RIM Earnings Preview: Another Round of Weak Results Expected

Research in Motion (NASDAQ:RIMM) will announce its fiscal year Q3 2012 earnings on December 15th, and we expect it to miss its own expectations again, continuing on a trend that was set a few quarters back. The company has lost over 70% of its stock value in the past year as increasing competition from Apple (NASDAQ:AAPL) and Samsung among others has eaten away at its smartphone market share causing revenues to decline. In a bid to preempt a big crash for its already fragile stock, the company set the tone for another bleak quarter ahead of its earnings call by announcing earlier this month that it will be missing its revenue guidance for the quarter. (see RIM Bets the House on QNX, 40% Upside if They’re Right)

See our complete analysis for RIM stock here

Expected revenue miss

RIM expects to miss its revenue guidance of $5.45 billion, which is the mid-point of $5.30 and $5.60 as per the outlook given by the company in the last earnings call. ^[1] We expect RIM to generate revenues of around $5 billion in this quarter, hit primarily by a stalling in Playbook sales.

Playbook charge

The company will take a $485 million charge  this quarter to write-down the value of ts unsold Playbook inventory. This is despite the promotions and discounts on offer this holiday season. Given the increasing competition in the nascent tablet market with the entry of cheaper rivals such as the Kindle Fire and the Nook as well as the launch of Windows 8 tablets next year in addition to the market-creator iPad, a persistent slow sell-through of the Playbook may imply further charges in the future. Playbook shipments have declined from 500,000 in its debut quarter to 200,000 in the next quarter and the company expects to ship about 150,000 this quarter.

Playbook 2.0 update

One of the main reasons for poor Playbook sales has been the lack of important features on the tablet such as a native email client and the BBM, which is one of the company’s flagship services. RIM had initially announced an OS update that would include these features within 60 days of its launch. However, the update has now been postponed to February 2012. It is indeed very concerning that an OS update is getting delayed since updates are generally easier to handle as compared to a brand new OS launch. This could imply serious flaws in the OS itself that is taking the company so long to overcome. We expect an update from the company regarding their 2.0 update schedule.

Blackberry shipments to meet expectations

Amid all the bad news surrounding the Playbook, the company will however manage to meet its expectations for BlackBerry shipments. Improving on its 10.6 million shipments last quarter, RIM expects to ship around 14.1 million smartphones this quarter, in line with its previous 13.5-14.5 million estimate. The BlackBerry contributes more than 50% to our $24 price estimate for RIM stock while the Playbook only 0.2%, so an increase in BlackBerry sales matters more than a slowdown in Playbook sales.

However, the company expects next quarter shipments to be below third quarter levels due to a lower-than-expected sell-through of its smartphones. It seems the newly launched BB7 smartphones failed to enthuse customers, making it extremely important for the company to deliver on its BB10 smartphones due to be launched early next year. A delay in this launch will make it a point of no return for the company, as it pins all its hopes on the new OS to stem the loss in its BlackBerry market share.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. RIM FY Q2 2012 earnings press release, September 15th, 2011 [↩]