Research in Motion Q1 Revisions

Research in Motion (RIMM) Q1 Revisions

INCOME STATEMENT
Three Months Ended May 29, 2010
Revenue	$4,351,471
Cost of Sales	$2,380,320
Gross Margin	$1,971,151
	45.30%
Operating Expenses:
R&D	$272,319
SG&A	$538,549
Amortization	$88,896
Total	$899,763
Income from Operations	$1,071,388
Investment Income	$4,454
Income before Taxes	$1,075,842
Provision for Income Taxes	$306,836
Net Income	$769,006
EPS
Basic	$1.38
Shares Outstanding	558,200

Previous estimates for this quarter’s earnings were the following:

Q1 EPS:  $1.29

Q1 Rev:  $4.35 Bil

Q1 Gross Margin:  43.4%

New estimates for the first quarter have been slightly revised as a result of RIMM’s Q4 results this past week:

            Q1 EPS (Revised):  $1.38

            Q1 Rev (Revised):  $4.351 Bil

            Q1 Gross Margin (Revised):  45.3%

Once again, the process of creating estimates included a combination of four things:

1)      Scouring through Wednesday’s earnings announcement and Management Discussion and Analysis (MD&A),

2)      Running numerous regression tests,

3)      Revising the common-size statements, and

4)      Choosing which estimates from all the tests best fit the data.

Revenue

When it comes to predicting revenue, I generally run five to seven different regression tests of past quarterly sales figures to determine which test(s) best predicts the previous quarter’s sales, this time of $4.08 Bil.  As you can see in the below accuracy table, the data I used in the First-Order model best predicted last quarter’s sales; therefore, that’s the model that I used to predict Q1 sales. 

Accuracy
Model	Prediction	Percent Err.	W/ St. Err.	Percent Err.	R^2	Ad R^2
First-Order	$3,739,447	8.3%	$4,092,011	-0.3%	86.05%	85.41%
Exponential	$5,071,297	-24.3%	-	-	98.60%	-
Deasonal	$3,779,412	7.4%	$4,137,282	-1.4%	83.71%	83.03%
Dummy	$3,823,812	6.3%	$4,206,712	-3.1%	84.69%	81.77%
Lagged	$4,531,045	-11.1%	$4,698,039	-15.2%	96.56%	96.20%

Operating & Non-operating Expenses

To arrive at the operating and non-operating expenses for RIMM, I employ two methods.  First, I run simple linear regression tests on each line of the income statement using the past ten quarters of data.  Second, I use common-size analysis to determine each line’s percentage of total revenue and then average each line.  Then, I compare the results against past business and economic trends and choose each estimate accordingly.

Q1 Quarterly Predictions
Period	Cost of Sales	R&D	SG&A	Amortization	Investment Income	Provision for Inc. Tax	Outstanding Shares
1	914,483	104,573	267,881	31,314	20,114	172,067	549,837
2	1,105,208	127,776	326,592	36,552	18,977	182,899	551,564
3	1,270,473	181,347	379,644	43,633	17,168	223,855	552,899
4	1,512,592	193,044	382,968	53,023	31,554	275,729	553,687
5	2,079,615	182,535	406,493	61,595	10,568	225,264	554,105
6	1,931,985	219,777	514,291	67,396	9,136	56,167	554,787
7	1,971,296	235,571	429,748	73,292	7,625	183,989	555,789
8	2,249,055	242,329	465,717	83,129	6,425	262,134	554,277
9	$2,216,622	$267,164	$497,642	$86,540	$5,454	$307,076	557,114
Regression	$2,566,353	$289,002	$538,549	$95,802	$2,630	$249,779	557,462
Aritmentic	$2,347,651	$272,319	$581,655	$81,989	$23,211	$306,836	553,784
Mean	$2,457,002	$280,660	$560,102	$88,896	$12,920	$278,308	555,623
	$2,380,320				$4,454		558,000

The estimates that I have arrived at show EPS in the upper range of RIMM’s guidance of $1.31-$1.38.   Also of note, the estimated gross margin figure is higher than what management is forecasting.  As the company shifts the makeup of their product line, I feel that GM will not be reduced by as much as management is anticipating.  Lastly, I was interested to see that my revenue estimate came right in line with what the company is expecting as well as what I previously predicted prior to Q4’s Wednesday announcement.

Be sure to click “Follow” to the left of this post.  Next up for analysis—GOOGLE!


Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.

The Street vs. Tyler Smithson -- Who will Reign Supreme?

Well folks, this was not a great day for analysts or stockholders of Research in Motion.  We saw RIMM report a mixed bag of earnings and guidance.  The goal of this post is to "tally the scorecard" and see who was more accurate:  The Street or Tyler Smithson.

The following table illustrates the differences between actual earnings, analysts' expectations, and my own estimates.

Figure 1

	Actual Results	Analysts’ Consensus	Difference	Tyler Smithson	Difference
Revenue	$4.08 Bil	$4.31 Bil	-5.88%	4.35 Bil	-6.62%
Gross Margin	45.7%	43.3%	5.25%	44.4%	2.84%
EPS	$1.27	$1.28	-0.79%	$1.34	-5.51%
Q1 Revenue	$4.35 Bil	$4.33 Bil	0.46%	$4.36 Bil	-0.23%
Q1 Gross Margin	44.5%	N/A	-	43.4%	2.47%
Q1 EPS	$1.35	$1.22	9.63%	$1.29	4.44%

  
We’ll take this one step at a time:

Q4 Revenue:  Perhaps the biggest surprise for the quarter was a sales figure far below what anyone was expecting.  In this instance, analysts won the battle since they were off 5.88% and I was off a slightly larger 6.62%.  0-1

Gross Margin:  It wasn’t that long ago that RIMM was posting GMs over 50%.  Lately the trend has been more toward 40%, so it was nice to see a pop back up to 45.7%.  Analysts on average predicted a Q4 GM that was 5.25% lower than results, while my estimate of 44.4% was only half that difference.  Score one for Tyler Smithson.  1-1   

EPS:  This is where I made the biggest mistake.  While the Street was only off one penny, I was seven cents too optimistic.  As can be seen below in Figure 2, there were two main dissimilarities between my income statement estimates and actual results.  First, the Provision for Income Taxes account was $30 mil higher than I expected and, secondly, I underestimated weighted average shares outstanding by 7,750 shares (this skewed my EPS estimate by $0.02/share, alone).  The Street-2, Smithson-1

Q1 Revenue:  RIMM is guiding for this quarter’s revenue to be in the range of $4.25-$4.45 Bil, with the mean being $4.35 Bil.  My prediction was for sales to come in at $4.36 Bil while analysts’ consensus was $4.33 Bil.  Given this, we are once again tied, this time at 2-2.

Q1 Gross Margin:  I could not find the Street’s forecast for Q1 GM so if anyone happens to find it, be sure to let me know.  Still 2-2

Q1 EPS:  Well, we all knew it would come down to one last estimate to determine the winner.  RIMM announced that they are expecting this quarter’s EPS to range from $1.31-$1.38, with the average rounded to $1.35/share.  While the Street was shocked to hear such lofty expectations, I was less taken aback.  Analysts’ consensus for Q1 EPS estimates came in at 9.63% lower than guidance, while mine was, once again, less than half that difference (4.44% lower).   3-2

Given the above data and estimates, it appears that once again Tyler Smithson reigns supreme with a win over The Street, 3-2. 

Be sure to click “Follow” to the left of this post so you don’t miss a single new estimate.  Next up to analyze is Google.  All you day-traders out there better tune in in the coming days!

Figure 2

Three Months Ended March 31, 2010
	My ESTIMATES	ACTUAL
Revenue	$4,354,493	$4,079,712
Cost of Sales	$2,422,842	$2,216,622
Gross Margin	$1,931,651	$1,863,090
	44.4%	45.7%
Operating Expenses:
R&D	$271,471	$267,164
SG&A	$554,904	$497,642
Amortization	$85,274	$86,540
Total	$911,648	$851,346
Inc from Operations	$1,020,003	$1,011,744
Investment Income	$6,532	$5,454
Income before Taxes	$1,026,535	$1,017,198
Provision for Inc Taxes	$283,042	$307,076
Net Income	$743,493	$710,122
EPS
Basic	$1.34	$1.27

Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.