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Does RIM See The Gap in iPhone’s Defenses?

Posted on Friday, Apr 3rd 2009

Yesterday, Research In Motion Limited (RIM) (Nasdaq: RIMM; TSX: RIM), a world leader in the mobile communications market reported a strong fourth quarter that beat estimates driven by the success of its BlackBerry Storm, which initially had some technical problems in its release in Q3.

Q4 revenue was up 84% y-o-y and 24.5% q-o-q to $2.78 billion on a shipment of 7.8 million devices (up 80%). Net income was $518.3 million or $0.90 per share versus $412.5 million, or $0.72 per share last year. Analysts expected revenue of $3.4 billion and earnings of $0.84 per share.

For the fiscal year 2009, revenue was up 84% to $11.07 billion on shipment of 26 million devices. Net income was up 46.3% to $1.89 billion, or $3.30 per share. The total of cash, cash equivalents, short-term investments and long-term investments was $2.24 billion at the end of the quarter, down from $2.49 billion at the end of Q3. Uses of cash included capital expenditures of $252 million and the acquisition of intangible assets of $222 million. It recently completed the acquisition of Certicom (cryptography).

RIM added about 3.9 million net new BlackBerry subscriber accounts in the quarter, up over 50% q-o-q and the total BlackBerry subscriber account base at the end of the quarter was about 25 million. RIM shipped its 50 millionth BlackBerry in January. This tremendous performance was driven by better than expected momentum following the holiday season and positive reception of the touch screen model Storm and other products launched in Q3 and Q4. Device ASPs in the quarter were about $370, higher than Q3 due to shifts in product mix.

In its stronghold enterprise market, RIM had double-digit subscriber growth.  Over the last two years, RIM has been focusing on the more competitive consumer market and currently about 70% of net new subscriber accounts were non-enterprise and about half of the total BlackBerry subscriber account base is non-enterprise.

In an earlier post, I had explored how new product launches in the consumer market are leading to the downward trend in margins. The consumer market typically has lower margins compared to the enterprise market, high marketing costs, and more pressure to launch new products. From about 50% in Q2 and 51.4% last year, gross margin has fallen to 40% in Q4. However, RIM expects to improve gross margin to between 43 and 44% in Q1 of fiscal 2010 through its cost reduction efforts, together with a favorable shift in product mix. For fiscal 2010, RIM expects gross margin in the low 40%s.

Somewhat on the line of Apple’s App Store, RIM has launched the BlackBerry App World that offers BlackBerry users a way to browse, buy, download, and install apps over the air. There is also talk of a new device to be launched in the summer that will feature a touch screen and traditional keypad and compete directly with the Palm Pre.

RIM is currently trading around $49 with a market cap of about $28 billion. I recently explored the possibility of Dell acquiring RIM. It hit a 52-week low of $35.05 on March 9. Its 52-week high was $148.13 on June 19 last year, a tumble driven mainly by the economy and its margin issues.

On strategy, I would personally feel more comfortable if RIM followed its strength in the enterprise market, and got more deeply into application infrastructure, making it viable for enterprise app vendors to make their applications accessible from the RIM devices easily, elegantly, and seamlessly. If I were advising RIM on their development platform strategy, I would ask them to focus on courting business application developers, an area that has never been Apple’s strong suite. I just hope that RIM is not going to go about chasing Apple’s tail in the consumer app arena with game developers, for instance.

I see a wide open opportunity for RIM. The question is, does RIM see it?

Chart for Research In Motion Ltd. (RIMM)

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I think that a little information is in order.Ontario would force the Canadian government to block any takeover.With Nortel gone there is no way RIM can be taken over by a foreign company.That would be suidide for P.M.Also the idea that margins have dropped because of the introduction of consumer devices is overblown.The curve and Pearl did not lead to reduced margins ,it was only the introduction of 3g devicesthat margins dived.That applies to the Bold as well as the Storm.Yes the Storm is probably the device with the lowest margin but it is a totally new technology.Apple probably lost money on the first Iphone because they had to cut the price 200 dollars after only 2 months.The Storm has greatly helped RIM at a time when carriers are cutting inventory and RIM is suffering form this as are all of the others.THe fact is that RIM has the upper hand which you will understand from Larry ‘s article and the latest Iphone update seession presentation which focused on battery and push notification.

Pablo Friday, April 3, 2009 at 9:47 AM PT

It’s hardly amazing that a company can show stellar results when they are propped up by their carrier partner.

Verizon bought many of those BlackBerry’s from RIM and gave them away two for one in a “Buy One, Get One Free” promotion that began in early Feb. and continues to this day. Balsillie said as much during the conference call.

Next time, try reporting ALL of the facts, Sramana.

Hype Buster Friday, April 3, 2009 at 1:20 PM PT

Do you think Verizon is doing this as a charity? It has something to gain from the exercise, making them a perfectly reasonable customer for RIM. Verizon is doing this to gain subscribers. I don’t see what’s wrong with RIM benefiting from the promotion.

It seems to me like a perfectly reasonable business deal.

You don’t?

Sramana Mitra Friday, April 3, 2009 at 1:52 PM PT

I guess all those at&t promos are not propping up the iPhone. You iPhone fanbois are certainly nervous about RIM stealing any of your thunder.

Let’s not forget the fact that the best selling smartphone the past 3 months was the Curve and it’s available on every carrier and it below $100 or free.

Verizon’s next sales report should show exactly how many Storms were sold regardless of the buy 1 get 1 promo. You look at this as some hardware race similar to game consoles, it’s PURELY about subscibers to the carriers. Anything that gets you back into another two year plan keeps them happy.

Apple wants you to think they are shifting the market but they still need at&t, at&t is just eating some of the cost of the hardware. Apple still has to agree to carrier terms no matter how much users think the other way. If you don’t like that have Apple buy and run their own wireless network then they can really be a totally walled in garden.

RIM’s quarter report only shows that the mobile market is bigger then iPhone and people enjoy having choice to buy and use the device that works best for THEM.

Frank Castle Friday, April 3, 2009 at 5:18 PM PT

It’s perfectly reasonable, but it won’t last. Verizon won’t do this forever and Apple’s iPhone 3.0 is right around the corner. It is also probably not an indication that the economy is rebounding as strongly as some would hope.

Hype Buster Friday, April 3, 2009 at 5:45 PM PT

I am personally very happy to see new phones challenging the iPhone – not just RIM but also the Palm Pre that is due out soon.

A market to get beyond early adopters needs competition and innovation.

I have a feeling you did not read what I wrote above about where RIM needs to focus its strategy to win in this game, and carve out its niche.

What would last or not last would depend on what moves RIM’s management makes.

Sramana Mitra Saturday, April 4, 2009 at 12:28 PM PT

IMO, RIM is going o right direction. Both Co-CEOs have focused to build entire eco system after announcement of app store during CTIA last week. They need to catch up on this with app store.. Still long way to go but there is strong opportunity in this market.. Trend is moving towards mid-low tier handset..

Vivek Sunday, April 5, 2009 at 9:10 PM PT

We would see more low and mid tier smartphone in future by RIM,attracting more non enterprise consumers on RIM platform and bringing them to involve in Blackberry apps

Vivek Sunday, April 5, 2009 at 9:12 PM PT