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LEAD Analysts: Christina Hussong Christopher J. Sanders Email: chussong@smu.edu ; cjsander@smu.edu Phone: (214) 563-0418 ; (214) 212-8783

Recommendation: BUY NOW

Key Points

• Research In Motion (AKA BlackBerry) has settled its ongoing litigation on March 3, 2006 with NTP.

• Undervalued by 30% on a DCF basis • Based on comparables, the stock price

would normally be overvalued but RIM’s PEG ratio is 1.27 which is much lower than the 1.64 that competitors are at which suggests growth prospects are higher for RIM which more than justifies its stock price and DCF value.

• Continued efforts to launch the BlackBerry with new carrier partners around the world.

• Extraordinary lineup of new handsets, software and services.

• RIM continues to draw customers by offering the whole package: devices, a wireless push E-mail service, and support for business applications.

• We feel like this is a good play based on the economic outlook of this industry as more firms are attempting to enter this market.

Market Data

NASDAQ RIMM

Technology: Communications Equipment

Current Price $ 78.11 52-Week High $ 90.53 52-Week Low $ 51.90 Shares Out 185 (in Millions)

Market Cap $ 15,725 (in Millions)

Ratios RIMM Industry

P/E 33.43 20.17

PEG 1.27 1.64

P/B 7.87 6.24

DCF Value $112.51

DCF Value (after settlement) $111.63

Company Overview:

Research In Motion (RIM) is a designer, manufacturer and marketer of wireless solutions for the mobile communication market worldwide. RIM provides platforms and solutions for access to e-mail, phone, short message service (SMS), personal organizer, Internet and intranet-based corporate data applications. It also licenses its technology to handset and software vendors to allow these companies to offer wireless data services using the BlackBerry Enterprise Server (BES) and BlackBerry Internet Service. The company also allows designated third party developers and manufacturers to improve their products and services with wireless connectivity. The company offers its products to carrier partners, resellers, and end users. RIM was incorporated in 1984 and is headquartered in Waterloo, Canada.

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Investment Thesis Research In Motion’s stock price has been penalized over the five-year battle beginning November 2001 with NTP Incorporated, a Virginia-based holding company. As the patent based case has been settled (March 3, 2006), we now feel that RIM is a solid buy. Even with the threat of shutting down the e-mail service of popular BlackBerry devices, RIM has still managed to stay on top in terms of both sales and revenue. RIM’s closest competitor Palm (NASDAQ: PALM) was still unable to capitalize on the situation as sales from the quarter ended in late November shows that Palm sold 602,000 Treos whereas RIM sold 645,000 new subscriber accounts. During the litigation, new competitors began to enter the market but we feel that with RIM’s new technology offerings that they will continue to excel in this market. We recognize that with the recent settlement RIM’s future appears to remain unclear. Our bet is that the market will clarify their outlook on RIM and the stock will climb to its true market value.

Getting Out of Deep Waters1 Five years ago NTP Incorporated filed a complaint alleging that certain RIM products infringed on eight patents held by NTP Inc. that cover the use of radio frequency wireless communications in electronic mail systems. Despite continued rulings in favor of NTP and threats of shutting down the BlackBerry e-mail service, RIM and NTP have signed a definitive licensing and settlement agreement. On March 3, 2006, all terms of the agreement were finalized and the litigation against RIM has been dismissed by a court order. The agreement eliminates the need for any further court proceedings or decisions relating to damages or injunctive relief. The total amount paid out to NTP has been $612.5 million and has been paid in full and final settlement of all claims against RIM. Included in this amount is the fully-paid up license going forward as well as money already accrued by RIM to date. More specifically, RIM has already accrued $450 million and the additional amount of $162.5 million will be recorded in Q4. With this settlement, RIM owns all patents that were once controlled by NTP that cover all of RIM’s products, services and technologies. The resolution permits RIM and its partners to sell RIM products and services completely free and clear of any claim by NTP, including any claims that NTP may have against wireless carriers, channel partners, supplier or customers in relation to RIM products or services, or in relation to third party products and services, to the extent they are use in connection with RIM products and services.

Tax Implications In 2001, 2002 and 2003 RIM experienced net income losses of $7.6 million, $28.3 million and $148.9 million in each of their respective years. The Company’s deferred tax asset balance includes operating loss carryforwards, which were created during the years of 2001-2003. More recently, RIM has been able to apply these loss carryforwards thus allowing RIM to increase their net income accounts. Since the deferred tax asset account has been depleted of funds, we feel that it is reasonable to estimate going forward that RIM will pay the Canadian general corporate tax amount of 36.5%.

1 Research In Motion and NTP Sign Definitive Settlement Agreement to End Litigation, March 3, 2006. http://www.rim.com/news/press/2006/pr-03_03_2006-01.shtml

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Developments2 Despite RIM’s hold backs, their key device the BlackBerry is still widely recognized as a full-blown, proven and unmatched wireless platform. There have been few, if any, customer defections because of the lawsuit and BlackBerry remains a popular and practical device. Even with this said, RIM is focusing on a phenomenon developing where so many more professionals are purchasing their own PDA’s and smart phone for personal and business use, where competitive offerings with cameras and cell-phone-like shapes could prove more appealing. RIM is focusing on “prosumer” features including instant messaging, voice over IP, and new E-commerce options. They intend to keep their current customer base by offering technologies, IT and telecom features that managers won’t find from consumer-oriented vendors.

− RIM recently acquired VoIP provider Ascendent Systems. This will allow RIM to turn the BlackBerry into a full-fledged business phone, capable of picking up calls that come into a user’s desktop phone extension, checking desktop phone voice mail, transferring calls, and ad hoc teleconferencing.

− RIM also announced it now supports Cisco Systems’ VoIP PBX, Unified CallManager 5.0, allowing Call Manager to extend those same kinds of VoIP features to users of BlackBerrys that run on company wireless LAN’s.

− RIM has improved its integration with other operating systems and devices through its BlackBerry Connect program, which helps ease some of those proprietary platform concerns.

− Even after the NTP settlement, RIM still has about $1.8 billion in cash and equivalents, leaving plenty of money for developing new features and functions.

− Under the “prosumer” approach, BlackBerry users can communicate with work colleagues through instant messaging applications, including Microsoft Windows Messenger and Lotus Sametime, made possible through upgrades in its BlackBerry Server version 4.1 released during the week of March 6, 2006. Also, Google Talk IM has become available as a free download for users with Google Gmail accounts, and it has supported American Online and Yahoo IM since last year.

− New E-commerce features will make it easy for users to buy and sell goods on popular websites like Amazon.com and eBay.

− RIM is continuing to partner with telecommunication companies around the world in order to provide the best technologies to these markets. For example, recently Maxis, Malaysia’s leading telecommunications company, partnered up with RIM to launch the BlackBerry 8700g in Malaysia. The 8700g features a completely reengineered device platform that offers the best combined data and voice experience for mobile professionals. With over 1,500 base stations powering new EDGE platform (Enhanced Data rates for GSM Evolution technology), they can provide up to three times the data speed of GPRS (General Packet Radio Service).

2 Malykhina, Elena. “Blackberry Faces Challenges Beyond The NTP Lawsuit”, Information Week, 2006/3/13.

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Comparable Analysis While RIM has the highest P/E ratio, the highest M/B ratio, the highest P/S ratio we believe that RIM is justified because their growth prospects are much higher than everyone else’s in its peer group. RIM’s PEG is 1.27 while its comparable group PEG is 1.64. The return on assets and the return on equity are quite low when compared to competitors. This may largely be due to the litigation they recently settled. We believe that management can now focus on their operations, so the return on equity along with the return on assets numbers should improve.

Comparables Research Comparable

Company Name In Motion Aggregate Microsoft Nokia Palm

Ticker RIMM MSFT NOK PALM

Beta 1.45 1.37 1.19 1.86 2.22 Gross Margin 55.61% 71.33% 84.77% 35.04% 30.56%

ROA 13.39% 18.38% 19.16% 16.43% 28.99%

ROE 17.50% 27.56% 27.75% 27.65% 47.28%

P/E (forward) 33.46 20.17 20.46 17.97 23.94

PEG (5 year expected) 1.27 1.64 1.60 1.78 1.90

M/B 7.87 6.24 6.34 5.85 2.27

P/S(ttm) 8.59 5.84 7.05 2.19 1.48

EV/EBITDA 138.34 24.46 22.44 19.12 24.70

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Discounted Cash Flow Analysis RIM is currently trading at $78.11. We believe that RIM is worth $111.63 when you factor in the settlement of the lawsuit. In this DCF model we assumed a 4.25% risk free rate and an equity market risk premium of 6.5%. We believe that the terminal growth for RIM is going to be 5% which is just above the GDP growth. The beta we used in our DCF model is 1.45, which we obtained from Bloomberg. In order to get this beta we compiled data from 2/26/1999 up until 2/28/2006, used the NASDAQ as the indicator and the result was an adjusted monthly beta of 1.45. In our DCF model we based our assumptions about sales on the projected EPS numbers that we looked up. Then we used our common size statement to make further projections for the income statement and balance sheet. Implications of Settlement Since RIM has already accrued $450 million, the additional $162.5 million will be recorded in Q4. The DCF calculation after the settlement was calculated by taking the Net Present Value of the future cash flows discounted by the WACC, minus the leftover amount of the settlement of $162.5 million, assuming that this amount is paid off now (date 0). We then divided the amount over the diluted number of shares outstanding. This calculation gave us a DCF valuation of $111.63. It is also important to note that the cash and cash equivalents account has more recently been extremely high due to the money restricted for litigation expenses. RIM’s recent average for the cash and cash equivalent accounts has been 139% of sales. We feel that after the recent settlement, the cash accounts will trend to 10% of sales in the long run.

Key Assumptions for the DCF Model

Date 4/11/2006

Risk Free Rate 4.25%

Equity Market Risk Premium 6.50%

Long-Term Inflation 3.00%

Terminal Growth 5.00%

Equity Beta 1.45

Tax Rate 36.50%

Rate of Return on Debt 6.00%

Number of Shares (Diluted) 185

Weight of Equity 99.70%

Weight of Debt 0.30%

WACC 13.33%

Stock Value Based On DCF $112.51 DCF(after settlement) $111.63

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Assumptions for DCF Model For Research In Motion

Assumption

Income Statement

Sales 33% Sales growth next year and trended down for years 2007-2015

Cost of Sales 28% COS growth next year and trended down for years 2007-20015

Selling, General & Admin. Expenses 20% of sales, the historical average

Depreciation 5% of Sales, Straight Line Depreciation

Other 0% of sales, the historical average

Interest Income/(Expense) 4% of sales, the historical average

Income Taxes 36.5% of net income

EPS Will grow to $2.51 (in 2006), $3.28 (in 2007) and 21.5% from years 3-5

Balance Sheet

Assets

Cash and Cash Equivalents 50% in 2006, 40% in 2007, 30% in 2008, 20% in 2009 and 10% for years 2010-2015

Accounts Receivable 25% of sales, the historical average

Inventory 10% of sales, the historical average

Other current Assets 8% of sales, the historical average

Property, Plant and Equipment (Net) 20% of sales, this is slightly higher than the average

Investments 93% of sales, historical average

Other Non-Current Assets 2% of sales, lower than the historical average

Liabilities and Shareholders' Equity

Accounts Payable 35% of sales, the historical average

Short-Term Debt 0%, historical average

Other current Liabilities 5% of sales, the historical average

Long-Term Debt 2% of sales, historical average

Other Non-Current Liabilities 1.5% of sales, points lower than the historical average

Other Assumptions

Number of shares outstanding Hold constant at current level (185 mil.)

Terminal Value 5% growth, in line with GDP

Settlement 162.5mil. This is the amount that still has to be paid.

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Risks There are two notable risks involved in purchasing RIM. One is the market risk of financial instruments. The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency of the U.S. Dollar. Due to the fact that RIM is headquartered in Canada, RIM has certain expenses such as salaries, operating costs and manufacturing overhead, which are incurred primarily in Canadian Dollars. RIM experiences the majority of their transactions that contribute to their revenues in U.S. Dollars, Canadian Dollars, Euros and British Pounds. RIM has hedged their foreign exchange risk in these matters by using derivative financial instruments, including forward contracts and options. We feel that RIM has taken the appropriate steps to minimize this risk and are confident that this will not cause a major disruption in RIM’s finances. The second risk RIM faces is the challenge of staying ahead of new fierce competitors, most notably Palm and Nokia. Palm seems to have gained momentum over the past year since adopting Windows Mobile 5.0 as an alternative platform to the Palm OS. Palm also came out with the Windows-based Treo 700w, which is their most well known and strongest product. They have also teamed up with Microsoft to develop more compatible software platforms, making them more competitive in the market. Now that RIM has settled its lawsuit, we feel that 2005 may have been a good year for Palm, but it will become a distant memory as we move forward. Nokia is also ramping up their plans to make wireless E-mail a standard application on its new business-class mobile devices. The Nokia 9300 will be launched during the early part of 2006 and the Nokia Eseries and E61 are set to launch in the latter part of 2006. Nokia points out that the E61 will have a similar look and feel to the BlackBerry but we feel that the services and technology offered cannot compete with RIM’s innovative ideas and business. Many of the newer features RIM offers are not yet available on Windows Mobile 5.0 and with the thriving business oriented and tech savvy consumer market, RIM will have a jump start on their closest competitors.

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Company Name

Research

In Motion Aggregate Microsoft

Nokia

Corp.

Palm,

Inc.

Ticker RIMM Comps MSFT NOK PALM

(LFY Income Statement):

Latest Fiscal Year End Date 2/26/2005 6/30/2005 12/31/2005 5/31/2005

Revenue (millions) 1,350$ 39,788$ 41,075$ 1,270$

Gross Profit 715$ 33,588$ 14,395$ 391$

EBITDA 107$ 12,254$ 4,303$ 76$

(Per Share Income Statement Data)

LTM Date 11/26/2005 12/31/2005 12/31/2005 11/30/2005

LTM EPS* 1.90$ 1.22$ 0.99$ 3.05$

CFY EPS Estimate 2.51$ 1.32$ 1.14$ 0.84$

NFY EPS Estimate 3.37$ 1.53$ 1.32$ 0.98$

Net Income 352.20$ 12,591.37$ 4,112.79$ 307.46$

*Excl. extra. Items, writeoffs, & one time charges

(Balance Sheet Data - MRQ):

Cash and Cash Equivalents 733$ 4,083$ 3,674$ 181$

Total Debt (incl. ST Debt and leases) 7$ -$ 478$ 35$

BV Per Share 10.66$ 4.26$ 3.50$ 8.84$

Total Common Equity (Book Value) 1,974$ 43,989$ 14,603$ 892$

(Stock Data)

Date 4/11/2006 3/28/2006 3/28/2006 3/28/2006

Stock Price 76.63$ 27.01$ 20.49$ 20.11$

Common Shares Outstanding 185 10,333 4172.38 100.87

Market Capitalization (MV of Equity) 14,192$ 279,104$ 85,492$ 2,028$

Total Mkt. Capitalization 13,466$ 275,021$ 82,296$ 1,882$

(Tot. Net Debt+MV of Equity)

(Profitability )

LFY Gross Margin 55.61% 71.33% 84.77% 35.04% 30.56%

LFY EBITDA Margin 16.23% 31.53% 38.42% 13.70% 6.18%

ROE 17.50% 27.56% 27.75% 27.65% 47.28%

ROA 13.39% 18.38% 19.16% 16.43% 28.99%

(Growth/Return):

Historical 5 Year Revenue Growth Rate 73.88% 10.80% 11.63% 2.39% 3.74%

Historical 5 Year EPS Growth Rate 73.04% 6.01% 5.75% 0.40% -5.31%

Projected ROE (CFY)

CFY EPS Growth Rate 19.50% 13.40% 13.80% 11.70% 10.40%

NFY EPS Growth Rate 30.70% 15.76% 15.90% 13.90% 16.50%

Projected Growth in EPS 5 Years 21.50% 11.73% 12.00% 10.00% 12.00%

Dividend Yield 0.00% 1.51% 1.33% 2.19% 0.00%

VL Timeliness - - -

(Risk):

Beta 1.45 1.37 1.19 1.86 2.22

VL Safety - - -

LT Debt / MV of Equity 0.05% 0.15% 0.00% 0.56% 1.73%

LT Debt / BV of Equity 0.35% 0.85% 0.00% 3.27% 3.92%

(Valuation):

MV of Equity / Book Value 7.19 6.20 6.34 5.85 2.27

Price/Sales 8.59 4.56 7.05 2.19 1.48

Price / EPS (TTM) 45.91 21.93 22.29 20.66 6.93

Price / EPS (06) 30.53 20.10 20.46 17.97 23.94

Price / EPS (07) 22.74 17.26 17.65 15.52 20.52

Total Market Capitalization / EBITDA 125.73 22.75 22.44 19.12 24.70

PEG 1.27 1.64 1.60 1.78 1.90

PEG to near term growth 2.24 2006 2007

Market Caps 380,817$

Total BVE 61,459$

Total Sales 83,484$

13.60% Total Earnings 18,946.14$ 22,040.57$

RIMM 2.45%

MSFT 71.99%

NOK 25.11%

PALM 0.45%

Total 100.00%

Equity Profiles

(Dollars in Millions)

Analyst Name: Christina Hussong and Chris Sanders

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