Research in Motion (NASDAQ:RIMM) announced its Q3 FY 2013 earnings on December 20th and as expected, the results were not very pretty. The company reported an operating loss of $230 million as compared to earnings of $328 million a year ago. Revenues were down 47% from the year-ago quarter, as BlackBerry 7 sales stalled ahead of the launch of the new BB10 devices in the first quarter of 2013. Healthy growth in sales in the international markets, which has been the company’s savior in previous quarters, wasn’t enough to offset the steep decline in sales in North America and U.K. This also caused the BB subscriber base to decline for the first time in the company’s history to 79 million last quarter. As a means to defend its subscriber base, the company is getting aggressive with its service fees as well which could pressurize margins in what we estimate is the most valuable division of RIM currently, the Push Email division.
What will however be reassuring to RIM’s investors is that the company managed to increase its cash balance by $600 million during the quarter. With BB10 delayed until the first quarter next year and competitors such as Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) 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: Cash Flow In Focus As BB10 Launch Nears) It is therefore a good sign that despite reporting net losses for three 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 is nearing the end of its employee reduction and has already achieved its target of realizing $1 billion in cost savings for the full FY 2013, a quarter ahead of schedule. While it is a good sign that, despite reporting operating losses, the company has executed on its cost-saving initiatives well enough to generate cash in the last three 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. With all of RIM’s hopes tied to the kind of reception BB10 receives in the market, investors will not mind the company reinvesting these resources in the launch of the new operating system. We maintain our price estimate of $12 for RIM’s stock, about in line with 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 six consecutive quarters. Last quarter saw RIM ship only 6.9 million BlackBerries, a precipitous drop of more than 50% y-o-y and about 7% q-o-q. While sales in the developed markets of the U.S., Canada and U.K. continued their steep decline, revenues from international markets such as South Africa, Venezuela and Indonesia saw a 7% growth – an indication of the sustained popularity of the BBM service in these regions.
With RIM announcing that the new BB10 devices will be launched soon after BB10 is unveiled on January 30th, many customers may have deferred purchasing a BB until next year. However, RIM faces an increasingly uphill battle against the two well-entrenched mobile ecosystems of the iOS and Android. Even when BB10 release, it will have to face some serious pricing pressures in the emerging markets where cheap Android smartphones are pushing down prices. Moreover, with BB10 to be launched only in Q1 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 unwilling to devote their resources to a platform with questionable chances of taking off.
Enterprise focus necessary
It is here that RIM’s almost 80 million strong 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 40% 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 thereby reducing RIM’s chances of pushing BB10 into the enterprise base. (see BES 10 Fragmentation Increases The Risk For RIM)