Research In Motion's Earnings Rimshot Schools the Market

Give credit where it's due: Research In Motion's (Nasdaq: RIMM  ) second-quarter earnings report was better than most critics and analysts (often one and the same) were betting it could produce.

Amid expectations of a dwindling subscriber base, vaporware in place of an updated OS, and an aging handset lineup, the once high-flying BlackBerry maker announced growing subscriber rolls, narrower losses, rising cash balances, and confirmation the BB10 OS is on track for the first quarter of 2013. The thumb in Wall Street's eye sent its stock soaring 17% in after-hours trading.

Yet with Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) already fixing their operating-system stars in the firmament, is this nothing more than too little, too late?

Research In Motion snapshot

Market Cap $3.7 billion
Revenue (TTM) $16.3 billion
1-Year Stock Return (67.4%)
Return on Investment (0.5%)
Estimated 5-Year EPS Growth 7.5%
Dividend and Yield N/A
Recent Price $7.14
CAPS Rating (out of 5) *

Source: FinViz.com.

On the field ... finally
Research In Motion proved that when the chips were down, it could do what's necessary to live on and fight another day. The BlackBerry subscriber base, which it preannounced the other day, grew by 2 million users to 80 million while revenue rose 2% sequentially to $2.9 billion. It shipped 7.4 million new BlackBerry smartphones and 130,000 PlayBook tablet computers. Cash balances grew $100 million to $2.3 billion, and more importantly, it generated $337 million in free cash flow.

But I think that's where the good news ends. The new BB10 OS looks good and puts it alongside iOS and Android, but that merely plays to its fan base. You're not going to have very many people giving up the iPhone or Samsung Galaxy in favor of a new BlackBerry as a result of the OS. It's lacking a "gee whiz!" factor. It puts RIM on the field but doesn't put it ahead of the pack.

And while RIM was adding net new subscribers, they were largely in emerging markets, where its lower-end handsets are more popular because they're cheaper. That's not an encouraging sign they'll convert to the new phones and new OS when they're introduced.

It should also be pointed out the heady numbers RIM reported for smartphones shipped in the quarter were just that -- shipped and not sold. Apple was selling 5 million iPhone 5s upon its release. But the 7.4 million is still less than the 7.8 million it shipped last quarter and is 30% less than it shipped in 2011.

Wrong way to the end zone?
Like Nokia (NYSE: NOK  ) , Research In Motion was eclipsed by its competitors in the smartphone market, and it's been playing catch-up ever since. In essence, BB10 is just another example of that, catching up to Apple and Google but not providing any impetus to choose a BlackBerry over either. Nokia is hoping Microsoft's (Nasdaq: MSFT  ) Windows OS will be enough differentiation to give it a leg up, but analysts are skeptical even of that.

Despite the growing cash balances, it's still facing some harsh financial times. Revenues, while up quarter-to-quarter, were down 37% from the year-ago period. It also has a lot riding on the new OS. If it doesn't live up to the fanfare of the previews, we can pretty much expect the company to crash and burn. It's made it even more imperative though because, as Business Insider reports, it's guaranteeing app developers they'll make $10,000 their first year or RIM will pay the difference.

BB10 is still at least five months away from introduction, so despite all the hype about the excitement it's generating, RIM has a long way to go yet before it's even in the public's hands. It did prove it has the financial wherewithal to make it through to that date, which was a big concern, but the launch date is only the next stage of the game. It really needs for BB10 to catch on so that it can start producing profits.

Seems to me there are way too many ifs and hopes there, so I won't be changing my rating of RIM on Motley Fool CAPS, where I marked it to underperform the broad indexes. But tell me in the comments section below though is you disagree with my assessment of Research In Motion and its ability to dial up new growth.

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Fool contributor Rich Duprey owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft, as well as creating a synthetic covered call position in Microsoft and a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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