The second straight quarter of disappointing financial results offers proof that Research In Motion is facing pressure from Apple, Google's Android, and others
Financial results and forecasts released by Research In Motion (RIMM) on Sept. 24 raised investor concerns that growth for the maker of the BlackBerry may be reaching its peak.
RIM expects sales in the current quarter of $3.6 billion to $3.85 billion. That's less than the $3.92 billion expected by analysts. In the previous quarter, sales also missed analysts' projections. RIM said fiscal second-quarter sales were $3.53 billion, a 37% increase from a year earlier but less than the $3.62 billion forecast by analysts.
That was the second straight quarter of missed financial forecasts, suggesting that RIM is under pressure from rivals, including Apple (AAPL), maker of the iPhone. Competition is likely to stiffen in coming quarters as handset makers release new smartphones, some equipped with Android, the operating system created by Google (GOOG) and other developers. "The company simply can't grow as fast as it once did," says Charles Wolf, an analyst at Needham & Co.
Charge Due to a Patent Settlement
Shares of RIM tumbled in extended trading after the results were released. The stock dropped 9.47, or 11%, to 73.59 after the announcement. During regular trading, the shares had fallen by 2.71—more than 3%—to 83.06.
Subscriber additions and device sales were also in the low end of RIM's forecasts. RIM sold 8.3 million new BlackBerry devices and added 3.8 million new subscribers, having forecast a range of 3.8 million to 4.1 million. It finished the quarter with approximately 32 million BlackBerry subscribers worldwide, up from 28.5 million a quarter ago.
The results included a one-time charge of $267 million, or 20¢ a share, as the result of the settlement of a patent lawsuit with Visto, a privately held wireless-messaging company based in Redwood City, Calif. Visto filed patent lawsuits against RIM in 2006. Included among Visto's equity investors is NTP, a holding company that until a late 2005 settlement had threatened to bring RIM service in the U.S. to a halt amid a patent dispute.
BlackBerry Prices Declining
Excluding the settlement charge, earnings would have been $1.03 a share. Gross margins, a key measure of profitability, were 44.1%, compared with RIM's forecast of 43%-44%.
RIM said it expects to sell 9.2 million to 9.9 million BlackBerry devices in the current quarter, indicating an increase of 37% to 47% from a year earlier, when RIM sold 6.7 million BlackBerrys. RIM also expects to add 4 million to 4.3 million subscribers.
Even as the company sells more devices than in previous periods, its average selling prices are coming down as competitors release smartphones. In the current period, RIM expects the average selling price of a BlackBerry to slip to $320, compared with $345 in the second quarter and $357 in the first. On a conference call with investors and analysts, RIM co-CEO Jim Balsillie attributed the decline in part to the success of the BlackBerry 8520, a reduced-cost version of the BlackBerry that's being sold at Wal-Mart (WMT). Balsillie said a new set of higher-priced devices will be introduced later this quarter. James Faucette, an analyst at Pacific Crest Securities, wrote in a recent research note: "We believe margin pressure could be further exacerbated by an increasingly competitive smartphone market."
New Threats from Android
One of the biggest sources of that pressure is Apple, which has sold 30 million iPhones since the device debuted in July 2007. Then there are new threats from Google and its many partners working on the Android operating system. Deutsche Telekom's (DT) T-Mobile is already advertising a new Android phone, and Motorola (MOT) is expected to announce a new batch of phones running Android soon. As Needham's Wolf put it: "I think in the fall season we're going to see a lot of Android phones. It's going to look like an Android invasion."