With RIM closing at $65.43 on October 2, down some 25% from its September 23, high of $88.08, it may be profitable to reexamine the underpinnings of Wall Street’s deep disappointment with the company.
Many commentators have created the impression that Apple (AAPL) and Palm (PALM) have all but stopped RIM’s growth. A reexamination of the facts shows that in 2Q 2010 RIM's subscriber base reached 32 million, up a net 3.8 million for the quarter and a net 13 million over 2Q 2009. Yet some bears groused endlessly that they wanted an additional 100,000 subscribers.
Moreover, revenue for 2Q was up 37%. But the Wall Street bears somehow blew this off too. These were the very same bears that frequently complain in other contexts they just don’t see top-line growth. Well, look at RIM! RIM’s 2Q revenue growth was driven by sales of 8.3 million devices up from 6.1 million a year earlier. There is no way the bears can argue that kind of revenue increase is priced in!
Many of those who were disappointed were especially troubled by RIM’s forecast for 3Q 2010. Net subscriber additions were forecast to increase by a mere 4.0 to 4.3 million. Device sales were expected to increase to 9.5 million (the mid-point of guidance) up from 6.7 million in 3Q 2009. In fact, RIM’s guidance suggests that device sales revenue for 3Q 2010 will be up some 35% over the prior year assuming a average sales price (ASP) of $320 (we will get to this) Not bad growth in light of : (1) the stiff competition, (2) the economy, and (3) RIM’s focus on maintaining a sound gross margin.
Still, some of the bears say that the real problem is RIM’s profitability. They imply that the smart phone is becoming a commodity and profitability is all but over. Hello! RIM’s 2Q gross margin was 44.1% and the company is forecasting 43% for 3Q. Did they ever check on Apple’s gross margin? Well, Apple’s companywide gross margin was 36% (in the quarter ending June 27) and they expect a 34% companywide gross margin for the current quarter. Incidentally, Wall Street did not punish Apple for the forecasted decrease.
What about RIM’s 3Q projected ASP of $320? This is a huge issue with the bears because it is down from $345 in 2Q. The decrease is driven by new lower price models such as certain BlackBerry Curve models. Whether the ASP will stay down in future quarters will depend on market conditions and the impact of RIM’s addition of some new upper end smart phones late in 3Q. But when you take into consideration the increase in the number of units sold, and the relatively high 43% gross margin, total gross margin grows rather nicely.
On its June 27 conference call Apple was asked how its $99 dollar iPhone sales were compared to other price points. Do you know what Apple said? They were mum saying only that it was confidential information. And Wall Street thanked them for their non-answer. The answer really did not matter because Apples’ phone revenue and phone profits were way up. Apple understands elasticity. Not only have they come out with the $99 iPhone, they have also recently cut the price of their MacBook Pro from $1,999 to $1,199 and have priced their iPod Touch extremely aggressively so they could “get that platform out there.”
RIM gets the concept of price elasticity and getting their platform out there too!. But somehow many on Wall Street view RIM differently even though like Apple, RIM’s gross margin continues to grow at a remarkable pace. Both companies know that if they keep a watchful eye on gross margin while expanding the market their profits will grow handsomely. On the 2Q conference call RIM’s management warned that price skimming was shortsighted. By contrast they talked about the benefit of establishing and holding lead position in the expanding market. They called this the "land grab."
The RIM sell-off is an error that the sharp minds on Wall Street will correct sooner rather than later,. With the stock at $65.43 there is a lot money left on the table. Read calmly, nothing in RIM’s 2 Q2010 earnings report suggests RIM is anything but a high growth very profitable company. I am staying long RIMM.
The RIM sell-off is an error that the sharp minds on Wall Street will correct sooner rather than later,. With the stock at $65.43 there is a lot money left on the table. Read calmly, nothing in RIM’s 2 Q2010 earnings report suggests RIM is anything but a high growth very profitable company. I am staying long RIMM.