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The Key Number in RIMs Earnings Release

Monday, October 1, 2012 3:30

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(Before It's News)

The latest quarterly report from Research In Motion Limited (NASDAQ/RIMM; TSX/RIM) was a positive surprise, which resulted in the shares moving up strongly following the news. Yes, Research In Motion (RIM) has had one of the sharpest declines in recent memory among technology stocks, but some investors are stepping in thinking that perhaps the worst is over and the market view has become overly bearish.

The important thing to note when investing is whether a company can beat expectations. The market view is what drives prices in any market. The more popular something is, the higher the demand and, thus, the higher the price. RIM’s stock has been beaten up with extremely poor sales results, therefore the market view was negative, and rightly so. However, this quarter the company exceeded estimates, which admittedly were low, for both revenue and the number of devices shipped. The CEO also stated that the company’s customer base also went up, from approximately 78 million users to 80 million.

RIM has failed to evolve and innovate against competing technology stocks, and this has meant that in a sector in which tastes change rapidly, it has fallen out of favor with the market view. This has not yet changed, as the company has yet to release its new operating system, due out in early 2013, so it has not yet made any significant gains in market share. Make no mistake, RIM is far from safe, but the key metric I was looking for was its cash levels.

Cost cutting was extremely important, as revenue, we knew, was going to be down. If costs could not be cut in time, its cash pile would continue to dwindle. What has the Street turning somewhat positive is that RIM increased its cash to $2.3 billion from $2.2 billion in the first quarter. The original worry was that if it ran through its cash pile, then the firm would be a possible bankruptcy candidate; however, this level of cash buys it time. While revenue from the year-ago period was down 31%, it was up two percent from the first quarter.

While RIM’s market share has completely crashed against other technology stocks, the market view might now look at the company from another perspective. It is true, it most likely won’t ever reach the dominant position it once held, but there might still be a place for RIM among technology stocks in this sector.

The market view has been extremely negative for RIM, as compared to other technology stocks in this sector, and with good reason. Apple Inc. (NASDAQ/AAPL) has gained a massive amount of business, as the firm has consistently created products that consumers really want. RIM sat back and stopped innovating, leading to this persistent negative market view.