Amid the bad news about writedowns and so on in Research In Motion’s second-quarter report, the handheld device maker’s revenue gains stood out as a bright spot — sales climbed by 88 per cent from the same quarter the previous year. Unfortunately, there are just a couple of caveats: One is that the stock market has been pricing in revenue gains of far more than that, and the other is that RIM is now expecting its sales will fall slightly in the third quarter and show little or no growth in the fourth. That’s not the kind of thing investors in a stock selling for 70 times earnings want to hear.
One of the reasons why RIM’s revenues won’t be growing at the speed they were expected to previously is that some of the company’s partners are in serious financial difficulty, including would-be wireless data provider Motient Corp. The U.S. company, which had a deal to offer RIM’s BlackBerry handhelds, said recently that it would not be making a major interest payment on some of its debt and that it is cutting jobs and will have to restructure its finances. Last year, RIM said that it expected to add 50,000 BlackBerry subscribers as a result of an expanded agreement with Motient.
RIM has now taken a $23-million writedown on inventory and receivables as a result of Motient’s “weakened financial condition.” And that is only the latest black spot on RIM’s planned rollout in the United States. Only two months ago, both Motient and Aether Systems — another startup wireless provider — as well as telecom partner Cingular Wireless (a venture of BellSouth and SBC Communications) said they were not adding subscribers as quickly as expected. Cingular added 60-per-cent fewer subscribers than analysts had expected, raising obvious concerns about future sales. Aether has also cut over 40 per cent of its staff and lost $103-million in the most recent quarter.
Research In Motion chairman and co-chief executive officer Jim Balsillie said on Wednesday the company isn’t that concerned about problems with some of its U.S. partners because “we believe that the migration to next-generation networks will limit our exposure to their difficulties.” But the rollout of those next-generation networks — such as the GPRS (global packet radio system) services some North American and European carriers are starting to offer — is not coming as quickly as expected.
That leaves the company in a bind: Its sales of the older-style BlackBerry pagers and handhelds are slowing and profit margins are tightening, but the new markets it needs in order to keep growing have yet to fully develop. RIM said that it has shipped 20,000 of its new handhelds to BT Cellnet,a unit of BT PLC, as part of a deal for 175,000 of the devices — but there was little detail about future shipments. The rollout of GPRS networks by BT and others has been held up by technical and financial hurdles.
Company watchers have been hoping for news of other launches similar to BT’s, since this is where the company expects much of its growth will come from, but so far there has been little. VoiceStream (a unit of Deutsche Telekom) has said that it plans to start offering BlackBerrys in “early 2002,” but apart from that all RIM has are “memorandums of understanding” with Internet and telecom providers in France, Italy and the Netherlands. Many are waiting until they see whether next-generation services will sell, or whether consumers are willing to pay enough for them.
In its release, RIM said sales for the second quarter were $80-million (far below many estimates), sales for the third quarter will be as low as $70-million to $75-million, and the fourth quarter will be about the same — meaning sales for the year could be 15 to 20 per cent below estimates. The company said it would have an operating loss of 6 to 9 cents for the third quarter and a loss of 8 to 12 cents for the fourth — which would mean a loss for the year of anywhere from 4 to 11 cents. That compares with earlier profit estimates for the year of 22 to 34 cents a share.
And RIM is still far from bargain priced. Even before the company revised its earnings expectations, the stock was trading for almost 70 times this year’s average earnings estimates and 30 times next year’s earnings projections. The company is now saying that its earnings for next year may be between zero and 10 cents a share — compared with earlier estimates of between 48 and 76 cents. That means despite its recent fall, and the fact that it is now trading close to its 52-week low of $13.70, the stock is still trading at more than 150 times next year’s estimated earnings. That may have looked reasonable a couple of years ago, but not any more. Mathew Ingram writes analysis and commentary for globeandmail.com