Scotia Capital analyst Gus Papageougiou published another research note today outlining the upside for investors over the next few months. I sounded off on his previous report in mid-October which outlined the potential upside in RIM if the launch of BlackBerry 10 goes well. As is always the case with reports like this, the report is an exploration of scenarios.
Papageougiou does a good job of tracking & analyzing the difference between shipment volumes on BlackBerry versus sell through rates. For those unfamiliar, Research In Motion recognizes revenue on product shipped to its distribution channels (carriers, retail stores, etc). But what really matters to the long term success of the business is sales to end customers, which is called "sell through".
Here's one of the interesting points he brings up in his report: RIM is selling 50% fewer handsets from its peak level 2 years ago. But that's when you measure it based on sell-in. RIM also reports sell-through numbers each quarter, and those sales - the ones that matter in my eyes, are only down 28% from their peak.
Of course, selling prices on handsets have also dropped, which is part of what has kept unit sales alive. RIM is using price as a weapon to ensure that it still has a large (and growing) subscriber base with which it can then market BlackBerry 10.
Over the last 5 quarters, RIM shipped substantially fewer phones than its end customers bought. Last quarter alone, RIM shipped about 3 million fewer units than were activated by buyers. What does this mean? It means carrier inventory has been bleeding dry. This is absolutely normal during product cycle transitions. So if BlackBerry 10 sees reasonable demand, carriers need to rebuild inventory. This means RIM will start shipping more phones than are activated, not less.
Scotia Capital estimates that RIM could ship 18.6 million devices in Q1 fiscal 2014, which is the quarter ending May 2013 (the first full quarter of BlackBerry 10 availability). Based on their model, that level of shipments could mean very significant earnings per share (EPS) of $0.42 for the quarter. It doesn't take a rocket scientist to realize that the market will extrapolate those kind of results and send the stock to even higher levels, should it materialize.
The US market is key to RIM's recovery, too. Looking at one of the charts in the Scotia Capital report, if my interpolation skills are of any use, it looks like Papageorgiou's estimates show that RIM still lost about 3 million subscribers in the US last quarter. Keep in mind these are just estimates, and RIM doesn't report a breakdown of subscribers by region. But if the Scotia estimates are even semi-accurate (and I have no reason to doubt them), all BlackBerry 10 needs to do is stop the bleeding in the USA and company's results will look dramatically different.
To keep things balanced, Scotia also points out that downward pressure on service fees is the single biggest risk facing the company. This is something I clearly agree with, and I've been saying it repeatedly here. So what's one more time, eh? It really is a big risk. There is no sugar coating it.
I realize that the company's COO, Kristian Tear, told Kevin in his interview that, "We will continue to have service revenues... We have discussions with the carriers on this and how we can evolve but right now as it stands, there have not been any changes there. When we have changes, we'll announce them". I'd love to find out that this means service revenues aren't going to change. But remember that RIM has publicly acknowledged the pressure facing these fees. Tear's comments shouldn't be prematurely treated as any kind of confirmation. It's pretty clear he was careful with what he said.
So there you have it. RIM might be facing a very strong Q1 (May quarter). Good news.