RIM: Big plans for the Second Half

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BlackBerry maker Research In Motion is benefiting from buoyant demand for smartphones, but not as much as some investors had hoped.

The Canadian company said on June 18 that fiscal first-quarter earnings rose 33%, to $1.12 a share, as sales jumped 53% from a year earlier.

RIM's performance reflects rising demand for smartphones, the handheld devices that offer e-mail and other features along with voice calling, even as consumers curtail spending on traditional cell phones and other electronics. The results also demonstrate that RIM is holding its own against formidable rivals, including Apple, maker of the newly updated iPhone, and Palm (PALM), which earlier this month began selling the long-awaited Pre.

Still, RIM shares initially slumped in extended trading after the report was released, when the company's projections for the current quarter failed to match expectations of the most optimistic Wall Street analysts. "The hopes were so high that they were impossible to meet," says Peter Misek, an analyst at Canaccord Adams. "Even a super-athlete can't jump over a 4-meter bar…The expectations just got out of hand." RIM said it expects to sell 8.1 million to 8.7 million devices, adding 3.8 million to 4.1 million subscribers, in the quarter ending on Aug. 29. Both figures were less than some of the more optimistic analysts had predicted.

RIM also called for sales of $3.45 billion to $3.7 billion this quarter and expects gross margins, which measure profitability, in the 43%-44% range. Those forecasts were in keeping with analysts' average projections. Shares of RIM initially fell 7% but recovered to $76.06. In regular trading the stock had slipped less than 1%, to $76.55.

"Spectacular" products ahead

RIM Co-CEO Jim Balsillie allayed concerns in a conference call with analysts, saying he expects a surge in the second half of the calendar year and that RIM plans to release "spectacular" products in coming months. In the first quarter, RIM sold 7.8 million BlackBerry devices and added 3.8 million subscribers.

The news came a day after RIM announced a new BlackBerry model, the Blackberry Tour, available in the coming weeks through carriers including Sprint Nextel and Verizon Wireless, which is owned by Verizon Communications and Vodafone. The report also came a day before RIM rival Apple is to launch the latest iteration of the iPhone, the iPhone 3G S.

Fancy phones come at a price, and in RIM's case, that puts pressure on margins. RIM said first-quarter margins were 43.6%, an improvement of nearly four percentage points over the quarter ended in February, but still down from the 50.7% gross margins of a year earlier.

The drop in margins came as RIM was gearing up for the launch of the BlackBerry Storm, a touchscreen device meant to compete directly with the iPhone. It was also prepping for the launch of the BlackBerry Bold, with AT&T. Both cost more to produce than earlier iterations of the BlackBerry, eating into margins.

Now the company says it expects gross margins to remain in the 43%-44% range. "I don't think they're going to get back to the 50% range anytime soon," says Matt Thornton, an analyst at Avian Securities. "They're going to launch a lot of new products in the coming year and there will be growing pains that come with that. And some of those products will be more expensive 3G products. We may continue to see some pressure on those gross margins."

Hesseldahl is a reporter for BusinessWeek.com.