Research In Motion: Wait for BlackBerry 10
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“So in war, the way is to avoid what is strong and to strike at what is weak.” – Sun Tzu, The Art of War
Research In Motion (NASDAQ: BBRY) entered its Q2 FY 2013 conference call with analysts expecting a loss of $0.46 per share. RIM beat by a penny. GAAP net loss was $235 million or $0.45 per diluted share. In addition, RIM grew its number of subscribers to 80 million and increased its cash by $100 million to $2.3 billion.
Considering the overall situation, the Q2 performance was a great victory for RIM. RIM entered the call after Google (NASDAQ: GOOG) Android and Apple (NASDAQ: AAPL) again mopped the floor with BlackBerry in Q2. While global smartphone shipments increased to 154 million units in Q2, BlackBerry shipments declined from 9.7 million units to 7.4 million units. Meanwhile, Android increased its shipments from 89.9 million units to 104.8 million units (IDC).
The tablet numbers were even worse. In Q2, 25 million tablets shipped and Apple accounted for 17 million shipments (IDC). RIM’s shipments were insignificant. In addition, BlackBerry suffered another outage last week and it looked like the company was on an inevitable decline.
However, the growth to 80 million subscribers (announced during a developers conference), which is up from 78 million in Q1, proves otherwise. RIM has been emphasizing the need to sustain its subscriber base until the release of BB10, but with declining market share and shipments the odds were stacked against RIM accomplishing that goal in Q2. RIM achieved the growth by taking a line out of The Art of War and focusing on its competitors’ weakest markets (The Art of War is a book on military tactics, but it has many applications in business).
While Android and the iPhone cannot really be called weak anywhere, they are weaker in less developed countries and in the lower end of the smartphone market. Android and iOS are extremely strong in the high end of the market. RIM sustained its subscriber growth by having an aggressive BlackBerry 7 upgrade program in multiple countries. In the call, CFO Brian Bidulka said, “In the current environment, we plan to continue to drive sales of BlackBerry 7 handhelds through aggressive pricing initiatives on our handheld devices and monthly infrastructure access fees, which will result in lower ARPU and continued financial pressure on revenue and gross margin. As discussed earlier this year, these pricing initiatives are being implemented to maintain or grow our subscriber base” (Seeking Alpha).
In the quarter, RIM’s sales outside the United States, United Kingdom, and Canada accounted for 58% of total revenue. In comparison, in 2010, the US, UK, and Canada accounted for 58%, 10%, and 5% of revenue, respectively. While RIM has not completely abandoned the US, the company has definitely taken the battle outside the states. In addition, the company increased its cash. It is an impressive performance.
Looking forward, the company still faces tremendous challenges. The iPhone 5 was just recently launched by Apple. While the iPhone 5 has faced criticism, it is still a good smartphone and has been selling well. In addition, Nokia (NYSE: NOK) and Microsoft (NASDAQ: MSFT) have been increasing, albeit by small amounts, the Windows market share in smartphones. From the recent trend, Windows could pass BlackBerry in the next quarter. Furthermore, Microsoft is preparing to launch its next generation phone OS, Windows Phone 8, and Nokia has unveiled its next flagship smartphone the Lumia 920, which has very good hardware. In addition, Samsung has hinted at launching the Galaxy Note 2 in the US on October 24. Finally, the tablet market will get a lot more crowded after Microsoft launches Windows 8 in October. Basically, moving forward, the competitive landscape will just get tougher for RIM.
In the conference call, RIM CEO Thorsten noted that BB10 is still on schedule to launch in the first quarter of 2013. With this quarter notched under RIM’s belt and cash burn concerns put to rest, it is highly unlikely that the company will go under before next year. In addition, the OS, which has been demoed in Dev Alpha B devices, looks to be very smooth. However, the company will be introducing a fourth OS in a market that already has two well entrenched operating systems from two of the biggest technology companies in the world. In addition, the third OS, while far from entrenched, is from Microsoft. Although RIM has bought more time with impressive execution, the odds are still stacked against it. Thus, the best move is still to wait for BB10 before considering an investment. Yes, the stock price will probably be higher, but investors will have a lot more information and certainty when making their moves.
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