Research In Motion - Expect Significant Volatility Ahead Of BlackBerry 10 Release

Dec.21.12 | About: BlackBerry Ltd. (BBRY)

Shares of Research in Motion (RIMM) have seen quite some volatility in after hours trading on Thursday. The producer of the once so popular BlackBerry reported its third quarter results for its fiscal 2013 after the market close. Shares initially spiked up trading with gains of 8%, but later fell back to trade with losses up to 10%.

Third Quarter Results

Research in Motion reported third quarter revenues of $2.73 billion, down 47% on the year before. Revenues fell roughly 5% compared to second quarter revenues. Quarterly revenues came in ahead of analysts consensus of $2.66 billion.

The company partially offset the impact of a revenue decline with gross margin improvements. This is remarkable given the extent of the revenue decline. Gross margins came in at 30.4%, which is up 440 basis points compared to the second quarter of the year. Margins are up 320 basis points compared to the third quarter of last year.

The company reported an operating loss of $230 million which compares to a $358 million profit last year. The company reported a net profit of $9 million as a result of the recovery of income taxes.

Adjusted net losses came in at $114 million, or $0.22 per diluted share. The bottom line was better than analysts estimates, who expected Research in Motion to report an adjusted loss of $0.35 per share.

CEO Thorsten Heins commented on the results, "RIM continued to execute on its product roadmap plans and to deliver on key financial metrics as it gets set for the global launch of BlackBerry 10. This is an exciting time and our carrier partners, application developers and employees are all looking forward to unveiling the innovation and excitement of BlackBerry 10 to our customers on January 30, 2013."

Outlook

During the current fourth quarter, the company continues to see pressure on its operating performance. The company continues to adjust its BlackBerry 7 device prices ahead of the much anticipated BlackBerry 10 platform launch on January 30.

The upcoming launch, and associated increased marketing expenditures, will impact the operating results for the fourth quarter.

Valuation

Research in Motion ended its third quarter with $2.7 billion in cash, equivalents and short term investments. The company operates without the assumption of debt, for a favorable net cash position.

For the first nine months of its fiscal 2013, Research in Motion generated revenues of $8.4 billion. The company reported a $744 million net loss, or $1.2 billion on a continuing basis. Full year revenues could come in around $11-$11.5 billion. The company is expected to report a large full year loss.

Factoring in a 10% decline in the share price in after hours trading, the market values Research in Motion at roughly $6.7 billion. Excluding the net cash position, the operating assets of the firm are valued at merely $4.0 billion. This values the firm at roughly 0.35 times annual revenues.

Some Historical Perspective

Year to date, shares of Research in Motion have lost roughly 12% of their value. Shares rose from $15 in January to highs of $18 later that month. Continued problems, mounting operating losses and a delay of the launch of the BlackBerry 10 send shares to lows of $6 in September. Shares more than doubled from that point, trading around $13 in after hours trading.

Despite the recovery, shares are still trading 90% below their all time highs set around $150 in 2008. The lower popularity of the phones and the competition from the iPhone from Apple (AAPL) hit the firm hard.

Between the fiscal 2009 and 2013, Research in Motion consolidated annual revenues around the $11 billion mark, after peaking at $20 billion in 2011. The company reported multi-billion dollar profits in each year, followed by an annual loss this year.

Investment Thesis

Shares of Research in Motion have more than doubled over the past quarter, and consequently were priced for perfection. The strong second quarter results, and the fact that the company's sees no further delays in the launch of the BlackBerry 10 send shares higher.

The company beat on both revenue and earnings metrics during the quarter, but shares fell after expectations have simply been too high. Besides the improving operating performance, shareholders are also delighted with the strong cash generation. The cash balances increased over the year, approaching the $3 billion mark.

Over the past years the company has been squeezed from phones running on Google's (GOOG) Android operating systems and the iPhone. Both companies have been struggling a bit lately, while the underdogs Research in Motion and Nokia (NOK) have made more upbeat comments, resulting in a strong recovery in the shares of both companies.

Investors are waiting for the highly anticipated BlackBerry 10 release on January 30. Many commentators call the launch decisive for the company. Either the release will revive the fortune of Research in Motion, or shares could fall back again, possibly ending up in a death spiral.

With the improved operating performance, the usual take-over rumors have resurfaced. Many technology firms are struggling in their respective domains and they could easily finance a possible acquisition of Research in Motion, even as shares have doubled over the past months. A possible price tag has increased by roughly $3 to $4 billion in recent months as a result of the rally. Many technology names, including Intel (INTC), Cisco (CSCO) and Microsoft (MSFT) have tens of billions of cash on their balance sheet, making a deal easy to finance.

Do not read too much in Thursday's trading action. The key event will be the BlackBerry 10 release in a little over a month time. Expect significant volatility in the meantime.

Shares trade more on rumors than fundamentals at the moment. For those investors believing in significant one-way volatility as either a result of a successful launch of the BlackBerry 10, or a real failure of the introduction, a long strangle option strategy might be suitable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.