Will RIM's Gamble Pay Off?

Research in Motion (RIMM) is expected to launch three new phones in the coming months: the Blackberry Bold (new to the US, already available internationally), a clamshell phone called the Pearl Flip, and a touch screen device expected to be called “The Storm" (pics). Unfortunately, new product launches – between component parts, subsidized pricing and promotional costs – can be expensive.  As a result, the company warned late Thursday that gross margins and profit will suffer in the third quarter.

Co-CEO Jim Balsillie characterized the situation as a “land grab” and justified the increase in near term expense as, essentially, an opportunity. It’s similar to the story pitched in June when the company showed sales and marketing expense up heavily. But the market didn’t treat that first glimpse as foreshadowing, and they weren’t convinced with the reiteration. The market also wasn’t completely satisfied with the rest of RIM’s earnings news.

By midday Friday, the stock was trading near $70 a share, well below its fifty week low of $80.20.  From Thursday’s market close of $97.53, it was down more than 25%.

Analysts at Deutsche Bank and RBC both downgraded their ratings.

Based on the new forecasts, RIM is expecting Q3 earnings in the range of 89 cents to 97 cents in the quarter ending November 29.  Analysts had previously expected 98 cents. Gross Margins are forecast by the company to come in at 47% instead of 50%. Revenue is pegged at $2.95b to $3.10b, ahead of analyst consensus for $2.94b.

The rest of the earnings news was not as negative as the sell-off would suggest.  Sales for Q2 ended at $2.58b, up from $1.37b in the same period last year. And despite continued escalation in sales and marketing expense, net income was $495.5m, or 86 cents a share – up from $287.7m (50c/share) for the same period last year.

Important customer acquisition and distribution metrics were also positive. For Q2, RIM had net subscriber additions of 2.6m, largely in line with estimates. Total Blackberry subscriptions were in at about 19 million. 42% of those total subscribers were non-enterprise users – a number indicative of greater penetration into the consumer market. Globally, about 70% of RIM’s customers came from North America – the fastest growing smartphone marketplace.

It can be dangerous to spend heavily in the near term to chase uncertain long term results. It can also prove sound investment. Looking ahead, RIM is taking a gamble. If the product push pays off, it could provide substantial upside compared to the post-sell off pricing. “If” being the operative word.

Critics will point out economic and competitive pressure could pose trouble. It’s worth noting, though, the smartphone marketplace is growing in the US. A recent study by Gartner put 2nd quarter expansion at 78.7% year over year. Similar data from NPD showed U.S. customers bought 9 million phones, an 84% year over year increase, in the first seven months of the year (January to July). Smartphones accounted for 19% of use phone sales – another growth metric. Adding to that, the revenue they generated was up 71% year over year.

Among the companies chasing smartphone territory, RIM has been near the front of the pack. For the first seven months, the same NPD study placed them as the top vendor in the U.S. (Apple (AAPL) was second). Gartner’s global Q2 study had RIM in second, behind global leader, Nokia (NOK). Apple didn’t make the global top 5 - but that may change with wider global distribution partnerships now in place.

RIM makes a good product and is seeing impressive subscriber growth. Then again, the iPhone is also a very good product. And there’s the as yet unproven Android based phones, touch models coming from Nokia and the general state of the economy pinching consumer and enterprise spending.

To gamble, or not to gamble - that is the question.

Comments

[RK:]

Land grab does not apply to the smartphone market. These devices are turned over every 1-2 years due to people dropping the phones (like me) or contract expiration. Market share gained one year can vaporize in the next. The smartphone market is not the PC market, which enjoys a much longer replacement cycle and people do not like to lose their investment in their software and their files. The consumer drives the smartphone market and he/she will keep flocking to the coolest and best phone of the moment. Device maker should maximize their profit every year, thereby to increase their potential to invest more in R&D and to stay ahead of competition.

2008 Sep 28 11:18 AM

[pennystocks...:]

"It can be dangerous to spend heavily in the near term to chase uncertain long term results." Basically, that means that a company should never develop new products. If Henry Ford followed your logic, we all would still be driving around with Model Ts.

2008 Sep 28 01:11 PM

[cabaretvolt...:]

Can RIMM survive and thrive on fickle consumer market dominated by Apple, Samsung, Nokia and even Palm? I'd say no and they'll have to defend against the big boys encroaching the lucrative corporate market. You can bet that Symbian and Microsoft along with Nokia and Samsung will be subsidizing the corporate as well as consumer market (cash strapped).

I bet Apple is working on "cheaper" iPhone. My company began to switch over to iPhone and can't wait to get mine early next year. We went from Treos to Blackberries to now iPhone.

Every dog has it's day and it's all down hill for RIMM IMHO.

2008 Sep 28 02:53 PM

[Evan Grey Owl:]

Don't confuse the effects of market manipulation with the value of a company. By my simple-minded calculations, Rimm was trading roughly around $100 in the weeks before Q2 earnings report. Loss of $30 per share on 565 million shares suggests that wealth in the amount of roughly 16.95 Billion dollars was re-distributed under the guise of 'market reaction to a disappointing earnings report'. Well, I don't buy it and this is one of several cases this year that point to market manipulation. Maybe a 10% drop would have been justified short-term, especially with the economic back-drop. But what is going on seems like a large holder or very large holders fixing this in advance. And if these analysts are worth their salt, where do they get off changing their stories overnight? Didn't they have any basis in reality for their numbers in the first place? Downgrades en masse can tank a stock. How does it profit the analysts who exaggerated expectations in the first place, to severely punish a company with a public downgrade because the analysts' numbers were wrong? The results were mostly in the range RIMM previously indicated. Becoming hysterical about small misses looks awfully like a gimmick to acquire shares at fire-sale prices. Let's keep an eye on the data and see where the biggest selling originated, when the Sept. 30 data become available. And then where the biggest buying originates at these 70's or even 60's levels. Our congress sure is right about lack of regulation.

2008 Sep 29 02:58 AM

[Apple at 60$:]

If they lowered their target for AApl from 178 to 115, why didnt they downgrade RIMM and other tech stocks?

2008 Sep 29 02:46 PM