RIMM: Great Expectations put Research in Motion in Bleak House

By William Trent, CFA of Stock Market Beat

With apologies to Charles Dickens, there are expectations and then there are expectations. Today’s earnings release from Research in Motion (RIMM) met the former but not the latter.

Revenue for the fourth quarter of fiscal 2007 was $930.4 million, up 66% from $561.2 million in the same quarter of last year. The revenue breakdown for the quarter was approximately 73% for handhelds, 19% for service, 5% for software and 3% for other revenue. Revenue for the fiscal year ended March 3, 2007 was $3.0 billion, up 47% from $2.1 billion last year. RIM shipped approximately 6.4 million devices during fiscal 2007.Approximately 1.02 million BlackBerry subscriber accounts were added in the quarter. At the end of the quarter, the total BlackBerry subscriber account base was approximately 8 million. Revenue and subscriber account additions will not be impacted by the restatement referenced above.

Preliminary GAAP net income for the quarter was $187.9 million, or $0.99 per share diluted.

Ignoring the fact that the SEC investigation may require the company to adjust the numbers down again, all of those metrics were more or less in line with the published expectations of Wall Street’s finest. However, companies trading at a trailing P/E multiple of 60, as Research in Motion is was, are generally held to higher expectations. Meeting the published estimates is not enough – they have to be beaten, and preferably by a wide margin. As we noted on Saturday with our earnings preview, “Research in Motion (RIMM) reports on [Wednesday]. Consensus is calling for $0.99 EPS on $933 million in sales, and guidance of $1.04 on $994 million for next quarter. We’re taking the under.” As to that guidance:

Revenue for the first quarter of fiscal 2008 ending June 2, 2007 is expected to be in the range of $1.025 billion-$1.075 billion. Subscriber account additions in the first quarter are expected to be approximately in the range of 1.125-1.15 million. GAAP earnings per share for the first quarter are expected to be in the range of $0.99-$1.07 per share diluted.

The company is forecasting higher than expected revenue but lower than expected profits, which they blame partly on the administrative costs associated with the options investigation. However, gross margins were down 150 basis points year/year and looking at the deals available on Amazon.com (including some that you have to click to a separate page to find out they’ll give you money to take one) we suspect it has more to do with very aggressive pricing in a desperate attempt to get units out the door. If they can only “meet” estimates when giving away the phone (and then some) what can we really expect for sales and profitability with both consumer and enterprise spending slowing and the Apple (AAPL) iPhone launch on the horizon?

Hint: Look at what is happening in the after hours trading for your clue.

Disclosure: Author holds put options on Research in Motion (RIMM) at time of publication.

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