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RIM Needs Prosumer Apps To Reverse Trend

Posted on Monday, Sep 28th 2009

Research In Motion Limited (RIM) (NASDAQ:RIMM; TSX:RIM), the maker of the popular BlackBerry with annual revenue of $11.07 billion, reported its second quarter results last week. Its third quarter outlook was disappointing as Apple and Palm have upped the ante by lowering prices on their phones.

RIM launched two new BlackBerry smartphones during the quarter, the BlackBerry Tour at $200 with Verizon and Sprint for CDMA networks and the BlackBerry Curve 8520 with T-Mobile for GSM networks. The low-end BlackBerry Curve 8520, available for $49, features a touch- sensitive track pad and dedicated media keys. The BlackBerry Tour supports high-speed 3G EVDO REV A networks and features a 3.2 MP camera, GPS, an advanced media player. However, it was allegedly having problems with its trackball that initially caused high return rates and is not as much a hit as the company’s earlier launches, Storm and Bold.

RIM is expected to launch its next version of the touch screen BlackBerry Storm on Verizon by the end of the year. Verizon is also expected to sell the Palm Pre and Motorola’s new Android phone by next year. If Verizon shifts its promotion focus to other vendors, would it affect RIM’s sales? RIM’s BlackBerries and push mail technology have their hold on the market,but with increasing competition from the Palm Pre and the iPhone as well as the new stream of Android phones from Motorola, its sales seem to be affected. Palm Pre is selling for $149 while the iPhone 3GS is selling for $200 and the iPhone 3G for $99.

The iPhone is gaining traction in the enterprise market and to counter its advances, what we really need to see from RIM are some great and exclusive business applications.RIM launched its AppWorld in April and since then, it has seen more than 20 million downloads of social networking applications like Facebook and MySpace, over 7 million downloads of Internet radio players such as Slacker and Pandora, and over 4 million downloads of IM clients. There is some development on its application ecosystem but it frankly doesn’t compare to 50,000 iPhone applications and more than a billion downloads. More importantly, the successful prosumer class apps are missing.

As for RIM’s financials, Q2 revenue was up 37% y-o-y and 2% q-o-q to $3.53 billion on shipment of 8.3 million units. Net income was $475.6 million or $0.83 per share versus $495.5 million, or $0.86 per share last year and $643.0 million, or $1.12 per share in the prior quarter. Excluding a legal charge of $112.8 million for the payment of the settlement of all patent litigation with Visto, adjusted net income was $588.4 million, or $1.03 per share beating analyst estimate of $1 per share but missing the revenue estimate of $3.62 billion. Q1 coverage is available here.

Gross margin improved to 44.1% from 43.6% last quarter due to reductions in raw material costs and shifts in the product mix. The company ended the quarter with $2.5 billion in cash, up by $78.5 million over last quarter. In Q2, RIM acquired Torch Mobile, a leading supplier of open-source web kit-based solutions, which should enable it to offer a mobile browser next year.

RIM added 3.8 million net new BlackBerry subscriber accounts, consistent with last quarter but at the lower end of its guidance mainly due to a higher percentage of Tour subscriptions going to existing customers for upgrades. It ended the quarter with 32 million subscribers. Device ASPs in the quarter were approximately $345, in line with guidance.

For the third quarter RIM expects to ship between 9.2 million and 9.9 million units. It expects revenue in the range of $3.60 billion to $3.85 billion and EPS in the range of $1.00 to $1.08. Gross margin is expected to be down to 43% and device ASP is expected to go down to $320. Net subscriber account additions are expected to be in the range of 4.0 million to 4.3 million. Analysts expect revenue of $3.9 billion and subscriber additions of 4.3 million. It is currently trading around $69 after hitting a 52-week high of $83.77 on June 10. Following the results announcement, Deutsche Securities downgraded the stock from Hold to Sell.

I wouldn’t move so fast to downgrade RIM. A well-thought-through prosumer app strategy can easily reverse the current trend.

Chart for Research In Motion Ltd. (RIMM)

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