Even the rosiest financial results come with a twinge of dour news for Research In Motion (RIMM). The maker of the popular BlackBerry e-mail paging service posted better-than-expected third-quarter earnings on Dec. 21, citing demand for hardware. Yet it cut forecasts for subscriber growth in the current quarter, citing the same issue that has been dogging RIM for months: concerns that a patent dispute with rival NTP will result in a shutdown of the BlackBerry service in the U.S.
Excluding costs for the falling value of assets, Waterloo (Ont.)-based RIM had earnings of 71 cents a share on sales of $560.6 million. Analysts had expected 65 cents a share on revenue of $549 million, according to Thomson Financial. RIM also met a subscriber target that had been trimmed in November. RIM added 645,000 customers last quarter, for a total of 4.3 million. In extended trading on Dec. 21, after results were released, RIM share prices jumped almost 4%.
But the numbers that analysts have been watching most closely are fourth-quarter estimates. The company maintained earnings and revenue forecasts, but took down subscriber-growth numbers a second time because of customer uncertainty and publicity about the NTP suit, RIM Chief Financial Officer Dennis Kavelman told analysts. RIM now expects to add 700,000 to 750,000 subscribers, compared with an earlier forecast of 752,000 to 800,000.
WORKAROUND IN THE WORKS? The revisions show that at least for now, the NTP case continues to take a toll on RIM's business. Arlington (Va.)-based NTP, a patent-holding company, filed suit against RIM in November, 2001. The U.S. District Court in Virginia is to set to decide soon whether to shut down RIM's U.S. service. And at this point, any discrepancy between hardware sales and subscriber growth could raise analysts' concerns about how swiftly handsets are moving off distributors' shelves.
RIM attributes the strong hardware growth to demand from existing customers eager to replace BlackBerry devices with newer models. Some analysts question how long RIM can succeed in selling devices to existing customers if new subscribers are signing up at a slower-than-expected pace. "If subscribers are below plan, people tend to be nervous about that," says Daryl Armstrong, an analyst at Citigroup (C).
During the earnings call, RIM Co-CEO Jim Balsillie outlined the different steps RIM is taking to allay customers' concerns. He said the company will soon release details about a technological alternative, or workaround, that RIM may adopt in case the BlackBerry service is suspended in the U.S. RIM also is continuing to engage in settlement discussions, with the assistance of a mediator (see BW Online, 12/08/05, "The BlackBerry Widow's Tale").
LOOKING TO WASHINGTON. Balsillie also noted that RIM is making headway with the U.S. Patent & Trademark Office (PTO), which is reviewing the validity of NTP patents. Indeed, RIM has received a spate of good news recently from the PTO, and the office said last week that it was speeding up its review process of the NTP patents (see BW Online, 12/09/05, "RIM's Race with the Clock").
In all, eight NTP patents are subject to review. But after an appeals court in August scaled back an initial infringement ruling, four patents remain at the heart of the case. In various preliminary reviews, the PTO has rejected each of those at least once. And with the new fast track, the PTO is expected to issue a final review as early as February.
Balsillie sees this as encouraging. RIM hopes the judge will be persuaded by the speedy review and the actions of the patent office to hold off on issuing an injunction (see BW Online, 12/01/05, "RIM Loses Another Round"). Judge James Spencer, who is overseeing the case in the U.S. District Court for the Eastern District of Virginia, last week set a timetable for the case. The two sides have to file briefs by Feb. 1.
"LONG WAY TO GO." Some lawyers following the case, though, expect that the judge is unlikely to wait for the PTO. In a Nov. 30 ruling denying RIM's request to halt the proceedings, Spencer was skeptical of RIM's timetable for how quickly the patents could be invalidated. Even if the PTO review rejects the four patents, NTP can appeal to a board within the PTO and then to a federal Circuit Court of Appeals.
"There is still a long way to go," says Stephen Maebius, a partner at law firm Foley & Lardner who is following the case. Maebius previously worked at the PTO. "It's a difficult situation, but there's no way the judge has to wait."
However, if the court decides to impose an injunction, RIM says it will turn to the workaround, which would let it keep the service up and running without relying on the disputed NTP patents.
FINAL COST. The BlackBerry maker has said little about the so-called workaround. With the PTO moving more quickly, it could use that workaround as a stopgap.
Still, many analysts expect that the most likely outcome will be that RIM exhausts its legal options and settles with NTP. Citibank's Armstrong says RIM remains likely to settle for between $650 million and $1 billion -- well above the tentative $450 million settlement that fell apart in June. No resolution, it seems, will come without a price.
Green is BusinessWeek's Internet editor in New York
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