RIM Outshines Palm As Smartphone Battle Heats Up

The contrast between Research In Motion’s strong quarterly performance and Palm’s disappointing numbers was stark on Thursday, but it’s too early to call winners in an intensifying smartphone battle. As cell phone users trade up to feature-rich, multimedia smartphones, established companies and newcomers alike are pressing hard to adjust their strategies in a burgeoning but increasingly unpredictable market, analysts say.

RIM has made a concerted push to grow beyond its loyal corporate customers. That seems to be paying off as it demonstrated strong growth in consumer and international markets when it posted third-quarter results. Its forecasts for the fourth quarter also surpassed analyst expectations. Palm’s quarterly performance was decidedly less impressive as it reported weaker-than-expected demand for its new Pre phone and said it was planning to spend heavily to try to bolster sales volumes. But even as RIM’s stock jumped 10.6 percent yesterday, some analysts were questioning whether it could maintain profit margins in a fight for sales against Apple’s iPhone and Motorola’s Droid.

RIM performed well in the third quarter, said UBS Analysts Phillip Huang and Maynard Um, but it needs to brace for a fight that will only intensify. Smartphone makers may cut prices to achieve sales growth, the UBS analysts said in a report that raised earnings estimates and their stock target price for RIM. CIBC World Markets Analyst Todd Coupland said there are legitimate competition concerns, but they don’t trump the sector’s considerable growth potential. “The market is clearly expanding,” he said. “RIM’s trick will be being able to adjust profitably through this.”

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Formidable Foe

As Apple’s latest results suggest, the iPhone is still a formidable competitor. It began as a consumer phenomenon, but it has started to make headway in the RIM-dominated corporate market, just as RIM has started to move aggressively in the consumer side. Apple sold 7.4 million iPhones last quarter, and is expected to sell between 8 million and 10 million in the current quarter as it expands into key overseas markets such as China.

Meanwhile, RIM shipped a record-breaking 10.1 million phones in the third quarter and expects to ship 10.6 million to 11.2 million in the current quarter. “Despite the perception that the iPhone is this huge consumer success, and RIM is owned only by geeks and carriers and chipheads, it’s not true,” said Duncan Stewart, an analyst at DSAM Consulting. “The battle of the public perception is not matched by the reality of actual consumer buying behaviour.” As it pushes into the mass market to fuel growth, RIM will likely sell more low-end phones, which will squeeze the average selling price and, in turn, profit margins, said Sanford C Bernstein Analyst Pierre Ferragu.

Palm’s Challenges

Analysts agreed that Palm, which also gave a disappointing earnings outlook, faces even greater challenges. Palm said on Thursday that partner Sprint Nextel was selling fewer Pre and Pixi devices than expected. And while it reaffirmed its 2010 forecast for revenue of $1.6 billion-$1.8 billion, it plans heavy spending on a marketing blitz to achieve that. “There was not a lot of encouraging news in Palm’s guidance,” said CL King Analyst Lawrence Harris.

Some analysts say it is too early to label Palm a loser, particularly as it may win more carrier deals. Kaufman Brothers Analyst Shaw Wu, for example, reiterated a ‘buy’ rating. “Our conviction level on Palm signing up Verizon in 2010 remains fairly high and we continue to see that as a positive catalyst for the shares,” he said.

To be sure, the response to RIM’s performance and outlook was not uniformly cautious. Its forecast led many analysts to hoist profit estimates and stock targets. They say RIM has proven its ability to march into the mainstream market while protecting profits. Allaying fears for the future are RIM’s manufacturing efficiencies, well-received product launches, technology advantages and increasingly attractive brand, analysts say. (Reuters)