RIMM Sinks, I’m Holding On

On Thursday, Research In Motion Limited [RIM] (Nasdaq: RIMM) reported second quarter results that were in line with guidance but slightly below analyst estimates. A major reason for missing estimates was the delay of the BlackBerry® Bold in the U.S. market due to battery and 3G connectivity issues.

Q209 revenue was up 88% y-o-y and 15% q-o-q to $2.58 billion on shipment of 6.1 million devices. Net income was $495.5 million or $0.86 per diluted share, versus $482.5 million, or $0.84 per diluted share in the previous quarter and $287.7 million, or $0.50 per diluted share last year.

RIM added about 2.6 million net new BlackBerry® subscriber accounts, and the total BlackBerry® subscriber account base was approximately 19 million. RIM is benefiting from the smartphone trend as described in a Q208 Gartner report. Smartphone sales grew 126% and the smartphone market share doubled to 17.4%. Nokia (NOK) was no. 1 with 47.5% market share, but its growth rate was just 8%. Apple (AAPL), on the other hand, saw its share decline to 2.8% as it cleared out first generation iPhones before the iPhone 3G release in July.

With its killer ‘push’ email application, RIM is well positioned in the smartphone market. However, it needs to innovate further and make its UI simpler, especially scrolling. We still haven’t seen anything that beats how iPhone deals with scrolling. With increasing competition (G1, the Google (GOOG) Android phone is the latest buzz), differentiation will be the key, especially for the software, OS and the UI, key aspects of the iPhone challenge. In the earnings call, there was mention of “unannounced product on a new platform” to be released later in Q3. I guess that would be the touchscreen model Thunder, and it remains to be seen whether this phone has any substantially innovative features.

Last quarter, we saw how increased marketing expenses were affecting RIM’s bottom line. That trend is continuing, as there are new product launches. Products on new platforms have a low profit margin while the new Pearl Flip, which uses an existing platform, has a better margin. The weakening dollar is also contributing to higher component costs. Overall, third quarter profit margin is expected to decline to 47% from 50.7% in Q1 and Q2. Device ASPs were approximately $344 and are expected to be the same in Q3.

For the third quarter, RIM expects revenue in the range of $2.95-$3.10 billion. EPS is expected between $0.89 and $0.97. The average analyst estimate was EPS of $0.98 and profit margin of 50%. The stock is currently trading around $73.

I seldom find a complete echo of my sentiments in Jim Cramer, but on RIM, I happen to share his feelings:

My trouble is that I like Research In Motion too much. I can’t recommend the stock in this environment but I think the company will have good growth. If you already own it, hold it.

Well, I am holding my shares.

Disclosure: The author owns RIMM.

Comments

[User 207572:]

I played with iPhoen and blackberry for a month. The I dumped all my RIMM shares. It is not because RIMM is not strong short term. The problem is that RIMM's model does not work any more. I don't know whether you know technology or not. I know investment and technology well. I actually invested in RIMM since it went public. I made lits of money by holding RIMM and AAPL last year too.

When I invested in RIMM since IPO, all pros were against me. They short RIMM heavily. Now they are all for RIMM. So strange because I thought the pros should know better. Sadly, they don't know a thing.

Here is the theory. I know you don't think I am right. But I tried:

When RIMM was young, people didn't think a email pager is a big deal. I knew it was big because people want "in writing anywhere". It is important for corporate world politics. Voicemail is not good enough. So, even RIMMs' device didn't have cell phone function. People still needed it, not to mention email and voice two-in-one. There were lots can be said why PALM, MSFT failed. But that's not the key point.

Why RIMM is doomed now? 1) It doesn't have iTune function - people want iPod and Cellphone in one. 2) Even it has iTune, it is not iPod. 3) It's OS cannot attract 3rd party software developers. RIMM tried this almost since the beginning. 3) Blackberry focused on technical features and security. It is not enough now. People want usability and style. 4) If APPL is fashion designer, RIMM is a tailor. They both make things for people to wear.

So, RIMM will first see its consumer market share stop growing, then shrink. This will kill its P/E ratio. It will take several years to see what will happen to its corporate world market share. I bet, eventually, it will be phased out or stayed as an old corporate email too. You know each company has lots of those old stuff. You don't need to see RIMM die. All you need is a slow growth story - then RIMM share will be around 40 - 50 dollars.

I doens't matter how RIMM's share perform short term. Don't look at the sales numbers short term. You have to see deeper than this to be a good investor.


Well, I tried. It's your money.

2008 Sep 28 06:55 AM

[buyitcheap:]

RIMM's been pulling this kind of bs since the early 90s - it's a good trading stock, that's all. I recall many Lucent holders expressing similar sentiments. At least attempt to protect yourself buy holding Leap Puts around 60. This stock is heading to 52.

2008 Sep 28 08:48 AM

[mollytjm:]

i think RIMM will hold on for awhile...but they will keep trying to play catch up with Apple's new products. The innovation is just not up to the competition with Apple and that is their main competition. i'm long APPL for that reason...i think in the long run, it will be Apple that does well.

2008 Sep 28 11:11 AM

[neutrino23:]

RIMM's first and, to some extent, second quarters benefitted from Apple not selling iPhones in anticipation of the new iPhone coming out. RIMM's financial Q3 runs through november. That will be the first full quarter competing head to head with Apple.

I agree with Mr. 207572. Apple is fundamentally positioned to bring dramatic new features to the iPhone platform over the next few years. They have fantastic technology based in OS X. They don't have to develop it. It already exists. They just need to apply their considerable industrial design and marketing power to decide how to employ this resource. RIMM will be playing catch up from now on. Where are they going to acquire a Unix platform like OS X along with all of the time tested technologies layered on top of that? Apple is not dealing with new technologies when they bring video or audio or other technologies to the iPhone. They are applying technologies that have been developed over the past decade or so and tested in millions of installations around the world. On top of that Apple's acquisition of PA Semi and its past experience in semiconductor design will allow them to design custom chip sets for better power, battery life and lower cost. On top of that Apple's market power allows them to include tie-ups with other companies that RIMM will find hard to match.

Disclosure: long AAPL

2008 Sep 29 12:45 AM

[Love Rimm:]

Mr. 207572. It is obious that you are a apple fan. the only music player that exists is an ipod..."NOT". It is also obious that you do not listen to developments in other companies, other than apple as well. RIMM has put in more investment dollars than apple has for R&D. Both have funds for software developers to both there platforms. In the Business world, I have been hearing more partnerships and software initatives for blackberry than the iphone by probably 5 to 1 since you insist on comparing rimm and apple. Apple makes a good product, but don't pretend you know what your talking about when it's obvious you only have eyes for one company and you don't know the half of others. This pertty well goes for all you apple lovers that have posted on this bloc.

2008 Sep 29 02:44 AM

[Apple at 60$:]

"In the Business world, I have been hearing more partnerships and software initatives for blackberry than the iphone by probably 5 to 1 since you insist on comparing rimm and apple"

Where did u find that data from? Also, you've been "HEARING" " "PrOBABLY" 5to1. Nice try. if you cant post anything reliable, pls dont post at all

2008 Sep 29 04:43 PM

[User 207572:]

I, Mr. 207572 just like to make money. I currently do not own RIMM AND AAPL. I just want to help you guys to give my view since I invested in both companies for a long long time.

I have been hearing RIMM is trying to atrract developers to wrire software for corporate world and consumer for 8 years. See where they are now.

RIMM's revenue from consumers is a big share comparing with its revenue from business.

It is amazing few people want to short RIMM. IN 2002 summer, when market hit bottom, everyone wanted to short RIMM. AMAZING.

2008 Sep 30 08:26 AM