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Research in Motion (RIMM) announced its second quarter's results late yesterday. RIMM had already bewildered investors earlier this year by announcing that it would delay the launch of its BB10 OS. Combine that with a poor 1Q2013 and you know why the stock tanked. Investor expectations from the second quarter's results were not really high, which is one of the primary reasons why a 'little' good news has resulted in such a significant increase in the stock price. Contrary to Wall Street's expectations, the company reported an increase in revenues and a less-than-expected loss. The best news from the earnings could have been the increase in subscriber base, but that had already been announced on the development conference; therefore, it was priced in before the earnings came out. We believe the market has overreacted to slightly good news, and RIMM can shed points before long.

Ycharts: RIMM 3-month Px

The stock took a fall after the first quarter's results came out, and has not been able to fully recover. In fact, the smartphone manufacturer saw its lowest share price ($6.22) this very week due to the anticipation of "bad" second quarter results.

2Q2013

Research in Motion is banking on its BB10 to bring about a radical transformation in its falling earnings trajectory, and until the OS is launched next year, there is little if any sustainable good news in terms of numbers. The average EPS estimates for the current quarter were $-0.47, varying between $-0.72 and $-0.13. The consensus revenue estimates for the current quarter were $2.49 billion, showing a YoY decline of more than 40%. The company reported slightly-better-than-expected EPS of $0.45, showing a 4.5% surprise. We are not deducting restructuring expenses from EPS because we believe these are not one time expenses, and the company will continue to incur them for the next couple of quarters. Revenues were also better than expected at $2.873 billion, showing a 15.4% surprise. However, gross margin for the quarter reduced from 28% to 26%, thus the increase in revenue was driven by price cuts more than anything else.

Another positive that caused the sudden jump in price is RIMM's terrible record at missing estimates. In the table given below, we can see that the company has not been able to meet analyst estimates in three of the previous four quarters. The biggest shock to analysts was the huge miss in the first quarter. Wall Street was expecting EPS to be around $-0.04; RIMM ended up reporting $-0.37 per share. This miss caused the stock price to tumble after the earnings announcement.

Earnings History

11-Aug

11-Nov

12-Feb

12-May

1- Sep

EPS Est

0.88

1.19

0.81

-0.04

-0.47

EPS Actual

0.8

1.27

0.8

-0.37

-0.45

Difference

-0.08

0.08

-0.01

-0.33

-0.02

Surprise %

-9.1%

6.7%

-1.2%

-825%

4.5%

Source: Yahoo Finance

Business Highlights

The following are some of the highlights for the second quarter:

  • Cash and cash equivalents increased by $100 million, bringing total RIMM cash to $2.3 billion.
  • Shipments of Blackberry phones for the quarter were 7.4 million; approximately 130,000 blackberry Playbooks were shipped.
  • Cash flow from operations was around $432 million for the quarter.
  • The company added intangible assets of $253 million and CAPEX of $87 million.
  • The company incurred a total of $136 in pretax charges for its CORE restructuring program. These charges were expensed as follows; $68 million in cost of sales, $20 million in R&D, and $48 million in selling, marketing and administration expenses.

Annual Developers Conference

The real good news for investors had come from the annual developers conference in San Jose, California. To the surprise of stakeholders, Chief Executive Thosten Heins said that Research in Motion's subscriber base had increased to 80 million subscribers from 78 million, as opposed to analyst expectations of a decline. He also announced that Twitter and Facebook (NASDAQ:FB) would have apps ready for the new BB10 OS. These announcements were the primary reason why RIMM rallied after hitting an all-time low on Monday.

Carriers interested in adopting the new BB10 models will start lab testing the product from next month onwards. Meanwhile, the company is in negotiations with social media companies to give their BB10 launch credibility and media buzz. RIMM also announced that it has already signed app development agreements with a number of social media companies such as Facebook, Netflix and Four Square. These agreements will be crucial to the success of the BB10, as applications are integral to the success of any operating system in the Smartphone Industry.

While the company is still trying not to directly fund the development of these applications, it is coming pretty close to doing just that, which is only going to put more strain on its $2.3 billion cash hoard. According to the Wall Street Journal, Martyn Mallek (RIMM's vice president of global alliances and business development) said that the company will help developers in any way possible, including reducing their risk by sharing costs.

Conclusion

Analysts were not too optimistic about the second quarter results, and RIMM was expected to report a loss. However, the company reported a loss that was less than what was being expected. There was a significant increase in revenues. However, the gross margin decreased from 28% to 26%. The increase in subscriber base and partnerships with app developers are the real good signs for investors. We believe that the price will fall after this 11% rally (20%+ increase in after-hours trading yesterday). Investors should realize profits and wait for more clarity regarding BB10 to take a long position.

Source: Time To Short Research In Motion