RIM Earnings Preview: What We’re Watching

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RIMM: Research In Motion logo
RIMM
Research In Motion
RIM CEO

Source: Flickr/textlad

Research in Motion (NASDAQ:RIMM) is expected to announce its fiscal year Q1 2012 earnings on June 16th. RIM has been an interesting story and in the last quarter, RIM’s stock has taken a beating. Its stock declined from $63 on March 11th, 2011 to around $37 today. [1] RIM continues to face 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. Additionally, the delay in smartphones launches based on BlackBerry OS 7 and QNX operating system creates uncertainty around its future product line-up. We believe that the key factors to look at from the upcoming RIM’s earnings release will be the revenue and gross margins outlook for the rest of 2011.

Our $51 price estimate for RIM stock is about 40% above market price.

RIM’s outlook critical to its stock value

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During the last quarter’s earnings, RIM updated its guidance for the year and mentioned that it expects a shortfall in BlackBerry smartphone sales along with a lower average selling price for these smartphones (see RIM Guides Lower, Stock Sensitive to Market Share Decline). It expects FY Q1 2012 revenues to be around $5.4 billion, which is lower than $5.6 billion that it achieved in FY Q4 2011. Similarly, it expects gross margin to decline from ~44% in FY Q4 2011 to 41.50% in FY Q1 2012.

With the updated guidance, we expect RIM’s market share in 2011 will be around 3.6% meaning it could sell around 57 million BlackBerry phones in 2011.

However, if RIM revises its outlook lower again, it could cause investor confidence and the stock to drop further. For example, market share is a critical driver for RIM, and a slight change in its expectations can cause large declines to our estimate for RIM stock. In the above chart, if the market share declines by half a percentage point in 2013, this knocks around 10% off our price estimate.

See our complete analysis for RIM

Notes:
  1. RIM’s stock quote for last 3 months on Google Finance []