Research in Motion Raises Spending in “Land Grab” for Smartphone Supremacy
Research in Motion (RIMM-NASDAQ) raised subscriber guidance and unit shipment guidance on their conference call last evening, but clearly is preparing to wage a scorched earth campaign against Apple, Inc (AAPL-NASDAQ) and the iPhone 3G:
``They're gearing up to battle with Apple,'' said Wilson, who is reviewing his ``market outperform'' rating on the stock. ``They're spending a lot of money on things like branding campaigns.'' Bloomberg
Make no mistake about; RIM missed their number, clearly coming in shy once you factor in help from a lower than expected tax rate, which helped to the tune of 2 cents. But the consumer market, which is now 40% of their business, is certainly changing the company's financial model, due to lower ASP's, among other things. The Pearl and Curve carry lower price points than the enterprise 8800 series, and the mix will continue to shift as consumer devices grow faster than enterprise.
And RIM is clearly investing in their future, aggressively raising spending on SG&A and R&D. Marketing and branding support to support the rollout of the Bold,Thunder and Kickstart later this year are the primary reason for any shortfall going forward.
R&D spending will also increase roughly 24% sequentially in the August quarter as the company invests in engineering and network infrastructure capabilities to support the strong subscriber growth.
But it is hard to spin a reduction in sequential EPS estimates. The quarter and guidance was no disaster, but expectations were clearly different from what Waterloo delivered:
CON:
-Gross Margin came in light, 50.7% vs 51% estimated. The weak dollar is pressuring RIM’s component suppliers, who passed along some of the pain to RIM.
-Several hundred thousand phones were sold without Blackberry service plans. Keep an eye on this metric going forward as consumers grow faster than enterprise.
-Q2 2008 EPS estimates cut to 84 to 89 cents from 90 cents. Near-term spending is growing faster than revenue, plain and simple.
-New products will not meaningfully impact near-term results; cannibilization must be monitored
PRO:
-Inventory turns improved to 9.6x from 9.2x, DSO’s 57 days versus 56 prior. Management comfortable with channel inventory, which rose quarter to quarter.
-Sequential revenue growth guidance of 16% and Y/Y growth of 89% is above consensus.
-2.6 million new subscribers is quarter is above previous estimates.
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Although Jim Balsillie is somewhat cavalier over the competitive threat posed by Apple, he clearly is going on the offensive, spending heavily in to support his “land grab”. Winning over consumers now might pay dividends over the next decade if they remain loyal, something Apple clearly already has accomplished with their hardcore fans.
Before Apple fans get too cocky, it should be noted their quarter won’t be pretty, given the transition to the iPhone 3G. If the phone is in tight supply, given it seems there are issues in the supply chain, earnings might be impacted into the fall.
But as I said last time RIM reported, investors might want to temper their expectations. The valuations of both stocks are unlikely to expand much from current levels; multiple expansion has been an underappreciated factor in both stock’s remarkable gains. Cautious money managers are likely to let the dust settle before declaring a winner in the battle for smart phones, but RIM fans will certainly feel the pain today.
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Update: Credit Suisse initiated RIMM the morning of 6/27 with a $100 price target, and some people are speculating RIMM stuffed the channel and the marketing spend is some kind of payola for the carriers. It is a heated debate.
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Research In Motion Falls as Forecast Misses Estimates
Bloomberg
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