Research In Motion's Positive Surprise

| About: BlackBerry Ltd. (BBRY)

After the bell on Thursday, BlackBerry and PlayBook maker Research In Motion (RIMM) reported its fiscal second quarter results. Expectations for the company going into the report were extremely low, as the company has lost plenty of market share and has seen revenues plunge over the past year. I previewed this report last week, stating how negative all of the expectations were. Surprisingly, the company reported an amazing quarter, with revenues and earnings beating expectations, and the company's cash pile increasing. While this company is not out of the woods yet, this report wasn't as terrible as most were looking for, and that sent the stock shooting higher in the after hours trade.

The headline numbers:

Research in Motion reported revenues of $2.87 billion for the fiscal second quarter. While that number represented a 31.1% drop from last year's period, analysts were expecting a drop of 40% to $2.5 billion. Research In Motion beat by more than $370 million, or 15%.

On the bottom line, analysts were looking for a loss of $0.46 compared to last year's profit of $0.80. As reported, the company lost $0.45. However, when you exclude restructuring charges (the CORE program), the company only lost $0.27. So the company beat by 19 cents, only the second time in the last five quarters that the company beat analyst expectations, and this was an extremely large beat.

The company announced that during the quarter, it shipped 7.4 million BlackBerry smartphones and 130,000 PlayBook tablets.

Margin analysis (prior 2nd quarters):

There are several takeaways from the changes in RIMM's three primary margins. First, I'm going to present the company's margins over the past four fiscal second quarters.

As you can see, RIMM saw a huge drop in all margins from the prior year period. However, you must remember that this is a company that currently is focused on driving revenues, sometimes at the cost of margins. If it has to boost expenses a little or cut prices to generate some sales, it will.

So what were the main reasons behind these margin drops? First, revenues declined by 31.07% over last year's period. However, the cost of goods sold only declined by 16.82%. That led to a gross margin dollar decline of 53.66%, because expenses didn't drop as fast as revenues. Overall, gross margins declined by 1,268 basis points.

On the operating side, research and development expenses declined by 3.67% from last year's period. Selling and marketing expenses declined by 18.16%. However, amortization expenses rose sharply by 30.50%. Overall, total operating expenses declined by 7.88%. The company reported an operating profit of $407 million in last year's period, but had an operating loss of $363 million in this quarter. Overall, operating margins declined by 2,239 basis points.

On the bottom line, Research in Motion swung from a profit of $329 million to a loss of $235 million, and remember, these numbers include the restructuring charges ($142 million loss excluding them). Overall, net profit margins fell by 1,607 basis points. That is bad, but not as bad as the drop in operating margins.

Margin analysis (last four quarters):

The second important way to look at RIMM's margins is to look at the past four quarters to see how things have changed from quarter to quarter. The following table shows the last four fiscal quarters.

Gross margins declined by 2 full percentage points from Q1, which is not a surprise. Revenues increased by 2.1% over Q1 levels, but the cost of goods sold rose by 4.94%. Overall, gross margin dollars fell by 5.2%, leading to the decline in gross margins.

Now RIMM's three primary operating expenses (R&D, selling and marketing, amortization) rose only 1.28% over Q1 levels. However, RIMM did not record any goodwill impairment charges in Q2, while Q1 saw a $335 million charge. That explains why operating margins rose by more than 1,000 basis points over Q1 levels.

RIMM lost $518 million in Q1, but thanks to no goodwill impairment charges, only lost $235 million in Q2. Net profit margins also rose by greater than 1,000 basis points.

The improving balance sheet:

Most analysts were expecting the balance sheet to get worse for RIMM after this quarter. One of the positives Research in Motion has been known for is its cash and investments pile, which totaled $2.25 billion at the end of last quarter. Due to the expected operating losses and net loss, most figured that the cash and investments pile would decline in this quarter.

Now if you read my earnings preview, I noted that the overall loss would determine the change in cash. With over 524 million shares outstanding (the diluted share count), for every penny the company lost in the quarter, you are talking about a $5 million loss.

Since the company only lost 45 cents per share overall, including the restructuring charges, and 27 cents excluding the charges, the cash and investments pile actually increased. Had the company lost 46 cents excluding the charges, the overall loss would have been approximately 64 cents. That 19 cent difference represents about $100 million in net income, which went to improving the company's operating cash flow.

The following table shows some key RIMM balance sheet numbers over the past six quarters. Dollar values in millions.

*Includes cash, cash equivalents, short and long term investments.

Overall, the cash and investments pile increased by $96 million. The company now has almost $4.50 in cash and investments per share. Working capital edged up slightly and the current ratio jumped a bit. The debt (liabilities to assets) ratio also improved significantly.

Outlook / BB10 update:

The company provided the following statement regarding Q2 and the BB10 situation:

"Despite the significant changes we are implementing across the organization, our second quarter results demonstrate that RIM is progressing on its financial and operational commitments during this major transition," said Thorsten Heins, President and CEO. "Subscribers grew to approximately 80 million global users, revenue grew sequentially from the first quarter, cash, cash equivalents, short-term and long-term investments increased by approximately $100 million to $2.3 billion, and carriers and developers are responding well to previews of our upcoming BlackBerry 10 platform. Make no mistake about it, we understand that we have much more work to do, but we are making the organizational changes to drive improvements across the company, our employees are committed and motivated, and BlackBerry 10 is on track to launch in the first calendar quarter of 2013."

In terms of the outlook going forward, RIMM issued the following:

"The Company expects that there will be continued pressure on operating results for the remainder of the fiscal year based on the increasing competitive environment, lower handset volumes, increased marketing expense associated with the launch of BlackBerry 10, and some impact from pressure by customers to reduce RIM's monthly infrastructure access fees. Also, the Company plans to continue to invest in targeted marketing and sales programs to aggressively drive sales of BlackBerry 7 handheld devices before the anticipated launch of the BlackBerry 10 smartphones. The Company expects to report an operating loss in the third quarter of fiscal 2013 as RIM continues to work through the transition to BlackBerry 10 and completes its CORE program. This outlook excludes any benefits or future impact of charges related to the CORE program."

Conclusion / stock movement:

This wasn't a great quarter for Research in Motion, because the company did report a huge decline in revenues and lost money.

However, the quarter wasn't as bad as many had hoped. Revenues and earnings beat nicely, and the cash and investments pile actually rose. Margins were down big from last year's period, but operating and profit margins rose over Q1 due to no impairment charges. The company expects an operating loss in Q3, but that is no surprise as it works towards the BB10 launch.

Research in Motion shares hit a new 52-week low on Monday of $6.22. After shares reversed earlier gains on Thursday, they fell to an intra-day low of $6.75. However, a late afternoon rally pushed shares up to $7.14 by the close.

As of 5:15 PM Eastern time, Research in Motion shares were up $1.56 in the after-hours session to $8.70, a rise of nearly 22%. I bought some RIMM shares in the after hours on the jump, but I sold them for a nice profit later on in the after hours session. Friday should be a very good day for RIMM shares, and that is due to the great earnings report. After news like this, RIMM might be a good long idea for the short term.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over 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.

Additional disclosure: Author bought and sold RIMM shares in Thursday's after hours session. Author may initiate a new position on RIMM during Friday's session, depending on market action.