Research in Motion (NASDAQ:RIMM): A pause that refreshes?

- Jefferies is lowering their rating to Underperform from Buy with a $35 price target (prev. $80) noting that based on their checks RIMM will see continued execution issues, product delays, and lackluster product launches for the next year. Firm believes Blackberry OS 7.0 (renamed, formerly 6.1) and QNX will be delayed and that carriers are withdrawing support. They have cut their FY12 (Feb) EPS to $5.50 (guidance $7.50), FY13 to $5 (St $7.37).

Ripple effect of Playbook execution issues
Jeffco’s checks indicate the issues with the launch have led to a fire drill and resources being pulled off of other projects. They think this will cause BB OS 7.0 phones to be delayed and that QNX handsets will be pushed back until H2:CY12. A month ago management guided to an early 2012 launch of QNX.

QNX pushout
While not officially delayed, on the conference call last night management did not mention QNX once and implied that BB OS 7.0 will be their primary handset operating system for much longer than we had previously expected.

They believe RIMM is touting OS 7 (formerly 6.1) due to issues with QNX, OS 8 (formerly OS 7). Firm believes QNX is having integration and compatibility issues with RIM’s massive telecom infrastructure (i.e., BES, BIS, NOC and node system). All of this has been coded to RIM’s original BB OS. QNX, being UNIX based, is requiring massive amounts of recoding. With many new launches and products the ability to do this recoding and retooling of infrastructure is likely to be delayed. This delay in Jeffco’s view is going to cause strained relationships with carriers, developers, etc.

Management had recently noted in an interview that a native email application would be available on the Playbook in 60 days. They believe that is unlikely.

BB OS 7.0 unproven and delayed
Management said BB OS 7.0 handsets were delayed by a couple weeks. Jeffco believes they may not launch until later in the Aug Q or maybe the Nov Q. And when they do launch, they will not get benefit of the doubt due to past execution issues. Firm thinks BB OS 7.0 will lack broad developer and carrier support as no QNX kernel means no Android app portability, and they will be reluctant to reinvest in a platform that is supposed to be replaced by QNX in a few months

Carrier support flagging: indications include AT&T not yet supporting BB Bridge, carriers charging for Playbook tethering, and consumers cannot buy the Bold at AT&T. They believe this will result in lower subsidies and less marketing support for RIM.

- RBC is downgrading RIMM from Top Pick to Sector Perform with a $55 price target (prev. $90) saying they continue to see positives in the story as RIM remains an Enterprise/Consumer Smartphone leader with an International franchise, built-in advantages, and loyal 60M user base. But until RIM regains its operational footing, they recognize the market is unlikely to recognize this value until investors see sustainable improvement in execution, transparency and visibility.

- Credit Suisse notes its hard to defend RIMM here, so they are adopting a wait and see approach. The magnitude of the negative preannouncement so soon after results is hard to defend and they are lowering their EPS by 8%/20% for FY11/12 to $6.52/$6.86 and their price target drops to $70. For now the firm adopts a wait and see approach until next week’s analyst meeting to gain visibility on upcoming products

What caused the negative preannouncement? CSFB believes that a combination of an aging product portfolio together with delays to new product launches are driving volume and ASP weakness in the current quarter. With weakness being noted in both North and South America, they are somewhat surprised by weakness in the latter given strong recent sell through in the region. This suggests rapidly changing dynamics. They now expect volumes to decline 10% qoq to 13.5mn and ASPs to decline 7% to $281. Any subsequent recovery depends on the competitiveness of new product introductions where we will get better visibility next Monday. The firm will revisit the viability of their 2HFY12 estimates at that time.

What’s next? Next Monday RIM will host a Capital Markets Day and developer conference where management has alluded to several high-end product launches. Depending on the competitiveness of these new products they will determine whether their volume estimates of 63mn for FY12 (up 20% yoy) and current hardware GM estimates of 31.2% are at risk.

Notablecalls: It didn’t take more than 4 week for RIMM to kitchen sink May qtr guidance again. Is management managing expectations here or are they really in trouble?

Little bit of both I think as they ready for the Monday product announcement. I’m not sure what to expect there really given RIM’s track record. The popular buy-side trade today will be to buy the weakness in hopes of positive news.

I can’t blame the buyers, as I can’t think how much worse it can get from here in the n-t. The pre-announcement has de-risked the qtr & any positive news will surely drive a meaningful rally from current levels.

People have been buying RIMM recently in hopes of the May 2 catalyst, so today’s sellers are more of the stop-loss variety than anything else.

I’m starting to hear chatter among analyst of an upcoming buy-back (10% kind), which could be meaningfully accreditive & de-risk 2011 EPS guidance.

Last but not least, RBC’s Abramsky has thrown in the towel. Ouch!

The Jeffco call may bring some pre-mkt sellers, but I will be looking to get long some RIMM after open. For a trade, ofc. Tight stops.