Tuesday, September 13, 2011

RIM Earnings Preview: Expect Guidance Raised by up to $0.50 in EPS

On July 25th, with RIM shares having closed at C$25.19, I wrote that I expected the shares to rise 20% in the next 2-3 months. On August 15th, with RIM at C$26.59, I increased the target to a 30% upside in the next 2-3 months (to C$34.57). When RIM announces earnings this Thursday, I expect a jump that continues the current rally, and takes the shares to C$56.05 over the next 12 months, an increase of 88.72% (over today's close of $29.70). The following are 5 reasons why.

1. RIM benefits as Samsung, Motorola and Nokia are temporarily handicapped

On August 24th, a Dutch court banned Samsung from selling Galaxy smartphones across all of Europe effective October 13th. This ban includes the Galaxy S, Galaxy S II and Ace. With RIM having a large market share in Western Europe, the removal of competition from Samsung will increase demand for OS 7 devices. In addition, it could allow RIM to leverage its dominance in the UK to increase market share in neighbouring countries such as Germany and France.

Meanwhile, Motorola is in the process of being bought by Google. This process usually slows down projects at the company being acquired. Of course, RIM would likely not feel the benefits from this slowdown until about 3-6 months after the announcement (August 15th) which would be November-February. With RIM expected launch the first QNX superphones in early 2012 (rumours from BGR are indicating before end of 2011) the uncertainty at Motorola could provide RIM a window to strike.

While WP 7.5 Mango is expected to launch in October, and Stephen Elop having stated that he wants Nokia WP devices available before the end of 2011, Nokia's recent record of slow product development makes a 2011 launch unlikely. Elop's strategic mistake of essentially telling the world that Symbian and MeeGo are garbage is significantly hurting sales of Symbian and MeeGo devices.  I expect Nokia's share price to tumble at some point late in 2011, as losses mount. In fact, with WP 7 adoption having been extremely weak, WP 7.5 is unlikely to change Microsoft's fortunes in mobile the way the company hopes. Thus, disappointing sales of WP 7.5 would once again ignite takeover speculation of RIM by Microsoft.

2. Earlier than expected launch of OS 7 devices

When RIM gave guidance of $0.75-$1.05 in EPS for Q2, the low end reflected what would result if RIM missed the back-to-school season completely. However, RIM launched OS 7 devices much earlier than expectations of August 26-31. The first OS 7 devices were launched in Canada August 10th, India on August 11th, UK on August 12th and US Verizon enterprise customers August 15th. RIM stated on August 3rd that more than 225 carriers have commenced or completed over 500 certification programs for the 5 new handsets. Adding in the Curve 9350, 9360 and 9370 (announced August 23 and already launched) and the yet-to-be announced Curve 9380 and Bold 9790 makes this global launch even more impressive. 

2. Reviewers and users like the Bold 9900

All 8 new BlackBerry 7 devices launched in August have received excellent reviews and comments from users. The Bold 9900 is particularly favoured, with sell-outs common in the US. This is a stark contrast to the same time last year, when some reviews complained about the Torch 9800 not having a faster CPU. Many non-BlackBerry users have observed that the Bold 9900 is the only other smartphone that has the hardware beauty and quality that is on par with the iPhone 4.

Thus, the Bold 9900 will be able to prevent most BlackBerry users from defecting to Android or iOS. In fact, the device is likely to cause a sizeable number of former BlackBerry users (who currently use Android or iOS) to switch back, and win over many first-time smartphone buyers.

4. Software announcements and launches could boost shares

RIM has been aggressively making announcements in recent weeks, which is part of the recent why the share price has recovered from the 52-week low of C$21.40. For example, RIM launched BBM 6.0 on July 28th, announced 5 new BlackBerry 7 devices August 3rd, hosted the first ever BBM Hackathon August 11-12, announced the Curve 9350, 9360 and 9370 on August 23th and BBM Music on August 25th. With the share price less than half of the 52-week high of C$69.30, it is likely RIM will continue to aggressively announce new hardware and software. I expect management to at least give updates on major software on Thursday.

Updates on software that could provide a boost to RIM shares include: native email, calendar, BBM for BlackBerry PlayBook, Android Player, BlackBerry Java Player and NDK for PlayBook. What most analysts fail to mention is that the powerful QNX NDK is currently in closed beta. RIM could announce partnerships with major gaming companies (e.g. EA) which would make the PlayBook the best gaming tablet on the market. However, I expect this to occur after Thursday.

RIM is also poised to make a big PlayBook 2.0 launch once most of the above software is available. The Android Player could be a big catalyst for consumers to buy the PlayBook, since they can enjoy both the 200,000+ apps on Android and the multi-tasking ability of the PlayBook QNX OS.

5. Competition from iPhone 4S internationally is over-blown

RIM is already benefiting as the iPhone 4S and 5 have been delayed to early-mid October. The fan-favourite Bold 9900 will likely be able to hold its ground against the iPhone 5. In addition, threat of the iPhone 4S is overblown, as the Curve 9350, 9360 and 9370 (with NFC chips) are major improvements over the best-selling Curve 8520 and 9300. In addition, the all-touch Curve 9380 will compete head-on with the iPhone 4S.  Apple's offering is essentially a 16-month-old product, and is unlikely to undercut RIM's on price. 

I expect RIM to sightly beat Q2 consensus of $0.89 EPS and $4.47 billion revenue (I expect $0.93 in EPS and $4.6 billion). However, shares will benefit mostly from a raised guidance for Q3, Q4 and FY 2012. I expect RIM to raise its FY 2012 guidance from $5.25-$6.00 to $5.65-$6.00. This would be a big boost, since the low end would be $0.53 higher than consensus of only $5.12.  Using a forward P/E of 9.5 on FY 2012 EPS of $5.90 (slightly below the high-end of what I expect to be management's guidance on Thursday) I expect the shares to reach C$56.05 over the next 12 months, an increase of 88.72% over today's close of C$29.70.

Q2 Guidance Q2 Consensus My Q2 Estimates
Shipment (units)
11-12.5 million

<12 million 12.3 million
$4.2-4.8 billion
$4.47 billion
$4.6 billion
Gross Margin
N/A 41.00%
EPS $0.75-1.05 $0.89 $0.93

FY 2012 Guidance FY 2012 Consensus My Estimated FY 2012 Guidance (to be announced Thursday)
FY 2012 EPS
$5.12 $5.65-6.00

Steve Jobs enraged by new Android app?  http://www.youtube.com/watch?v=U8ufVq5yKWQ

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