Research In Motion (RIMM) 3Q:2009 results

Last quarter RIMM had guided significantly lower. I suggested that there were significant margin issues developing due to the variety of products they were offering – Storm and Bold are totally different base designs than the existing line. Efficiencies of scale tend to decline as design breaks out of the box – the Bold with its 3G internals and the Storm with its multi-touch screen will cost more to produce due to their less than standard parts. Economies of scale evolve from doing the same thing repeatedly. RIMM makes a lot of QWERTY keyboards for their phones and has been doing it long enough that its cheap for them to do. By tangling with the touch screen, they've opened themselves to a whole lot of new costs and subsequently lower margins.

After preannouncing lower results for the current quarter on November 2, RIMM slightly missed consensus revenue figures due to product hiccups getting out the Bold and the Storm. They guided to much stronger revenue for 1Q:2010 (3.2 – 3.3 bil versus consensus of 2.9 bil) but EPS guidance goes up only slightly to .83 - .91 versus consensus of .83. Gross margins are the culprit – guidance of ~41% is significantly below the ~46% the street has modeled. Some of this is due to well-publicized Storm issues – its slow as hell and subject to false-clicks that make it difficult to navigate for the user. As this phone is positioned as an iPhone challenger, difficult navigation is a gigantic problem versus expectations of buyers. People are expecting an smooth as glass iPhone-like experience and instead their touchpad is like flypaper and keeps sucking them into the wrong commands. Software updates are ongoing and the problem is being corrected but the damage is done on some level – the media has thrown out numbers like 40-50% of Storms are being returned within the 30 day window. Despite this, the product is in short supply.

I worry their revenue guidance for 1Q:2010 will prove to be aggressive – they weren't as big in consumer in years past and they likely will be surprised by the magnitude of the post-holiday drop as the economy sets in and the financial layoffs discourage upgrades – blackberry has been historically very dependent on the financial community. Some of the lower margin guidance is likely related to lower anticipated enterprise sales of software – there is excess capacity on Wall Street now.

Success on new products has the effect of reducing buyers of the other lines: they're getting lots of customers for the products that are more expensive for them to make and selling less of the really profitable products. Normally this would be great but as the Storm is an "exclusive" product for Verizon, there won't be the same kind of efficiencies on it going forward. When they start to ramp touch screens for other carriers, there may be some economies of scale.

In the meanwhile, numbers will head lower on the margin guidance. The stock is cheap relative to its growth rate should margins stabilize and begin to ramp again. I'm sidelined presently and I'll be looking for signs of positive inflection. I don't want to buy the stock here. I want to buy it at $30-31. Technically that's where I think its going. It'll also be pretty cheap if it gets there as earnings estimates range from $3.00 - $3.65 for 2010.

Fed: We’re going to zero

Yesterday the Federal Reserve cut the discount rate to 0.50%. They talked about the diminishing threat of inflation and a commitment to promoting price stability and growth. There are unprecedented credit problems within the economy at so many levels. Previous comparable real estate troubles resulted in significant US stock market declines from 1929-1932 (down 90% peak to trough). The Fed pursued a much tighter and more restrictive policy then. The good news is the current Federal Reserve has proactive policy in place to combat the biggest threat to financial stability this country has ever faced. The bad news is it may not matter. The administration (Treasury and Fed) continue to try to loosen credit conditions by replacing frozen credit vehicles with fresh money, as if the problem is that there is not enough lending. There remains too much credit outstanding and it will require some time to repair the damage to consumer balance sheets. Americans are rightly more concerned about maintaining what they have than picking up new credit obligations. It's not the lack of lending – it's the lack of desire to borrow. Businesses borrow to fund anticipated growth opportunities and businesses see no growth opportunities at present – most seem to expect a dour 2009 at least. That will not spur demand for loans, just for refinancing. It's not about growing here – its about surviving.

Perhaps a better comparable to our current woes is Japan, which burst a real estate bubble in 1990. Interest rates in Japan did not hit zero percent until 1996. There was a brief rally during the cuts but those rallies became the highs over the next several years and not the lows in the stock market. Though the Nikkei's slide had already brought it from 38000 to 20000, it continued to spill for the next several years, reaching a low in the low 8000s – a decline of some 77% and 13 years from its 1990 high.

NPD data out - Macs down a little in November

After +28% y/y sales gains in Macs in October on the back of new Macbook releases, sales slowed. Piper's piece says now they're running up 11% y/y for the December quarter. What he's not saying is November was down 1% y/y. Big deceleration... lot of guys hiding there. Apple still holding up a lot better than you'd think -- they're priced at twice the competitive offerings. Nonetheless, the economy even catching them. Goldman had a very prescient call this morning downgrading the stock.

Make ‘em squirm

Too big to fail, too fat to live. The automobile sector employs hundreds of thousands of people, and that's just the ones getting paid for not working. They can't get let 'em go under. Conversely, they're totally corrupted. They've spent hundreds of millions of dollars to avoid having to make more fuel efficient cars. They show up to beg for billions in private jets. There's something utterly wrong with the way they think. They think the problem is we're not buying enough cars and not that they're making too many. It's arrogance on a grand scale.

The Bush administration is prepared to give them the bare minimum of what they require to survive. GM has estimated they need 9 billion to get to March. Chrysler says they need 4 billion. Ford says they can get by but they'd really love some money anyway. So they're going to give them 15 billion. This is probably correct – if they gave them the 34 billion they asked for, it wouldn't force much change. By giving them as little as possible, it makes them address the model, not just the cash requirements. It also makes them come back and beg. They should have to report on their progress, on their cost improvements, on how they're going to address a 10 million car run rate instead of the artificial 16 million rate they're geared to.

Really, though, the auto industry suffers from massive overcapacity. They produce better cars than they did. And those cars last longer. This is a great example of the structural problems created by the credit bubble. As financing was so readily available, perfectly good cars were retired because it was so easy to just get another one. The used fleet is enormous and quite young and able. We don't need all the cars they produce and without the easy credit we can't possibly consume them. If they start the credit flowing there again, it will just continue to create unnecessary overcapacity there. This harkens back to the Depression – their business is geared towards a much higher volume than the economy requires due to shamefully lax credit conditions for so many years.

I'm trying to buy a car now. It's an interesting exercise. The car dealers are really suffering. They're still long a lot of 08s and the 09s are not moving either. I was offered an 09 for 1k under invoice price last week. The dealer is already freaking out that he's not going to be able to sell his 09s… and its still 2008. What about the dealers? Does that 15 billion dollar package do anything for them? Probably not. With auto sales down 40% there's probably more inventory than ever and with people hunkered down, the used market is the place they'll turn for bargains. New cars are in trouble till the existing fleet gets older and retired. At least, that's what should happen. Maybe they'll come up with some manipulative stimulus package to get people to keep buying new crap they don't need. That seems to be the overarching intention of the government intervention so far.

The auto executives will be back in 3 months and they ought to be. It'll be Obama's problem and we're probably better served having Obama deal with it versus having the current administration float them for any longer than they have to. These companies need to rationalize their business models, not just feed money into their bloated manufacturing lines and pension funds.

Semis rally on bad news

Broadcom, Altera, National Semiconductor, Integrated Device Technologies and Texas Instruments are all up sharply after guiding estimates well below the street. Does this mean it's time to pile in?

The business environment is perhaps the worst I've seen in 25 years of watching the market. Valuations are telegraphing major estimate cuts for next year. And this seems right to me. And today, the market is saying there is enough conservatism in investor sentiment that even 30% reductions in outlooks for semiconductors are acceptable and that these rates of decline are unsustainable. And I agree. They won't see these kinds of drops in their sales consistently.

This move today comes after a 20% rally off the lows in the SOX. We're in the dead spot between Thanksgiving and Christmas. The conference presentations I'm listening to don't suggest any kind of imminent uptick. In fact, it looks like semi inventories were relatively elevated coming into the quarter and the reductions in order patterns are appropriate.

I think semis will start to work higher when order rates begin to pick up. At least, historically, that's what makes them work higher. We are still seeing cuts. We have no clear picture on OEM demand going forward. I suspect that the economy has been hampered enough that Cisco and Dell will see no immediate snap back to business. I think without a snap back in business, the OEMs will force the semis to live hand to mouth – like they've done in the past.

Q1 is typically down for technology for a number of factors but those have become more pronounced in recent years as electronics have become a much larger mix of holiday shopping. I assume no bounce in the early days of January… and I expect further disheartening outlooks from PC and handset makers will keep a lid on any kind of sustained rally. Gross margins literally are just cracking this quarter for many semi companies. There's no sense of a near-term bottom in those and gross margin is what makes these stocks work. Without expanding gross margins you just get more sweat and tears for less profit. I think its too easy for them to rally on these kitchen sink numbers.

I'm a better seller of tech here in general. I think people have the right idea here… I just think they're probably too early and that the group will go lower again once the dour nature of Q1 becomes apparent. I'm not saying this right here is the top… I just wouldn't be buying them here unless I had a very long time horizon… which I rarely do. I think they'll be lower in January.

Texas Instruments (TXN) guides way lower

The street was braced for $2.8ish billion. They guide to $2.3 - 2.5 billion. EPS goes from 30-36 cents to 10-16 cents.

What would you expect? The whole chain has guided lower and most of the OEMs with the exception of the freakishly strong HPQ have also.

Anyway... tomorrow should be interesting.

Molex (MOLX) guides down... so does Altera (ALTR)... so does Integrated Device Technology (IDTI)

Molex makes electrical connectors. They go in all your doo-dads. December revenue is now expected to be 650-670 mil versus prior lowered outlook of 750-800 mil. They declined to give operational profit guidance as they're trying very hard to get costs down and can't tell how successful they'll be yet.

Altera, which a couple of months ago had guided to what seemed like an aggressive midpoint of down 1% now says revs will be down 9-12% for the December quarter.

IDTI says "Order patterns have deteriorated since mid-November as customers become more cautious in the face of a weakening economic environment. As a result of
diminishing demand from customers across all geographies and end markets, we now
anticipate that fiscal third quarter results will be below our prior
projections." Revs are guided to 165-170 mil vs prior 175-185 mil. EPS are guided a nickel lower. This one looks good compared to some of the others -- they're only down 10% at the midpoint versus their prior guidance.

I'm going to post this quickly before someone else blows up.

National Semiconductor (NSM) in-line, guidance apocalyptic

420 mil for revs is in line w/ their guidance. Guidance of down 30% sequentially equates to roughly 295 mil in revs for next quarter, the street has 374 mil modeled. They say gross margins will decline -- no kidding!

Dell trade

I've been waiting for $12 to short Dell. I made some short sales. I've left some room to make more sales at $12.75 should it come to that.

Broadcom (BRCM), National Semiconductor (NSM), Texas Instruments (TXN), Altera (ALTR)

Broadcom (BRCM) has an analyst day. The webcast is available.

National Semiconductor (NSM) reports tonight. As most analog semis have seen big downticks of ~25% to their December quarter outlooks, expect National Semi to guide down. They've got a nasty triple threat in their results this quarter – September, October and November – all of which were the weakest months in the last several years for the industry. It won't be pretty.

Texas Instruments (TXN) will guide lower yet again on their mid-quarter update. Nokia, their largest wireless customer, seems to be in major disarray and Texas Instruments has totally stuffed the channel for a couple of quarters. The downward revision here could be startlingly severe. The street has been moving numbers down to the 2.9 – 3.0 bil area. It could be 10-20% weaker than that without too much imagination stretch. This is the slowest boat in semis and always hits the drawbridge head on when it comes down.

Altera (ALTR) also has a mid-quarter update after the call. No edge there. Obviously it'd be surprising if they didn't lower guidance.