Adjusting RIM Estimates on Difficult Outlook

Research in Motion (NASDAQ:RIMM) announced its fiscal year Q1 2012 earnings, in which it provided a bleak revenue outlook for Q2 due to delays in new product introductions. ^[1] The results for Q1 were also well below the previous guidance provided by RIM, which is causing investor confidence in the stock to collapse. The company now expects the revenue range for Q2 to be between $4.2-4.8 billion while it posted $4.9 billion in revenues for Q1. The delay in the new Blackberry 7 also means that RIM misses the back to school period and will face continued competitive pressures from Apple’s (NASDAQ:AAPL) iOS, Google’s (NASDAQ:GOOG) Android and now Microsoft’s (NASDAQ:MSFT) Windows Phone 7 operating system platform.

Because of lowered outlook, we have updated our price estimate to $42.60, which is around a 40% premium to the market price.

RIM Provides Bleak Outlook

In our earnings preview note, we feared that if RIM revises its outlook lower, it could cause investors to lose confidence in management and so we expected to see shares take a hit (see RIM Earnings Preview: What We’re Watching). This is precisely what happened, and the stock crashed more than 10% in after-hours trading on the Nasdaq immediately following its release of earnings. During the quarter, RIM shipped around 13.2 million BlackBerry phones, down from 14.9 million it sold in the previous quarter. We now expect any gain in RIM’s share in the global mobile phone market to be more subdued in future, with a slight gain in 2011.

According to the management:

Fiscal 2012 has gotten off to a challenging start.  The slowdown we saw in the first quarter is continuing into Q2, and delays in new product introductions into the very late part of  August is leading to a lower than expected outlook in the second quarter. ^[1]

We note that mobile phone market share is the most sensitive driver to our estimates and by dragging the trend line in the chart below you can see how changes in this forecast can dramatically move the price estimate. According to our forecast, if RIM market share reaches 2% by the end of our forecast period, this lowers our price estimate to around $32.

Managing Expenses Will be Key

We now expect SG&A and R&D expenses as a percentage of gross profits to increase dramatically. We are optimistic that this ratio will decline in 2012 as cost cutting efforts gain traction and sales kick in from the new Blackberry 7 launch. If this thesis proves incorrect and expenses remain elevated, there could be additional downside to our forecast.

See our complete analysis for RIM

1. RIM FY Q1 2012 earnings press release, June 16th 2011 [↩] [↩]