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RIM Fee Change Makes BlackBerry 10 Do or Die

On a post-earnings analyst conference call, RIM CEO Heins highlighted how a better management of the company's purse strings will help with new product launches. "Working capital performance has been very strong... these resources will be reinvested in our BlackBerry 10 launch," said Heins, while adding that a $1 billion 2013 cost reduction program has already been achieved.

Although RIM is running ahead of expectations on its management of cash flow, the company's CFO warned that it will post an operating loss in the fiscal fourth quarter as a result of service fee declines, a cannibalization of potential BlackBerry 7 sales and a significant increase in advertising spending heading into the BlackBerry 10 launch. RIM nevertheless said it would end the year with significantly more than the $2.1 billion in cash that it entered the year with.

CEO Heins said a mix of improving cash flow, quicker than expected cost reductions and a strong response to BlackBerry 10 means the company is hitting a bottom heading into 2013 after years of market share losses. "We believe the company has stabilized and will continue to turn a corner in the New Year," said Heins on the analyst call.

Third quarter earnings give crucial insight into RIM's financial picture headed into the New Year, but they are unlikely to change the longer term outlook of the struggling handset maker. More importantly, analysts and investors await details on the launch of BlackBerry 10, and prospective enterprise and consumer demand.

That launch, slated for late January, may provide more insight than third quarter earnings on whether RIM can reignite competition against Apple (AAPL) and Google (GOOG)-powered devices in the ultracompetitive handset and tablet markets, or whether its best option resides in a takeover or asset sale.

That's the perspective of Donald Yacktman, the head of Yacktman Asset Management, a mutual fund investor that is Research In Motion's fifth largest shareholder, according to Securities and Exchange Commission filings compiled by Bloomberg.

In a telephone interview prior to RIM's earnings, Yacktman said he wasn't expecting much out of the company's third quarter earnings. "I wouldn't expect a lot. I think they are burning a lot of cash right now," Yacktman said.

From Yacktman's perspective, the fund's investment in RIM is about the handset maker's discounted price and a set of assets that include cash, patents and an large embedded user base that puts a floor on the company's share prices.

"If the phone works out great, in the future you have tremendous upside," said Yacktman of RIM's BlackBerry 10 launch. If not, Yacktman expects RIM to be acquired by a healthier competitor.

According to Bloomberg data as of Sept. 30, Yacktman Asset Management owns just under 4.5% of RIM's outstanding shares worth $325 million. Yacktman said in the telephone interview prior to earnings that the mutual fund was in the money on its RIM investment. [Any changes to Yacktman's RIM position will be unveiled in mid-January, when the manager releases year-end holdings]

Given RIM's pricing change ahead of BlackBerry 10, Yacktman's wait and see approach to third quarter earnings may become all the more relevant.

"If BB10 fails, it will likely be unable to stumble along and will either become a take- under candidate or a niche business," wrote Misek, the Jefferies analyst, of how the service fee changes potential outcomes of a RIM turnaround. "If BB10 succeeds, its business model will more closely resemble other handset [manufacturers]," added the analyst, referring to subsidized consumer-oriented smartphone makers like Apple and Google.

For more on Research In Motion's prospects, see the top 4 risks to BlackBerry 10. Also see TheStreet's initial review of the RIM's new line of handsets and its operating system.

-- Written by Antoine Gara in New York

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