Thursday, April 09, 2009

Research in Motion (NASDAQ:RIMM):

Morgan Keegan is out with some brilliant comments on Research in Motion (NASDAQ:RIMM) after the co filed its 40F (annual report) yesterday morning. The takeaways are two-sided:

Most importantly, RIM's warranty disclosure reveals that RIM over-accrued for warranty expense (accrual greater than realization) by roughly $75 million, which negatively impacted GM by 220 bps in Feb. The firm suspects a more normalized accrual accounts for about 1/2 of the GM improvement from Q4 to Q1 (the other 1/2 likely mix). Warranty experience (actual cash outlay) has only ticked up modestly in last 2 quarters (i.e., new products are equally high in quality as older products).

New Products Not Showing Material Difference In Warranty Experience - RIM's warranty experience (the actual cash it pays out for returns, etc...) is remarkably stable since the launch of its new product line up last fall. In the August quarter of last year (last quarter before selling Bolds, Storms, 8900s, Flips), RIM's warranty experience was 2.4% of revenues. In the Feb. quarter, it was 2.6% of revenues with likely over 1/2 the shipments being from the new handsets. This seems to be quantitative proof that return rates on the new products are only slightly higher than RIM's traditional handset portfolio.

RIM's raw material balance was up 21% sequentially in Q4, and it continues to grow its purchase commitments for future inventory at a rate of over 100% y/y, which indicates that based on their ordering pattern, RIM does not seem to be acting as if its trends will slow anytime soon.

Summary: Overall, RIM's annual report was enlightening on a number of fronts. First, it appears RIM's new 9000 series products do not have significantly higher return rates or warranty expenses than previous RIM handsets. It also appears RIM accrued very aggressively to its warranty reserve in Feb., which likely led to an artificially low GM, which helps explain why May GM guidance was so strong sequentially.

Notablecalls: So what does this mean? RIMM artificially kept GM's low and then provided blow-out guidance. So this means there won't be any real improvement in GM and the recent rally is a head-fake?

Go figure.

The call is brilliant but won't get much attention unless any of the tier-1 firms come out and lower their L-T margin views.

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