RIMM: Research in Motion Conference Call Confirms Our Bearish Call
Our first reaction to the Research in Motion (RIMM) earnings was release was that, in line with our forecast, “companies trading at a trailing P/E multiple of 60, as Research in Motion was, are generally held to higher expectations. ” Not wanting to get too cocky, however, we decided to give the transcript a thorough reading to see how management’s comments fit in with our outlook for wireless. For example, the company says:
Pearl continues to do exceptionally well and is available through over 90 carriers around the world, and the 8703 for CDMA continues to show strong adoption and the response to the recent launch of the BlackBerry 8800 has exceeded our expectations.
(Excerpt from the full RIMM conference call transcript)
This appears to contradict our overall bearishness toward the handset market, and particularly the notion that consumer sales may be frozen by the pending Apple (AAPL) iPhone launch. However, anything sold for negative $75 ought to “do exceptionally well,” and management admits as much shortly afterward:
Carrier programs such as mail-in rebates and the launch of the White Pearl with T-Mobile and the launch of the 8800 at AT&T all served to stimulate demand in January and February.
(Excerpt from the full RIMM conference call transcript)
It also jibes with comments from Palm after their recent quarter:
We saw an increase contribution from lower priced smartphones as we introduced the Treo 680 to the market at a lower price point and a sleeker form factor to attract a new customer demographic. As expected, smartphone ASPs declined in the third quarter.
(Excerpt from the full PALM conference call transcript)
Motorola’s comment in the press release preannouncing their disastrous quarter also fits in: “The company expects the Mobile Devices business to incur an operating loss in the first quarter, and to experience a gradual recovery in the second half and be profitable for the full year.” It all adds up to the same message: there are too many handsets available for sale. And, as usually happens when there is too much of something, prices are getting cut so deep that the sellers can’t make any money. They are all acting like the restauranteur who prices the menu to lose money but plans to make it up in volume. Research in Motion even helps us quantify it:
Total devices shipped in the quarter of approximately 2 million were up from 1.8 million in the prior quarter. Sell-through in the quarter was strong with approximately 1.75 million devices being activated, which means we are selling almost two devices for each new subscriber account added.
(Excerpt from the full RIMM conference call transcript)
It also means that they sold 250,000 more to carriers and retailers than the carriers and retailers sold to their customers. That wouldn’t be so bad if the company weren’t piling up its own stash.
Inventory on hand increased by approximately $40 million as we continue to purchase additional raw materials and build semi-finished goods to support demand for current and upcoming product launches.
(Excerpt from the full RIMM conference call transcript)
Of course, that $40 million was just the sequential increase. On a year/year basis inventories are up 90% to $255 million, which is twice the growth rate of sales. The sequential inventory growth of 15.7% is also faster than even the high end of the range for sequential sales growth guidance (10.2% - 15.6%). Again, too many phones.
The thorough reading did little to change our outlook toward wireless or expectations for RIMM stock.
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