Updated at 3:30 p.m. PDT with information from the conference call.
BlackBerry maker Research In Motion on Thursday said it sold fewer BlackBerry phones than analysts had expected and that the company's quarterly earnings were hurt by a legal settlement.
Even though RIM still saw strong sales of BlackBerrys, the news sent the company's stock price tumbling in after-market trading. Many are now wondering if RIM's disappointing sales are an indicator of a wider smartphone slowdown or if the news is an indication that the company is losing its edge in an increasingly competitive market.
RIM's co-CEO, Jim Balsillie, said the company is still in very good shape.
"This stuff (smartphones and mobile applications) is going much more mainstream," he said during the conference call. "And we are teed up to go much more mainstream. If this crosses over, as I think we are doing, we are in a good position and a very prosperous position."
He told investors and analysts that they shouldn't look too deeply into the sales numbers for hidden indications of a market slowdown. And despite a lackluster forecast for the next quarter, he said sales are set to explode in the long term.
"I appreciate looking for trends," he said. "But I don't think you should extrapolate too much over a little bump here or there."
Balsillie said earnings fell 4 percent in the second fiscal quarter due in large part to charges associated with a legal settlement.
For the quarter that ended August 29, the company said it earned $475.6 million, or 83 cents a share, compared to profits of $495.5 million, or 86 cents a share, for the same period a year ago.
What really hurt the company's profits was a charge of $112.8 million related to the settlement of a patent dispute with Visto. Excluding this charge, RIM said it would have earned $588.4 million, or $1.03 per share for the quarter.
Revenue rose to $3.53 billion from $2.58 billion a year earlier. Analysts had expected earnings of $1 a share on revenue of $3.62 billion, according to Thomson Reuters.
RIM also reported that it shipped slightly fewer devices than what analysts had expected. The company said it shipped about 8.3 million BlackBerry devices during the quarter, adding about 3.8 million new subscribers. Analysts had expected the company to add about 4 million new subscribers on shipments between 8.5 million and 8.6 million.
RIM said it expects revenue of between $3.6 billion and $3.85 billion for the third fiscal quarter that ends November 28. And it expects earnings per share to be between $1 and $1.08.
These forecasts are slightly lower than analysts' third-quarter revenue of about $3.9 billion. And they wanted to see RIM add 4.3 million new subscribers instead of the 4 million to 4.3 million new subscribers the company predicts.
Although Wall Street was disappointed in RIM's results, the fact remains that the company is still growing handset sales. In fact, sales are up about 40 percent compared to a year ago. But because RIM has been known to have even higher growth rate, some analysts are disappointed with these figures and are punishing the company's stock, which had been up earlier on Thursday in anticipation of the company's earnings news. After the market closed, shares were down 10 percent or more.
So the big question remains: what do RIM's results mean for the rest of the industry?
RIM leads the market in smartphone sales in the United States. But the company has many competitors nipping at its heels., especially its new iPhone 3GS, introduced in June. And there are new Google Android phones from HTC and Motorola coming to market soon.
Even the Palm Pre did relatively well during the second quarter, despite the fact that it was being exclusively sold on Sprint Nextel, the third-largest wireless operator in the country, which happens to continue losing subscribers every quarter.
So it's quite likely that sales of smartphones will continue to climb, as Balsillie predicts. But he admitted during the call that the challenge the company faces is in executing its strategy. This means making sure that RIM's latest products get out the door on time.
"I really like our strategy," Balsillie said. "I know we are doing all the right things. But we have a lot of execution risk...And who knows what's going to happen."
For his part, Basillie says the company is well-positioned for the upcoming holiday season with new phones such as the BlackBerry Tour and the latest BlackBerry Curve, which were introduced this summer. Analysts also expect RIM to launch the next version of its touch-screen BlackBerry Storm on Verizon Wireless before the end of the year.