Some Hope For This Company?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's no secret that I have my doubts about Research In Motion's (NASDAQ: BBRY) ability to grow and thrive. I've written in the past that they need to focus on what they do best, and that is make software.

The company's hardware designs haven't changed much, and what customers like the most is the security of the BlackBerry system. I've even argued that RIM should consider getting out of hardware production and license their software to multiple device manufacturers. For the most part, RIM is staying the course, and there might be a few rays of hope for this much maligned company.

It has been a while since RIM investors have been able to say with confidence that the company's turnaround plans are on track. In fact, if you look at RIM's last earnings report, you get a sense of the challenges the company has faced over the last year or so.

When a company reports revenue down 47%, net income drops from $0.51 per share to $0.03, and cash flow declines by over 66%, you know there are serious issues. These are real numbers from RIM's last earnings release. Even with all this negative news, there are a few bright spots that investors can cling to.

First, RIM did manage to generate enough cash to increase their cash balance significantly. In the last nine months, the company's cash and investment balance jumped by almost 40% from $2.1 billion to $2.938 billion. For a company that is trying to tread water until the official launch of the BlackBerry 10 system, cash is indeed king.

This increase in cash balance is the exact opposite of what happened at similarly beleaguered cell phone company Nokia (NYSE: NOK). In Nokia's case, the company's net cash position dropped 30% in the last year, and as a result, they recently announced the elimination of their dividend.

Another bright spot for RIM was their gross margin relative to other cell phone manufacturers. Even with their recent earnings miss, Apple (NASDAQ: AAPL) is the king of the hill when it comes to gross margin. The company just reported a 38.63% gross margin, and even this was considered as a concern. On the other hand, RIM showed a gross margin of 30%, and Nokia was only able to manage a margin of 27.5% in the same timeframe.

The key difference between RIM and Nokia is the fact that Nokia still produces a lot of feature phones, which carry much lower margins. While RIM may not be able to match Apple's gross margins, the fact that they are at 30% before the release of the BlackBerry 10 lineup is somewhat encouraging.

In theory, RIM's new BlackBerry 10 lineup should command better margins because of their newer feature set. In addition, pricing should hold up due to pent-up demand from users who have been patiently waiting for these devices. The bad news is that this is sort of a double-edged sword. In the next quarter, results are likely to be pressured as customers delay a purchase while waiting for BlackBerry 10. In addition, every day that BlackBerry 10 isn't available is another day that Apple and Google's (NASDAQ: GOOG) Android systems pick up more users.

In the last few months, we have seen Apple sell over 47 million iPhones, Nokia reportedly shipped over 4 million Windows phones, and Android activates reportedly over 1 million devices a day. To put this a different way, Apple sells more iPhones in just under two quarters than BlackBerry has in total subscribers. Google activates more Android devices in one week than BlackBerry sold in the last three months. While RIM may not have to be number one, two, or three, in the market to be a good investment, it's clear they are operating at a disadvantage.

The biggest challenge for investors is to justify buying RIM over their competition. This choice should be slightly easier now that Nokia axed their dividend. Both Nokia and RIM are expected to see negative earnings in the short-term. However, analysts expect 10% EPS growth from RIM, yet just 5% EPS growth from Nokia in the next few years. Just like in the marketplace, the real challenge comes from Apple and Google.

After Apple's current quarter haircut, it now yields about 2.3%, and analysts are still calling for over 20% EPS growth. For a stock that sells for just 9.6 times earnings, this seems like a big discount based on their expected growth. Google just posed a good quarter, and sells for about 16 times earnings. For a company expected to grow at 14.48%, this seems like a reasonable price.

The bottom line is, if you are looking for a turnaround in RIM, investors should try to turn a blind eye to next quarter's results. It won't be until the following quarter that investors will be able to gauge the effectiveness of BlackBerry 10 in the marketplace. RIM's ability to increase their cash on hand strengthens the investment case, but no doubt the company needs BlackBerry 10 to perform well. The company has a long road ahead, but it looks just a bit brighter than before.

MHenage owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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