The Good, The Bad And The Ugly From RIM's Earnings Report

| About: BlackBerry Ltd. (BB)
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In the after-hours of Thursday, Research in Motion (RIMM) announced its quarterly earnings. The results were a little better than analysts had predicted. The company reported a loss of 22 cents per share as opposed to the 35 cents per share of loss expected by the analysts. Also, the company generated revenue of $2.73 billion as opposed to the $2.66 predicted by the analysts. Initially, the investors took this as good news, and the shares rallied by 7%, but this was reversed quickly afterwards as the share price plunged by nearly 20% on Friday.

Quarter to quarter, RIM's BlackBerry sales volume declined by 7%, and year to year, the volume declined by 51%. This was mostly expected, because the company's BlackBerry 10 is not launched yet. In the last several months, Research in Motion had been in a rally mode along with Nokia (NYSE:NOK), as the investors thought both companies were grossly undervalued as a result of panic-driven selling.

BGC's analyst Colin Gillis has a price target of $7 on the company which currently trades for $10 per share. Mr. Gillis believes that RIM was overbought recently because investors were too hopeful about the future release of BlackBerry 10, which may or may not change things around for the company. It looks like Mr. Gillis believes that BlackBerry 10 is too late and too little to attract much attention from the customers when iOS (NASDAQ:AAPL), Android (NASDAQ:GOOG) and Windows Phone (NASDAQ:MSFT) have been on a momentum.

The number of BlackBerry subscribers fell from 80 million to 79 million. While this is a slight fall, this is the first fall in number of subscribers reported by the company in its history. Obviously, a big part of the fall could be attributed to the clients who are waiting on BlackBerry 10, which should hit the shelves in a matter of months. It's very typical for costumers to hold up on buying certain things when they know that a new version will hit the markets soon. On a related note, BlackBerry 10 is expected to be released in multiple markets simultaneously, as Research in Motion is already in talks with 150 carriers worldwide. Just a couple months ago, the number of carriers involved in the talks was only around 50.

Now onto the good, the bad and the ugly:

The Good:

There is finally a confirmed date for BlackBerry 10 to hit the markets, and this product will be in many markets all at once. This is a good move for the company, as it this product will determine its very future in the near term.

Another good point for RIM was the improving margins. The gross margin for Research in Motion in the last quarter was up both year to year and quarter to quarter to 30.40%. In the next quarter, the margins will probably drop again because the company will have to spend a significant amount of money for marketing its new products; however, this is only a short term trend.

Despite fighting for survival and a long gap since the last major product release, the company continues to be cash-flow positive. In the last quarter, the company's operations generated $900 million, and its cash reserves increased by $600 million. This will allow Research in Motion more room to operate and a larger margin of safety in case things don't go as planned with BlackBerry 10.

The Bad

The number of BlackBerry phones continued to fall in the last quarter. The company was able to sell 6.9 million BlackBerry devices as opposed to the 7.4 million in the same quarter a year ago. In addition, Research in Motion's management mentioned in the call that they would be reducing the price of BlackBerry 7 devices in order to clean inventories in many markets. While this is good for the inventories, this will be bad for the overall margins. Many investors did not take this news well, evidenced by the sharp decline in the share price of the company.

The Ugly

In addition to the usual concerns, the investors were also concerned with the way the company will handle its service charges in the future. Typically, a third of RIM's revenues come from the fees it charges its users for using its network. It looks like the company will offer multiple options for these fees, ranging from the cheapest to most expensive. In addition, the company announced that it might actually eliminate service charges from some of the new customers in order to attract them into the ecosystem. While the company's CEO Thorsten Heins called the change a "very continuous, very well-managed transition" the investors continued to sell the stock on panic. This is likely to put some pressure on the company's profit margins in the short and medium term. The device sales have been on the decline, and it will be very dangerous for the company to mostly rely on device sales for survival.


Things will be very interesting and quite volatile for Research in Motion as we move forward. Obviously, the company's investors are highly concerned that its new line of products might not be good enough to save the company. Currently, the short interest in Research in Motion is near all-time high. As a result, there might be a huge short covering if things go well for the company; however, we will not find out the reception BlackBerry 10 will receive from the consumers for a few months. It will be also interesting to see how the company's new service fee plan will work out. At the moment, investors aren't too happy about it, but things can always change. The service fees are not only one of the largest revenue generators, but also one of the highest-margin business items for RIM.

For the time being, I wouldn't buy or sell this company. I would rather stay in the sidelines for another quarter and see whether BlackBerry 10 will create much positive reaction from the consumers. The last quarter has been very noisy for the phone companies, because many phone companies including Apple and Nokia released new phones to the market in the quarter. Of course, the holiday season played a huge role in the noise as well. By the time BlackBerry 10 comes, the holiday season will be over, and many consumers will have already bought a new device. This doesn't necessarily say that BlackBerry 10 will have no appeal though. BlackBerry 10 phones can still attract a lot of business people who don't necessarily shop for a phone in the holiday season.

All in all, I don't think RIM's quarter was that great, but it wasn't that bad either. I believe that the 20% decline in the share price might be an oversell.

Disclosure: I am long AAPL, NOK, MSFT, GOOG. 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.