RIMM - the battle of the analysts continues

I guess the phrase of the day should be "It's always darkest before the dawn."

Last Monday, Dec 10, Morgan Keegan analyst Tavis McCourt said wireless carrier T-Mobile USA lowered prices it charges for RIM's BlackBerry Pearl smart phone to $99 from $149, showing "that the Pearl is becoming a more mature product in smart phone land." He also said that that there was a "Potential" loss of momentum of Blackberry sales.

What a load of horse sh*t.

The stock began to drop from a high of $125 that morning as any momentum players in the stock would have unloaded their positions quickly. The stock has been as $97 as the overall market has had some problems with ongoing issues related to mess in the financial sector.
On November 20, Jim Balsillie (the Co-CEO of RIM) presented at the Scotiabank Tech conference (while the fire alarm was ringing in the conference facility). The first question was from the Scotiabank analyst, "Are you seeing any slowdown resulting from any layoffs in the financial sector. Balsillie's answer was "whatever impact we are seeing is dwarfed by the international sales. RIM's growth is coming from new channels in new markets (China, Russia, Eastern Europe, Latin America), rather than increasing penetration at large US financial services firms.

I guess McCourt didn't bother to listen to that call, as he was too busy with "channel checks" in the US market - which I guess really means visiting 3-4 AT&T wireless stores in the city where he lives.

So why did the Morgan Keegan note cause any issue? The "news" was two weeks old.
A few other Wall St. (and Bay St.) analysts began to chime in with their views.

This morning, a note from Goldman Sachs indicated that investor concerns around a weakening financial services IT spending environment have pressured shares down from the $125 level to $100. Goldman retained their rating at Buy and a $147 target price.

Citigroup says that the shares of RIMM were a very strong performer in 2007, and they think that RIMM is "the" stock to own for 2008. It is a pure-play in one of the fastest tech markets (smart phones) and should grow sales at 57% and see EPS growth of 66% in CY2008.

Consensus for the November 30 quarter is revenue of $1.65 billion, EPS of $0.62. RIMM is expected add 1.65 million subscribers this quarter ending November 30, though consensus for units shipped are in the 3.85 million range. Estimates for the February 2008 Qtr have edged down recently, but Citi thinks strong trends continue for RIMM into 2008, despite recent macro and financial services concerns. Citi reiterated its Buy rating and a $140 target price.

If we get in-line or slightly higher than expected results on Dec 20, the stock should remain at current levels as it has already taken a 30% haircut. I doubt that the shorts are done, but the stock closed at $106 on Friday, and it did trade as high as $109 , so it was apparent that many shorts were closing their positions in advance of the earnings, and going home with a nice profit.

On the Q2 earnings call on October 4, Balsillie indicated that the November quarter (Q3) would be the first time that RIM was being "featured" by the carriers for Christmas promotions. In other words, RIM would be filling the channel with units in anticipation of demand. This occurred in the US, Canada, and numerous European and Latin American countries that celebrate Christmas. Moreover, due to the timing of RIM's various quarter ends, and the recurring nature of their deals with the carriers, they have a pretty good idea how the quarter is going to turn out by the time they report the quarter. Their estimates for future guidance are pretty good - and they try to be conservative. As a result, RIM has been beating estimates and increasing guidance for the subsequent quarter.

Bottom Line: RIM will beat its published estimates for the November quarter. However, what will guidance be for the upcoming February quarter?

RIM begins to ship to China in December (so a full quarter of shipments there), so if RIM indicates that guidance is close to guidance for the November quarter - the stock will be back at $125 on Friday morning. If guidance is appropriate for a typical February quarter, then the stock may be below $100 again, and will slowly work up over the year as they execute on their fast growth. Last year, guidance for the February 2007 quarter was subscriber additions of 950,000 - 975,000. They reported 1.02 million subscribers for that February quarter. Therefore, my sense is that RIM's guidance will need to be about 1.35 million subscribers for the February 2008 quarter - which will be the same number as their guidance for the November quarter.

Moreover, it also seems likely that RIM will officially announce the upcoming Blackberry 9000 (a keyless unit comparable to Apple's iPhone). This unit will have to be available soon as AT&T has a new branded keyless phone made by HTC (China) using Windows Mobile, and looks much like the UI the iPhone.

In early October, the BGR website "leaked" news about the new BB 9xxx phone. It won't have the amount of hype and speculation an iPhone did before its release, but there is a great deal of anticipation about its upcoming release.

First off, the 9xxx will truly be a 3G device - unlike the iPhone which as advertised as 3G (meaning that data throughput will 1 Megabit / sec - or enough throughput to carry a full motion video conference call over the airwaves. IPhone works on EDGE, and EDGE is not 3G - and its not even as fast as Verizon's (and Sprint's) EV-DO data network which can handle burst speeds of 750Kilbits per second). The new BB unit will most certainly will have a 3G radio and we’re not talking about the European bands. (The actual 3G bands are not yet clear, but we can only assume North American 3G is a go).

Second, it will have simultaneous voice and data as the phone will be HSDPA - not that Wi-Fi fakery .

Third, it will contain a beefed up 600MHz processor!

And yet, RIM still doesn't sell any BB units in retailers such as Best Buy - but this I've known for years, but was somewhat surprised to learn that this continues to this day. I was out Christmas shopping earlier this week, and found that the wireless carrier booths in the middle of the malls were selling Blackberry units, but the biggest electronics retailer in the US still does not sell the units - and never has sold them (I spoke to a couple Best Buy salespeople about this, and they were sure that another store carried it, but they were unable to find it in their inventory system. I have never seen any Best Buy outlet sell Blackberries as RIM's deals are with the carriers.

However, imagine the sales if RIM did a deal with Best Buy - which is very unlikely.
RIM sells the units to the carriers for $300 or so depending on the model. As a result, the carriers subsidize the purchase of the RIM hardware to their subscribers, and then lock you into a 2-3 years contract - which is why you can get Pearls and Curves for $150 or less. The carrier is happy to subsidize the hardware because they can also lock the subscriber into a high margin data contract (this is how you get emails and internet access). Several years ago, the GSM/EDGE carriers like T-Mobile and AT&T were getting gross margins of 80% on data services. Verizon and Sprint (CDMA) were getting 95% plus. In other words, hugely profitable - and this has not changed.

T-Mobile began offering data plans at $10 per month last quarter, but for a limited amount of data throughput. Apparently, Smartphone sales began to increase quite nicely. Therefore, (and back to the Morgan Keegan note), if T-Mobile is offering Blackberries for $99 (from $149), then it seems logical to conclude that T-Mobile will be looking to sell a lot more very profitable data plans. Why would anyone assume that RIM take the hit on the price reduction? Just because other companies take the hit is not an answer. RIM has always done things differently, and has stuck to their deals.

So now it becomes a battle of the analysts. In one corner, a nobody from a regional firm who is trying to make a name for himself by calling a turn. In the other corner, the analysts from the national firms who have already "made it", and are trying to protect their client's positions.

Who made the better call? We'll find on Dec 20 when RIMM reports. However, you can be sure that the Research Director and the head of Capital Markets at Morgan Keegan came over and patted Tavis on the back, since his "Call" likely caused a bunch of sell orders that came through his firm.

The stuff that really drives me crazy is when the media pick up on negative stuff, and rather than do a little homework and run a balanced article, they simply get the negative stuff online to meet tight publishing deadlines. This intellectual laziness costs people tons of money, but at the same time, creates nice opportunities for those of us who can spend some time figuring out the truth vs. the sophistry and pure nonsense.