Research in Motion (RIMM) announced its Q2 FY 2013 earnings on September 27th and as expected, the results were not very pretty. The company reported a net second quarter loss of $235 million as compared to earnings of $329 million a year ago. Revenues were down 32% from the year-ago quarter, but saw a marginal improvement sequentially as an improving sales mix towards the higher end BlackBerry Bold handsets offset the overall decline in volumes. The company is aggressively launching new BB7 handsets and seeing the BB7 upgrade cycle take off in the international markets of South Africa, Saudi Arabia, United Kingdom and Indonesia while the developed markets of U.S., Canada and U.K. are seeing an increasing interest in BlackBerry Bolds. RIM also managed to increase its BB subscriber base to 80 million during the quarter as churn rate improved and a number of new customers signed on to its popular BBM service in international markets.
More importantly, RIM managed to increase its cash balance by about $100 million during the quarter. With BB10 delayed until the first quarter next year and competitors such as Apple (AAPL) and Samsung (SSNLF.PK) expected to continue to munch on RIM’s market share until then, we said in our earnings preview that RIM should be looking to conserve its cash balance and hold on long enough for the BB10 devices to start seeing positive demand. (see RIM Earnings Preview: Focus On Cash Flow Until BB10 Launch) It is therefore a good sign that despite reporting net losses for two quarters straight, the company is still generating cash by executing on its CORE program well.
As part of the CORE program, RIM said that it has already met half its employee reduction target and is efficiently managing its capital expenses which dropped sequentially by almost a half this quarter. The company has already realized $350 million of the target $1 billion in savings that the CORE program should help it achieve for the full FY 2013. Should it continue to execute on the program well and avoid burning through cash in this tough transition period, we could see some optimism return to the stock. We maintain our price estimate of $12 for RIM’s stock, about 40% ahead of the current market price.
BlackBerry sales continue to decline
The struggling smartphone maker has seen its BlackBerry unit sales fall y-o-y for the last five consecutive quarters. Last quarter saw RIM ship only 7.4 million BlackBerries, a precipitous drop of 30% y-o-y and about 5% q-o-q. However, device revenues staged a mini-comeback this quarter with sales mix improving due to an increased adoption of the higher-end BlackBerry Bold handsets in developed markets. Meanwhile, the emerging markets of Asia Pacific, South Africa, Venezuela and Indonesia, continue to see a good number of new subscribers adopt entry-level BlackBerries due to the popularity of the BBM service in these regions.
However, RIM is not out of the woods just yet. It is still facing some serious pricing pressures in emerging markets with cheap Android smartphones pushing down prices. Moreover, with the BB10 OS launch now pushed to the first quarter of 2013, RIM will be subject to greater competitive pressures as the iPhone 5 has been launched and a slew of WP8 and Android smartphones will also be making their way out between now and then. The competitive pressure will come not only from potential customers deciding to purchase rival smartphones, but also from developers put off by the management’s constant change of stance.
Enterprise focus necessary
It is here that RIM’s huge 80 million subscriber base could come in handy. With BB nowhere near its peaks of customer appeal, RIM will be primarily looking to get its installed base to upgrade to BB10 initially. At the same time, RIM will bank on its push e-mail and BBM service revenues to tide over this difficult transition period. CEO Thorsten Heins has said the company is looking to leverage the security strength of BlackBerry services that governments and enterprises around the world have come to rely on.
We believe the BlackBerry services, which include push e-mail and BBM, are unique value propositions for RIM’s customers, and the company is doing the right thing by realigning its focus on this segment. Our estimates show that this is RIM’s most valuable division currently, accounting for almost 45% of our price estimate for the stock. But a carrier push to reduce fees as well as a loss of more enterprise customers to rival platforms, as the bring your own device (BYOD) movement becomes more popular, could hinder RIM’s strategic moves to boost revenues from the services division. In addition, the new BB10 devices will not be supported by the existing enterprise servers (BES), potentially making the BES 10 upgrade process costlier and complicated and reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)
Disclosure: No positions