RIM Beats Estimates But So What

Oct. 2.12 | About: BlackBerry Ltd. (BBRY)

We dug into smartphone maker RIM's (RIMM) future prospects earlier last week, and the company proceeded to post better than expected second quarter results Thursday after the market close. Revenue fell 31% year-over-year to $2.87 billion, but that was nearly $400 million better than the consensus expectation. The firm also improved its losses, which shrank to $0.27 per share on an adjusted basis, compared to $0.99 last year and far less than the consensus estimate.

In an attempt to retain market share, RIM has drastically slashed the prices for BlackBerry devices. Gross margins have tumbled tremendously from 38.7% a year ago to just 26% during its second quarter. Although the company cut operating expenses by over $100 million, the cuts were not nearly large enough to compensate for the gross margin declines, resulting in a net loss of $235 million.

The firm shipped 7.4 million BlackBerry phones and 130,000 Playbook tablets. RIM confirmed its previous statement that the subscriber base has grown to 80 million users. However, we were more surprised to see that the business is essentially break-even on a cash-flow perspective year-to-date. We view this in a very positive light because if the firm can preserve its cash balance, option value in the form of time to develop the "right" product mix is preserved.

Ultimately, shares of RIM remain cheap, but that doesn't make it an attractive investment (we demand both good value and good momentum characteristics for a stock to be one of our best ideas). Still, we are very encouraged with the firm's ability to slow its cash burn even as its margins crumble. RIM certainly faces a tough battle against Apple (NASDAQ:AAPL) and Android (NASDAQ:GOOG) in the smartphone race, so its future is very much in question. By extension, we aren't interested in adding shares to the portfolio of our Best Ideas Newsletter at this time. Our methodology continues to steer us clear of potential value traps.

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.

Additional disclosure: AAPL is included in the portfolio of our Best Ideas Newsletter.