Research in Motion ( RIMM ) recently announced the fiscal year Q4 2011 earnings, in which it gave a disappointing revenue outlook for FY Q1 2012 quarter. Its shares tumbled by 10% in the after-market hours after the announcement and opened around these levels Friday morning. RIM, which competes with Apple ( AAPL ), Nokia ( NOK ) and Motorola Mobility ( MMI ) in the smartphone market, stands to lose further ground in the near-term as suggested by the weak outlook. However, we still believe there is value for long term holders of the stock despite the disappointing guidance.
We have updated our price estimate for RIM stock to $69.59 , which is about 25% higher than market price.
BlackBerry Smartphone Sales to Slow
RIM is expected to introduce the PlayBook tablet from April 2011 onwards. RIM sold 14.9 million BlackBerry phones in the recently concluded FY Q4 2011 quarter. Although one would expect that RIM would be able to sell many more devices in the next quarter since this number would benefit from the PlayBook introduction, the company disappointed with its outlook. According to the company, it expects to sell 13.5 million to 14.5 million devices in the next quarter, which includes BlackBerry smartphones and PlayBook tablets. In addition, the company's QNX based smartphones were supposed to ship later this year and are being pushed back to 2012.
We estimate RIM's market share will slowly grow to just about 5% share in the mobile phone market by 2013 from around 3% in 2010 though the disappointing outlook creates some risk to our market share estimates.
Lower Gross Margins..
During the earnings conference call, the management announced that the company's gross margins could decline to less than 40% in 2011. This is a significant decline from the gross margins levels of 45% that it achieved in 2010. The company reasoned this decline on lower pricing outlook for its BlackBerry smartphones, as well as the higher-mix of lower-margin PlayBook tablets. Although the company does not provide an estimate of PlayBook gross margins, we believe it could be around 25% for 2011.
..and Rising Operating Expenses
The company also expects that its R&D and SG&A expenses could rise rapidly over the course of 2011. It mentioned that it plans to launch multiple versions of PlayBook tablet, which will support different 4G technologies viz. WiMax, LTE and HSPA+. It also plans to invest heavily for integrating the QNX operating system in its smartphones and tablets. RIM acquired QNX in April 2010 with a view to enhance its product portfolio (see RIM Can Lift Market Share, Stock Value with Enhanced Product Portfolio ). Although these investments are done with a view to grow its business from the long-term point of view, the rapid rise of operating expenses could be negative for its stock in the short-term. We now expect a rapid increase in R&D levels in 2011 followed by moderate increase beyond that.
But Longer Term Things Don't Look so Bad
In the second-half of 2011, the company plans to introduce a new line of BlackBerry smartphones which, according to the company, will have much higher performance and packed with new features. A few months back, we analyzed how the new BlackBerry line-up could induce new customers signups and facilitate RIM's market share gains (see Can RIM Hit a Home Run with New BlackBerry Lineup?).
RIM's PlayBook is also expected to pick momentum in the second half of 2011 as it plans to come out with multiple versions of tablets supporting 4G technology. Although the company has not provided with the outlook for PlayBook sales, we believe RIM's large enterprise market presence will benefit its sales in the long-term (see Can RIM Leverage its Enterprise Market Presence to Lift Tablet Sales?).
So while RIM provided a weak near-term outlook, we have a more sanguine view of the company's outlook towards the back half of the year. We believe that the company's strong product portfolio could help it regain its lost momentum in the quarters ahead.