Shares of Research in Motion (RIMM) are�down 70 cents, or over 7%, at $9.16, after Morgan Stanley’s Ehud Gelblum this morning cut his rating on the shares to Underweight from Equal Weight, writing that “the only way RIM remains a viable entity is at a fraction of its current size, a transformation that erases much of its earnings power.”
The immediate danger is that RIM will miss the consensus for this quarter, the fiscal Q2 that ends in August, as it gets hit with a “triple whammy,” writes Gelblum, suffering with an aging device portfolio, seeing a “pause” in buying ahead of the introduction of new models based on its forthcoming “BB10” software, and contending with an overall weakening smartphone market.
Gelblum models the company adding 2.8 million new subscribers this quarter, and selling 5.8 million devices. That’s actually up from his prior estimates, and his revenue goes higher as well, to $2.19 billion, with a net loss of 26 cents. But that’s still below the consensus for $2.92 billion in revenue and a 2-cent loss.
Gelblum thinks BB10 won’t be enough to shore up the company’s devices sales, writing,
Jabil, which likely continues to supply into RIMM post RIMM�s supply chain rationalization, guided on June 19th its high velocity sales down 22% q/q, implying RIMM�s business (which accounts for slightly less than half of Jabil�s high velocity business) is likely down over 50% q/q. We therefore believe that BB10 is unlikely to be manufactured until September with retail availability in October at the earliest, leading BB10 to miss back to school and to compete head-to-head with the next iPhone in mid-fall. In addition, we believe BB10 is likely to use QCOM�s popular but highly supply-constrained 8960 28nm LTE integrated application processor, which could remain in short supply until CQ4, creating additional downside risk to shipment estimates, while RIMM�s announcement that BB10 has no keyboard (which we believe is a key feature of blackberries that is keeping the existing blackberry faithful strong) is equally worrisome.
He also thinks that as market share losses accelerate next fiscal year, the company’s cash made from services will be consumed trying to keep devices afloat:
Cash generated by the valuable Services business is essentially consumed going forward by the money losing Devices business implying that the lucrative Services business is worth very little as long as the Device business continues to operate.
Current assets yield a fair value of $15.50, on a sum-of-the-parts basis, he writes, but that’s unlikely to provide a floor for the stock, he thinks:
RIMM is trading below its SOTP valuation mostly because the stock is anticipating the company continuing to run the Devices business, negatively impacting future cash flows in the process. We also do not believe any strategic decision would come fast enough to salvage the current SOTP value in the company � to wit, the split of Motorola into MMI and MSI took well over two years to complete. A more detailed analysis of the value of the services business and the patents follow.
Gelblum’s note today comes amidst a report from the U.K.’s Sunday Times stating that RIM could split up its handset and services businesses.
Update: Gelblum wasn’t the only one with glum things to say about RIM. Goldman Sach’s Simona Jankowski cut her outlook for smartphone industry growth overall, while noting that she expects RIM to report its first-ever subscriber decline this quarter.
On the bright side, Jankowski expects BlackBerry shipments of 9.9 million last quarter, which is better than the Street consensus, which she pegs at 8.8 million units. Consequently, her fiscal Q1 estimate is at $3.16 billion in revenue and a break-even profit line, compared to the consensus $3.15 billion and a penny profit.
Like Gelblum, she focuses some of her discussion on the takeaways from RIM’s manufacturing partner Jabil Circuit (JBL), which on June 19th forecast this quarter below consensus:
Supply chain manufacturer Jabil noted that RIM fell below 10% of sales in the May quarter. Jabil�s High Velocity System�s (HVS) segment, of which RIM is about 35% of the total, fell by 7% qoq vs. our estimate of down 2% qoq. Jabil also guided HVS down 12% qoq for the August quarter vs. our prior estimate of flat. Jabil commented that its HVS business ex-RIM is healthier, implying RIM is worse than the overall market. This compares to our hardware sales estimates for RIM of -33% qoq in the May quarter and -18% qoq in the August quarter. Finally, our channel checks suggest that in-store and online Blackberry model availability fell slightly during the quarter while ASPs remained relatively stable.
Jankowski has a $13 fair-value, sum-of-the-parts estimate, with the most significant difference between her and Gelblum being that she views RIM’s intellectual property being worth $3 billion, more than twice what Gelblum assigns to it. Other parts of her model are lower, however.
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