Does Research In Motion Have an Achilles' Heel?

Research In Motion (RIMM - commentary - Trade Now) announced first-quarter results last night after the close that were in line on the top line and above guidance on pro forma EPS. More important, guidance was at least in line with current Street consensus estimates.

Revenue in the quarter was $3.42 billion (up 53% year over year and down 1% quarter over quarter), with GAAP EPS of $1.12 and pro forma EPS of 98 cents (excludes extraordinary gains). The gross margin was 43.6%, in line with guidance and down 710 basis points from last year but up 360 basis points from the second quarter. The operating margin was 20.2%, down 860 basis points year over year and down 100 basis points quarter over quarter. Excluding one-time charges, however, the operating margin was 23.0% and above expectations.

Cash from operations was huge, about $615 million vs. only $6 million a year ago and more than double the prior quarter. As a result, the cash position increased about $240 million in the period. Accounts receivable increased about $220 million, and days sales outstanding increased about six days, to 61 days. Inventory declined about $50 million, but days of inventory was flat at 30 days. Channel inventory was characterized as being about flat with the prior quarter, or about four weeks (very low). As was the case in the prior quarter, management was not expecting any replenishment to take place in the near term.

Research In Motion's sales were very good, with 7.8 million units having shipped in the quarter, an increase of 44% from the prior year and flat with the prior quarter. ASPs were $357, slightly above guidance. Of these units, 7.3 million, or 94% were to new subscribers or replacements. New activations in the period were 3.8 million, a 3% decline vs. the prior quarter. As has been the case for some time, most new subscribers were "non-enterprise," and this quarter represented about 80% on the new subscribers. This strength did raise some questions on the call as to demand from enterprise accounts, but management sees no concerns in that market.

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At the time of publication, Faulkner had no positions in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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