Research in Motion (NASDAQ:RIMM): Colour on Quarter

Research in Motion (NASDAQ:RIMM) reported FQ4 results last night, missing estimates (ex-tax) & guiding lower for FQ1. The company did guide F2010 EPS to above consensus.

– We have 3 downgrades out this morning: from Deutsche, Merrill & Baird. Other firms, including CSFB, RBC, Jefferies & JPM remain Buy rated and are defending the name telling clients to buy weakness. So the Street appears to be pretty much divided on the name.

Yet, I think one should look no further than to read what Deutsche Bank is saying about the name. They are downgrading RIMM to Sell from Hold with a $50 target (from $60).

Here are the comments:

Time is not on RIM’s side. We think this quarter was just a taste of what lies in store for the company. The company is feeling the growth of Android shipments which are replacing Blackberries in all of the company’s markets. In the core enterprise base, a growing number of corporates are opening their e-mail systems to iOS and Android. Emerging markets, which have driven RIM’s growth over the last two years, appear to be slowing as well. We think this trend will only get worse as Android smartphones get dramatically cheaper. We believe fully powered Android phones will be available for $100 by early 2012, and this will threaten RIM’s growth in all markets. Given the choice between a fully-featured Android smartphone and a comparably priced Blackberry e-mail only device, most consumers will go with the smartphone. The company has held up their Blackberry Messenger (BBM) platform as a factor that locks in consumers. We think any such loyalty will prove fleeting as alternative messaging streams open up.

We have remained neutral on the stock on expectation that their new QNX operating system could provide a meaningful improvement in the company’s prospects. We no longer believe this is true. While RIM has grasped some of the important conceptual elements of a modern OS, it now appears that these lessons have not taken root. Instead of offering a single coherent OS strategy, they are fragmenting their own platform by offering multiple elements. In conjunction with their earnings release today, the provided an update on their OS strategy. This includes a Java VM for existing Blackberry apps, a separate Davlik JVM for running Android apps, the Adobe AIR platform, their webworks web-tools OS, and now an NDK. By our count, that is five separate platforms, and we believe this will confuse developers to the point of distraction. This is exactly the “appeal to everyone” strategy that first Motorola and then Nokia pursued which resulted in very low levels of developer interest.

Moreover, the company mentioned that there will be no QNX handsets available until calendar 2012, until then the new OS will only be available on tablets. We think this will limit the size of the customer base and the appeal for developers. While the company has decided to designate these new handsets not as smartphones but as superphones, the reality is that the new devices will at best merely match the capabilities of competing devices. As a result, we think RIM will lose share this year and next.

We also found many questions in their guidance. For 1Q12, they clearly guided below expectations. We find further fault with their full-year guidance. They have indicated that gross margins will likely decline and operating expenses go up with the launch of the Playbook. The company would not break out Playbook gross margins, only saying they would be below 40%. We believe Apple’s gross margins for the iPad are well below that level and Apple’s much larger volumes and internal silicon likely means they have a material cost advantage over RIM. In reaching their FY12 $7.50 EPS guidance, they seem to be assuming a much larger revenue growth rate than we think is achievable with their core Blackberry shipments. We are much more cautious on the potential for the Playbook.

Finally, we believe the company faces a major structural impediment to finding a coherent strategy. The company still has co-CEOs. In all our years covering stocks, we cannot think of a situation where this ended well (with the exception of Motorola where they split the company). We believe there is growing division within RIM and this evident in the fragmentation of their OS platforms. One camp appears to want all the benefits of a proprietary OS while the other wants to go down a more commercial, lower-opex path using Java, Android, AIR and other people’s R&D. Our checks indicate that the company now has multiple parallel working groups aligning along different camps, reduplicating work. This is not only expensive, but looks set to stymie their ability to steer a clear strategic path. In short, we think their market dynamics are working against them and we do not have the confidence that they can solve this problem.

Consequently we downgrade our rating from Hold to Sell

Notablecalls: Brian Modoff & Jonathan Goldberg, CFA say it all. Nothing more to add. I think anyone long RIMM should read this.

Not making a call here, though. It’s down 12% pre market & may as well bounce here in the s-t.

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