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 The Street thought RIM's Q1 was an easy beat-and-raise layup, but the BlackBerry maker (narrowly) missed both revenue and EPS estimates, and issued weak profit guidance for Q2. Shares traded down 10% after-hours, below $129, and will almost certainly drop Thursday morning.
August quarter revenue guidance, though, was above consensus. So what's the disconnect? RIM says operating expenses will jump 26%-28% during the quarter as it spends more on R&D and marketing, and preps to roll out a bunch of new products before the holidays. (Like the BlackBerry Bold on AT&T and a touchscreen device code-named Thunder, for Verizon Wireless.)
During RIM's conference call, co-CEO Jim Balsillie said he's fine investing in the future at the cost of near-term profits. We think he's right. The smartphone market is rapidly growing, but so is RIM's competition. In the next year, expect the land grab to heat up fiercely between RIM, Apple, Google's Android partners, Microsoft, and Nokia. RIM has one of the strongest platforms in the industry, and leads the U.S. smartphone market by a wide margin. But they could easily lose their footing if they don't stop pushing out new products and aggressively marketing them.
One specific thing we think Balsillie is underestimating -- or at least acting too coy about: How much impact Apple is going to have with the 3G iPhone that's coming out next month for $199 -- a 50% price drop. When asked whether RIM would overlap much with the iPhone's customer base, he answered with a brusque, "Nahhhh. Nahhhh."
We admire his confidence. And he's right to some extent: Apple will not invade RIM's enterprise market overnight. But we think the iPhone will be a huge hit with consumers, and consumers are increasingly important to RIM. "Non-enterprise" customers accounted for 40% of RIM's sales during Q1, up from 38% last Q4, 34% last Q3, 30% last Q2, etc.
Key Q1 metrics:
Revenue: $2.24 billion, up 107% y/y but short of $2.27 billion consensus
EPS: $0.84, a penny short of $0.85 consensus
Net subscriber additions: 2.3 million, even with 2.3 million estimate (Lehman)
Phones shipped: 5.4 million, below 5.5 million estimate (Citi)
Q2 guidance:
Revenue: $2.55-2.65 billion, above $2.44 billion consensus, $2.5 billion (Citi)
EPS: $0.84-$0.89, below $0.90 consensus, $0.94 (Citi)
Net subscriber additions: 2.6 million, below 2.8 million estimate (Citi)
Release, updated financial model.
Live conference call notes:
5:00 Call begins. Standard disclaimers.
5:05 Jim B. going over recent highlights. Good feedback from carriers on recent event. 2.3 million net sub adds, in line with April forecast. Total BB sub base over 16 million. Strength in N.A. and heavy promotion of Curve in latter part of quarter.
5:06 Growth in LatAm and UK. Non-enterprise now more than 40% of total base. Talking up BB Bold.
5:07 Blown away by Bold! Never seen a better looking display on a smartphone. Clearly I'm pretty amped about this smartphone. Never heard a faker-sounding endorsement!
5:09 Global agreement with BrightPoint to distribute BB products and services. Extending into new territories. Tiered pricing plans continue to drive market success.
5:10 Excited about launching Bold in AsiaPac, will stimulate further growth. SAP app for BlackBerry.
5:13 Talking about fund to bribe people to write apps for BlackBerry. And roll-outs at T-Mobile, which Jim B. pronounces "Mo-beel."
5:19 Hiring a lot of engineers, building facilities that could house 1,000 engineers over time. Expanding outsourcing, new network center outside N.Am.
5:20 Brian going over results/stats from release.
5:21 51% gross margin, in line with expectations.
5:24 Forecasting rev, etc. Hardware shipments over 6 million units at ASP of $349. High shipments thanks to high sales, stocking for back-to-school promotions for August. BlackBerry Bold to ramp in Q3. Inventory well within comfortable range. Software rev expected to increase slightly. 50.5% GM. Weak US dollar to put pressure on margins. Total opex increase of 26-28% from Q1, with R&D up 23-24%, Sales, marketing, admin up 28-30%.
5:26 Expect R&D investment to keep going up. Missed some of the guidance stats... will go back and add relevant ones.
5:28 Jim B. back on. Time for Q&A.
5:29 Citi's Suva: Color on SG&A and investments making in future? SG&A came in $10 million more. More marketing? More new product? How should we feel comfortable? A lot of stuff happening in Q3. Product launches. Carriers lining up etc. All for stuff we have going on in Q3. Really comes down to what we're going to do on the top line. Q2 usually not the busiest time. Holiday season by far a lot of execution efforts. Investing to drive the top line... shifting outside traditional R&D.
5:33 More talk about spending now for future top-line growth. "Adoption acceleration game." Top line very important... must invest for growth.
5:35 What do you see company looking like after investment for next level? More of everything you're doing today? More products, bigger brand, more capacity? Something different? We see many aspects od business shifting. You've seen some interesting capabilities in b-to-c, SAP, carrier and channel, much more applications. (Not making any sense.) Slid in a bit of a sleeper today -- Australia-Cisco deal.
5:38 By Sept. will have better idea of how we can do during holiday season. Long-term strategic things "because it drives the cascading of all these channels."
5:41 Most new products have lower GM when they launch, improvements as they scale. ASP matters too; what do you do with pricing depending on what segment of the market you're targeting?
5:42 Wouldn't model gross margins going up significantly in Q2.
5:43 New products will make up a small percent of 6 million phones during next quarter. "Very very fortunate" to have bought certain patents.
5:50 To what extent other variables about pricing? iPhone: lower pricing. Able to change subsidy levels? Overlap with Apple? Doesn't have particular relevance to our thinking. When you cross over to more consumer areas, hero product treatment, how should you price entry and acceleration, co-op, those sorts of things. Do you do special one-time entry things? Triple digit-type growth strategies. You reserve the right to say no and slow down growth trajectory.
5:52 Adoption and land grab. By far in RIM's best interest to have a fair model to sustain this hypergrowth.
5:54 Too much overlap with iPhone customer base? "Nahhh! Nahhh!"
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