RIM's second quarter falls short; Forecast light; Margins to fall

Updated: Research in Motion's second quarter results fell short of estimates and the third quarter outlook was weaker than expected too.RIM said Thursday (statement) that it reported net income of $495.
Written by Larry Dignan, Contributor

Updated: Research in Motion's second quarter results fell short of estimates and the third quarter outlook was weaker than expected too.

RIM said Thursday (statement) that it reported net income of $495.5 million, or 86 cents a share, compared to $287.7 million, 50 cents a share, a year ago. Revenue was $2.58 billion, up 15 percent from a year ago. What's not to like? Well for starters, RIM's earnings missed Wall Street estimates by a penny and revenue slightly missed the mark.

And then there was the outlook. RIM projected revenue of $2.95 billion to $3.1 billion with net income between 89 cents a share to 97 cents a share. Wall Street was expecting earnings of 98 cents a share.

On a conference call, RIM executives said that gross margins are expected to fall from the 50 percent range in the second quarter to 47 percent in the third quarter. Here's why: Jim Balsillie, co-CEO of RIM, said new hardware platforms such as Bold have higher costs. In addition, RIM is relying on single source suppliers for some parts. Meanwhile, RIM, which is increasingly reaching consumers, can't pass along costs. Toss in the fact RIM is developing new technologies to use advanced networks margins will continue to fall to the "mid-40s" range into the fourth quarter and beyond.

Balsillie did note that "enterprise business remains strong and our momentum in the consumer marketplace continues."Balsillie made a good argument that the company should sacrifice margins today to grab the most platform market share. Balsillie said the mobile market is undergoing a sea change and RIM would be foolish not to expand aggressively. He noted that investors need to determine whether they want margins today or a platform that can be leveraged years into the future.

But investors weren't buying it--literally--and the falling margins are worrisome. The chart tells the tale. I circled what happened to shares as Balsillie continued to talk about RIM's plans to go for the land grab at the expense of a few points of gross margins.

On a conference call with analysts, Balsillie noted:

  • 42 percent of RIM customers are not enterprise users.
  • The launch of RIM's Bold device is evenly split between consumer and business users.
  • RIM is expanding its channel presence into Wal-Mart, Best Buy and Radio Shack. It sounds like most of these retail efforts are focused on sales of the Pearl. The big question is whether Pearl and RIM's focus on semi-fickle consumers continues to ding margins. With its focus on consumers, RIM will have to churn out hot devices to maintain margins.

On that final point about aggressive product cycles, Balsillie said RIM is up for the challenge. He said you'll see aggressive launches into the Autumn. By the numbers:

  • RIM added 2.6 million net BlackBerry accounts. Total accounts were 19 million.
  • RIM shipped 11 million smartphones in the first half.
  • R&D second quarter spending was $181 million, up from $88 million in the same quarter a year ago.
  • Gross margins for the August quarter was 50.7 percent, flat with the previous quarter, but down from 51.3 percent a year ago.
  • The company ended the quarter with cash and equivalents of $2.24 billion as of Aug. 30.

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