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Friday, February 22, 2008

Research In Motion , Is A Buy ! ?

RIM Keeps Getting Good Reception
Research In Motion (RIMM: Nasdaq) By Pacific Crest Securities ($106.69, Feb. 22, 2008)
RESEARCH IN MOTION RAISED its fiscal fourth-quarter subscriber forecast to between 15% and 20%, above its original guidance of 1.82 million net subscriber additions. The company reiterated its revenue guidance of between $1.80 billion and $1.87 billion and earnings-per-share guidance of between 66 cents and 70 cents.
Consistent with our checks during January and early February and our meetings with the company at last week's Mobility World Congress (formerly 3GSM), we believe the company is seeing very little seasonality in net subscriber growth during the fiscal fourth quarter.
We believe the majority of the upside is attributable to North America, where carriers are increasingly promoting and subsidizing Blackberry products due to their better-than-corporate-average average revenue per user.
At AT&T, sales of the higher-average selling price, higher-margin [Blackberry] Curve have benefited from selling prices as low as $99 and from its Valentine's Day promotions. [Verizon Communications' and Vodafone's] Verizon Wireless and Sprint Nextel continue to see increased momentum for Blackberry products after the release of the CDMA [protocol]-enabled Pearl [handset], and some of their retail outlets have only recently begun selling the product.
We are not concerned that the increased subscriber forecast was not accompanied by an increase to revenue or EPS. We believe that RIM had expected to increase channel inventory during January and February when it provided its initial guidance, taking advantage of the expected seasonal lull in net subscriber additions to address a relatively lean inventory level at certain customers (we continue to see spot stock outages of Blackberry products, particularly the Curve).
We do not believe the company has been able to ramp device shipments fast enough to both increase inventory levels and meet the better-than-expected device sell-through. Because the company recognizes revenue on a sell-in basis, and sell-in has remained relatively consistent with the original forecast, the higher-than-expected sell-through has not affected the company's revenue and EPS guidance. However, we believe relatively lean inventory will be carried into the fiscal first quarter, providing meaningful sequential growth in revenue and EPS.
In addition, we believe that average selling prices were at least somewhat affected because we believe the upside in unit sell-through is attributable to North America, while we believe Western Europe has seen seasonality closer to what was expected. The result is less positive average selling prices and margin impacts from the favorable exchange rates.
We are raising our fiscal 2009 estimates to take into account the better-than-forecast net subscriber additions and expected channel inventory levels. We are raising our fiscal 2009 revenue and EPS estimates to $9.01 billion and $3.63 from $8.68 billion and $3.41.
We continue to believe there is potential upside to our revised estimates from either better-than-forecast replacement sales or net subscriber additions, or both. The company has previously indicated that greater than 40% of existing Blackberry subscribers use devices that are more than two years old. A 50-basis-point improvement in replacement sales as a percentage of overall sales would drive an additional five cents in EPS, compared with our revised fiscal 2009 estimates.
An additional 500,000 net subscriber additions would drive an additional 23 cents in EPS to our new fiscal 2009 estimates at currently assumed replacement/new mix levels. It is worth noting that in any given period, subscriber growth upside is likely to be accompanied by the replacement/new split being slightly below assumed levels.
Our $136 price target is based on 38 times our fiscal 2009 EPS estimate of $3.63.
-- James Faucette
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