We reaffirm our long-term Neutral recommendation on Research In Motion Ltd. (RIMM). The company declared mixed financial results for the fourth quarter of fiscal 2011. Although EPS beats the Zacks Consensus Estimate, revenue was below the estimate. Management provided a weak outlook for the ensuing first quarter of fiscal 2012. Ever since the legendary iPhone of Apple Inc. (AAPL) hits the market, Research In Motion started losing its leadership position.
For the last couple of years, the company failed to introduce any smartphone that can capture the market from iPhone. Meanwhile, the situation got aggravated once Google Inc. (GOOG) launched its Android software, which pushed BlackBerry further toward trough.
In the previous quarter, gross margin of Research In Motion was 44.2% compared with 45.7% in the prior-year quarter. We anticipate the gross margin to fall further in the neat term primarily due to two reasons: firstly, the launch of “PlayBook” will result in increased marketing expenditure and other selling expenses and secondly, growing share of sale in the emerging markets out of total sales, which may reduce ASP. Customers in the Asian markets are very much price sensitive and that may reduce the overall gross margin of the company.
Nevertheless, a silver lining for Research In Motion is the global smartphone market, which is largely untapped and is providing huge opportunity for the company. The strong brand value of BlackBerry is expected to keep the earnings momentum high. The company has established effective sales distribution networks with 565 wireless carriers in over 175 countries.
Although Research In Motion is on the verge of launching its first tablet, we are not sure whether the company will be able to snatch market share from Apple’s iPAD. While iPAD mainly targets the mass market, PlayBook is designed primarily for limited enterprise customers. Secondly, unlike iPAD, PlayBook cannot connect directly to wireless networks and needs Bluetooth connections of its users’ BlackBerry handset or Wi-Fi cloud for Internet access. Thirdly, PlayBook will run on QNX software instead of newly launched BlackBerry 6.0 operating system. This may create confusion among third party application developers to develop any software unique to all BlackBerry products.