Research in Motion (RIM) is expected to launch three new phones in the coming months: the Blackberry Bold (new to the US, already available internationally), a clamshell phone called the Pearl Flip, and a touch screen device expected to be called “The Storm (pics).” Unfortunately, new product launches – between component parts, subsidized pricing and promotional costs – can be expensive. As a result, the company warned late Thursday that gross margins and profit will suffer in the third quarter.
Co-CEO Jim Balsillie characterized the situation as a “land grab” and justified the increase in near term expense as, essentially, an opportunity. It’s similar to the story pitched in June when the company showed sales and marketing expense up heavily. But the market didn’t treat that first glimpse as foreshadowing, and they weren’t convinced with the re-itteration. The market also wasn’t completely satisfied with the rest of RIM’s earnings news.
By midday Friday, the stock was trading near $70 a share, well below its fifty week low of $80.20. From Thursday’s market close of $97.53, it was down more than 25%.
Analysts at Deutsche Bank and RBC both downgraded their ratings.
Based on the new forecasts, RIM is expecting Q3 earnings in the range of 89 cents to 97cents in the quarter ending November 29. Analysts had previously expected 98cents. Gross Margins are forecast by the company to come in at 47% instead of 50%. Revenue is pegged at $2.95b to $3.10, ahead of analyst consensus for $2.94b.
The rest of the earnings news was not as negative as the sell-off would suggest. Sales for Q2 ended at $2.58b, up from $1.37b in the same period last year. And despite continued escalation in sales and marketing expense, net income was $495.5 m, or 86cents a share – up from $287.7m (50c/share) for the same period last year.
Important customer acquisition and distribution metrics were also positive. For Q2, RIM had net subscriber additions of 2.6m, largely in line with estimates. Total Blackberry subscriptions were in at about 19 million. 42% of those total subscribers were non-enterprise users – a number indicative of greater penetration into the consumer market. Globally, about 70% of RIM’s customers came from North America – the fastest growing smartphone marketplace.
It can be dangerous to spend heavily in the near term to chase uncertain long term results. It can also prove sound investment. Looking ahead, RIM is taking a gamble. If the product push pays off, it could provide substantial upside compared to the post-sell off pricing. “If” being the operative word.
Critics will point out economic and competitive pressure could pose trouble. It’s worth noting, though, the smartphone marketplace is growing in the US. A recent study by Gartner put 2nd quarter expansion at 78.7% year over year. Similar data from NPD showed U.S. customers bought 9million phones, an 84% year over year increase, in the first seven months of the year (January to July). Smartphones accounted for 19% of use phone sales – another growth metric. Adding to that, the revenue they generated was up 71% year over year.
Among the companies chasing smartphone territory, RIM has been near the front of the pack. For the first seven months, the same NPD study placed them as the top vendor in the U.S. (Apple was second). Gartner’s global Q2 study had RIM in second, behind global leader, Nokia. Apple didn’t make the global top 5 – but that may change with wider global distribution partnerships now in place.
RIM makes a good product and is seeing impressive subscriber growth. Then again, the iPhone is also a very good product. And there’s the as yet unproven Android based phones, touch models coming from Nokia and the general state of the economy pinching consumer and enterprise spending.
To gamble, or not to gamble – that is the question.
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