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Bullish on RIM and Palm

Posted on Monday, Dec 21st 2009

Last week, Research In Motion Limited (NASDAQ:RIMM; TSX:RIM), the BlackBerry maker with annual revenue of $11.07 billion, reported stellar third quarter results while Palm, Inc. (NASDAQ:PALM) reported second quarter results that missed estimates. However, both companies beat estimates for device shipments. Let’s take a closer look.

Palm reported Q2 revenue of $78.1 million, down 59%. Net loss narrowed down to $81.93 million or $0.54 per share from a loss of $506.2 million or $4.64 per share last year and $161.1 million or $1.17 per share last quarter. Excluding charges, net loss was $59.6 million or $0.37 per share versus $80.2 million or $0.73 per share last year. Analysts expected loss of $0.32 per share. Q1 coverage is available here.

Palm shipped 783,000 smartphones, down 5% q-o-q but up 41% y-o-y but more than analyst estimates of about 700,000. Smartphone sell-through for the quarter was 573,000 units, down 29% q-o-q and 4% y-o-y and both the company’s Web OS products accounted for close to 80% of this number. The Palm Pre was launched in June; its price has been cut by $50 since, and during the quarter, the company launched the Pixi with Sprint, the Palm Pre with Telefonica Europe, and introduced the Pre to Mexico with Telcel. Palm plans to launch more Web OS products with more carriers to extend its base.

There are two main things the company needs to add: more carriers and applications for its Web OS products. Its carrier in North America is Sprint, a partnership which has been disappointing, to say the least. Verizon is expected to launch web OS products in early 2010. Overall, Palm’s Web OS products are available with four carriers in seven countries.

Palm will be showcasing the launch of its full developer program at CES in Las Vegas in January. It will also be releasing Web OS version 1.3.5, which will let customers download and store more applications, improve Wi-Fi and application performance, improve battery life, and increase the Pixi’s speed and responsiveness. The Palm app catalog has a modest 800 apps, an improvement over its collection of just a dozen applications in June but still a far cry from the 100,000 in the iPhone App Store.

Gross margin declined to 25.6% versus 27.9% in Q1. Palm expects gross margin to be in the mid to upper 20s range in the second half of 2010 as it works with carriers to increase its subscriber base. The company increased its marketing spend in Q2 by $18 million in support of the launch of the Palm Pre in Europe with Telefonica and the launch of Palm Pixi at Sprint. The company ended the quarter with $590 million in cash, including the $360 million that it raised from a public equity offering.

Palm is adopting a new accounting standard that would allow it to recognize a substantial portion of Web OS product revenue on delivery. Currently, web OS revenue is amortized over a two-year period. The company reiterated its fiscal 2010 guidance of $1.6 billion to $1.8 billion. But to achieve that, the company will need to execute well on its upcoming launches. The stock is currently trading around $10 with market cap of about $1.45 billion. It hit a 52-week high of $17.50 on September 22.

Chart for Palm, Inc. (PALM)

RIM, in its Q3 results, reported that revenue was up 41% y-o-y and 11% q-o-q to $3.92 billion on shipment of 10.1 million units including its 75 millionth BlackBerry. Net income was $628.4 million or $1.10 per share versus $475.6 million, or $0.83 per share last quarter and $396.3 million, or $0.69 per share last year. Analysts were expecting earnings of $1.04 per share on revenue of $3.8 billion and shipment of 9.6 million. Q2 coverage is available here.

RIM added 4.4 million net new BlackBerry subscriber accounts, up 70% y-o-y and 16% q-o-q. It launched three new BlackBerry smartphones in the quarter: Storm 2 with Verizon and Vodafone, the Bold 9700 with multiple carriers in North America and around the world, and the Curve 8530 for CDMA networks.

RIM’s stellar results came from its strong focus on the international markets. During the quarter, 37% of revenue and 35% of BlackBerry subscriber base was from outside North America. RIM is now looking to expand in China with agreements in place with China Telecom, Digital China, and China Mobile. It is also exploring the possibility of manufacturing and conducting R&D there.

In the United States, RIM has its products with all the four major carriers. In spite of pushing the Motorola Droid aggressively on its network, Verizon continues to support BlackBerry products with its highly successful Buy One, Get One (BOGO) promotion, attractive pricing and placement in the former’s retail stores. Sprint this quarter aggressively promoted the BlackBerry Tour at $149 and the Curve 8330 at $49 with the launch of a BOGO promotion that led to substantial growth in the Sprint BlackBerry subscriber base. During Q3, T-Mobile launched its first 3G BlackBerry smartphone, the Bold 9700. The Bold 9700 was also launched with AT&T during the quarter, which also recently launched the BlackBerry 8520. AT&T is offering a special 50% discount on BlackBerry smartphones, including the Bold 9700 and the Curve 8520.

Gross margin fell to 42.7% from last quarter. The company ended the quarter with $2.41 billion in cash, down by $90 million over last quarter. During the quarter, RIM repurchased shares for about $775 million.

BlackBerry App World continued evolving with support added for 18 new countries, including India, Australia, and New Zealand. RIM also recently unveiled a new services platform that makes it easier to offer advertising within applications and includes support for built-in payment capabilities, push content, and location-based services.  It also announced Open GL ES support, a Java GUI builder, and Theme Studio to help developers generate dynamic user experiences. Further, the company announced a partnership with Adobe that will allow developers to use Adobe Flash and Adobe Creative Suite to create applications for the BlackBerry platform.

For the fourth quarter, RIM expects revenue in the range of $4.2 billion to $4.4 billion and EPS in the range of $1.23 to $1.31. Gross margin is expected to about 43.5% and net subscriber account additions are expected to be in the range of 4.4 million to 4.7 million. The stock is currently trading around $70 with market cap of about $40 billion. It hit a 52-week high of $83.77 on June 10.

Chart for Research In Motion Ltd. (RIMM)

I am bullish about both the companies: Palm, as CEO Jon Rubinstein has pointed out, differentiates itself from the competition from Google’s Android phones by owning the entire user experience — the hardware, the software, and the services. But its Web OS product sales haven’t picked up enough; hopefully the addition of a carrier will give them a boost. RIM has a firm foothold in the smartphone market with a killer push email feature that is finding itself new markets. I would be happier if it were to develop some groundbreaking prosumer applications as well.

I still believe that Palm is an acquisition target for multiple companies, including Dell and Nokia. RIM can either go it alone or hook up with another major player. I would not be surprised if at some point HP, Cisco, or Microsoft show up in the horizon as smartphone acquirers, given their trajectories.

Meanwhile, 2010 will be an interesting year for both Palm and RIM.

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