Earnings Preview: Research In Motion

Zacks

Research In Motion Ltd. (NasdaqGS:RIMM - News) is slated to release its third quarter 2012 results on Thursday, December 15, after the closing bell. The current Zacks Consensus Estimate for the third quarter is pegged at $1.22, representing an annualized negative growth of 29.66%.

With respect to earnings surprise over the trailing four quarters, Research In Motion has outperformed the Zacks Consensus Estimate in three quarters of the last four quarters. The average earnings surprise was negative 0.39%.

Second-Quarter Recap

Total revenue in the reported quarter was $4,168 million, down 9.8% year over year and was also below the Zacks Consensus Estimate of $4,522 million.

Net income in the second quarter of 2012 was $329 million or 63 cents per share compared with $797 million or $1.46 per share in the prior-year quarter. Adjusted EPS (excluding cost optimization program expense) of 80 cents also missed the Zacks Consensus Estimate of 89 cents.

Gross margin in the reported quarter was 38.7% compared with 44.5% in the year-ago quarter and 43.9% in the previous quarter. During quarter, Research In Motion shipped around 10.6 million BlackBerry smartphones and around 200,000 BlackBerry Playbook tablets.

Agreement of Estimate Revisions

In the last 30 days, out of the 26 analysts covering the stock, EPS estimate was increased by seven analysts for the third quarter of 2012 while 12 moved it downward. For the fourth quarter of fiscal 2012, out of the 33 analysts covering the stock, none increased their EPS estimates but 21 reduced the same.

For fiscal 2012, in the last 30 days, out of the 36 analysts covering the stock, only two analysts increased their EPS estimates while 22 analysts moved in the opposite direction. Similarly, for fiscal 2013, out of the 39 analysts covering the stock, only one analyst increased the EPS estimate while 24 reduced their EPS estimates.

In synergy with the downward revision, we believe that stiff competition from Apple Inc.’s (NasdaqGS:AAPL - News) iPhone/tablets and Google’s Android-based smartphones, coupled with tepid response for their much-hyped PlayBook tablets will act as headwinds for the company going forward.

Moreover, the company’s recent announcement of providing $485 million for losses relating to the inventory backlog of PlayBook tablets in the third quarter of 2012 is another blow to its future growth prospects.

Magnitude of Estimate Revisions

During the last 30 days, for the third quarter of 2012, the current Zacks estimates remained flat with the Zacks Consensus Estimate of $1.22. For the fourth quarter of 2012, the current estimates were 24 cents short of the Zacks Consensus Estimate of $1.42. For fiscal 2012, the current estimates were 30 cents below the Zacks Consensus Estimate of $4.71. While for fiscal 2013, the current estimates were 73 cents short of the Zacks Consensus Estimate of $4.70.

Earning Surprises

In the previous quarter, Research In Motion Ltd. reported EPS of 80 cents, which missed the Zacks Consensus Estimate by 9 cents. The current Zacks Consensus Estimate for the ongoing quarter contains 0.80% downside potential while for the upcoming quarter, it reflects an 8.48% downside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2012 and fiscal 2013, the Zacks Consensus Estimates downside potentials are 1.59% and 6.55%, respectively.

Our Recommendation

We believe stiff competition from Android-based smartphones and tablets coupled with Apple’siPads and newly launched iPhone 4S will result in loss of market share for the company. Moreover, Research In Motion is also giving away $100 applications free of cost to its offended customers, which in turn will put further pressure on EPS, in our view.

However, we believe that the launch of BB7-based handsets coupled with reduced tablet prices during this holiday season will certainly boost sales in the near term. Moreover, the company plans to launch their first QNX-based smartphones in the middle of 2012, which we believe will be accretive to the company’s revenue and will also help them regain market share.

We, thus, maintain our long-term Neutral recommendation on Research In Motion Ltd. Currently, the company has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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