Research in Motion (RIMM) is in the midst of its conference call with analysts following a disappointing fiscal Q2 report and mixed outlook for the current quarter, which promises higher-than-expected revenue but declining gross profit margin based on sales of new BlackBerry models released last month.
RIM stock is off $5.50, or almost 19%, at $24.04 in late trading.
BlackBerry Demand
During the call, co-CEO Jim Balsillie said that although the company shipped fewer BlackBerry units than expected, sell-through of the devices in Q2 was “the second-highest ever at 13.7 million units,” with the BlackBerry “Bold 9900″ leading to a 50% jump in sales outside of North America in the first two weeks of this quarter.
Balsillie said the new BlackBerry units shipped last month have been “enthusiastically received by our partners and customers for their blend of technical performance and industrial design.” Demand for the BlackBerry was strong in all regions, he said. The new units are just starting to enter Latin America and Asia this quarter, he added.
Balsillie said that the expected 27% to 37% rise in unit shipments this quarter will lead to steady improvement in our earnings per share in Q3 and Q4.”
RIM’s other co-CEO, Mike Lazaridis, said that the new model of the BlackBerry Curve is rolling out with 165 carriers this quarter, setting it up to be “the largest and most successful launch of BlackBerry smartphones in our history.”
PlayBook Fixes
Regarding shipment of 200,000 units of the PlayBook tablet computer in the quarter, which was below what the company expected, Balsillie said the company would take steps to improve those results.
“We’re planning to launch a major software upgrade for PlayBook,” he said, “which will deliver highly anticipated new capabilities and applications which we expect to reinvigorate sales.”
“We also have a number of upcoming programs in place to drive sell-through in PlayBook in both enterprise and consumer channels as we head into the Fall and holiday buying season.”
Lazaridis conceded the PlayBook had been hindered in the marketplace by a lack of apps and content. He said the company would offer a “bundle” of “a number of significant features and enhancements,” which will be demo’d in October.
Lazaridis outlined those improvements:
Built-in native e-mail, calendar and contacts … the previously announced Android App player, enhanced web browsing … the availability of new consumer Apps and multi-media and video content including BlackBerry Video store which will have 10,000 movies and TV shows available On Demand to buy or rent as well as new movie releases on the same day as DVD availability and of course, with the built in HDMI output, the ability to enjoy videos on your TV without the need to purchase additional system components. As well as further improvements to BlackBerry Bridge.
QNX Transition
As regards the company’s transition of its the BlackBerry to the “QNX” operating system, Balsillie said the OS 7 models still have “a lot of runway we believe can carry us through the transition to QNX-based smartphones.”
When asked about the time frame for QNX-based BlackBerrys, Balsillie said the company’s developer event in October will feature “development phones” so people can “experience” the device. He said the company was “excited about the fact that we’ve already got the development phones operating right now,” but that he didn’t want to give away secrets as to delivery dates for QNX.
Lazaridis said that the transition will be made easier by the fact that BlackBerry OS 7 and QNX both use common development environments, such as “HTML 5.” When pressed as to how fast QNX devices might take over, he remarked, “we’re going to see strong growth in both and they have different market segments and different appeal around the world,” implying the two operating systems will co-exist for some time.
Restructuring
The company was mostly done with the 10% headcount reduction it announced over the summer, he said. He said the company had struck the right balance to assure it can continue to support customers and maintain product development amidst rapidly changing technology.
Gross Margin Outlook
During the call, Edel Ebbs, the director of investor relations, detailed the expected drop in gross margin to 37%, which clearly has taken the Street by surprise.
“This decrease versus Q2 reflects the lower percentage of service revenue in the mix and the anticipated implementation of a number of programs designed to increase PlayBook sell-through,” said Ebbs.
When Ebbs was pressed by an analyst as to how long the pressure on gross margin would last, she said that promotional activity over the “next few months” would make for “more than one quarter impact.” But then when someone asked if the new BlackBerry 7 devices would begin to help things in the fiscal Q4 that ends in February, Ebbs responded, “That’s correct.”
Before the call started, some of the Street’s responses started to trickle in.
RBC Capital’s Mike Abramsky writes that RIM are “the gang that can’t shoot straight.” His conclusion about the miss and the lower EPS forecast is that, “Credibility sinks further as it’s apparent to us that visibility remains very low and investor risks remain elevated.”
Jim Suva with Citigroup reiterates a Sell rating on the shares, writing “We are surprised at the gross margins guidance to be only 37%, below consensus at 39.6% especially the new product launches.” Suva notes that the company’s outlook for EPS to hit the low end of its previous forecast does not take into account share buybacks (which would tend to lift per share results as share count is shrunk.)
Among the questions to which Suva seeks answers: “How does RIMM maintain application developer loyalty given some potential confusion about adopting the BB7 or QNX platforms while competitive platforms appear to have momentum with application developers? Why has the QNX Android player for the Playbook tablet been delayed and does this impact the timing of the planned QNX phones launch or features? and Is there significant risk to the potential iPhone 5 launch w/ Sprint given Sprint is the only US carrier q/out the iPhone?”
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