Raymond James jumps back in on reeling RIM

Miss earnings consensus by a penny, grow revenue via a growing consumer demand, and see your share price get slaughtered by 15% in the aftermarket. That is Research In Motion’s (RIM:TSX, RIMM:Q) life this morning. Jason had told me that AT&T was having network problems launching the Bold, what with the iPhone hogging up all of the 3G bandwith; I didn’t connect that to a softish quarter, though. Doh!

Here is a glass-half-full take from the equity research team at Raymond James:

“First, The Bad News

A more detailed review of RIM’s F2Q09 results can be found at the end of this
INsight. But let’s get the bad news out of the way first.

– EPS guidance below consensus. While revenue guidance was fine, EPS guidance of $0.89?$0.97 (which includes a $0.01 positive EPS impact from a gain on an asset sale) was below consensus EPS estimate of $0.98.

– Gross margin trending down. While F2Q09 gross margins were 20 bps higher than our expectations (50.7% vs. 50.5%), for F3Q09 RIM expects gross margin to be around 47% and then trend towards 45% in F2010E.

– Guidance risk from uncertain launch timing of new devices. RIM also indicated that the timing of certain product launches has slipped. As a result, new products initially scheduled for launch in early F3Q09E are now likely to launch later in the quarter. RIM’s F3Q09E guidance currently
includes the Bold, Pearl Flip and a third un?announced product shipping in F3Q08E (likely the Verizon [VZ?NYSE] touchscreen). Additional delays with the Bold (AT&T, T?NYSE) and Pearl Flip 8220 US launches could shift shipments from F3Q09E to F4Q09E.

Mitigating Factors

– Now greater potential for upside than downside. While guidance was disappointing, in a way it also helps reset expectations to levels that have greater potential upside rather than downside.

– Margins trending down but … RIM should be able to offset some of the gross margin pressure with operating leverage. For example, in the upcoming F3Q09, RIM expects operating expenses to decline as a % of revenue by 1%?2%. Lest we forget, RIM also attributed half of the gross
margin decline to lower pricing in “hero campaigns” – where BlackBerry devices are the star promoted products (posters in stores, showcase on billboards and placement in ads). RIM is now engaged in more “hero campaigns” with many more carriers – which in return should drive a
disproportionate amount of device sales and activations. We view those investments positively and necessary to gain further share.

– Some room for error. There will always be some risk until the new devices are officially launched but we believe RIM has been conservative with its guidance to the extent possible and left itself some room for slippage.

Our Thoughts – And Why We Are Upgrading

With the price haircut after hours, we think it’s finally interesting to start taking a look at RIM.

– The recurring revenues are intact. In our initiation of coverage, we argued that RIM (and Apple) are the only device manufacturers that have successfully established a compelling ecosystem of devices, applications, services and content that they are subsequently monetizing into a recurring revenue stream. RIM has been extremely successful in monetizing its enterprise email subscriber base and Apple has done same with its media?delivery business.

Nothing has changed with this view.

We estimate RIM generates $6 ? $8 revenue per user per month from operators for its BES subscribers. This revenue stream is recurring and highly profitable. We have updated our valuation of the BES recurring revenue stream. We had used a 12x terminal multiple previously but with valuations shrinking, we now use a 10x terminal multiple. We assume no market share gain for this base value. This gives us a base value of $28.4bln for RIM’s BES recurring revenue stream.

– Sum?of?the?parts analysis shows $74 per share value. At these levels, you would be paying for just the BES recurring revenue stream and the hardware business at 1x sales. Future market share gains or any monetization value from the BIS consumer opportunity would be incremental.

– High?end smartphones is still where you want to be. While high?end smartphones won’t be entirely immune to a market slow?down, we continue to see smartphones grow at 3x+ the growth rate of the overall handset market longer term. In a recent August 27 report, Gartner forecast that smartphones are expected to comprise over 700 million of the total 1.8 billion handset market by 2012. This would imply a CAGR of 38% for smartphones compared to the 10% range for the overall handset market.

– Biggest product cycle still ahead. With arguably the most successful end?to?end wireless data solution and a growing BlackBerry brand that has now crossed over to the maintstream consumer market, RIM new product launches position them well for significant share gains. While
launch delays are inevitable risks, the resetting of expectations lower leaves greater upside potential than downside.

Valuation

Based on its after hours share price, RIM trades at 13.3x C09 EBITDA (vs. Apple at 12.2x) and at 19.3x C09 EPS (vs. Apple at 20.9x). RIM’s PEG ratio stands at 0.8x.”

MRM
( I own RIM)