Research In Motion: Second Quarter Improvement Comes As A Surprise To The Market

Sep.28.12 | About: BlackBerry Ltd. (BBRY)

Shares of Research In Motion Limited (RIMM) rose up to 20% in after-hours trading on Thursday. After the close, this manufacturer of the once-so-popular BlackBerry reported second-quarter results for its fiscal 2013.

Second Quarter Results

Research In Motion reported second quarter revenues of $2.9 billion, down 31% on the year. Revenues were up 2% compared to first quarter revenues of $2.8 billion. Revenues comfortably beat analysts consensus of $2.49 billion.

The company reported a GAAP net loss of $235 million, or $0.45 per share. Excluding pre-tax restructuring charges of $136 million, related to the Cost Optimization and Resource Efficiency plan ("CORE"), adjusted net losses came in at $142 million, or $0.27 per share.

In comparison, last year Research In Motion reported a GAAP net profit of $329 million, or $0.63 per diluted share. The adjusted net loss of $0.27 per share, came in much lower than the $0.47 per share loss feared by analysts.

During the quarter, Research In Motion shipped 7.4 million BlackBerry smartphones and just 130,000 PlayBook tablets. PlayBook shipments halved compared to the first quarter of 2013.

The BlackBerry subscriber base rose by some 2 million over the quarter to roughly 80 million global subscribers. On average, analysts have predicted the subscriber base to remain stable, or fall slightly compared to the first quarter.

The company remains focused on the launch of the BlackBerry 10, anticipated in the first quarter of the calendar year of 2013. Some investors and analysts were fearful of yet another delay of the much-anticipated new set of phones.

CEO Thorsten Heins commented on the results:

"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. 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."

Outlook

Research In Motion expects continued pressure on operating results throughout its fiscal 2013. The very competitive environment, lower handset volumes, and launch costs associated with the BlackBerry 10 will impact profitability.

The company continues to aggressively market and drive sales of BlackBerry 7, in anticipation of the BlackBerry 10 launch. Operating losses are to be expected in the third quarter as well. This excludes any short-term benefits of charges related to the "CORE" program, as announced in March of 2012.

Valuation

Research In Motion ended its second quarter with $2.3 billion in cash and equivalents, up some $100 million on the quarter. The company operates without the assumption of any meaningful debt, for a net cash position of over $2 billion. The relative strong financial position comes in handy in the transition period to the BlackBerry 10.

For the full year of 2012, Research In Motion generated revenues of $18.4 billion. The company still generated net profits of $1.16 billion for the year. Factoring in a 20% jump in after-hours trading, the market values the firm at some $4.5 billion, or just $2.2 billion for the operating assets of the firm.

For the first six months of its fiscal 2013, Research In Motion generated revenues of $5.7 billion, making an annual estimate of $10 billion rather conservative. This means that the market values RIM at merely 0.2 times its annual revenues for its fiscal 2013, a year in which the company will lose money. Strong cash flows have already resulted in two subsequent quarters in which net cash balances at the firm increased modestly.

In all fairness, operating cash flow generation was driven by amortization and impairment of goodwill.

Investment Thesis

Year to date, shares of Research In Motion have lost roughly 40% of their value. Shares traded as high as $17 in January when CEO Heins took over control, and acquisition rumors surfaced in the market. Shares hit lows of $6 in recent weeks, but recovered to levels around $8.50 in after-hours trading on Thursday.

Over the past five years, performance has been totally deceptive. Shares have fallen over 90% compared to 2008's highs of $140 per share. The dominance of Apple's (AAPL) iPhone and Google's (GOOG) Android, has surprised many in the industry, and resulted in large share price declines at Finnish Nokia (NOK) as well.

Investors are discounting the prospects of these fallen angels too much in my opinion. Not everyone can afford an expensive new iPhone every upgrade cycle, and many consumers settle for phones in the mid- to low-end of the smartphone offering range. In recent months, more and more speculation about acquisitions or long-awaited introductions from new models have lifted shares of Nokia and RIM from their lows.

CEO Heins has quickly intervened after taking the job in January of this year. In March, he announced the "CORE" program, which targets $1 billion in cost savings per annum. The program will result in an estimated $350 million in one-time costs, of which $136 million was taken in this quarter. The company will reduce its headcount by 5,000 and continues to work on a broad strategic and operational review, while researching leverage possibilities for its BlackBerry Platform.

Make no mistake, the introduction of BlackBerry 10 will be the break or make for the company. Fortunately, the company reiterated its deadline for the first quarter of calendar 2013 today. Furthermore, Research In Motion made upbeat comments about developers actions, availability of apps and demand from carriers.

The somewhat stronger results for the second quarter give the company more breathing space in anticipation of BlackBerry 10, yet the new line of phones remains the key driver for any potential future value. For now, investors have reason to be hopeful, and possibly be cautiously optimistic.

Disclosure: I am long RIMM. 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.