Thursday, March 24, 2011

RIMM Earnings: 3 Things Investors Should Know

Research in Motion announced 4Q earnings today that beat market expectations, but lower 1Q guidance sent the shares down 10% in after-hours trading.  EPS (earnings per share) was $1.78, $0.02 above consensus of $1.76 and 40.16% above last year's $1.27.  Revenue in the quarter was $5.6 billion, a 36% increase over last year.  

Management also gave EPS guidance for FY 2012 that was significantly above expectations, guiding to $7.50 versus consensus of $6.80.  However, investors focused on the lower 1Q EPS forecast of $1.47 to $1.55 versus consensus of $1.65, and drove the shares lower.

1. Entry into the tablet market obviously results in capital expenditure

While the lower 1Q guidance was disappointing, it was well explained.  On the conference call, it was stated that the lower 1Q EPS is caused by higher capital expenditures due to the PlayBook, and several BlackBerry devices that are near the end of their life cycle.  

RIMM is spending more money in order to develop 3 4G versions of the PlayBook (LTE, HSPA+ and Wi-MAX).  In addition, a lot of capital expenditure is needed for software, hardware and developer aspects as RIMM launches the PlayBook, the first tablet for the company and one that runs on a new OS.  For example, the free PlayBook offer for developers who submit a PlayBook app is likely part of the reason for the lower 1Q EPS.  In addition, some corporations will be receiving trial units of the tablet.

The lower 1Q EPS was also caused by several devices that are nearing the end of their life cycle.  RIMM did not launch a new device in the quarter, and devices such as the Bold have been in the market for many months.   This results in lower sales volume.

2. Transitioning to QNX is an opportunity

The increased expenditure will result in RIMM launching the most powerful tablet on the market, and future BlackBerry smartphones running the QNX OS.  Since RIMM is one of the oldest smartphone makers, a transition period is inevitable as the company moves away from the legacy BlackBerry OS to the QNX OS, whose multi-tasking and performance capabilities make it the most powerful smartphone and tablet OS on the market.  

RIMM also announced today that it will be providing 2 app players, so that Android 2.3 and BlackBerry Java apps can be run on the PlayBook.  This instantly overcomes a perceived weakness of few apps, since the PlayBook will have the several thousand PlayBook apps already submitted, 25,000 apps in App World and 200,000 Android apps. 

3. A very strong FY 2012

RIMM today gave guidance for FY 2012 EPS of $7.50, which is $0.66 above the consensus of $6.84.  With the shares having closed today at $64.09 (before the after-hours sell-off) the shares are trading at a forward P/E of 8.55, far lower than Apple's P/E of 12.

Other than the many touch-screen devices that will be launched this year, the PlayBook should be a big part of this year's profits.  With the most powerful multi-tasking and performance capabilities among tablets, a thriving QNX developer community and now over 225,000 apps available, sales of the PlayBook will likely exceed expectations.  In addition, there is significant pent-up demand from corporations, and a portion of the installed base of 60 million BlackBerry users will be buying a PlayBook.  

Thus, with Gartner expecting tablet sales of 54.8 million this year, most analysts' expectations of 2 to 3 million PlayBooks sold are too conservative.  In fact, it would be more reasonable to expect the PlayBook taking 10 to 15% of market share, which would put sales at 5.48 to 8.22 million units.

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