Here’s what investors need to understand about RIM’s Q2 results

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By Chris Umiastowski on 27 Sep 2012 09:30 pm
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Once every 13 weeks, RIM drops their latest set of financial results. Tonight, the results were slightly better than expected. Supporting this, the stock soared by about 20% in after-hours trading.

I always like to analyze the numbers, and I like to look at them in comparison to expectations. But as usual, I'm reminding you that anyone who looks only at the quarterly numbers and compares them to Wall Street estimates is missing the big picture. These numbers don't tell us anything about RIM's future, but they do highlight certain opportunities and risks.

So let's get to it.

Revenue was actually $2.9 billion, up by 2% to compared to last quarter. Up is better than down, but 2% isn't a big move. To me it just shows that sales are stable while RIM goes through an enormous transition towards the new BlackBerry 10 platform. Overall, this is good news (so far) because it helps RIM maintain its cash balance which it needs badly.

As we heard from Thorsten on Tuesday in San Jose, the customer base is now 80 million strong, with 60 million users on BBM. This is another good sign because it means RIM's user base is still growing by more than 10% annually. Again, this is super important for the company - a shrinking customer base would increase the risk of a BlackBerry 10 flop. A growing customer base is very encouraging.

In my editorial from earlier today, I talked about the importance of cash to RIM's Q2 results. Recall that after Q1, RIM had a cash balance of $2.2 billion, having generated almost $300 million in cash flow from operations (excluding working capital changes) for the period.

Last quarter they said they'd maintain an approximately flat cash balance in Q2. I was worried it might drop. It did not. They actually ended the quarter with more cash - specifically $2.3 billion. How did they achieve this? It looks to me like another reduction in working capital (reducing inventory and accounts receivable). Obviously this isn't a sustainable source of cash, but I'll take what I can get.

RIM says its cash balance will remain stable next quarter, with some movement around the exact timing of restructuring charges. This can only mean they aren't expecting a revenue collapse, otherwise I don't see how it would be possible. I admit I'm surprised as to how stable their sales seem to be given the age and global competitiveness of BlackBerry 7.

But it's not all roses. To keep its sales up, RIM has been dropping prices. Ehud Gelblum, the analyst from Morgan Stanley, asked a great question about profitability on handsets. RIM management didn't answer him directly but it was very obvious to me they were admitting they lose money on device sales. Their rationale? It's necessary to protect their subscriber base and get people onto BlackBerry 7 devices as much as possible. I happen to agree with RIM completely on this. They need a user base to carry forward. They can't risk losing subscribers. It's worth eating some of the cost to make this happen.

But it still leaves RIM in a position of uncertainty. They don't make money on devices. They need to change this in order to have a long-term sustainable business model. And to make matters (potentially) worse, they generate over $1 billion in revenue per quarter on service fees. These service fees are under pressure. We have no idea how much pressure they're under. In fact, that $1 billion number has been very stable. But RIM acknowledges the pressure. What if this cracks? What it if really starts to decline? What if that happens while RIM still isn't able to make money on hardware? Should that happen this company will hemorrhage cash. At that point, it may not matter how good BlackBerry 10 is.

The good news is the market is clearly still willing to pay for high end devices. The iPhone 5 and the Galaxy S3 are good examples. If RIM can join Apple and Samsung at the high end of the market, it should earn a reasonable profit on hardware. And if it can deliver a superb messaging experience (as it always has) carriers will continue to pay for the use of RIM infrastructure. I just didn't want to paint a rosy picture without also presenting the risks.

Bottom line: RIM delivered numbers that surprised Wall Street to the upside. They've got some runway left. They're showing off a strong set of developer tools an user interface features on BlackBerry 10. The wait isn't going to be much longer now. The company is very different from it was one year ago. They're not out of the woods. Not by a long shot. But they are far from dead. They've still got a very real shot at success in the emerging mobile computing market.

32 comments

Jtaylor1986

It seems like BIS role in bb10 is dimished. These fees dont seem destined to continue in any scenario.Maybe service fees are including app world revenue which is presumably increasing even as noc fees go down so is stable overall.

diegonei

Hmm, well, I guess it's safe to say BBM will still need the NOC, even if not BIS properly said. RIM could maybe make BB10's "BIS" a set of services rather than access to the NOC.

BBM;
BBM Music;
BlackBerry Protect;
BlackBerry Cloud Services (this one is me wishing, not a rumor or Intel whatsoever);
Crackberry.com account (integrated to BBID - and this one is a joke :) ).

SuperionMaximus

It's pretty much a given that RIM will announce some kind of cloud service. RIM never commented on the rumor that they are looking to sell Newbay (a cloud service company they bought for 200 million), so either it was never true, or no one is interested. But the fact they bought a cloud services company alone means they've had this in mind for a long time and I'm sure this is one of the secrets that will be revealed a little closer to BB 10 launch.

owadkelly

Excellent write up - I agree with everything written

ianchristie1972

When I saw the rise in stock price I was very happy. While things are still rocky for RIM, hopefully this good bump will reduce some of the doom and gloom surrounding their future.

kemj

This Q2 call really surprised me. I was expecting massive losses and even a user base shrinkage. Up 2 million users from last quarter. That's pretty bold for a company that "should be dying".

STAY OPEN TO POSSIBILITIES. BE BOLD.

SuperionMaximus

I agree, the rumors of RIM's demise have been greatly exaggerated.

I think the Q2 numbers surprised everyone, especially Wall St. But even Engadget had a hard time writing an article with a negative spin when RIM revealed they were still growing their subscribers.

dbollman423

Thoughtful analysis. I tend to think that the report, in and of itself, was not solely responsible for investor outlook and the stock price bounce. The events during this week had something to do with the tentative confidence the market has shown.

kupfernigk

Other phone stocks always rise when Apple has perceived problems. The case chipping and poor mapping of the new iPhone seem to have given a rise to just about everybody else. My feeling is that the traders will try to keep RIMM low and build up positions, because what they want to do is to make a nice profit in January. So long as it doesn't decline any further leaving them with an end of year loss, there is no harm in taking a punt on a successful BB10 launch. From such a low base, even a relatively small move in dollar terms could turn into a substantial profit; per dollar invested, a RIMM move from 7 to 9 would be better than Apple going from 700 to 800.

kozmo68

The rest of the tech world should be as bias as this report. Spandas Lui from ZDNet tweeted "RIM continues slide", seriously how about a little research before spewing inaccurate headlines. The one thing worse than ANALysts talking out of their a$$ is the out to lunch tech reports.

Bobert_123

I thought they got rid of you Chris its been a while since I saw one of your articles heheh,

Very well written I agree 100%

fanchettes

Great write-up Chris! It's so refreshing to see thoughtful analysis - backed up with statistics - on a tech blog, as opposed to the subjective, traffic-grabbing word-grenades the so-called "tech experts" like to toss toward RIM.

feldmen01

Very honest and we'll written. Thanks Chris.

Corbu

" They don't make money on devices. They need to change this in order to have a long-term sustainable business model." "The good news is the market is clearly still willing to pay for high end devices."

Agreed. Just a thought then: how about coming up with an upscale version of the N and L Series, with a fancier design, sometime in Q2/Q3 2013?

Superfly_FR

Chris, on a financial basis, how's the (almost) free renew program they set for companies to promote BB7 upgrades influencing the overall device margin ?
I mean, on one side, they flush the inventory (that was provisioned) but they don't get much money on devices; could this partially (if yes, what proportion) explain the "selling at cost" ?

As always, it's a pleasure to learn from you ... nice article.
(and sorry if this is barely understandable ... I'm sure you'll get what I mean :))

Chris Umiastowski

I understand exactly what you're asking.  No problem :)  

 

When they wrote down a bunch of BB7 inventory it hit their gross margins in that quarter. Just making up the numbers, let's imagine a device that cost them $200 to manufacture.  Say they write down the inventory so the new value is $100.  If they sell that harware at $100 the gross margin is 0%.  If they had not written down the inventory, the margin on the sale would have been -50%.  

 So, past writedowns help the current period gross margins.  They don't make current margins worse.  The writedown wasn't that big on bb7 as I remember, so I doubt this is a significant factor today.  Bigger issue is just the overall promotional pricing they're using.  

jay64

Well, it does not appear they did much inventory write down with AT&T for the 9900 and the 9860, the latter of which they have not listed for months. AT&T contract hell prices for the 9900 are not great and non contract prices are rediculous. Almost all of the slightly better then negative sales growth was overseas where margins are smaller to begin with. Another poster wrote "My feeling is that the traders will try to keep RIMM low and build up positions, because what they want to do is to make a nice profit in January."
I agree, they will play it like a fiddle for day trading purposes between now and pre launch and then a bump post launch but for how long ? Sales will jump at intro becuase of true BB addicts - like iphone fanatics, but if the numbers go down week to week they will start shorting the hell out of it, smelling blood in the water.
The keyboard one looks like a 9900 on steroids. Flat keys - hope not !

Superfly_FR

Thanks Chris, that's insightful.

redblackberry

good job RIM. blackberry's user interface has changed dramatically especially from the desktop side. i can say that is stunning for me and very user friendly.back to the topic, the best thing that i read is the price of stocks is increasing slowly, even though thats not answer RIM expectation, but thats normal for this year. At least, RIM could improve their stocks price slowly in order to convince investor and also try to fight tough competitor such as Apple and etc.in my personal opinion, be careful to determine when u want to reveal the new blackberry 10. prepare all the marketing strategies in every countries, prepare all the hardware in every countries and make balance with after sales service to make society relief by buying the new blackberry.Pay attention for some countries such as Indonesia, which is popular with Refurbish product, even customer do not know whether the product is new or second hand. Seller can change the case easily and make seal for blackberry box. Again and again, the victim is not only customer, but also RIM Name.
there should be a person from RIM office which has a job to ensure if all product that going to customer is 100 percent brand new from box. Meanwhile, do not seller determine the price, it must be determined from RIM or from device makers office such as Apple. If there is small difference for the price, thats fine due to logistic, marketing and tax.
in the end, i can say that RIM step is very careful before revealing the new blackberry to society, but, do not wait too long to unveil the new product, because blackberry 7 is on maturity level right now and people are very bored with it.

Arthur108

Very nice article Chris ! We have to face reality. RIM is in deep shit but they are not dead yet.

hurds

Still gotta listen to the call later. I feel like carriers are beging RIM to reduce the role of BIS. I wonder with apple opening up data centers if they are trying to emulate RIM (I know, sacrilegious to say)

veeru789

Chris,
u bring difference to this site. great work....always pleasure to read your articles.
cheers,

br14

Great insights Chris.

Have to say I'm starting to believe after a long period of doubt.

Thorsten Heins seems to have quickly identified the fat that has bogged down RIM and is slowly performing surgery.

He's continued the strategy (mistaken in my view) of not fully leveraging the existing BB7 infrastructure - which are still great phones if not great games devices - but at least they're still marketing the devices in price sensitive markets.

A dual platform strategy could well get them back to the table as decent Android and iPhones are sold at a price premium. And once on BB7, BBM and other platform tools might be the secret to retaining subscribers and moving them onto BB10.

lorax1284

I wondered if BIS, technically, is part of what is preventing Skype and Netflix (real time data flow apps) to be built for BB10 (or BB7 for that matter). The fact that Skype WAS released by Verizon and ONLY Verizon years ago suggests some jiggery-pokery on the Verizon network to facilitate it... if reducing BIS's "profile' with carriers is what it takes to get leading-edge apps onto the BB10 platform, RIM can't afford to be stubborn: they'll have to be creative and find other ways to replace revenue.

If BIS has nothing to do with why Skype and Netflix aren't available on BB10 or the PlayBook... well, then...

http://www.youtube.com/watch?v=V3FnpaWQJO0

thatplaybookguy

Netflix in Canada sucks major ass, so really who cares about them anymore. I wouldn't be surprised if someone came out with a competing service, oh wait....

birdman_38

Marketing. With an emotional appeal

thatplaybookguy

I am making money off my stocks. better to buy now than later. You too can make money from RIM!! BB10 for the win!

Nick Shadow

I think the wild card may be partnering with someone in some form. Thor suggests this sort of off handily, and mentioned it on the call. It always seems to unnoticed, but he strikes me as a person who doesn't make remarks like that without something behind them.

I think you have to listen closely to what he says, he is understated by nature, so if he occasionally mentions this possibility, then they are working on something. Some might say that by partners, he means the carriers and channel folks, I don't think so.

Lastly, he talks about a whole new platform and suggests that it can be used in many ways and in a variety of markets. I think that plays back to the partnership, but also that they may have a strategy to get some the pressure off of phone sales. Perhaps in the future it is much less about phones, which is going to continue to have margin pressure. It is just too easy for someone to make a phone and be a player.

Thanks Chris, I was hoping you would recap the situation, well done

Nick

timmy t

Taking a loss on each sale makes sense if you are going to get service fees or increase the sales of other products from the sale of that phone?
Isn't that what Amazon does with the Kindle?

timmy t

Nick, I think by partners, he is referring to independent app developers as well.