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Friday, September 26, 2008

Research In Motion (RIMM) 2Q:2009 results


Revenue in line. EPS in line. Subs close but not quite. Despite a series of product delays (Bold, Thunder [now called Storm]) and the flip phone for T-Mobile, RIMM managed to eke out a decent quarter. The guidance, however, was an utter blind-side.

Product gross margins will head down 350 bps for Q3 to ~47% and will head to the mid 40s for 2010. Research In Motion makes a great product – the Blackberry. One of the wonderful things about that business for them has been that they're all pretty darn similar – they use similar interfaces, similar internal parts, the same software. It creates manufacturing efficiencies – when you make millions of the same parts, you get better economics.

And along came the iPhone. The iPhone hasn't hurt their current business yet (though it's probably a factor in the lower outlook). What it did do, though, was cause a massive ripple in their design. No longer will the Blackberry be a somewhat clunky, slightly slower brick with tiny-size chicklet keys that handles email better than any other handheld device out there. Now they're doing flip phones, they're doing 3G, they're doing touch screens. They're trying a bunch of different things to try to bring new consumers onto their platform. In doing so, they've given up their manufacturing efficiencies and consequently gross margins are coming down substantially. Furthermore, they've got to be forecasting further price competition on the horizon as their guidance suggests any efficiencies they pick up over time will be eaten up by lower top-line pricing.

The company has said they don't feel the need to rush to respond to the iPhone… but that doesn't seem plausible. They announced products (3G, touchscreen) to stem the tide before they were ready – both the AT&T Bold and the Verizon Storm slipped out of the quarter because they weren't ready on time – right there, that's rushing.

Promotional activity is extremely high right now heading into the holiday selling season and will likely trail off early next year, creating some difficult sequential sales comparisons going forward. Though no one touched on it in the Q&A that I heard, their guidance of flattish corporate server software sales seems very aggressive – the financial vertical will remain extremely horizontal at present and shows no sign of improving. There's excess capacity there and the assets are in bankruptcy. And let's face it, banks and brokers are not going to be hiring again soon.

The stock is broken in a big way. Numbers will likely head down to $3.60ish. I think this market is nasty, people are hurting, RIMM is widely held. Multiples are bleeding as the economic woes are likely to overhang business for several quarters. Expect the stock to languish for a while. Stock could be $60 by the time the non-promotional flat quarters roll around early next year. I'd say $75 is a reasonable long-term target price. Sadly, that's a couple of bucks below where its trading now. And people are trapped and likely to stampede. Great company. Bad stock. Stay away.

(Sorry this wasn't posted pre-opening.)






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