RIM disappoints the market with Q1 results

RIM’s fiscal Q1 results were out yesterday, coming in slightly below analyst expectations and – for the first time in a long time – showing no sequential growth.

Shipments of devices were flat on the previous quarter at 7.8m. Average sale price fell slightly to $357.

Total revenue was down slightly sequentially to $3.42bn, though up over the year by 53%. Revenue from handsets fell from $2.88bn last quarter to $2.77bn.

Operating profit fell from $733m in the previous quarter to $690m, although it was up from $646m a year earlier.

Subscriptions to Blackberry services also slid sequentially from 3.9m in the previous quarter to 3.8m, though up 65% year on year.

Co-CEO, Jim Balsillie, did a good job of talking the results up using the year-on-year growth figures. He described RIM as having “sector winds at our sail” and enthused strongly about the roadmap for the next 15 months.

The company gave guidance for the next quarter of 8.1 – 8.7m device shipments, 3.8 – 4.1m new subscriber accounts, $3.45 – 3.7bn revenue, a stable gross margin at around 43% and EPS of $0.94 – 1.03 compared to $1.13 in this quarter. Analysts were disappointed as this was down on their expectations.

Comment:

RIM has done almost too well during the last few quarters, as the recession has hit, and is now in a position where the stock market almost expects it to beat expectations. This has been reflected in the share price which nearly doubled from March to mid-June.

The previous quarter’s results were exceptionally good and, in fairness to RIM, it would be hard to build solidly on those in the current climate.

The big question about these results is whether the pause in RIM’s growth is because

• of market conditions finally hitting RIM
• it is being hit by competition from Apple (or possibly other competitors); or
• portfolio and other product timing issues.

Jim Balsillie said in the earnings call that he does not see evidence of enterprises or consumers saying they will avoid buying RIM devices or services because of economic conditions.  If anything he said that the whole smartphone area is growing strongly and that RIM has gained share over the last few quarters, building  momentum.

He also said that it is not caused by channels reducing inventory, as this largely happened 2 quarters ago and inventory levels have been running at comparable levels during the current quarter.

He did say, though, that consumers had made up 80% of RIM’s buyers in the quarter, up from nearer 50% as a run-rate.  Given the overall lack of growth, this suggests that corporate buying has slowed sharply, which would not be a surprise in the current climate.

However, Balsillie also said that the enterprise segment is starting on an architectural shift towards its Mobile Voice System (MVS) which integrates cell phones with the PBX, something RIM has been developing for several years. He suggested that this quarter’s slowdown may be no more than the start of this trend coupled with a corporate budgetary breather after an exceptional quarter last time round.

Other commentators have suggested that RIM is (finally) being hit by competition, mainly from the iPhone.

That is plausible.  Apple did not release any new devices in the period covered by RIM’s results, so it is unlikely to be a pure volume switch in favour of Apple.  But Apple had announced its OS 3.0 and the world was waiting for its new models to appear in early June – this probably caused some stalling of smartphone sales especially in N.America, though we will not know until other reports are in.

But it’s not just Apple.  Early sales of the Palm Pre had a small effect in N.America. Other vendors – Nokia, Samsung and LG – have been successful with Qwerty and Qwerty-slider devices in other regions where RIM is typically stronger in consumer segments.

Further key factors for the quarter were:

• a cost reduction in hardware, as promised in earlier quarters, coupled with a product mix shift saved $100m in cost of sales
• one-off changes in tax treatment pushed expenses up by $110m but also brought a significant reduction in tax liability
• RIM’s App World went live in the quarter – few details were given on how activity levels are going
• consumers now make up over 50% of RIM’s subscriber base, leading to increased focus on consumer channels such as WalMart and greater opportunities in pre-paid sales

Given the growing mix of consumers in RIM’s user base, and the large number of Qwerty devices being launched both at the high-end and in the mid-range from other vendors, it’s clear that competition for RIM is becoming more intense across the board.

RIM is in a strong position with products, with it’s brand and – increasingly – with its channels.  But it needs the corporate market to start firing again quickly and also needs to keep its consumer device portfolio refreshed at a competitive rate.