Research In Motion Performs Better Than Expected

| About: BlackBerry Ltd. (BBRY)

Research in Motion (RIMM) announced its earnings for the last quarter on Thursday in the after hours. Analysts were expecting the company to have an operating loss of 47 cents per share after generating $2.49 billion in revenue. The company ended up having an operating loss of 27 cents per share while generating $2.87 billion in revenue. The investors of the company cheered the news, increasing the company's share price as much as 20% in the after hours. Despite the operating loss, the company reported an increase in its cash holdings from $2.2 billion to $2.3 billion.

Due to heavy competition from Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF), LG (OTC:LGEAF) and other Asian phone producers, Research in Motion saw its market share melt significantly over the last few years. The company has been sharing a similar fate with another mobile phone giant, Nokia (NYSE:NOK). While Nokia's management has been fighting the situation very hard by cutting costs, entering in partnerships, and launching a variety of new phones capable of challenging Apple and Samsung's flagship phones, the management of Research in Motion has been criticized for not doing enough to change things in the company. Until very recently, the company's management simply sat back and hoped that things would fix themselves. Of course, it never happened.

The company announced that it was on schedule to launch its new operating system BlackBerry 10 along with the phones that will run on that operating system by the first quarter of next year. This is kind of disappointing to me because the company's new operating system and phone are likely to miss out the holiday season when companies sell a lot of products. The company's very existence will depend on the new line of products that go with BlackBerry 10, and the company will have to work hard to sell these products after the holiday season.

It looks like the company will continue to focus on some limited markets where BlackBerry continues to be popular such as Canada, the UK, South Africa, Saudi Arabia, and Indonesia. In these countries, the company will mainly focus on existing BlackBerry owners and attempt to upgrade them to newer versions of the phone and operating system. The company's revenue is down 31% compared to the same quarter a year ago. The company's loss of $235 million compares badly with the $329 million profit reported by the company last year in the same quarter.

On a positive note, the company's user base increased to 80 million. It is important for the company to grow its user base at a time its revenue is declining rapidly. On a negative note, the company sold only 7.4 million BlackBerry units as opposed to 10.6 million units last year. Also, the company sold 130,000 PlayBook tablets as opposed to the 200,000 PlayBook tablets sold last year.

The company has posted a loss for the third quarter in a row, but the rate of the loss seems to be stabilized. While the company expects to report a loss for at least another quarter, things might pick up after the release of BlackBerry 10. If things don't turn around with BlackBerry 10, the company will have to look at selling assets and even itself as a whole. The company spent $136 million on cost-cutting measures such as employee reduction and redesign of work. These are one-time fees and the company is likely to save more money in the long run. The company hopes to cut another 5,000 employees and save another $1 billion on cost cutting measures.

Given that the company trades far below its book value, any positive development is likely to be bullish for the company in the short term. In the long term, it is very difficult to determine where BlackBerry will lead this company. If I had to pick between Nokia and Research in Motion, I would (and did) pick Nokia because Nokia has been more proactive about its turnaround and I like the company's products better. During the announcement of Lumia 920, Nokia proved to the world that it can produce a phone comparable to Apple's iPhone and Samsung's Galaxy S3. In addition, Research in Motion's patent portfolio isn't as impressive as Nokia's and the company doesn't enjoy backing of a company similar to Microsoft.

It is too early to tell how Research in Motion's turnaround will play out. The dynamics in the smartphone market move too fast. The company's next line of products and its ability to market those products will determine the future of this company. For the time being, I would recommend either staying away from this company or initiating a very small position which you are ready to lose. If things go well, the stock price has a lot of upside potential; however, if things don't go that well, the stock price might go down to zero. Those who have already bought the stock can lower their breakeven price by selling covered calls. The stock's high volatility provides relatively large premiums for the company's covered calls.

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.