RIM Bets the House on QNX, 40% Upside if They’re Right

RIMM: Research In Motion logo
Research In Motion

Research in Motion (NASDAQ:RIMM) announced that it will miss its revenue guidance for the third fiscal quarter ahead of the earnings call due later this month, sending its shares plummeting by almost 10% Friday. [1] The once mighty RIM has fallen more than 70% YTD as competition from Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android devices took smartphone market share away in recent years. Its most recent ploy of entering the nascent tablet market with a half-baked product to counter the iPad has also met with poor results as consumers refuse to buy the over-priced tablet leading to a heavy stockpiling of unsold inventory. RIM has, of late, been trying to sell off inventory with aggressive promotions and advertising. (see RIM Tries Buy 2 Get 1 Free to Sell Playbooks in Desperate Move)

See our complete analysis for RIM stock here

Why RIM won’t abandon the Playbook

However, it seems that in spite of the promotions, the company has not been able to meet its grossly overestimated forecasts. According to DigiTimes, RIM had a forecasted sales of 4-5 million Playbooks for 2011 in April when it made its debut. [2] However, its final sales for the year will only be a small fraction of that. Playbook shipments have been dismal this year, falling from a poor 500,000 in the quarter of its debut to 200,000 in the second quarter and now the company has reported sales of only 150,000 units this quarter. The company said that it will book a one-time pre-tax charge of $485 million in order to write off the hugely unsold Playbook inventory.

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RIM is however not giving up on the Playbook as it is the only device in the market that runs on the QNX platform, which the company is betting its future on. Smartphones based on BBX, which draws largely from the QNX, are not due until next year.

The company recently announced that its BBX smartphones will have the same 1024 x 600 display resolution and 16:9 aspect ratio as the Playbook so that apps developed for the tablet also runs on BBX. [3] RIM is looking to strengthen its relationship with developers by making it easier for them to develop apps for the QNX platform so that when it comes out with its smartphones, it will be able to better compete with the Android and the iOS ecosystem. Abandoning the Playbook will turn developers away from QNX and work against that strategy.

Margins under pressure

Continuing with the Playbook, however, means that more price cuts are in store as the company looks to sell off inventory by increasing its promotional discounts. The most basic of the Playbooks costs around $271 to make, according to iSuppli estimates, and the company has slashed its price to $199 for the holiday season. Selling the tablet at huge discounts will have an adverse impact on the gross margins as the average selling price of the tablet decreases.

We forecast a falling margin forecast for the coming years, however, if you believe that the margins will decrease faster or that the company will see a revival in fortunes with its BBX-powered smartphones, you can adjust the forecast line and check out the corresponding impact on RIM’s stock price.

In addition to the inventory write down, RIM also announced that it will incur a charge of $50 million related to the service outage that had affected millions of BlackBerry users around the world this quarter, in the aftermath of which the company offered $100 of free apps and one month of technical support in a bid to pacify customers. (see RIM Apologizes, Offers Cash but Fails to Appease Mr. Market)

In light of the recent announcements, we have revised our price estimate for RIM’s stock to $24 which is about 40% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. RIM says it will miss Q3 quidance, plans to book charge due to poor PlayBook sales, BGR.com, December 2nd, 2011 []
  2. Quanta cuts PlayBook production lines, DigiTimes, September 21st, 2011 []
  3. RIM: BBX smartphones will have same resolution, aspect ratio as PlayBook, BES support, too, Engadget.com, November 10th, 2011 []