Smartphone giant Research In Motion Ltd. (RIMM) is still reeling under an extremely challenging environment, reflected in its soft top-line growth. Yesterday, after the closing bell, RIMM declared the financial results of its first quarter of fiscal 2011. Total revenue was $4,235.4 million, below the Zacks Consensus Estimate of $4,356 million and also below the company’s own guidance. 

BlackBerry mobile phones failed to see any significant demand upsurge. In the first quarter, RIMM shipped 11.2 million BlackBerry devices and added 4.9 million net new BlackBerry subscribers. Both figures are at the low end of the company’s own guidance. There is no doubt that RIMM is facing stiff competition from Apple Inc.‘s (AAPL) iPhone and several newly-launched smartphones based on the Android operating system of Google Inc. (GOOG), especially the flagship DROID smartphone of Motorola Inc. (MOT).

Nevertheless, RIMM was able to increase its profitability. Net income in the first-quarter fiscal 2011 was $768.9 million or $1.38 per share, compared with net income of $643 million or $1.12 per share in the prior-year quarter. Quarterly EPS of $1.38 was also better than the Zacks Consensus Estimate of $1.34.

Although gross margin increased in the reported quarter to 45.4% from 43.6% in the year-ago quarter, it was slightly below 45.7% in the previous quarter. This indicates RIMM is primarily selling low-end BlackBerry devices, resulting in a lower quarterly ASP of around $300 compared with $311 in the previous quarter.

Segment-wise, 79% of revenue accounted for Device shipments, 16% for Services, 2% for Software and the remaining 3% for Other revenue. At the end of May 29, 2010, RIMM had approximately 46 million BlackBerry subscribers, up 60% year over year.

During the first quarter of fiscal 2011, RIMM generated approximately $1,123.5 million of cash from operations compared with $614.6 million in the prior-year quarter. Quarterly free cash flow was over $855 million compared with $304.3 million.

As of May 29, 2010 RIMM had approximately $3,267.2 million of cash and investments and no outstanding debt on its balance sheet, compared with approximately $2,869.7 million of cash and investments and no outstanding debt at the end of fiscal 2010 (February 27, 2010).

Outlook Strong for Second Quarter

RIMM guided its second-quarter fiscal 2011 revenue between $4.4 billion and $4.6 billion. The mid-point of $4.5 billion is exactly in line with the current Zacks Consensus Estimate. Quarterly EPS will be within the range of $1.33 to $1.44. The mid-point of $1.37 is well above the current Zacks Consensus Estimate of $1.31.

Gross margin is expected to be around 44% due to an unfavorable product mix toward low-end BlackBerry devices. Net BlackBerry subscriber additions in the second quarter are expected to be in the range of 4.9 million to 5.2 million.

New Product Launch

RIMM will unveil two innovative high-end BlackBerry mobile phones in the current quarter. We believe one of these may be the highly anticipated BlackBerry 9800. These new smartphones will have full touchscreen control, full slide-out keyboard, upgraded BlackBerry 6.0 operating system and an improved user interface and webkit based browser.

RIMM has a lot of expectations from these two devices. Management announced that the company’s financials may improve from the second quarter of fiscal 2011.

Our Take

Robust growth of 3G smartphones throughout the world is likely to benefit RIMM in the near future. The strong brand value of BlackBerry is expected to keep the earnings momentum high for RIMM. However, we also believe that RIMM desperately needs a mobile phone that can outperform iPhone or Android based-phones in the market; failing which the company will face serious problems in a market that is changing very rapidly in terms of technology, price, and data plan provided by the carrier.

We maintain our Neutral recommendation for RIMM. It is currently a Zacks #3 Rank (‘Hold’) stock.

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