Profit Rises, but Investors Fear BlackBerry Maker Will Find Holiday Season ToughFears that Research In Motion Ltd. is spending heavily to push a new slate of sleek BlackBerry devices to holiday shoppers outweighed news of higher sales and profit, sending shares plunging.
Second-quarter earnings released Thursday showed RIM growing strongly, but weak earnings guidance for the third quarter spooked investors already worried that the economic downturn will erode the profits of do-it-all phones known as smart phones.
RIM posted net income for its second quarter ended Aug. 30 of $495.5 million, or 86 cents a share, up from $287.7 million, or 50 cents a share. Sales rose 88% to $2.58 billion. Shares of RIM fell 24% in early trading Friday to $74.07 on the Nasdaq Stock Market.
The Waterloo, Ontario-based company forecast fiscal third-quarter earnings of 89 cents to 97 cents a share, based on a lower-than-expected gross margin of 47%. Analysts polled by Thomson Reuters had forecast earnings of 98 cents a share.
"There is fear that this is a segment where you have to spend a lot on marketing to attract customers, and this is what is eating into profits," said Tero Kuittinen, a telecom-equipment analyst at Global Crown Capital LLC.
RIM has been investing heavily with its carrier partners to push its brand to consumers around the world. So far, it has captured 17.4% of the global market for smart phones, according to market firm Gartner Inc., and 54% of the U.S. smart-phone market, according to the research firm IDC.
To sustain this momentum, RIM needs to ship in bulk to carrier stores in the coming weeks before the start of the holiday season. In the U.S., the company is expecting to debut the Bold, a model with improved Internet and multimedia capabilities; the touch-screen Storm, a model designed to ward off the allure of Apple Inc.'s iPhone; and the Pearl Flip phone with a smaller keyboard.
The company is also working to bring new messaging, social networking and retail applications to its devices, through partnerships with Ticketmaster, Microsoft Corp., Time Warner Inc.'s AOL, TiVo Inc. and others. It is also marketing aggressively to increase the global distribution of its products, which are sold in 150 countries. The company added 2.6 million subscribers in the second quarter for a total of 19 million.
But the cost of adding so many new models, applications, distributors and subscribers is expensive. Analysts worry that the new promotions could be undercutting the rich subscription fees from its core business users.
Jim Balsillie, co-chief executive, expressed confidence that this investment would pay off as consumers replace basic cellphones with smart phones and start doing more with them. He also said that its increasing scale would help it bring down the cost of production and that adding suppliers would help it reduce the cost of key components. "If there was one thing that I would do if I had more latitude is...invest more," Mr. Balsillie said in a call with investors.
How consumers react to the new devices won't be known for six months, after RIM reports results for its fourth quarter, which ends in February. And it will be several months before the impact of the credit crisis, and layoffs among users in financial services, can be seen in subscriber numbers.
By: Sara Silver
Wall Street Journal; September 26, 2008
