RIM's No Good Very Bad Day, A Look Ahead To Earnings

Research In Motion Limited is having a no good very bad day. BlackBerry users in parts of Europe suffered heavy outages. Reports state that 6% of total users were affected by the disruption. This comes on top of recent woes regarding RIMM, and its delay of the. RIM CEO Thorsten Heins has apologized for the outage in a message on the company’s website. Research In Motion Limited (NASDAQ:RIMM) reports F2Q13 on Thursday, September 27. Note RIMM did not provide guidance at its F1Q13 earnings call but noted it expects to incur an operating loss (May quarter marked the first operating loss for the company).

Shares of the troubled Blackberry maker are currently down over 5% at the time of this writing. Research In Motion Limited (NASDAQ:RIMM) did get an upgrade from CitiGroup today, but that does not seem to have satisifed investors.

Prem Watsa, the largest shareholder, appears to be the only one who can save the company. If he does have some magic trick up his sleeve. Let us look at some of the other issues facing the company besides today’s events, ahead of earnings.

Another challenging quarter.

With Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM)’s aging BB7 portfolio and intensifying competition at the lower end of the market, investors believe RIM’s fundamentals likely continued to deteriorate in 2Q. Consensus forecasts expect ASP to decline 8% q/q to $190 (consensus: $194) on aggressive price discounting on BB7 and a higher mix of low-ASP devices. We forecast gross margin of 26% (LY: 39%, LQ: 28%) and a second consecutive quarter of operating loss.

Sub adds upside?

In a recent interview (August 14), CEO Heins indicated that Research In Motion Limited (NASDAQ:RIMM) now has 80 mln subscribers worldwide, up from ~78 mln total subs indicated in its last earnings report. This would imply a net sub add of ~2 mln during the August quarter, a pick-up from the <1 mln sub adds in the May quarter. All else being equal, better than expected net add should bode well for units shipment in 2Q (consensus: 6.9 mln, RJ: 7.0 mln) but the ongoing channel destocking (~7.2 mln units in the past 12 months) as RIM loses shelf space could limit upside. Given the likely lower quality of the sub adds (prepaid, emerging markets), analysts forecast a decline in ARPU and services revenues (-11% q/q last quarter).

Sale likely needed to unlock value

With BB10 now delayed until C1Q13 while the competition refreshes its line-up in 2H12 (iPhone 5 and high-end Android devices), we believe that could set Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) further back on the specs curve and the possibility of a comeback is diminishing. The timing delay could also dampen developer interest in the BB10 platform. Without a sale, investors expect the deteriorating fundamentals to continue to erode value.

(Disclosure: No position in any securities mentioned)