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Research In Motion Ltd (BBRY): This High Value Investment Is Worth The Wait

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Research in Motion Ltd. (BBRY)The popularity of Android has become a serious problem for competing mobile platforms. The only smartphone platform showing some resemblance of competition is Apple, but then again it relies mostly on hardware capabilities. Google Inc (NASDAQ:GOOG) Android now accounts for nearly 75% of all smartphone devices. In this Android dominated space, Microsoft Corporation (NASDAQ:MSFT) and Research In Motion Ltd (NASDAQ:BBRY) (NAS are trying to carve out a market for their platforms. The market has been keeping a close eye on the efforts of Research In Motion Ltd (NASDAQ:BBRY) to make a comeback in this highly competitive smartphone industry.

Fundamentals

The quarterly earnings reports are a gold mine for investors looking for fundamental information. It is even more crucial for Research In Motion Ltd (NASDAQ:BBRY) investors because it gives device sales data and expectations from the future. Therefore, it was no surprise when company valuations slid 30% following the disappointing results from the first quarter. The street was expecting it to post earnings of $0.07 per share on revenues of $3.38 billion. BlackBerry missed these targets miserably, posting revenues of $3.07 and EPS of -$0.10.

Lower than expected device sales were the primary culprit behind the ‘miss.’ The street was expecting shipments of 7.3 million, but they missed the target by 7% and reported 6.8 million shipments. A decline in shipments is normal during the transition to a new platform, but surprisingly even the new BB10 devices came below expectations. The street was expecting BB10 device shipments to be around the 3.3 million mark. Research In Motion Ltd (NASDAQ:BBRY) only managed to ship out 2.7 million devices.

The Good

Missing the market expectations was a massive setback for Research In Motion Ltd (NASDAQ:BBRY) but at least the company managed to show 9% top line improvement year over year. While the recovery might be slower than the market anticipated, it is still there. The cost cutting measures and premium BB10 pricing are reflected in the improving gross margins. Gross margins improved to 33.9% as compared to 32.8% in 2012. The company is also in no immediate financial crisis. It generated approximately $630 million from operation cash flows and increased its cash pile to $3.1 billion from $2.9 billion in the previous quarter. In a positive strategic move, BlackBerry is now trying to target the high growth Asian and South American markets with the medium-low end devices. The company launched its latest Q5 devices for this purpose.

The Bad

The biggest disappointment from the quarter was the low sales of BB10 devices. The company managed only 2.7 million shipments for its new flagship phones which are probably its last chance for a comeback. The devices were not able to garner consumer interest. The U.S. launch was delayed, so the North American impact was limited.

A strong Research In Motion Ltd (NASDAQ:BBRY) subscriber base has always been an argument for an investment in BlackBerry. Unlike companies like Nokia, which rely only on device revenues, service revenues from BlackBerry have always been a key factor behind the buy argument for BlackBerry. This strong subscriber base limits the downside because it is a constant source of operating cash flows from services. The shrinking of subscriber’s base to 72 million from 76 million is another sign of concern. The street was also expecting a decline but only of around 2 million.

While targeting the mid and low range markets is a positive step, the company is going the wrong way about it. The Asia and South American markets focus highly on value. The primary method of estimating this value is through hardware feature. Research In Motion Ltd (NASDAQ:BBRY) is selling (Dual-core, 8 GB and 5MP camera) Q5 for around $400-$500 (Unlocked) when the consumers can buy Samsung’s S3 for almost the same price. The latter has a quad-core processor, 8MP and 16GB memory. If the company is serious about targeting this market, it will have to reduce the price and compete on hardware capability with Android devices.

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