RIMM Delivers a Bold Forecast

For Faulkner's preview heading into the Research In Motion conference call, please click here.

Research In Motion (RIMM - commentary - Cramer's Take) reported third-quarter results that were essentially in line with the company's pre-announcement, and guidance for the fourth quarter turned out substantially better then expected.

Revenue in the quarter was $2.78 billion (up 66% year over year and 8% quarter over quarter), with GAAP EPS of 69 cents (pro forma = 83 cents). The gross margin, as expected, was 45.6%, down more than 500 basis points year over year and sequentially. This was due to the stronger-than-expected demand for the company's new products. The operating margin was 23.0%, also down due to the lower gross margin. Unlike past quarters, however, operating expenses grew only 3% sequentially, well below the rate of revenue growth. The company experienced a tax anomaly in the period, pushing the rate up to 41%. This was partially offset by a one-time investment gain of $13 million.

Cash from operations was a very strong $560 million, enabling the company to add about $100 million to its cash position. Accounts receivable increased about $70 million, but days sales outstanding declined three days, to 59 days. Inventory increased about $70 million, but days of inventory remained unchanged at 36 days.

Generally speaking, sales were in line with the pre-announcement but not from a mix perspective. Unit demand was good with 6.7 million units having shipped in the quarter, but more than half of the demand was from the newly introduced Storm and Bold. The ASP was $337, below expectations due to the foreign exchange impact. The Storm remains capacity-constrained, and that will not be resolved for several more weeks. Management believes that anticipation for the new products led to the relatively weak level of new activations in the quarter of only 2.6 million vs. 3.1 million in the prior year.

Guidance for the fourth quarter was actually better than I expected. Revenue is anticipated to be $3.3 billion to $3.5 billion, or up 19% to 26% sequentially. New units are expected to be 7.5 million to 8.0 million, with ASPs up to $370. The strong new product demand will continue to weigh on the gross margin, however, with the expectation that it drops further to 40% to 41%. Operating expenses should be up 11% to 13% sequentially and the tax rate is anticipated to be at a more normalized 29% to 30%. Pro forma EPS are expected to be 83 cents to 91 cents. Current Street consensus is for revenue of $3.0 billion and pro forma EPS of 83 cents.

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At the time of publication, Faulkner had no positions in the stocks mentioned, but The Telecom Connection model portfolio was long Research In Motion.

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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