Before Research in Motion (RIMM) reported quarterly earnings, the majority of investors were bearish on the company. The bears expected RIM to report a decline in subscribers and a decline in revenues. Bearishness was high enough to push short float to 20%. Shares failed to break a trading-range between around $6.50 and $8, which began in July when RIM closed at $7.50. RIM was last assessed as being worth $8.35. Since that time, RIM traded in a bearish pattern, and tested lower lows. Investors should look at three initiatives that will dictate the value of its shares for the rest of 2012:
1. Blackberry 10 launch
2. Cost Optimization and Resource Efficiency (or "CORE") Program
3. Corporate Strategy
Of the three RIM initiatives, Blackberry 10 will be the most important for valuing its shares. RIM's CORE program and strategic review process resulted in lower operational costs, lower inventory, and improvements in the efficiency of its marketing. This was necessary to adjust to the realities of its declining profitability in its existing Blackberry 7 business.
Second Quarter Earnings Summary
RIM grew revenues by 2%, increased its subscriber base to 80 million, grew cash by $100 million to $2.3 billion, and generated $432 million in cash flow from operations. RIM grew its user base by successfully executing an upgrade program from Blackberry 6 to the Blackberry 7 Bold product line on the high end.
$1.7 billion (or 60%) of RIM's revenue was from hardware, while service revenue was 35% ($1 billion) of total revenue. Gross margins dropped to 26%, from 28% in Q1. RIM sold-through an estimated 10.4 million units, while selling 130,000 units of Playbook.
RIM lost $235 million ($0.45 per diluted share) in the quarter. Excluding restructuring charges, RIM lost $142 million ($0.37 per diluted share).
Three initiatives will dictate the value of shares in RIM:
1) Blackberry 10
Blackberry 10 puts an emphasis on RIM's strength: multitasking. RIM is innovating the paradigm "in-out" multitasking to that of natural flow among applications. Describing the experience as "seamless" and "fluid" will make for good marketing. Functionally, RIM adds the "peaking" gesture to enable users to check notifications without leaving an existing application view.
RIM is likely to meet its already-revised 2013 launch date for Blackberry 10. RIM is leveraging its existing relationship with carriers. Carriers will be given a chance to test the device in labs in October.
2) CORE Program
RIM set a target of saving $1 billion in fiscal 2013. RIM will realize $350 million in savings in the first half of fiscal 2013. RIM is on track to reduce the number of manufacturing sites from 10 to 3. The workforce count was reduced by 2,000 during the quarter. An additional reduction of 2,500 staff will be completed by the end of fiscal 2013.
3) Corporate Strategy
RIM said during its conference call that it had discussions with other companies to license Blackberry 10. Shares do not reflect any likelihood that RIM will be successful in licensing the operating system.
RIM managed to reduce inventory to $785 million from $1 billion in the previous quarter. Operationally, RIM succeeded and improved its supply chain while delivering a more successful marketing campaign. With RIM operating at a lower cost structure, margins should be expected to improve throughout 2013 when Blackberry 10 is launched.
Unsurprisingly, average revenue per user (or "ARPU") will continue to decline as long as Blackberry 7 devices are being sold. An expected decline in gross margins and revenue may limit upside in RIM shares, but will add value to the company when Blackberry 10 is finally released. RIM is capturing the user-base upgrading from feature phones, while growing its Blackberry Messenger ("BBM") user-base. BBM is growth driver in regions like South Africa, Asia Pacific, the Philippines, and Indonesia.
RIM should be expected continue to lose market share to Google's (GOOG) Android and Apple's (AAPL) iPhone. RIM addressed its delayed transition and market share loss by shrinking its operational cost structure, targeting $1 billion in savings.
In the near-term, RIM's competitor is Nokia (NOK) and Microsoft (MSFT). Nokia's Windows Phone 8 ("WP8") is set to be released soon, making WP8 and RIM contending to be the third top-smartphone. Nokia is scheduled to release WP8 in November in Europe and in the U.S. At an unsubsidized price of $770 for the Nokia Lumia 920, RIM could still be competitive if its premium device sells for less on its initial launch.
In the meantime, by simultaneously promoting Blackberry 7 and introducing advancements offered by Blackberry 10, RIM shares likely found a bottom at $7.50. It would not be unreasonable to expect markets to value RIM at $10. December open interest is highest for these $10 call options, but RIM is more likely to reach this double-digit share price in 2013.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM, NOK over the next 72 hours.