By Chris Bulkey, principal analyst at Technology Research Group
Research In Motion
( RIMM) reported revenue and earnings of $4.08 billion and $1.27 per share for the fourth quarter of fiscal 2010 (TRG estimates - $4.07B and $1.28).
Revenue growth remained in deceleration mode -- 18% year on year for the quarter vs. 29% in the preceding quarter. Revenue deferrals were down 4% sequentially. Guidance for thefirst quarter of fiscal 2011 implies modest top and bottom-line improvement (revenue =$4.25B-$4.45B, EPS = $1.31-$1.38). Gross margin is expected to fall 120 basis points quarter on quarter (to 44.5%).
Results fell short of estimates; stock is selling off as a result (down roughly 6% in early trading). Several sell side analysts cut estimates and ratings. As usual, however, they turned bearish after the damage has been done. A look back at the red flags we raised over the past two quarters shows how investors could have seen this coming.
Decelerating top-line growth, erratic gross margin trends, and pressure on ASPs were readily apparent. A steady increase in the provision for obsolete inventory, over the first three quarters of fiscal 2010, signaled product obsolescence issues. Lenient tax rates and cuts in R&D expenses signaled a need to manage earnings. Management pointed to new products and market opportunities as reasons for optimism. We disagree. Bottom line is that RIM sells a highly commoditized product into a competitive market. Their operating model is flawed. The proof is in the numbers.
The following table summarizes P&L indicators from the most recent quarter (F4Q10), the previous quarter (F3Q10), as well as the year-ago quarter (F4Q09). Metrics are GAAP-based unless stated otherwise.
Valuation & Recommendation
Shares are up 10% year to date and valued at 17 times trailing GAAP earnings. Chief competitor
(rated sell) trades at roughly 23 times. Apple's accounting turned suddenly aggressive in the final quarter of fiscal 2009 (ended October), but financials are still in better shape. The company also has a broader product line that leaves it less vulnerable to commoditization in its handheld device business. Though less expensive, we do not view RIM as a value at current levels. Recent results suggest operations are far from stable. We reiterate a sell rating and $53 price objective (target multiple moves to 11 times forward earnings from 12 times).
Chris Bulkey is the principal analyst at Technology Research Group in Narberth, PA