Fund My Mutual Fund: Research in Motion (RIMM) Squeezes Blackberry Suppliers as Economy Falls

Monday, April 13, 2009

Research in Motion (RIMM) Squeezes Blackberry Suppliers as Economy Falls

Posted by TraderMark at 12:30 PM

As we did last week, I am hoping to begin being able to talk more about company and sector specifics instead of discussing the bailout or the Federal Reserve paper printing operation of the week. I doubt it will last long but I'm going to try ...

Interesting story from Bloomberg re: Research in Motion's (RIMM) squeeze on suppliers. Since the earnings report at the beginning of the week, the stock has had no quit in it [Apr 3: Research in Motion Soars on Solid Numbers] Along with revenue growth, the obsession with RIMM is always its margins, especially as it accelerates its diversion away from the corporate market and into the consumer market.

Gross margin is expected to come in between 43 and 44 percent, the company said, up from 40 percent currently. Investors had been concerned about gross margins after a terrible recent showing. RIM's shift from its high-spending business-user focus to a broader, costlier consumer smartphone market has crushed margins. In the span of a half year, RIM's gross margins narrowed to 40% from the 50.7%.

In light of that, this story makes a lot of sense; the company indicated they expected a rebound in margins in the coming quarter from this period's 40%.

Research In Motion Ltd. Co-Chief Executive Officer Jim Balsillie said the BlackBerry maker is reducing supply costs as surging growth provides him with leverage to press for bargains during the recession. “Being a strong growth company in a challenging environment makes you an important customer,” Balsillie said in an interview at his office in Waterloo, Ontario. That is probably helping RIM to elicit better terms from the companies that make equipment for its BlackBerry phones, he said.
Shrinking expenses, coupled with fresh sources of revenue such as the App World application store, may help the device maker bolster profit margins and thrive in the worst global recession since World War II. RIM has offered discounts on the Storm and other new models to attract customers reluctant to spend as they wait out the slowdown.
This month, RIM said gross margin, the percentage of sales left after production costs, will expand this quarter, signaling the company is absorbing the impact of introductory offers. Before that, the stock had dropped about 12 percent over two months as investors fretted about the effect discounts would have on margins, following RIM’s February prediction that fourth-quarter profit would come in at the low end of targets.
“Their volumes are increasing by leaps and bounds, which has to increase their purchasing power,” said Nirav Parikh, senior vice-president and equity analyst at TCW Group Inc. in Los Angeles. “The margin step-down has already occurred and the stock has been punished duly.”
RIM’s five biggest suppliers account for almost 90 percent of its production costs, according to data from relationship- mapping software Connexiti. Electronics manufacturer Elcoteq SE makes up a third of RIM’s costs and relies on the company for 20 percent of annual sales. (those must be some interesting negotiations) “Markets are getting more difficult and everyone is trying to minimize costs,” said Elcoteq spokesman Carsten Barth. “We obviously always try to help our customers because if they are successful, we are successful.”
Elcoteq, based in Luxembourg, is joined by Jabil Circuit Inc., (JBL) a electronics maker, and by chipmakers Marvell Technology Group Ltd (MRVL)., Multi-Fineline Electronix Inc. and Qualcomm Inc., (QCOM) according to Connexiti.
RIM and rivals such as Cupertino, California-based Apple are vying for subscribers as the pool of spending dwindles. Sales growth of smart phones, handsets with Web and e-mail functions, will slow to 3.4 percent this year, about one-sixth the pace of 2008.
Keeping profit margins high will be difficult given how fickle consumers constantly expect new devices, said Jonathan Goldberg, an analyst at Deutsche Bank Securities Inc. “To keep consumers upgrading they have to stay on the Hit Parade or innovation treadmill indefinitely and that may prove to be beyond RIM’s abilities,” he said. “We see these issues creating margin pressure over time.” San Francisco-based Goldberg rates the stock “hold.”
The company also expects to generate more cash through App World, which opened last week, and now offers about 1,000 programs. Application developers get 80 percent of the royalty from every download, while RIM will split the remaining 20 percent with its carrier partners. New revenue sources like that and the company’s phone- ordering partnership with Ticketmaster Entertainment Inc. “are going to come in to enhance” gross margin, Balsillie said. The company projects a margin of 43 percent to 44 percent this quarter.