RIM Shares Hammered

The BlackBerry maker turned in strong results for the first quarter but says it will sacrifice profits for long-term gain
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Fighting Apple comes with a heavy cost. Research in Motion (RIMM), the Canadian maker of the popular BlackBerry devices, continues to sign up new subscribers at an impressive clip, even in the face of growing competition from Apple's (AAPL) snazzy iPhone and other devices. But in a first quarter earnings report on June 25, the company disappointed investors by saying it would sacrifice profits in the short term to improve its competitive position in the future. Its stock plummeted 12% on June 26, as the overall stock market slid.

On the surface, RIM's earnings appeared plenty impressive. The company reported revenues of $2.24 billion, up 107% from the year-earlier period. And it generated $483 million in net income, or 84¢ a share, compared with net income of $223 million in the same quarter last year, or 39¢ a share. It also said that wireless operators added 2.3 million new BlackBerry subscribers in the quarter, bringing its industry-leading total in the smartphone market to more than 16 million subscribers.

"A Land-grab Game"

But RIM fell short of the financial community's high expectations. Analysts were expecting the company to report $2.27 billion in revenue, and 85¢ a share in net income, according to a poll by Thomson Financial. Profits were light because operating expenses came in higher than expected. RIM is ramping up its investments to capture more market share, with operating costs rising 22%, instead of the expected 17%.

"The quarter was good but it wasn't better than expected," says Ken Smith, senior portfolio manager of Munder Capital Management, which owned 90,000 shares of RIM as of the end of March. "There was no positive surprise."

On a conference call following the announcement, analysts expressed concern about RIM's growing expenses. The company attributed the rise to an increase in prices of components and a more aggressive investment strategy. But RIM co-CEO Jim Balsillie said the company must boost investments in infrastructure, research and development, and sales and marketing to capitalize on surging demand for smartphones—and beat back competition from Apple, Nokia (NOK), Microsoft (MSFT), Palm (PALM) and others. "It's a bit of a land-grab game now," he said. "We're pretty excited by the growth prospects."

Launch Delays

The guidance for the second quarter offered by the company was also a mixed bag. RIM raised its revenue guidance from $2.44 billion to a range of $2.55 billion to $2.65 billion. But it lowered its profit forecast from 90¢, to between 84¢ and 89¢ per diluted share. It plans to ramp up its capital expenditures from the $190 million in the first quarter to an average of $250 million over the next two quarters.

The results clearly disappointed investors who have been driving the company's stock ever higher. In the last five months, Research in Motion's stock has soared 70%. It hit an all-time high in the last week. But in mid-day trading on June 26, the stock price nosedived $17 to $125. RIM's stock had soared after its previous four earnings reports.

RIM is betting that two new handsets, the Bold and the Thunder, will ignite a new round of growth. The Bold, a BlackBerry device that uses speedier third-generation wireless technology, has already been delayed from its initial target date of June or July. RIM execs would not specify a specific launch time frame, only saying it will be released this summer. "We expect shipments of BlackBerry Bold to really start ramping [in the third quarter]," said Edel Ebbs, RIM's vice-president of investor relations.

Room for both BlackBerry and iPhone

The Thunder, expected to be a touch-screen version of the BlackBerry, has not even been announced by the company. But smartphone watchers expect it will be rolled out later this year in time for the holiday shopping season. "They are really well positioned for the end of the year," says Munder's Smith.

The Thunder is a clear counterattack against Apple's iPhone, which dazzled consumers with its innovative touch-screen interface and easy-to-use software. Some analysts have expressed concern that the existing iPhone and a new faster model coming out in July could eat into RIM's market share and profits.

But so far it appears that both companies can succeed, since the smartphone category is gaining share from the traditional cell phone market. Smartphones made up 10% of total phone sales last year but are expected to capture 31% of the market by 2013, according to research shop ABI. "RIM and Apple are in the catbird seat," says Smith. "They are both well positioned. I think they will find different audiences."