Research In Motion (RIMM) – Pre Earnings

Today at 4:00 PM eastern time, RIMM will be announcing their Q2 earnings. Analyst expect EPS to increase by about 104% QoQ to $0.49 and revenues to double QoQ to $1.3 – 1.4 Billion. This is based on strong domestic and international sales.

As of now, these estimates do not mean anything. Analyst are not sure whether or earnings will beat or miss. As a result, a number of analyst have lowered their ratings but increase the price targets and estimates at the same time. So either way it moves, they will be covered.

Currently almost all options trading down on RIMM at the moment is pure speculation. There are only about 12K ITM Put options compared with 102K OTM Put options. Its about the same spread with the call options with 85K open interest out of the money, with 39K near ITM and only about 14k Deep ITM. With a Put/Call Ratio of about .82, we are looking at an equal amount of speculation on both sides of the equation. Implied volatility for all near the money put and call options is around 90-95.So with these numbers it can be seen that RIMM will be shooting up like a rocket and falling like a rock. Either way the moves will be huge.

Earnings wise, RIMM should beat. My own prediction is set for RIMM to announce earnings at $0.51. But expectations on how much it beats is another question. Beating by a penny or 2 is not going to cut it for the company. At least a solid beat of $0.04 – $0.05 is needed.

Outlook wise, if China blackberry sales are good then outlook should improve. The overall market for handsets is still continuing to grow as more consumer switch over from normal cellphones to smartphones.

Overall prediction:

Earnings @ $0.51, and a conservative revised upwards guidence for fiscal year on both EPS and revenue.

Stock should end up at around 105-110.

Palm, Inc. Post-Earnings Analysis Q1 2007

Palm, Inc. reported a loss of -$0.01 on Friday, August 31, 2007. Revenue QoQ was up 12% to $302.2 million. Smartphone sell through was up 21% to 689,000. The full report can be found here (link).

Overall, analyst were expecting an EPS of $0.08. Though, missing earnings was not the prime reason for the 4% drop. The biggest factor was the revised downward economic outlook. Palm sees Q2 earnings to be at about $0.06 – $0.08 a share with about $370 – $380 million in revenues. Wall Street analyst were expecting around $0.10 a share with $397 million in revenues. (link).

Prediction analysis:

I was off the mark with the improved financial outlook. It appears that either Palm, Inc. itself does not believe in the success of their new product or they are being extremely conservative in their estimates. My personal belief is the latter, as the overall sentiment on the company from the market is one marked with negativity. Managing future expectations at the moment is extremely important for company management.

Earnings wise, it was common knowledge that Palm, Inc. would not be able to beat since they issued a warning 1 month in advance. So no huge surprise there. The reason though given by analyst was interesting, as they state it was competition from AAPL’s iPhone that resulted in low sales, (more on this later).

Next Qtr (Q2):

Palm’s next 3 months (Sept, Oct, Nov) will be extremely interesting. The first holiday season after the horrible subprime summer. With the current credit crunch, loss of jobs in the mortgage sector, high mortgage payments due to rising interest rates, large numbers of foreclosures and even heavier competition with the release of many new smartphone models from competitors, Palm is looking at a very tough environment.

Subprime:

• The subprime fallout would make low prices an even larger player when it comes to buying smartphones. With the new Centro model, Palm has somewhat adequately accounted for this.

Palm’s biggest weakness is it’s competition. RIMM’s own blackberries are steamrolling PALM’s Treos on the business side. Nokia is pulling away everyone else whom wish to have a more eye catching phone.

• RIMM has released their new Blackberry Curve to great reviews. This and other blackberries with their exceptional OS should continue to take more market share away from Palm.
• NOK has expanded and is continuing to expand into the smartphone market. Worldwide, they command a 50% market share, mostly at the expense of Palm. With the release of the new N95 and a constant pipeline full of wonderfully designed phones, they should continue to sell very well. Unlike RIMM, NOK poses a considerable threat to Palm’s new Centro.
• AAPL’s iPhone is an entertainment device. Most corporations have it out right banned, and will not allow it to be connected to their mobile network. As a result, I do not believe it poses a significant threat or any threat at all for that matter. Most people who would consider buying an iPhone, will not consider Blackberries or Treos, because the targeted audience is different.

General Market:

The general market for smartphones continues to grow and expand. As it is starting to become a more profitable business, it can be expected for Samsung to beef up its own product lineup in this category. Also, Sony-Ericsson and LG should be joining the fray soon. MOT already has a few out on the market … but the quality of those phones just are just not up to par with the result.

Overall, I do not expect Palm will beat earnings next quarter either. The Subprime problem should weigh down consumer spending. Heavy competition will once again crimp Palm’s turnaround efforts. And if the general market for Smartphones expand, it can be expected for the rest of the big cell phone manufactures to jump on board.