TSX Commentary

Outperform, Above Average Risk, Price Target: $120.00
Strong Q3 results/outlook should help reaffirm RIM’s competitive strengths, consumer demand and business model. Strong Q3 Beat helped affirm RIM’s competitive strengths, consumer demand, business model. Q3 at $3.9B rev (41% Y/Y) and $1.10 EPS, beat street ($3.8B, $1.04). Dispelling pricing pressure fears, GMs/ASPs came inline with guidance (42.7%/$317) with stable ARPU. Cashflow was a record $1.1B (RBC at $600M), fully funding RIM’s 12M $775M share repurchase (adds $0.12/sh F11EPS). RIM appointed CAO Brian Bidulka (Molson’s) CFO, and Keith Pardy (Coke/Nokia) CMO. Knockout Q4 Guidance reflects continued momentum, pending launches, intact channel support. Q4 outlook for $4.2-4.4B rev and $1.23-1.31, beat street at $4.1B (RBC at $4.1-4.3B) and $1.12 (RBC at $1.15-1.21). Unit guidance for 10.6-11.2M (36-44% Y/Y) at strong 43.5% GMs, to us shows RIM’s business model remains healthy. ASPs at $320 (+1% Q/Q), inline. On 80%+ consumer mix, sub adds at4.4M beat expectations (4.0-4.3M guidance, RBC at 4.1M). On surging international sales (up 31% Q/Q), RIM shipped 10.1M handsets (22% Q/Q, highest in 6 Qtrs), vs 9.2-9.9M guidance. Enterprise remains soft (<20% of sub adds) on IT spending,
December 18, 2009 expected to recover 1H/CY10. RBC CM’ OP thesis remains: 1) leadership, share gains in large, underpenetrated opportunity; 2) sustained competitive advantages; 3) financial outperformance.

Veritas has also published a report on Research in Motion. Veritas believes that if the after market reaction to Research in Motion’s (“RIMM” or the “Company”) Q3-F10 is any indication, then the bulls must be heartened while those with a bearish outlook should be looking to hibernate. RIMM’s results for the quarter and its forecast for Q4-F10, imply that for F10 the Company’s device sales are likely to exceed Veritas’ estimated 36M units and its subscribers will surpass Veritas’ forecast of 39M. Accordingly, the analyst has revised its estimates for F10 and F11. Veritas now forecasts device sales of 47.5M units for F11 (44.5 earlier) and 59.1M units for F12 (55.5 earlier). The Company is selling more of its low end devices which are finding their way into the pre-paid segments. Clearly the upper end of the market doesn’t have the wherewithal to absorb higher end product from the likes of RIMM. Given Jim Balsillie’s comments surrounding “Turbulence in the ecosystem/channel”, Veritas believes that a deflation of at least 5% on the $320 ASP of Q4-F10 is highly probable. Veritas believes RIMM’s ASP for F11 is likely to approach $300. If the bearish thesis on RIMM falters, it will be at the altar of the service gross margin. Although ARPU per subscriber declined 12.3% YoY, the scalability of the entire operation and the 84% gross margin of the segment continue to provide the cash flow buffer that RIMM needs to compete in the devices segment. However, recurring outages and exploding data traffic growth, call for significant investment in upgrading and building out the network. More importantly, competitors such as Motorola and Nokia are looking to offer consumers the option of subscribing to services similar to those provided by RIMM at no cost to either the customer or the carrier. Veritas is fine tuning its valuation to $47.00, and is maintaining its sell rating.