The BlackBerry maker said that it would come in at the low end of its earnings estimates despite strong subscriber growth.
Research In Motion, maker of the popular BlackBerry smartphone, warned investors Wednesday that it will likely hit the low end of its earnings forecast for the fourth quarter.
The news comes despite the fact that RIM also predicts strong subscriber growth for the quarter. RIM said Wednesday that it will add about 3.5 million new subscribers by the end of the quarter. This figure is about 20 percent higher than the 2.9 million new subscribers the company said it had expected on December 18.
So what does this mean? Analysts believe the fact that RIM is growing subscribers but slipping in terms of revenue means that the company is likely sacrificing profit margins to win new customers. RIM also said its gross margins will be at the low end of the range it gave previously. Gross margins are expected to be around 40 percent to 41 percent compared to about 45.6 percent in the third quarter.
RIM is facing stiff competition from other phone makers, especially Apple. The new iPhone 3G device went on sale last summer, and Apple sold about 6.9 million new iPhones worldwide during the third quarter. Shipments slowed a bit in the fourth quarter, but were still strong. The company sold 4.3 million new iPhones.
RIM launched its own touch-screen phone, the Storm, in November to compete head to head with the iPhone. The device is sold exclusively through Verizon Wireless. Feedback from consumers so far has been lackluster, as many have complained that the device's software and hardware perform sluggishly.
Maynard Um, an analyst with UBS, said in a research note that RIM's lowered earnings expectations might also suggest that consumers are returning the Storm for the older and less expensive Curve.
James Faucette, an analyst at Pacific Crest Securities, told Business Week that the margin pressure appears to be coming from hardware. The Storm and the BlackBerry, another phone launched this fall, are expensive for RIM to make. This means that RIM makes lower gross margins on these devices.
Market research firm iSuppli recently took apart the BlackBerry Storm and priced its components at about $203. Verizon sells the device for $199 with a two-year contract. Another iSuppli report says the Blackberry Bold's hardware cost is about $158. Meanwhile, the iPhone costs $174.
The news might also indicate that the smartphone market may not be as resilient to the recession as some experts had thought. Market research firm IDC said earlier this month that smartphones are likely to be the bright spot in an otherwise dismal cell phone market. But the high prices of these devices might make it a difficult sell to cash-strapped consumers.
RIM's fiscal fourth quarter ends February 28. And the company reports quarterly results April 2.