When Credit Suisse analysts downgraded Research In Motion (RIMM), they were apparently so aggressively criticised that they felt compelled to release another note this morning defending themselves. In the note, CS addresses three key criticisms.
First CS defends its conservative estimates for growth in the smartphone market:
Smartphone market – could it be bigger? We believe not given three points.
1) Our smartphone forecast already builds in a healthy dose of optimism as we are forecasting 2H/1H unit growth of 50% in 2008 (’07/’06 were 32%/29% respectively);
2) Our estimates anticipate accelerating unit growth of 64% in 2009 from 37% in 2008, and
3) Our proprietary affordability study shows that the addressable market for smartphones is over 800mn LT; and within this we assume that effective penetration will be 75% by 2010.
Second, CS insists that a ramp at Verizon won’t compensate for RIMM’s loss of share at AT&T due to the iPhone:
Won’t Verizon/international offset any AT&T share loss? We don’t think so. Our view on RIM’s overall smartphone share is driven by our expectation for share loss at AT&T in NA (25-30% of hardware revenue) over the next several quarters. Here we believe that RIM’s current share at AT&T (70% in 2QCY08E) is unsustainable given AT&T’s commitment to Apple and the subsidized 3G iPhone. Also, while we acknowledge that the ramp at Verizon could be strong (we estimate 55% share for RIM at Verizon exiting 4Q08, up from 32% in 1QCY08), we maintain our view that this will not completely offset AT&T share loss. Finally, our global smartphone share forecast of 13.4% in CY09 allows for a fair degree of international share expansion.
Finally, CS notes that while gross margins on the Pearl were better than expected, newer products don’t show the same promise:
Pearl GMs better? What about new products? We still see pressure ahead. Our updated BOM analysis still shows that structural ASP/GMs for the consumer platform are around $250/40%. As consumer oriented products rise in the mix, we believe that ASP and GM pressure will intensify. In addition, we believe that newer products are unlikely to be materially GM accretive. We expect that FY10 ASP’s will decline by 11% and group GM will drop to 47.6% from 49.7% in FY09.
Credit Suisse reiterated its Underperform rating and $100 price target.
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