which would still be just about 3% overall.

Caris & Co. sees macro growth driven by: a) faster 3G wireless networks; b) handhelds now true communications and computing platforms; c) carriers aggressively subsidizing to increase average revenue per user (ARPU)/migrate users; and d) availability of richer content/applications.

Caris & Co. believes Apple's iPhone and Application Store set a high new bar, but BlackBerry has multiple competitive and technology advantages in super-efficient wireless data/messaging, enterprise incumbency/push e-mail, end-to-end security and unique Network on a Chip (NoC)-based service infrastructure; all of which Research in Motion is working to leverage for mass market media/content and third-party applications, including its new "BlackBerry App World" for distribution.

Gross margin has become Research in Motion's most critical near-term metric but Caris & Co. thinks it can at least stop sliding as the homerun Curve from calendar 2007 was followed by a too-packed rollout of brand new 3G models, Bold, Storm, late-calendar 2008, but Research in Motion now ramps up volume/component cost/yield curves, and high-margin recurring Services grow as a % of mix. Caris & Co. doesn't expect gross margins to recover much but doubt they now really need to for the stock to work.

Caris & Co. fiscal 2010 estimates well below consensus with EPS just flat year-over-year, but see 27% revenue growth and gross-margin stabilization enabling more than 20% EPS rebound in fiscal 2011/calendar 2010 estimates.

With Research in Motion about to report February-quarter results, already mostly preannounced, Caris & Co. model May-quarter revenue and EPS below consensus at $3.2 billion/75 cents, including 7.1 million units down quarter-over-quarter for the first time in 13 quarters but believe this is more than compensated by today's lower valuation.

For fiscal 2010, ending February 2010, Caris & Co. models revenue up 27% year-over-year to $14.0 billion and EPS just flattish at $3.38, but with gross margin stabilizing at new low-40% levels, then setting the potential for meaningful EPS rebound of more than 20% in fiscal 2011E, calendar 2010.

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A year ago, two new venture capital funds dedicated solely to smart-phone applications were received by entrepreneurs with great fanfare.

Kleiner Perkins Caufield & Byers unveiled in April its $100 million iFund for developers working on features for Apple Inc.’s iPhone. A month later, Canadian investors JLA Ventures teamed up with the Royal Bank of Canada and Research in Motion Ltd. to gather $150 million for the BlackBerry Partners Fund.

Instantly, the two funds received hundreds of pitches from entrepreneurs; Kleiner got about 1,500 in the first month alone. As the hype grew last summer around the opening of Apple’s iPhone App Store, many industry watchers and analysts predicted an enormous wave of investments for app makers, and a glut of new companies emerging.

Since that time, consumer spending has slowed as the world’s economy reels from a severe downturn. As a result, both JLA and Kleiner say their investment pace has slowed down considerably. “We tell developers, we’re not interested in funding lifestyle apps, or a garage business of one or two people,” said Matt Murphy, the Kleiner partner who oversees the iFund, which has so far backed five application companies. “We’re looking for apps with proven traction….This is not a grant fund.”

The sentiment is similar at BlackBerry Partners, which just closed its fifth app-company investment. “We’ve raised the quality bar higher than it was six months ago,” said Kevin Talbot, vice president of the Royal Bank of Canada and managing director of its venture division. “We’re more selective. The pace has slowed a little bit, but it’s just a pause. We’re not sitting on the sidelines. There’s no competition for deals, so we’re just taking things slower.”

Despite receiving thousands of pitches, the iFund has invested in just five developers to date: mobile social network Pelago Inc., home-security app iControl Networks Inc., mobile games publisher Ngmoco Inc., lifestyle-and-motivation app Booyah Inc. and marketing platform Gogii Inc. While the value of some of those deals weren’t disclosed, it’s clear much of the capital allocated to the iFund is still available.

BlackBerry Partners, which launched in May, announced its first three investments in October after looking at more than 3,000 companies. Including two other investments since then, BlackBerry Partners’ portfolio includes location-based city guide Buzzd Inc., mobile payment app Digby Inc., travel-management app MobiMate Inc. and analytics company Neuralitic Systems Inc. The fifth deal has been finalized but not yet disclosed, Talbot said. The lion’s share of the $150 million fund is still waiting to be put into play.

The slow evolution has been punctuated by sudden developments, however, like the $3.9 million investment last month in app maker SonicMule Inc., a company that, by its own admission, does not have a solid plan to monetize its popular apps.

New investor Granite Ventures led the round, joined by previous backers Bessemer Venture Partners, Maples Investments and company executives. David Cowan, a partner at Bessemer, said at the time, “I don’t even know what an exit looks like here.”

Smule makes, among other things, an app that enables users to blow into the iPhone and play it like a primitive flute. While a year ago that might have seemed like a risky bet, investors can now see exactly what kind of traction such an app has, and make a more informed decision.

“Smule is really smart about users, and how to engage them, and sell them their other products,” Murphy said. “They came out with a simple, lightweight, easy-to-understand [app], and they added a small, subtle social element. It was nice learning they did.”

Both firms said they are still overwhelmed with pitches from entrepreneurs, and that they will likely make app investments in 2009 at roughly the same pace they did in 2008, with four or five new investments each. The developers’ enthusiasm should only grow when Research in Motion opens its own storefront for BlackBerry applications later this month.

Google Inc. recently opened up an app store for Android-enabled phones while handset maker Palm Inc. did the same for its own smart phones. 

“We’re still bullish,” said Talbot of BlackBerry Partners. “The question remains, how do they monetize?”

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It's far too soon hang a "Do Not Resuscitate" sign on Dell's door.

For one thing, the company is sitting on $9.5 billion of cash, equal to $5 a share. Back that out of the stock price, and you're paying just $3.61 a share for a computer-wholesaling business that just netted $2.5 billion, or $1.39 a share in the fiscal year ended Jan. 30, and could earn $1.11 in fiscal '10. Average these estimates, and the business sports a price/earnings multiple of just under three.

You won't find Dell's other key asset on the balance sheet, but in the executive suite. Founder, Chairman and Chief Executive Michael Dell returned to lead the company about 25 months ago, and is busily crafting a turnaround strategy to see it through some of the darkest days the U.S. has endured in decades.

If the CEO can implement his plans, shares of Dell could get a new lease on life. For now, pessimism rules.

Amid the global economic rout, PC sales have plunged, and IDC, a market-intelligence firm that tracks demand, sees a continuing erosion. Both consumers and corporations have delayed purchases; the latter is particularly painful for Dell, as corporate buyers still account for almost two-thirds of its sales, which topped $13.4 billion in its latest fiscal year.

Dell is more exposed to the PC slump than either Hewlett-Packard or Apple, both of which also recently reported disappointing earnings. The toll was apparent in Dell's fourth-quarter results: Revenue fell 16%, to $13.4 billion, and earnings from operations slumped 30%, to 29 cents a share, two pennies more than the market's subdued expectations.

In a conference call with analysts, Dell executives focused on the company's cost-cutting initiatives, particularly a plan to eliminate $4 billion in costs in the four years ending 2011. In the past three years, Dell has lost the competitive edge it enjoyed for so long from its low-cost assembly lines, mainly because rivals like HP have been opening even lower-cost plants in China. It's Dell's turn to play cost catch-up.

Dell's other turnaround efforts have borne little fruit so far. Plans to boost higher-margin server and services sales have stalled, while a deliberate move away from direct consumer sales via the Internet has flopped. Although Dell PCs can now be purchased in 24,000 retail outlets, Dell gets only 2% more revenue from the consumer than it did a year ago.

Nothing came of last year's carefully leaked rumors that Dell would try to leverage its brand name with a planned MP3 music player and smart cellphone. That's a good thing. It's difficult to see what Dell could bring to a party that includes Apple's iPod and iPhone, and Research In Motion 's BlackBerry.

"A revitalized Dell must first accept that the Dell of 1999 is gone forever, and that the company must go down a new and different road to prosper," says Richard Kugele, an analyst at Needham.

First, says Kugele, the company should accept that expansion into consumer products like smart phones would be stupid, as would any grand plan to try to grow consumer PC sales. It would be best, he argues, for Dell to expand in its core commercial market via the sale of higher-value software and services.

But the only way for Dell to "really make itself over" would be through an acquisition, he says, noting that NetApp, a leading provider of storage and data-management solutions, and Accenture might make logical targets.

For that matter, Dell itself could become a takeover target, given its sterling brand, entrenched manufacturing network and not least, that stash of cash. That the patient is under the weather is all too clear. But nearing death's door? Not a chance.

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Picking fruit off the ground is a chancy affair. After the collapse of 2008, Research In Motion’s shares have rallied strongly this year, helped by the popularity of its new BlackBerry Storm mobile phone. Unfortunately, a warning that margins and earnings for the fourth quarter would be at the low end of expectations sent the stock tumbling 17% on Wednesday, February 11, erasing half the recent gains.

RIM’s problem is that profits are not growing at the same pace as sales. Turnover in the year to February will be almost twice that of 2008, which was in turn double that of 2007. Operating income will have merely tripled during the same period, and it is not clear at what level those shrinking margins will stabilise.

While new subscribers are signing up at a record rate, economic weakness appears to be hitting the level at which existing customers, mostly businesses, are choosing to replace their BlackBerrys. It is also hard to avoid the suspicion that as RIM targets a greater share of the consumer market, discounting and marketing support for its telecoms operator partners is being used to generate subscriber growth.

Operating margins are likely to fall to about 20% this year, typical for makers of smartphones, from 29% in the previous financial year. If RIM can hold the line at this level then, trading at a 16 times earnings multiple, RIM would be cheap for a company still expected to increase sales by a third this year.

However, the smartphone market is becoming highly competitive as every handset maker trumpets this niche as the only source of recession-proof growth. As fancy touch-screen phones proliferate, prices will necessarily suffer, and RIM shares are unlikely to move in the opposite direction to its margins. Watch out for the thorns.

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Shares of one-time industry leader Motorola (ticker: MOT) have taken a beating recently, as it struggles to remain relevant after its products have given up their former status as the "it" phones to rivals. However, the two heads of the telecom company signaled their continued belief it Motorola by purchasing $2.7 million in stock.

On Friday Gregory Brown, Motorola Co-CEO and CEO of the Broadband Mobility Solutions unit, purchased 525,000 shares for $2 million, an average of $3.84 a share. Mr. Brown continues to own 2.2 million shares. Also on Friday, Sanjay Jha, Motorola Co-CEO and CEO of Mobile Devices unit, purchased 200,000 shares for $734,480, an average of $3.67 a share. Mr. Jha now owns 3.9 million shares.

Both own stakes that are less than 1% of the Schaumburg, Ill. based company's shares outstanding. The purchase was the first for both insiders. Brown has been at the company the longer of the two, joining in 2003. Jha, who came to Motorola in August 2008, was previously the chief operating officer at Qualcomm (QCOM).

The purchase by Brown is the largest by an insider at the company in at least six years, and both buys represent the first significant inflows at Motorola in 4 years, according to InsiderScore.com. Prior to the transactions, insiders had heavily favored sales of shares to purchases.

Motorola was once the toast of the industry when it came out with the must-have Razr phone. However, later efforts never matched the Razr's initial popularity, and customers began to migrate to Research in Motion's (RIMM) BlackBerry and Apple's (AAPL) iPhone offerings.

Shares of Motorola, which fell 35 cents to $3.90 on Tuesday, February 10, 2009, have seen a modest recovery since they slipped to a 52-week intraday low of $3 on Nov. 21. However, given the stock's year-ago high of $11.92, it has been a difficult year. In the last 12 months, Motorola has a 63.1% haircut. By comparison, the Dow Jones U.S. Telecommunications Index has lost 31%, and the overall market is down 34.6%.

Ben Silverman, director of research for InsiderScore.com, notes that the purchases show Brown's and Jha's commitment to Motorola, demonstrating their belief in cost-cutting measures to be implemented in the near term, as well as the ability of new handsets to possibly stem the tide of sales losses to companies with more sought-after products.

"We can appreciate [Brown and Jha] sticking to their guns and the buys are certainly noteworthy, especially if you believe that Motorola can cost-cut and innovate its way out of a quagmire," he says. "The prevailing sentiment, however, is that it will need to do something big, and do it soon in order to avoid having the Mobile Devices [unit] sink the ship."

Silverman says he would also like to see more insiders stepping up and showing confidence. The purchases by Brown and Jha came just days after the company reported disappointing fourth-quarter results. Motorola lost $3.6 billion, or $1.57 a share. In the year-ago period it had posted a profit of $100 million, or five cents a share. Even excluding one-time items, the company lost a penny a share while analysts had predicted a break-even quarter.

The company also said that it was expecting a larger loss in the first quarter of 2009 than analysts had expected. Motorola also suspended its dividend. Thomas Weisel Partners analyst Matthew Sheerin maintained his Market Weight rating on the company following the earnings report.

"Motorola's fourth-quarter results exemplified the dynamic nature of the company, with the two non-handset segments showing strong profitability in a tough environment, while the mobile-device group lost further market share and profitability worsened," he wrote in a research note. "With nearly all of its end-markets softening considerably, the picture won't get much better in the first half of 2009; in fact, we expect profitability in the first half of 2009 to be down year-over-year despite substantial cost cutting."

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