Over these past many months, if I had switched into permabear clothes stitched with Research In Motion (RIMM) shares and options, I might be retired on an island somewhere. Instead, for the past several months or more, I have chosen the much more difficult path of looking for the silver lining in RIMM’s story. I have married shares and calls with my puts and have ended up mostly running in place.
Tonight, RIMM disappointed traders and investors once again with its latest earnings report. This time, it was not an outright miss on overall earnings or revenue guidance. Sure, the playbook sold 200K units versus 500K in the previous quarter, but the decline should be no surprise – especially given HP’s (NYSE:HPQ) ungraceful exit from the tablet business. Indeed, I am pleasantly surprised to see RIMM can still sell in the six figures.
Alas, RIMM built up enough expectations that they would deliver some outstanding news ahead of the Christmas selling season to make up for all the awful news earlier this year. The near 50% rally from the recent lows demonstrated some of the growing anticipation. The bottom line is that the massive number of shorts crowded into RIMM won the day once again.
RIMM did try to offer some encouraging news. From the highlights:
- Revenue in the second quarter was $4.2 billion and service revenue surpassed $1 billion for the first time
- GAAP net income of $329 million or $0.63 per fully diluted share; adjusted net income of $419 million or $0.80 per fully diluted share
- The BlackBerry subscriber base grew 40% year over year to surpass 70 million
- RIM’s largest roll-out of BlackBerry smartphones was initiated with 7 new smartphones launched with over 90 carrier and distribution partners in 30 countries during the latter part of Q2
- Approximately $780 million was invested as part of a consortium of companies that successfully bid to acquire intellectual property assets from Nortel
- BlackBerry smartphone shipments in Q3 are estimated to grow between 27-37% over Q2 shipments
Conspicuously missing from the highlights, at least for me, is news of the company’s stock repurchase activity. During previous buyback periods, RIMM has provided details on shares purchased and the amount of money spent on those shares. The count of outstanding shares indicates that RIMM did not purchase any shares. Sure enough, RIMM reports zilch on the line of the balance sheet for “Common shares repurchased.” Total common shares outstanding essentially remained the same from the previous quarter at 524M. Curiously, cash, cash equivalents, short-term and long-term investments declined from $2.9 to $1.4B. RIMM explains where the money went as follows:
“Uses of cash included strategic purchases of intellectual property assets associated with RIM’s participation in a consortium of companies that successfully bid to acquire Nortel Networks Corporation’s patent portfolio, of which RIM’s cost is approximately $780 million, capital expenditures of approximately $285 million, and working capital requirements.”
Putting it all together, I can understand why investors might get nervous seeing such massive expenditure for very uncertain returns. To date, RIMM has been a cash-generating machine, and I cannot recall when was the last time the company drew down so heavily on its cash hoard on a percentage basis. The upside (yes, there I go again looking for a silver lining!) in this news comes from the prospect of future repurchase activity. With the stock selling off sharply in the after hours by 19% and trading just above multi-year lows, RIMM might just feel the need to start drawing down on its repurchase authorization ... unless, of course, management foresees even worse news coming and even cheaper opportunities ahead for buying back stock.
Be careful out there!
Disclosure: I am long RIMM.
Additional disclosure: I am also long RIMM calls and puts