RIMM Sinks, I’m Holding On

Yesterday, Research In Motion Limited (RIM) (Nasdaq: RIMM; TSX: RIM) reported second quarter results that were in line with guidance but slightly below analyst estimates. A major reason for missing estimates was the delay of the BlackBerry® Bold in the US market due to battery and 3G connectivity issues.

Q209 revenue was up 88% y-o-y and 15% q-o-q to $2.58 billion on shipment of 6.1 million devices. Net income was $495.5 million, or $0.86 per diluted share, versus $482.5 million, or $0.84 per diluted share in the previous quarter and $287.7 million, or $0.50 per diluted share last year.

RIM added about 2.6 million net new BlackBerry® subscriber accounts, and the total BlackBerry® subscriber account base was approximately 19 million. RIM is benefiting from the smartphone trend as described in a Q208 Gartner report. Smartphone sales grew 126% and the smartphone market share doubled to 17.4%. Nokia was no. 1 with 47.5% market share, but its growth rate was just 8%. Apple, on the other hand, saw its share decline to 2.8% as it cleared out first generation iPhones before the iPhone 3G release in July.

With its killer ‘push’ email application, RIM is well-positioned in the smartphone market. But it needs to innovate further and make its UI simpler, especially scrolling. We still haven’t seen anything that beats how iPhone deals with scrolling. With increasing competition (G1, the Google Android phone is the latest buzz), differentiation will be the key, especially for the software, OS and the UI, key aspects of the iPhone challenge. In the earnings call, there was mention of “unannounced product on a new platform” to be released later in Q3. I guess that would be the touchscreen model Thunder, and it remains to be seen whether this phone has any substantially innovative features.

Last quarter, we saw how increased marketing expenses were affecting RIM’s bottom line. That trend is continuing as there are new product launches. Products on new platforms have a low profit margin while the new Pearl Flip, which uses an existing platform, has a better margin. The weakening dollar is also contributing to higher component costs. Overall, third quarter profit margin is expected to decline to 47% from 50.7% in Q1 and Q2. Device ASPs were approximately $344 and are expected to be the same in Q3.

For the third quarter, RIM expects revenue in the range of $2.95-$3.10 billion. EPS is expected between $0.89 and $0.97. The average analyst estimate was EPS of $0.98 and profit margin of 50%. The stock is currently trading around $73.

I seldom find a complete echo of my sentiments in Jim Cramer, but on RIM, I happen to share his feelings: “My trouble is that I like Research In Motion too much. I can’t recommend the stock in this environment but I think the company will have good growth. If you already own it, hold it.” Well, I am holding my shares.