Research in Motion Takes Hit from Component Costs and Dollar, Hints at New Product

After missing sales and profit estimates for its Q2, BlackBerry maker Research in Motion (RIMM) on its conference call this evening with analysts focused like a laser on what it’s doing to attract consumers. What the Street may focus on, however, with the stock down over 19% this evening, is a projection for gross profit margin to fall from 50.7% of sales last quarter to 47% this quarter.

Land Grab

On the call, co-CEO Jim Balsillie told analysts that “there is a shift taking place in mobile devices,” with smartphones vastly outperforming regular cell phones — he used the phrase “land grab” at one point. With RiM having 54% share of smartphones last quarter, according to data from IDC, Balsillie said “now is the time to aggressively pursue adoption.”

Make a dash for new customers, in other words. And because that means focusing on consumers, profit is getting squeezed between the cost of more complex devices and the need to price for the consumer.

As Balsillie put it, the new phones the company is making, such as the “Bold,” have “higher associated costs” for parts, such as 3G radios and the like, while the average selling price of the company’s products is expected to stay the same as last quarter. “It’s very difficult to pass these costs along to the consumer,” said Balsillie.

Aggressive discounts

Balsillie also said the rising U.S. dollar made component costs more expensive. But when pressed by an analyst, Balsillie conceded that 50% of the hit to gross profit will come from “more aggressive pricing” in retail. It takes “some aggressive pricing for a hero campaign,” said Balsillie, referring to marketing jargon for getting pride of place in retail outlets. “You’re going to see, everyone has a hero campaign where we’re the featured device for the buying season.”

In all, Balsillie’s enthusiastic description of new opportunities, at the cost of profit, sounded rather unlike the stable, consistent picture of RiM that most fund managers would describe. “We’ve never introduced so much new product so fast,” he said. “There are a lot of new revenue streams that are teeing up on this. The models aren’t static. This is such a hot product cycle. And we’re not done this autumn. You’re going to see even more stuff – it’s a remarkable time.”

“This is a lot of new newness,” Balsillie waxed. “This is like nothing you’ve seen.”

New revenue streams

Balsillie tried to ease the blow regarding profits, by noting that the company hopes to obtain additional sources of some components that are currently sourced through a single vendor, which may ease those associated costs in future. He also said that “there are opportunities for other higher margin revenue streams,” in future. “We see some very exciting new high-margin revenue strategies that come out of all of this,” he added.

Referring to sales, management mentioned that both the Bold and the “Flip,” a flip-phone device, will be on sale this quarter. The Flip has a high gross margin, the company noted, but the Bold has higher costs, and in addition, the gross profit will be affected by “smaller quantities of an unannounced product on a new platform” expected to ship in the quarter. That product could be the much-rumored “Thunder” touch-screen phone.

For Q3, R&D is expected to rise 11%, and sales and marketing expected to rise between 10% and 11%. The company said it expects operating expenses to decrease as a percentage of revenue sometime after Q3.

iPhone, anyone?

No one mentioned Apple (AAPL), but when pressed on whether competitive pressures were a factor in the margin decline, Balsillie stuck with his insistence that it was all about the company’s “land grab” as smartphones in general replace cell phones.

“Investors have to decide, do they want that leverage off of a small revenue base or a large revenue base,” said Balsillie, referring to his goal of accumulating customers in advance of the higher-margin services he hinted at. When pressed about the land grab, Balsillie urged the big picture over the long time: “Exactly how the [business] model will settle out … we gotta be there,” he insisted. “If we give up ground for short-term gratification, that’s not in the best interests of our shareholders, not even close.”

Comments

[User 207572:]

RIM will lose consumer market share. It is Music, stupid. People want a device like iPhone. RIMM just cannot compete the music player part. That leaves Blackberry holders to carry additional ipod for music. It just doesn' work.

RIM's success was built on the market for "in writing anywhere" and phone/email in one. Now we want to add music. And RIMM just cannot do what apple is doing with the iTune.

How funny to see all the people on the street are cheering for RIMM. They call themselves pros. I remember when I invested in RIMM, the street bashed RIIM like hell. Now I am out of the stock and they are in.

Good luck.

Waiting for an entry point for AAPL.

2008 Sep 25 09:02 PM

[User 270157:]

Last time I checked, people bought phones for their primary purpose...to make phone calls. If you look at the actual data that analysts have been reporting, RIM is holding its ground easily against iPhone encroachment. The iPhone is a toy. There's always going to be a market for toys. I even think its a great toy, but music features alone aren't going to force RIM to cede ground to a toymaker.

2008 Sep 25 10:20 PM

[User 207572:]

When RIM just went publuic, people used similar argument - people use phone to make phone calls. Who used a small device to write serious email. Guess what, RIM won.

Now same argument is made for RIM - phone is not mainly for music.

Please check again after 2 years.

It is really simple. No need to cary two devices. Also, RIM's advantages are all technical. Given time, AAPL can do all of them. Give RIM 10 years, it will still not be able to do music. RIM does not have that culture.

You may think it is easy to make things stylish. Check all the PCs, they are all ugly. Companies ruled by technicians don't know fashion.

Period.

2008 Sep 25 11:34 PM

[Evan Grey Owl:]

They (RIMM, AAPL) still serve somewhat different niches and there is plenty of room in the world for both "bests". The adoption of their mobile products is a world-changing kind of phenomenon ; perhaps we should concentrate on the use of such products to improve lives, rather than get ill over a 1 cent discrepancy in earnings.

If one cent means so much, should I be investing in Copper?

2008 Sep 26 12:53 AM

[brewer:]

What RIMM is saying in this call is they can't possibly compete with a $200 iPhone, not even trying to sell to their so-called crackberry addicts.

iPhone, like we have been saying for almost 2 years, simply, totally outclasses the blackberry. It's simple, people want more than email and text messaging. Yeah, it's fun to have the internet in your pocket, but that doesn't make the iPhone a 'toy'. (Quit posting Steve Ballmer.)

Blackberry is 90's technology. iPhone is a better device even if you've never owned an iPod. If you've owned an iPod, it's a slam-dunk.

2008 Sep 26 09:53 AM

[Caltorguy:]

Apparently the new Bold works seamlessly with iTunes so I'm not sure what the music issue is - it will also do great photos and video (can record video too). I still think that the data compression technology is BB's ace in the whole, and the fact that it has a keyboard that for the primary business purpose - email - makes like infinitely easier. The iPhone has apparently, after only 3 months, tapped out all of AT&T's 3G capacity - this would not be the case with the Bold. I also wonder if big business is going to be happy about providing staff with what even the AAPL fanboys acknowledge is primarily a multimedia device with a a phone attached. Companies pay for data too.

2008 Sep 26 11:12 AM

[Fremont Rea...:]

RIM is still the preferred device for users who respond to email. Touch is great for enlarging and shrinking a web page, but a keyboard is best for typing. I refuse to pay a premium for a phone's data service ala Apple. Data is data.

2008 Sep 26 12:10 PM

[jocca:]

iPhone is not a toy. It is a computer in your pocket with the best internet browsing features of all the phones in existence now. It is a great e-mail computer. I have my virtual keyboard set up in such a way that I can input western and Chinese characters within the same document. Great for the 1 billion strong Chinese population out there. It is not a toy, it is what the pocket computer of the future is supposed to be like.


On Sep 25 10:20 PM User 270157 wrote:

> Last time I checked, people bought phones for their primary purpose...to
> make phone calls. If you look at the actual data that analysts have
> been reporting, RIM is holding its ground easily against iPhone encroachment.
> The iPhone is a toy. There's always going to be a market for toys.
> I even think its a great toy, but music features alone aren't going
> to force RIM to cede ground to a toymaker.

2008 Sep 28 08:45 PM