By Sramana Mitra

The market was stunned last week as Research In Motion missed analyst estimates by a slight margin. Its stock has plummeted to $117 from a 52-week high of $148.13 on June 19, providing a great opportunity to buy. In this post, we will take a look at RIM's and Palm's recent earnings reports.

Research In Motion Ltd. (NASDAQ: RIMM) posted Q1 revenue of $2.24 billion, up 19% q-o-q and 107% y-o-y on a shipment of 5.4 million devices. Net income was $482.5 million, or $0.84 per diluted share, compared with $412.5 million last quarter and $223.2 million last year. Analysts estimated revenue of $2.27 billion and earnings of $0.85 per share.

In line with its April forecast, RIM added 2.3 million BlackBerry subscriber accounts, taking the total to over 16 million subscribers. Though RIM is experiencing tremendous growth, increased operating and marketing, expenses are affecting its bottom line. Operating expenses increased by 77% y-o-y and 22% q-o-q. Sales, marketing and administrative expenses increased to $327 million, about 15% of revenue. The new 3G iPhone at $199 with push email is now an aggressive competitor that no one at the company can ignore.

RIM is rising to the competition with increased advertising and new releases: the new BlackBerry Bold this summer and the BlackBerry Thunder, expected in the third quarter. It has also been scaling its infrastructure to support its growing base of subscribers. However, the critical factor is going to be the operating system, with Nokia (NOK) becoming the sole owner of Symbian. Apple (AAPL), of course, is the proud owner of one of the best operating systems in the business, giving them a tremendous edge in the battle that is now in full swing.

For the second quarter, RIM expects revenue between $2.55 and $2.65 billion. EPS is expected to be in the range of $0.84-$0.89. The company expects to add 2.6 million subscriber accounts. Gross margin, under pressure from the weak U.S. dollar and higher component pricing, is expected to be about 50.5%, lower than Q1's 50.7%. Operating expenses are expected to increase by 26%-28% from Q1, with sales, marketing and administration expenses up by about 28-30%.

As I have said in earlier posts, RIM is a great company and a strong beneficiary of the convergence device movement. Its overwhelming growth of 107%, (the fourth straight quarter with over 100% growth), and some exciting releases are just some of the reasons to buy this stock. Many analysts agree with my view.

Meanwhile, Palm is still working on its turnaround, which has gained momentum from the success of the Centro. As we saw in a recent post, Palm's U.S. smartphone market share rose from 7.9% to 13.4% in Q1.

On June 26, Palm Inc (NASDAQ: PALM) reported its Q4 and FY 2008 results. Q4 revenue was $296.2 million, down 26% y-o-y and 15.2% q-o-q and below the analyst consensus of $301.11 million. Net loss was $23.9 million, or $0.22 per diluted share, and came in below the consensus of $0.18. Last year's net loss was $17.8 million, or $0.17 per diluted share.

Smartphone sell-through in Q4 was 968,000, up 29% y-o-y, or 16.2% q-o-q, driven by strong Centro sales on AT&T's (T) network. The recent announcement of Verizon (VZ) as another carrier is bound to add to sales. However, the Centro continued to bring the gross margin down to 25.3%.

Palm's Windows Mobile product line is about to be revamped to include features like 3G, integrated WiFi, and GPS. It is also working on its platform, a move that could help restore the line to its former glory. I discussed Palm's OS plans in an earlier post. At this point, my biggest complaint is that Palm has squandered its opportunity in both OS and software applications for many years, and in this round, the company has to get this aspect right. The competitive pressures are significant, and the company will not survive another round of poor execution.

For FY 2008, revenue was $1.32 billion and net loss was $36.2 million, or $0.34 per diluted share, compared to earnings per share of $0.70 in 2007. Smartphone sell-through was 3.2 million units, up 19% y-o-y. Smartphone revenue was $1.13 billion, accounting for 85% of revenues in 2008 compared to 80% in FY 2007. This growth was offset by 38% y-o-y decline in handheld revenues net revenues. Operating expenses decreased 3% y-o-y to $463.9 million.

Clearly, the success of the Centro and Palm's new Windows Mobile line and OS plans will help in the company's turnaround. Palm was recently upgraded from Sell to Hold. It is currently trading around $5 with a market cap of around $578 million. In the smartphone sector, I own all three stocks: Apple, RIM and Nokia, and I will most likely pick up some Palm as well. I am very, very bullish on the sector as a whole.