Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB), the Canadian smartphone manufacturer surprised the Wall Street with a rise in profit during the Q4. The company reported that it has sold 1 million Z10 smartphones, which was more than what analysts were estimating.

Blackberry bbry Research in Motion Ltd

Analysts at Morgan Stanley believe the 700 bps upside to Gross Margin in FQ4 to 40% is sustainable, driven by restructuring savings from renegotiated supplier contracts with, EMS partners, and licensors.  Analysts calculate device GM of 12%, up 1500 bps q/q, including a double-digit boost in BB7 GM.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s BB10 also appears off to a solid start, with 1M units in FQ4 spot-on MS estimates. and a surprising 55% users coming from other platforms, analysts suspect Android. CEO Heins stated 65-75% of the Z10s shipped in FQ4 sold through, implying channel inventory is lean.

While subs fell 3M q/q to 76M, 2M below analysts estimates, ARPU rose 2% q/q to $4.15, implying the lost subs were low-end prepaid subs that were not contributing to Service revenues anyway. CEO Heins does not expect service fees to decline on BB7 devices, leading firm to moderate their BB7 ARPU decline which adds ~$300M to service rev in FY14 and FY15, and $1 to research firm’s SOTP.

Sell-through slowed to 7.9M from 8.4M in FQ3 as subs presumably awaited BB10. Channel inventory fell another 1.9M q/q and finally appears clear, implying the 6M smartphone shipments in FQ4, 1.5M below analysts estimates, grow to a more natural sell-through level plus BB10 channel fill in FQ1, supporting analysts 8.5M estimates.

Management expects to “approach” break-even in FQ1, despite a 50% q/q increase in marketing spend as GM remains strong.

Morgan Stanley Reiterate OW and $22 PT on Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) as the year of global sell-in appears on-track, while the higher GM and ASP on BB10, and restructuring savings, should drive earnings higher.

Cash Flow:

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) generated CF from operations of $219 mln on strong working capital performance. Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) ended 4Q with net cash of $2.9 bln ($5.48 per share) – flat from last quarter.