The second quarter results from Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) are considered to be a strong one by Morgan Stanley (NYSE:MS). The revenues reported by RIM of $2.87 billion were $566 million higher than the estimates from Morgan Stanley. “With holiday promotions coming up next quater, and the iPhone 5 and the new Android and Win 8 devices all finally out”, the report from Morgan Stanley expects an 11 percent quarterly decline in RIM’s ASP for the third quarter.
The current strategy followed by Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM), of maintaining and growing its subscriber base – even at the cost of profits, is not fully appreciated by Morgan Stanley. Though the company’s gross margins were above the estimates from Morgan Stanley by 40 basis points, its device gross margins for the second quarter remained negative. For the third quarter, the report expects the device gross margins to dwindle further, as “Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) competes against the iPhone 5 and a host of other well-priced Android and Windows 8 devices heading into the holiday selling season”. The improvement in the company’s gross margins this quarter is mainly due to a ‘mix-shift to BB7 and its slightly higher GM, rather than to a fundamental improvement in the business”. RIM’s strategy of pricing below the cost, is certainly not a sustainable one, but it could afford it, as it has a “cash-flow rich services business to fund its devices losses”.
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RIM’s subscriber base registered a quarterly growth of 2 million, which was 1.5 million more than the estimates from Morgan Stanley (NYSE:MS). The growth in subscriber base will help the company to boost its new BB10 OS, but it could also “shrink the pool of potential BB10 “upgraders,” since the higher-end BB7 adopters may be part of the BlackBerry faithful, and may have otherwise held out for a new device in 1-2 quarters”. RIM’s quarterly revenues growth in its strong higher end markets, the UK and Canada, grew by 34 percent and 103 percent in the second quarter, mainly on account of “sell-in of higher-end BB7 devices”.
After some respite in the second quarter, due to BB7 mix-shift, the report expects the RIM’s fundamentals to resume deteriorating in the third quarter. BB10, despite having attractive features, may not be able to “make a dent in the quickly established handset world”. Morgan Stanley (NYSE:MS) also feels that the depleting inventory of BB7 devices in the channel, highlights the lack of confidence on Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM) by carriers, as “turning around a business that is getting used to selling devices at negative gross margin is a philosophically difficult thing to do. Even Motorola, at the depth of its operating losses, was selling handsets at a high-teens gross margin”.