RIM's turnaround prospects: Analysts highly skeptical

Analysts give RIM props for stabilizing, but say the company still has a rough road ahead. Can it continue to sell BlackBerry 7 devices in emerging markets to keep sales stable?
Written by Larry Dignan, Contributor

Research in Motion delivered better-than-expected second quarter sales, showed it can be resilient and even sparked some hope about a turnaround. Analysts were having none of it.

The commentary following RIM's quarter was across the board negative. Sure, analysts gave RIM a few props, but for the most part agree that the company is toast.

Research in Motion reported a second quarter loss of $235 million, or 45 cents a share, compared to earnings of $329 million, or 63 cents a year ago (statement, Techmeme). Revenue for the second quarter was $2.9 billion, down 32 percent from a year ago. Wall Street expected RIM to report a second quarter loss of 46 cents a share on revenue of $2.5 billion.

In other words, RIM CEO Thorsten Heins showed his company can reel in costs, become more efficient and sell BlackBerry 7 devices in emerging markets. Any turnaround talk is highly premature say analysts. Here's a look at the commentary bouncing around Wall Street about RIM.

Northern Securities analyst Sameet Kanade said investors should head for the exits on RIM:

In contrast to the positive reaction to yesterday’s FQ2-13 results announcement, we continue to believe that RIM’s fundamentals are expected to deteriorate going forward given the need for a significant investment in the BB-10 device build-out and the risk associated with potential success of this new platform. We believe investors should utilize this short-term euphoria to exit or reduce positions until C2013 when the potential for success of the platform becomes clearer.

National Bank analyst Kris Thompson took the other side of the RIM trade:

Increasing target price to $12/sh; we think there is money to be made ahead of the C2013 launch of BB 10. The new management team is executing by maintaining the BlackBerry subscriber base, managing costs and cash and seemingly readying an early C2013 BB10 global platform launch.

Thompson's take was in the minority.

These BlackBerry 7 devices will sell in emerging markets with immature networks that need RIM's compression technology.

Morgan Stanley analyst Ehud Gelblum said it's relatively easy to maintain share when you sell devices at a loss:

RIM appears to be focused on maintaining and growing its subscriber base - even at the cost of profits - a strategy we did not fully appreciate previously, and one that is not sustainable indefinitely. While total gross margin of 28.4% was actually up 40 bps q/q and 40 bps ahead of our estimate, we calculate device gross margin remained negative for the second quarter in a row at (5.9%), albeit a slight improvement from (7.7%) in FQ1. In FQ3, we expect device gross margin to fall again, deeper into the red to (11.6%) as RIM competes against the iPhone 5 and a host of other well-priced Android and Windows 8 devices heading into the holiday selling season.

Jefferies analyst Peter Misek said that RIM's prognosis remains grim even with an emerging markets push.

Management focused on less competitive geographies such as Venezuela, South Africa, Indonesia, the Philippines, and other parts of Asia-Pac. In these countries, networks are immature and therefore the Blackberry platform works best due to its compression technology. Management highlighted that the strength in net adds was due to BBM and we believe it indicates a further shift towards the consumer market, which brings with it lower subscriber fees. Despite the better than expected quarter, challenges remain. RIM is a subscale handset maker that is losing share in all major geographies going forward, especially in the higher ASP/ARPU developed markets. Following the launch of the iPhone 5, we believe market share losses accelerated in the UK, Canada and other iPhone markets.

More: RIM's Q2: Ugly results on tap | RIM asks developers to keep loving BlackBerry. Do I say 'I do'? | RIM's BlackBerry 10: Why I still believe | RIM banking on BlackBerry Balance, HTML5, BYOD trend

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