Technology

RIM Signals Margin Squeeze Ending


Research In Motion's stock soared on the news that profit margin pressure is expected to ease, despite competition from Apple

Research In Motion's margin squeeze may be coming to an end. A report released Apr. 2 indicated that profitability will be on the rise in the coming months for the maker of the BlackBerry smartphone.

Reporting fiscal fourth-quarter results, RIM (RIMM) said it earned $518 million, or 90¢ a share, as sales surged 84% to $3.46 billion. Wall Street analysts on average had expected earnings of 84¢ a share on $3.4 billion in revenue. The company also forecast sales and profit in the current quarter that exceeded analysts' expectations.

The upbeat forecasts and better-than-expected results went a long way toward alleviating concern that RIM was sacrificing profitability in its battle with iPhone maker Apple (AAPL). RIM's stock has tumbled from an all-time high of 148.13 in June as the company raised spending on tricked-out phones designed to better compete with the popular music-playing, Internet-connected iPhone. RIM has had a lot to prove to investors, says RBC Capital Markets analyst Mike Abramsky. "The first is coming out of the penalty box on margins," Abramsky says. "The second is a reset with investors of their confidence in RIM's leadership in the smartphone industry. Tonight's results will help them do both."

RIM stock surged in extended trading, after the results were released. The shares leapt 11.06, or 22.5%, to 60.15, after having closed at 49.90.

Component Costs Decreasing

RIM co-CEO James Balsillie said the company will report gross margins in the 43%-44% range in the current quarter, after fourth-quarter margins slid to 40% from 51.4% a year earlier. Margins will remain in the "low 40s" for the rest of the 2010 fiscal year, he said. Margins have come under pressure as RIM increased subsidies designed to give carriers added incentive to offer the BlackBerry on their networks.

One reason for the improvement is decreasing costs for BlackBerry components, Balsillie said. RIM may be able to contain costs by broadening its stable of device manufacturers, Kaufman Bros. Equity Research analyst Shaw Wu wrote in a Mar. 31 research note. RIM is expected to steer some manufacturing toward Hon Hai Precision Industry, also known as Foxconn, the same firm that manufactures the iPhone for Apple. While RIM manufactures many of its own BlackBerry devices at its home base in Waterloo, Ont., it has also been known to work with Luxembourg-based Elcoteq and Canada's Celestica.

Investors will remain focused on RIM's ability to attract new customers, says Ken Dulaney, a wireless industry analyst with Gartner (IT). "Wall Street has always looked at RIM as a high-profit cell-phone maker, and that's not something that can continue," Dulaney says. Amid ongoing rivalry with Apple and other makers of smartphones, RIM will have to lower prices on data plans and devices, which will in turn eat into profitability. "RIM has to go into the consumer market with more device models and lower prices on services and to get into places like Europe," Dulaney says.

Greater Product Diversity on the Way

In the fourth quarter, RIM added 3.9 million subscribers, bringing its total to 25 million. Of the new users, 70% were non-enterprise customers, meaning consumers who bought their own device or small business customers, a sign RIM may already be broadening the market for its devices. Roughly one-third of new subscribers are located outside North America. The company expects to add 3.7 million to 3.9 million new subscribers in the current quarter.

During a question-and-answer conference call with analysts, Balsillie hinted that more diversity in RIM's product lineup is on the way. "Pricing is a big function of what is at play," he said. "You'll see more powerful segmenting and more powerful options." He also said the company is close to releasing a major upgrade to its BlackBerry Enterprise Server, the software that large companies use to run and manage the devices.

There is still a land rush going on among vendors of smartphones such as RIM, Apple, Nokia (NOK), and Palm (PALM), as well as software makers including Microsoft (MSFT), Dulaney says. "Smartphones are growing by leaps and bounds," he says. Still, amid economic turbulence those leaps aren't quite as wide as they used to be. Measured in units, smartphones increased 3.7%, to 38 million, in the fourth quarter of 2008, compared with a gain of about 14% for the full year, according to Gartner.

Business Exchange related topics:

Research in Motion

Smartphones

iPhone

Apple

Hesseldahl is a reporter for BusinessWeek.com.

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