Does RIM See The Gap in iPhone’s Defenses?

Yesterday, Research In Motion Limited (RIM) (Nasdaq: RIMM; TSX: RIM), a world leader in the mobile communications market reported a strong fourth quarter that beat estimates driven by the success of its BlackBerry Storm, which initially had some technical problems in its release in Q3.

Q4 revenue was up 84% y-o-y and 24.5% q-o-q to $2.78 billion on a shipment of 7.8 million devices (up 80%). Net income was $518.3 million or $0.90 per share versus $412.5 million, or $0.72 per share last year. Analysts expected revenue of $3.4 billion and earnings of $0.84 per share.

For the fiscal year 2009, revenue was up 84% to $11.07 billion on shipment of 26 million devices. Net income was up 46.3% to $1.89 billion, or $3.30 per share. The total of cash, cash equivalents, short-term investments and long-term investments was $2.24 billion at the end of the quarter, down from $2.49 billion at the end of Q3. Uses of cash included capital expenditures of $252 million and the acquisition of intangible assets of $222 million. It recently completed the acquisition of Certicom (cryptography).

RIM added about 3.9 million net new BlackBerry subscriber accounts in the quarter, up over 50% q-o-q and the total BlackBerry subscriber account base at the end of the quarter was about 25 million. RIM shipped its 50 millionth BlackBerry in January. This tremendous performance was driven by better than expected momentum following the holiday season and positive reception of the touch screen model Storm and other products launched in Q3 and Q4. Device ASPs in the quarter were about $370, higher than Q3 due to shifts in product mix.

In its stronghold enterprise market, RIM had double-digit subscriber growth.  Over the last two years, RIM has been focusing on the more competitive consumer market and currently about 70% of net new subscriber accounts were non-enterprise and about half of the total BlackBerry subscriber account base is non-enterprise.

In an earlier post, I had explored how new product launches in the consumer market are leading to the downward trend in margins. The consumer market typically has lower margins compared to the enterprise market, high marketing costs, and more pressure to launch new products. From about 50% in Q2 and 51.4% last year, gross margin has fallen to 40% in Q4. However, RIM expects to improve gross margin to between 43 and 44% in Q1 of fiscal 2010 through its cost reduction efforts, together with a favorable shift in product mix. For fiscal 2010, RIM expects gross margin in the low 40%s.

Somewhat on the line of Apple’s App Store, RIM has launched the BlackBerry App World that offers BlackBerry users a way to browse, buy, download, and install apps over the air. There is also talk of a new device to be launched in the summer that will feature a touch screen and traditional keypad and compete directly with the Palm Pre.

RIM is currently trading around $49 with a market cap of about $28 billion. I recently explored the possibility of Dell acquiring RIM. It hit a 52-week low of $35.05 on March 9. Its 52-week high was $148.13 on June 19 last year, a tumble driven mainly by the economy and its margin issues.

On strategy, I would personally feel more comfortable if RIM followed its strength in the enterprise market, and got more deeply into application infrastructure, making it viable for enterprise app vendors to make their applications accessible from the RIM devices easily, elegantly, and seamlessly. If I were advising RIM on their development platform strategy, I would ask them to focus on courting business application developers, an area that has never been Apple’s strong suite. I just hope that RIM is not going to go about chasing Apple’s tail in the consumer app arena with game developers, for instance.

I see a wide open opportunity for RIM. The question is, does RIM see it?