RIM Earnings: Cash Flow In Focus As BB10 Launch Nears

Research in Motion (NASDAQ:RIMM) is expected to announce its Q3 FY2013 results on December 2oth. While RIM’s shares have almost doubled in value since last quarter’s earnings announcement, it has come mostly on the back of growing optimism surrounding the soon-to-be launched BB10 devices. However, with BB10 to be launched only in Q1 2013 and competitors such as Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) expected to continue to munch on RIM’s market share until then, RIM’s results this quarter are likely to remain weak. To add to RIM’s woes, competition in the smartphone market has increased with Microsoft (NASDAQ:MSFT) making a reinvigorated mobile play with its combined Windows 8/Windows Phone 8 push this holiday season.

While RIM’s operating results this quarter are unlikely to be pretty, the company will be looking to conserve its cash balance and hold on long enough for the BB10 devices coming out next year to start seeing positive demand. In order to drive operational efficiency, RIM is executing on what it calls its CORE program to bring about “at least $1 billion in savings by the end of fiscal 2013”. While it is a good sign that the company has managed to generate cash despite reporting net losses in the last two quarters, we expect RIM to burn through some of these reserves in the next few quarters as it builds channel inventory ahead of the BB10 launch. This quarter, we will be looking at the extent to which RIM’s cost-saving initiatives have taken hold in preparation for the cash-burn phase coming up. With BlackBerry sales falling off a cliff in developed markets, we will also be taking a look at RIM’s performance in the international markets that have so far helped it defend its huge subscriber base.

See our complete analysis for RIM stock here

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 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, continued 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 to sub-$150 levels. 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 not willing to devote their resources to a platform that has questionable chances of taking off.

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)

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