Blackberry's Earnings Warning Fits With Our Thesis
If we are as impressed by the new product lineup as co-CEO Jim Balsillie suggests that we will be, we'll reconsider our full-year view.
Market Update
Just over one month after reporting its fiscal fourth quarter, Research in Motion (RIMM) warned that first-quarter revenue and earnings are going to miss the expectations that management discussed during the last conference call. We are leaving our fair value estimate unchanged, as our expectations for the full year are below management's current guidance.
The Thursday release comes just days before RIM's annual BlackBerry World event, and while the timing of the announcement is unfortunate, we think management did the right thing by getting the bad news out there. Given that management is basing its full-year expectations on the launch of new BlackBerry devices later in the year, it will be especially interesting to see what the firm announces next week. If we are as impressed by the new product lineup as co-CEO Jim Balsillie suggests that we will be, we'll reconsider our full-year view.
We've been bearish on RIM's prospects for some time now, and while it is far too early for us to declare vindication, we do think the earnings warning fits with our thesis. RIM is selling fewer BlackBerry devices than it expected, and the ones that it does sell are at the lower-priced part of the product line. We think that at the high end of the smartphone market, RIM doesn't yet have a product that is competitive with the iPhone or the high-end Droid handsets from Motorola . Additionally, the BlackBerry OS lags far behind Android and iOS in the availability of third-party applications.
With that perspective in mind, we think it makes perfect sense that RIM's sales are suffering and that most of the weakness is at the higher end of the product line. Consumers who want a next-generation smartphone experience are probably flocking to iOS and Android, while consumers who want a reliable no-frills communication device are still buying BlackBerry devices. Although we are skeptical about RIM's high-end efforts, we believe that for e-mail and voice communication, BlackBerry still leads.
The next couple of quarters (and even the upcoming week) should be very interesting for RIM. During the evening call, Balsillie admitted that RIM's high-end handsets are aging and that the company is in the middle of a transition. But he promised to deliver the moon in the next iteration of BlackBerry OS (RIM is jumping directly from 6.0 to 7) and the devices that will run on it. He also expressed confidence that analysts would be delighted with and heartened by what they'd see at BlackBerry World next week.
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