Earning Preview: Research In Motion - Analyst Blog

Research In Motion Ltd. (RIMM) is on the verge of declaring its quarterly financial results that may turn out to be very critical for its future operations. On September 16, after the closing bell, the company will announce its second quarter results of fiscal 2011. Despite generating healthy net earnings in the last quarter, the stock has plunged nearly 25% in the last two and half months. Considering a 52-week price chart, the stock is down almost 50% from its peak and now trading at the low-end of the 52-week price range.
 
Immediate Challenge
 
Research In Motion started suffering once Apple Inc. (AAPL) launched its first iPhone. In fact, BlackBerry is quickly losing market share to iPhone in its core enterprise market. Furthermore, several countries, namely, India, Saudi Arabia, and United Arab Emirates have raised security concerns about BlackBerry, the company's unique selling point.
 
According to our view, Research In Motion has to deliver in its second quarter fiscal 2011 on all operating fronts (1) revenue (2) EPS (3) margins (4) number high-end BlackBerry phone shipment. Failure on any one front may significantly impact the stock price. Our view is supported by the bearish trend in the recent Zacks Consensus Estimate revisions.
 
Agreement of Analysts
 
Out of the 41 analysts following Research In Motion, in the last 30 days, 4 analysts revised their estimates downward for the ensuing quarter and also for the next quarter. Whereas, just 1 analyst revised estimate upward for the ensuing quarter and 2 analysts did so for the next quarter.
 
For fiscal 2011, in the last 30 days, out of 43 analysts covering the stock, 5 analysts have revised estimates downward and 6 analysts have done so for fiscal 2012. Just 1 analyst raised estimate for fiscal 2011 and also for fiscal 2012.
 
However, the current Zacks Consensus EPS estimate of $1.35 for the second quarter fiscal 2011 indicates a substantial 31.42% gain year-over-year. Similarly, for fiscal 2011, the current Zacks Consensus EPS estimate of $5.56 indicates a whopping 27.27% gain year-over-year. We believe, these enormous gains are mainly due to poor results in fiscal 2010 when the North American economy was in recession.
 
Magnitude of Estimate Revisions
 
During the last 30 days we did not find any change in the consensus EPS estimate which remains exceptionally static. Second quarter fiscal 2011 EPS is $1.35, third quarter EPS is $1.40, fiscal 2011 EPS is $5.56 and fiscal 2012 EPS is $5.93. All remains the same during the previous 30 days.
 
Earning Surprises
 
With respect to earnings surprises, the company's positive track record is not expected to persist in the coming quarters. Research In Motion produced average earnings surprise of 2.75% in the last four quarters, which means that it beat the Zacks Consensus Estimate by that measure over the last year. In fact, the current Zacks Consensus Estimate for the second quarter fiscal 2011 contains a modest downside potential of -0.74% and for fiscal 2011, the downside potential is even larger at -2.34%.
 
Our Concerns
 
Research In Motion desperately needs BlackBerry to outperform the market. Failing which the company will face serious problems about remaining competitive in a market which is very rapidly changing in terms of technology, price, and data plan provided by the carrier. The company's much-hyped BlackBerry Torch, which was launched in the first half of July, failed to enthuse the consumers.
 
In addition to iPhone, the smartphone market is now going through a wave of Google Inc.'s (GOOG) Android software-based devices. Motorola Inc. (MOT) is gradually revamping its fragile mobile phone segment using Andriod. Low-cost producers like HTC, LG Electronics, and Samsung have also become major threat to the company.
 
As a result, Research In Motion is being forced towards the retail customer segment for which average selling price is markedly lower than the enterprise segment. This is taking a huge toll on both revenue and margins.
 
Silver Lining
 
Nevertheless, it is also our view that there exist rays of hope for Research In Motion. Firstly, BlackBerry has strong global brand value which may keep its earning momentum in the near-future. Secondly, robust growth of 3G smartphones throughout the world has opened up a huge international market for Research In Motion. We believe Blackberry is actually gaining market share especially in the emerging markets at the expense of Nokia Corp. (NOK). Thirdly, solid liquidity position of nearly $3.3 billion of cash & investments and no outstanding debt will enable management to pursue long-term R&D activities for innovative products.
 
Our Recommendation
 
In view of the equally strong presence of positive and negative factors, we maintain our long-term Neutral recommendation for Research In Motion. Currently it is a Zacks #3 Rank (Hold) stock.
 
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