Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

ThinkEquity Downgrade of RIMM -$45?? $20?

Technology : Wireless Handsets &
Infrastructure
October 21, 2005 $RECONB$
Research In Motion Ltd. Sell
RIMM $64.66 Sell

Coming Wave of BlackBerry Connect Devices to Hurt RIMM’s Top and Bottom Line
Pablo Perez-Fernandez, Ph.D.
415-249-1343
[e-mail]
Sales - 888-288-8206
Trading - 866-575-3595

INVESTMENT CONCLUSION: The impending launch of BlackBerry Connect/Built-in on a range of handsets from PALM’s Treo 650 to NOK’s E61 will have a detrimental impact on the growth of RIMM’s top and bottom lines, in our view. The success of the competition weighed against last quarter’s negative net adds growth rate and the clear mandate from enterprises to adopt open standards makes us wonder how RIMM will match or exceed the
aggressive FY07 consensus estimates. Finally, we think RIMM’s international expansion, while successful will not match past expansion rates and will undoubted lead to significant
service ARPU contraction.

As a result, we are initiating below-consensus FY07 EPS
estimates and cutting our price target to $45. We rate RIMM a SELL.

We are initiating FY07 estimates (EPS = $2.87) significantly below consensus. We are cutting our target price from $60 to $45 (16x our FY07 EPS). We expect a gradual share decline over the next year, with acceleration in FY1Q07 (May ’07)

We believe investors are now starting to fear the competitive environment facing RIMM, but the full extent of the situation will be understood only after competitive devices start
shipping in volume in CY2H06. We expect RIMM to experience unwanted, excess handset channel inventory in FY1Q07
(May ’06) and FY2Q07 (Aug. ’06) when the competition will be in full force. BlackBerry Connect and Built-in will do little to stimulate demand for RIMM’s email service because Connect is an inferior product and companies, not individuals, determine how many email accounts to activate.

Instead, we expect RIMM to lose device sales to PALM, NOK, MOT, BenQ (formerly Siemens Mobile Phones), HTC, and Sony Ericsson. RIMM needs BlackBerry Connect/Built-in to be extremely successful. Failure to be extremely successful means that either BB Connect is a veritable failure or that it simply steals market share away from RIMM’s own handset sales.

Competition and international expansion will cause a marked contraction in service ARPU. We expect the current trend to continue, with ARPU going from approximately $25 – ARPU in FY2Q06 and down from $36+ in FY1Q05 – to $17 by FY4Q07.