RIM Earnings Preview: Focus On Cash Flow Until BB10 Launch

Research in Motion (NASDAQ:RIMM) is expected to announce its Q2 FY2013 results on September 27th. 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, expectations from the earnings call are at an all-time low. To add to RIM’s woes, competition in the smartphone market is only increasing with Microsoft (NASDAQ:MSFT) making a reinvigorated mobile play this holiday season with its combined Windows 8/Windows Phone 8 push.

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 looking to cut 5,000 jobs and execute on its CORE program to bring about “at least $1 billion in savings by the end of fiscal 2013”. Last quarter, the company managed its working capital well enough to generate $274 million in positive free cash flow despite reporting a big operating loss. With BlackBerry sales falling off a cliff, we will be looking at the company’s cash position to see the extent to which the cost-saving initiatives are helping it mitigate the impact of the revenue decline.

See our complete analysis for RIM stock here

BlackBerry sales plummet

The struggling smartphone maker has seen its BlackBerry revenues fall y-o-y for last four consecutive quarters. Last quarter saw RIM shipping only 7.8 million smartphones, a precipitous drop of 40% y-o-y and 30% q-o-q. The BB7 smartphones that were launched late last year aren’t doing well in developed markets, where the customers are upgrading to the iPhone and other Android-based smartphones. And the emerging markets, where entry-level smartphones have sold relatively well, are subject to pricing pressures from competitors.

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 put off by the management’s constant change of stance.

Enterprise focus necessary

With slowing BB subscriber growth, RIM will aim to keep its 78 million installed base intact to upgrade to BB10 later. Moreover, an erosion of its subscriber base endangers RIM’s ability to 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)

Meanwhile, RIM has said that it is evaluating other strategic options that could help it leverage its assets to increase shareholder value. We will be looking for cues this earnings call that shed light on the possible options that RIM has identified as a future course. We have a price estimate of $12 for RIM stock, about 80% ahead of the current market price.

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