By Vivek Shankar
Sept. 26 (Bloomberg) -- Research In Motion Ltd., maker of the BlackBerry e-mail phone, fell as much as 21 percent in late trading after competition from Apple Inc.'s new iPhone curbed its profit forecast for the second quarter in a row.
Earnings will be 89 cents to 97 cents a share in the third quarter, hampered by the cost of building more advanced devices and selling them at lower prices, Research In Motion said yesterday. Analysts in a Bloomberg survey had predicted earnings of 99 cents on average for the period, which ends Nov. 29.
The company is battling a challenge from the iPhone and other competitors with four new models, boosting development and marketing costs. The iPhone's $199 price tag may limit how much Research In Motion can charge for its latest products, making them less profitable than older models. Gross margin, or the percentage of sales left after production costs, will drop to 47 percent in the current period, from 50.7 percent last quarter.
``The gross margin is a nightmare,'' Peter Misek, an analyst with Canaccord Adams Inc. in Toronto, said in an interview with Bloomberg Radio. ``We certainly didn't expect that.''
Research In Motion, based in Waterloo, Ontario, fell as much as $20.49 to $77.04 in late trading yesterday. If that decline holds up today on the Nasdaq Stock Market, it will be the biggest one-day drop since January 2001.
Two in a Row
While Research In Motion's sales forecast met analysts' projections, the profit missed estimates for the second straight quarter. The company also has had to delay the U.S. release of one of its new phones, the BlackBerry Bold, until October. That device was designed to compete directly with the iPhone.
Handset makers are racing to establish themselves in the booming market for so-called smart phones, devices that manage e- mail and the Web. Shipments of the products may more than double to 288 million units in 2009 from last year, according to Stamford, Connecticut-based research firm Gartner Inc.
Research In Motion plans to increase its market share over the next few quarters, even if that means reducing profits in the short term, co-Chief Executive Officer Jim Balsillie said yesterday on a conference call. Gross margin in the fourth quarter may drop further, the company said.
``Does it change the profitability structure of the company? That's the concern,'' said James Faucette, an analyst with Pacific Crest Securities in Portland, Oregon. He recommends buying Research In Motion shares, which he doesn't own.
Expensive Features
Research In Motion is working on a touch-screen phone and an update to its Curve consumer model, in addition to the Bold and a flip-phone version of its BlackBerry Pearl, according to Mike Abramsky, an analyst at RBC Capital Markets in Toronto.
Some of the new phones are more expensive to make because they have more features, Balsillie said. The Bold, for example, has a brighter screen.
``It's difficult to pass on all these costs to customers,'' Balsillie said.
Sales this quarter will rise to as much as $3.1 billion, the company said yesterday. That topped analysts' average estimate of $2.96 billion.
Second-quarter net income rose 72 percent to $495.5 million, or 86 cents a share, from $287.7 million, or 50 cents, a year earlier, the company said. Analysts predicted a profit of 87 cents on average for the period, which ended Aug. 30. Revenue climbed 88 percent to $2.58 billion, compared with a projection of $2.59 billion from analysts.
Higher Costs
Sales and marketing costs almost doubled in the quarter, rising to $379.6 million, while research and development spending more than doubled, climbing to $181.3 million.
``The cost of selling and launching all these platforms is much higher than what people thought,'' Pablo Perez-Fernandez, an analyst with Global Crown Capital in San Francisco, said in an interview. He recommends buying the shares, which he doesn't own.
Research In Motion added 2.6 million users last quarter, compared with a 2.64 million estimate from Perez-Fernandez. The company expects to add 2.9 million users this quarter, missing Perez-Fernandez's projection of 3.09 million. Research In Motion currently has about 19 million BlackBerry users.
The company, which once focused mainly on corporate users, is offering cheaper phones to reach customers outside the business world. In the past quarter, Verizon Wireless reduced the price tag on the BlackBerry Pearl to $79 from $99. About 40 percent of Research In Motion's users are now consumers, while the rest are business customers.
Apple, based in Cupertino, California, is attacking the market from the opposite direction. After winning over consumers, it's going after corporate users with features such as access to office e-mail.
Apple introduced the iPhone 3G in July, selling a million units in the product's first three days. The original iPhone, which ran on a slower network, debuted in June 2007 at a price of $599.
Research In Motion increased its share of the U.S. smart- phone market to 53.6 percent in the second quarter from 44.5 percent in the first, according to Framingham, Massachusetts- based research firm IDC. Apple's phone sales slowed in the quarter as it prepared for the July launch of the iPhone 3G.
To contact the reporter on this story: Vivek Shankar in San Francisco at vshankar3@bloomberg.net
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