Traders Betting On Rim

Research In Motion Ltd. has perhaps been the most volatile blue chip stock in Canada over the past two years, disappointing one moment then exultant the next.

Thursday, was another one of those days.

RIM's Thursday began with an intermittent BlackBerry email outage across North America but ended with the problem being solved in time for investors to share the good news of a stock rally after the markets closed.

Shares of RIM jumped more than 11% in late trading on the NASDAQ after the Waterloo, Ont., technology company posted third quarter financial results and guidance for the current quarter which surpassed Wall Street expectations.

"We are pleased to report record shipments of more than 10 million BlackBerry smart phones during the third quarter with higher than expected revenue, earnings and subscriber growth," RIM's co-chief executive officer Jim Balsillie said in a statement.

RIM said revenue for the third quarter, ended Nov. 28, 2009, was US$3.92-billion, with earnings per share of $1.10 per share diluted. Revenue was up 11 per cent over the $3.53-billion RIM earned in the same quarter a year ago.

On average, analysts polled by Thomson Reuters IBES were expecting earnings per share of $1.04 and revenue of US$3.79-billion

RIM said net income for the quarter was $628.4-million, up from $475.6-million in the same quarter a year ago.

Investors greeted the company's forecast with relief, since shares of the BlackBerry maker have been locked in an unpleasant roller coaster ride since peaking at more than $144 in June of 2008. After worries over the company's gross margins and the volatility in the world's capital markets caused a freefall in RIM shares in the fall of 2008, RIM's stock price bottomed out near $36 in March. However, it has gained steadily since then, topping $70 in late trading yesterday.

Canaccord Adams financial analyst Peter Misek characterized RIM's results and guidance as "very good."

Mr. Misek believes RIM remains well positioned to compete against devices such as Apple Inc.'s iPhone, which has recently been blamed for causing bandwidth congestion issues due to the way its data processes operate with the networks of certain carriers, including AT&T Inc.'s in the United States.

"In a world of finite bandwidth RIM will do just fine," he said. "So will Apple, but for different reasons."

RIM added 4.4 million new BlackBerry subscribers in the quarter, bringing RIM's global user base to about 36 million. RIM said it shipped 10.1 million devices in the quarter.

RIM's gross margins - a stat closely watched by investors which indicates how much RIM can charge for each BlackBerry - fell to 42.7% from 44.1% in the previous quarter.

RIM began selling both the BlackBerry Storm2 and Bold 9700 in the quarter and continued rolling out the Curve 8520 to international markets.

For the current quarter, RIM said it expects revenue to fall between $4.2-billion and $4.4-billion, with a gross margin of about 43.5% and earnings per share of between $1.23 and $1.31 diluted. RIM said it expects to add between 4.4 million and 4.7 million new BlackBerry users in the quarter.

Internationally, RIM continues to grow. In addition to announcing a pair of deals with China Mobile and Digital China Holdings Ltd. to bring the BlackBerry to the world's most populous nation, Mr. Balsillie told investors on an afternoon conference call that the company is looking at the possibility of opening manufacturing and research and development facilities in the region.

Mr. Balsillie said 37% of RIM's revenue in the quarter came from markets outside North America. More than 35% of RIM's subscribers come from outside the United States and Canada and the company now works with more than 530 carriers and distribution partners around the world.

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Traders are speculating RIM will rebound from a big decline since the company forecast sales in September that were below analysts' estimates, said Nick Agostino, an analyst at Research Capital Corp. in Toronto who has recommended the shares for more than three years.

Traders are snapping up options on Research In Motion Ltd., betting the shares will climb 25% in five weeks as prospects for sales accelerate, especially in China.

Investors buying contracts to purchase RIM for US$80 through Jan. 15 helped drive bullish contracts on the stock to twice the level of bearish ones, the highest ratio since March 2006, according to data compiled by Bloomberg. The last time calls outnumbered puts by as much, shares of the Waterloo, Ont.-based BlackBerry maker quadrupled in 19 months.

Traders are speculating RIM will rebound from a big decline since the company forecast sales in September that were below analysts' estimates, said Nick Agostino, an analyst at Research Capital Corp. in Toronto who has recommended the shares for more than three years.

RIM is expanding distribution in China and its BlackBerry Curve surpassed Cupertino, Calif.-based Apple Inc.'s iPhone as the top-selling consumer smart phone last quarter, helped by price cuts.

"People are realizing the haircut the stock has taken since the last quarter was overdone," Mr. Agostino said. "People were looking for further deterioration in the business model, and what they're seeing recently from sales channels is signs of what could be a stable quarter."

RIM's Toronto-listed shares (RIM/TSX) closed yesterday at $67.82, up $2.73, or 4.2%.

In New York, Research In Motion's Nasdaq-listed shares (RIMM/NASDAQ) jumped US$2.98, or 4.9%, to $64.14. Declines since the company's Sept. 24 sales forecast pared year-to-date gains to about 51% before yesterday.

The stock must rise 25% from yesterday's close in U.S. trading to reach the strike price on the January US$80 contracts. Calls give the right to buy shares for a given price through a certain date, while puts convey the right to sell. RIM hasn't closed above US$80 since September.

The company said in September that revenue for the three-month period ended Nov. 28 would be as low as US$3.6-billion, less than the average analyst projection of US$3.91-billion, according to data compiled by Bloomberg.

January US$80 calls have more than doubled since Dec. 4 to 96,650 contracts, the highest so-called open interest for RIM options. That's the steepest rise among the company's options during the past two weeks, according to data compiled by Bloomberg and Trade Alert LLC, a New York-based provider of market analytics.

The company said yesterday that it will sell a BlackBerry customized for China and partner with an affiliate of Lenovo Group Ltd. to increase business in the world's biggest mobile-phone market. On Dec. 7, RIM reached an agreement to expand distribution through Digital China Holdings Ltd. Both Lenovo and Digital China are based in Hong Kong. "That has shown people there is international growth potential in the stock," Mr. Agostino said.

RIM gets more than 70% of its revenue from North America, according to data compiled by Bloomberg.

The RIM options rose 14% to US50¢ yesterday. Trading volume exceeded 25,000 contracts on Dec. 4 and Dec. 7.

"Upside call buying remains the theme," options strategists at Susquehanna International Group LLP in Bala Cynwyd, Pa., wrote in a Dec. 7 report.

"This trading suggests investors are using these relatively inexpensive calls in order to position for significant move to the upside in shares over the coming months."