RIMM: Q3 Earnings Better Than Expected, Still No Analyst Consensus

Although Research In Motion Ltd. (RIMM) posted better-than-expected third quarter earnings on Thursday, analysts were still mixed on the company’s outlook. The shares were sharply higher on Friday.

It’s now a margin game. With a slew of new devices launched and heavily marketed, RIM has now seen its gross margins cut to 45.6% and expects it to fall to around 40% to 41% in the next quarter.

RBC Capital Markets analyst Mike Abramsky said in a note:

Positively, this positions RIM to gain share and counter intensifying competition amidst strong economic headwinds. Negatively, the higher mix of lower- margin new Smartphones pressures GMs (scale efficiencies help, but won’t fully offset).

Relying on lower gross margins means the company is now a top-line growth story, said UBS analyst Jeffrey Fan.

“The big wild card, in our opinion, is operating expense. If revenue were to weaken, RIM would likely be able to cut out a significant amount of cost,” said Mr. Fan, who lowered his price target on RIM shares from $50 to $42 with a “neutral” rating. “However, based on management commentary, we believe this is unlikely near-term.”

JP Morgan analyst Paul Coster believes RIM’s gross margins and overall business could begin to stabilize once volumes of its BlackBerry Storm matures and economy recovers.

Mr. Coster said:

The company’s product line up and application portfolio is expanding rapidly, suggesting that positive momentum can be maintained at the expense of Tier 1 OEMs that are otherwise constrained. In the broader context of enterprise and consumer technology, this remains a compelling growth stock, in our view.

He maintains his “overweight” rating on the stock.

The impact on RIM’s margins may also be due to the beginning of a price war against other smartphone vendors such as Apple Inc. (AAPL) and HTC Corp. and it may not recover in the near term, said Citigroup’s Jim Suva.

Mr. Suva said:

We think most investors will wait to see how the February quarter actually plays out and may even want to see May results since that should be sufficient time (~7 months into the launch of Storm and the domestic launch of Bold) to gauge RIM’s success. In the meantime, we think shares won’t be significantly revalued higher given the decelerating EPS growth.

He has raised his price target on RIM from $43 to $46 with a “hold/high risk” rating.

Still, Research Capital’s Nick Agostino remains bullish on RIM and feels the company’s gross margin guidance may be conservative.

Mr. Agostino said:

As RIM seeks volume in the channels and favourable channel placement to counter any competitive threats, we believe that the company is finding it increasingly difficult near term to pass on higher costs associated with newer products.

It is in turn absorbing the costs to gain aggressive pricing and marketing support from its carrier partners – as such, it is targeting volume growth and share gains from the likes of Nokia (NOK), Motorola (MOT) et al, in its new business model to drive top-line expansion and profits.

Mr. Agostino reiterates his “buy” rating on RIM shares with a $82 price target.