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Research in Motion Struggles With US Revenue, Operating Expenses Growth


Revenue from the US is now 49% of total versus 65% a year ago, and it produced its second consecutive contraction on a year-year basis.

Research in Motion (RIMM) reported its first fiscal quarter last Thursday. Its revenue was at the low end of guidance and below Street consensus, but EPS beat the Street. Not surprisingly, the stock took an 11% haircut on Friday. It's a stock that's underperformed for some time, down 23% year-to-date and down 31% from its late March high.

More than a few bulls on the name have focused on the EPS results. It's true that while revenues have disappointed for a couple of quarters the earnings have exceeded expectations. But there's a reason for that in the relative margin differential of the business segments.

In the fiscal first quarter, Research in Motion's devices revenue declined 1% sequentially to 79% of total revenue. As you can see below, 1% of revenue is a little more than $42 million. The gross profit on 1% of device revenue is slightly more than $15 million. However, since that same 1% is now from software and services, the gross profit is more than $35 million. The mix shifts to the more profitable side of the house.

You can also add in the fact that the company's growth in operating expenses was well below guidance. Back in March, it forecast opex growth of 3%-6% sequentially when in fact it only grew 1% from the fiscal fourth quarter.

I wanted to wait before commenting on Research in Motion because I wanted to see its 6-F filing with the SEC on the quarter. That's the only place it discloses revenue by geography. While someone on the call was worried that international revenue growth was waning, as you can see from the graph below, the real problem is the US. Revenue from the US is now 49% of total versus 65% a year ago, and it produced its second consecutive contraction on a year-year basis.

It's no secret that Research in Motion is being pummeled domestically by iPhone (AAPL) and Android (GOOG). But once again, Co-CEO Jim Balsillie urged investors not to worry. Research in Motion's new platform is expected to commence shipping in the late third quarter/early fourth quarter and, according to Balsillie, "You'll be really surprised by it and I think you'll just be amazed at how it's a quantum leap over anything that's out there."

It's nice to see that Balsillie's enthusiastic about the new platform, but methinks he just flunked PR 101: managing expectations. That's setting the bar pretty high and, by Friday's actions, investors weren't buying into it. I think it's apparent, too, that they knew what would happen with the announcement of a 31 million share stock repurchase. Obviously, they felt the need to have someone helping to soak up Friday's volume.

So sit back and wait for a couple of months for the curtain to be raised and Research in Motion will take us where no one else has gone before. I can't wait!
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