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RIM Misses Estimates; Palm’s Revenue Also Down

Posted on Tuesday, Jul 1st 2008

The market was stunned last week as RIM missed analyst estimates by a slight margin. Its stock has plummeted to $117 from a 52-week high of $148.13 on June 19, providing a great opportunity to buy. In this post we look at RIM’s and Palm’s recent earnings reports.

Chart for Research In Motion Ltd. (RIMM)

Research In Motion Ltd. (NASDAQ: RIMM) posted Q1 revenue of $2.24 billion, up 19% q-o-q and 107% y-o-y on a shipment of 5.4 million devices. Net income was $482.5 million, or $0.84 per diluted share, compared with $412.5 million last quarter and $223.2 million last year. Analysts estimated revenue of $2.27 billion and earnings of $0.85 per share.

In line with its April forecast, RIM added 2.3 million BlackBerry subscriber accounts, taking the total to over 16 million subscribers. Though RIM is experiencing tremendous growth, increased operating and marketing expenses are affecting its bottom line. Operating expenses increased by 77% y-o-y and 22% q-o-q. Sales, marketing and administrative expenses increased to $327 million, about 15% of revenue. The new 3G iPhone at $199 with push email is now an aggressive competitor that no one at the company can ignore. RIM is rising to the competition with increased advertising and new releases: the new BlackBerry Bold this summer and the BlackBerry Thunder, expected in the third quarter. It has also been scaling its infrastructure to support its growing base of subscribers. But the critical factor is going to be the operating system, with Nokia becoming the sole owner of Symbian. Apple, of course, is the proud owner of one of the best operating systems in the business, giving them a tremendous edge in the battle that is now in full swing.

For the second quarter, RIM expects revenue between $2.55 and $2.65 billion. EPS is expected to be in the range of $0.84-$0.89. The company expects to add 2.6 million subscriber accounts. Gross margin, under pressure from the weak U.S. dollar and higher component pricing, is expected to be about 50.5%, lower than Q1’s 50.7%. Operating expenses are expected to increase by 26%-28% from Q1, with sales, marketing and administration expenses up by about 28-30%.

As I have said in earlier posts, RIM is a great company and a strong beneficiary of the convergence device movement. Overwhelming growth of 107%, the fourth straight quarter with over 100% growth, and some exciting releases are just some of the reasons to buy this stock. There are many analysts who agree with my view.

Meanwhile, Palm is still working on its turnaround, which has gained momentum from the success of the Centro. As we saw in a recent post, Palm’s US smartphone market share rose from 7.9% to 13.4% in Q1.

On June 26, Palm Inc (NASDAQ: PALM) reported its Q4 and FY 2008 results. Q4 revenue was $296.2 million, down 26% y-o-y and 15.2% q-o-q and below the analyst consensus of $301.11 million. Net loss was $23.9 million, or $0.22 per diluted share, below the consensus of $0.18. Compare this to last year’s net loss of $17.8 million, or $0.17 per diluted share.

Smartphone sell-through in Q4 was 968,000, up 29% y-o-y, or 16.2% q-o-q, driven by strong Centro sales on AT&T’s network. The recent announcement of Verizon as another carrier is bound to add to sales. However, the Centro continued to bring gross margin down to 25.3%.

Palm’s Windows Mobile product line is about to be revamped to include features like 3G, integrated WiFi, and GPS. It is also working on its platform, a move that could help restore the line to its former glory. I discussed Palm’s OS plans in an earlier post. My biggest complaint at this point is that Palm has squandered its opportunity in both OS and software applications for many years, and in this round, they have to get this aspect right. The competitive pressures are significant, and the company will not survive another round of poor execution.

For FY 2008, revenue was $1.32 billion and net loss was $36.2 million, or $0.34 per diluted share, compared to earnings per share of $0.70 in 2007. Smartphone sell-through was 3.2 million units, up 19% y-o-y. Smartphone revenue was $1.13 billion, accounting for 85% of revenues in 2008 compared to 80% in FY 2007. This growth was offset by 38% y-o-y decline in handheld revenues net revenues. Operating expenses decreased 3% y-o-y to $463.9 million.

Clearly, the success of the Centro and Palm’s new Windows Mobile line and OS plans will help in the company’s turnaround. Palm was recently upgraded from Sell to Hold. It is currently trading around $5 with a market cap of around $578 million. In the smartphone sector, I own all three stocks: Apple, RIM and Nokia, and I will most likely pick up some Palm as well. I am very, very bullish on the sector as a whole.

Chart for Palm, Inc. (PALM)

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This opening weekend’s sales of the iPhone 3G gives some more light on the poor showings of both RIM and Palm. With activation issues, Apple sold over 1 million iPhones in 3 days. If Apple’s servers hadn’t been maxed out, their sales would have been even greater.

First the easy one. Palm had their chance and missed the opportunity to continue to be the leader of the converged device market. They will never again have a chance at leadership in this market.

RIM is the current North American leader in smart devices. They were only good at one thing — email. Blackberries have frustrated me multiple times; their interface is quite obtuse. For anyone that doesn’t use them on a daily basis, their non-intuitive user interface can be confusing. That’s the opposite of the desired effect of a user interface. All of these experiences with CrackBerries have led me to believe that RIM doesn’t get it. (This commentary is from someone who is likely in the top 1% of technical knowledge and ability.) Imagine what mere mortals who are afraid of technology feel about the obtuse BB interface.

The one thing that the original iPhone, and now the iPhone 3G, show is that Apple gets it. They take complex technology and make it incredibly easy for normal people to use. That’s a winning formula that will continue to cause ulcers and headaches for anyone who is long either Palm or RIM.

Not to disagree with you but I do. I would recommend being short on both RIM and Palm. They both had their day. I’m not optimistic about their competitive ability against Apple’s superior designers and engineers.

I was quite long Apple in January and February. At the time I was quite certain that the market was overreacting, and that the consensus estimates for Fiscal 2009 Q2 were going to get blown out of the water. By the time of their earnings report in April, the AAPL buying opportunity at deep discount had passed.

You may be right that either of the other two may be a discount at the moment. Being a value investor, I’m always primed for a good deal. However, I never bet on a company with negative momentum. Especially if they are one-trick ponies in a market where neither will ever be market leader, in either sales or innovation. Yes, I am predicting that current leader RIM sales will fall behind Apple’s sales of the iPhone in short order. RIM will never again reclaim their market leadership. I don’t make such statements lightly.

Competition in the cellular industry, and even the smart device market, will come from Nokia and Samsung. You have given positive remarks on both of these iPhone competitors. I would accumulate any of the three whenever their price points merit: Apple, Nokia and Samsung.

I would avoid both RIM and Palm, except to short, or for other more sophisticated trading maneuvers – and never without a short hedge. And if you don’t know what I’m talking about, then you should not be buying either stock.

That’s my market analysis. Historically, I’ve been a good read of companies’ ability to compete in the marketplace. No one can always predict exactly or be able to always explain the market’s reactions to individual stocks. I like to look at the company’s fundamentals. Over time, the stock price eventually realigns with reality.

A company’s current sales are a good indicator of future sales. But one must also look beyond current performance, and analyze market factors that may take away or add sales going forward. Again, I don’t like RIM or Palm’s chances to compete as independent entities. Either has a better chance of being acquired whenever their capitalization gets cheap enough. That’s not the kind of stock that I would overwhelmingly recommend.

Realtosh Monday, July 14, 2008 at 7:22 PM PT