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In its second quarter, Research In Motion (Nasdaq:RIMM) missed earnings by a penny and lowered guidance for the next quarter sending the shares down sharply, illustrating the perils of growth stock investing and high expectations stocks.

The company reported fiscal second quarter diluted earnings per share of 86 cents and revenue of $2.58 billion on September 25. Guidance for the next quarter was lowered to a range of 89-97 cents per share. Research in Motion added 2.5 million subscribers to its subscription base, bringing the total BlackBerry subscribers to 19 million. (For more about growth stocks, read Great Expectations: Forecasting Sales Growth.)

Q3 Wrap Up
The company updated several metrics for the third fiscal quarter of 2009:
  • Revenue of $2.95-$3.10 billion.
  • Net subscriber account additions 2.9 million.
  • Earnings per share of 89-97 cents.
  • Gross margin of approximately 47%.
While some companies and investors would kill for revenue growth that was up 88% year over year and 15% sequentially; and earnings per share that were up 36 cents from 50 cents in the same quarter last year, it was not enough for the company's shareholder base.

Investors in the company have been fraught with worries the last several months. Research In Motion sells a lot of product to enterprise or corporate customers, including the financial services industry. We all know the problems in that sector, and these companies' severe credit problems are limiting their ability to fund discretionary spending. During the conference call, the co-CEO and Director James Balsillie said that enterprise customers make up 58% of its subscriber account base. Management indicated that they were seeing "strong demand" heading into the second half of the year.

Cellular Competition
Another worry for investors is the extra cost the company is expected to spend to market the next generation of smartphones. Research In Motion currently has 17.4% of the global smartphone market, but is currently facing stiff competition from new models of smartphones from Apple (Nasdaq:AAPL) and now Google (Nasdaq:GOOG), which just released its first model last week.

The company has several new models that have recently been released or will be soon: The BlackBerry Bold, The Storm and The Pearl Flip Phone, which is marketed toward the 70% of customers who prefer a flip type structure on a cell phone. The company said during its conference call that selling, marketing and administrative expenses came to $380 million in the quarter, and that in the next quarter these expenses would be up 10-11%.

Margins Down
The guidance that the company gave for the upcoming quarter implies an operating margin of 25%, according to analysts on the call, which would be the lowest since the first quarter of 2005. Management did not sound convincing when asked if the company could return to recent operating margins of 31-32%. "I mean, I don't think that - I mean, I think that there's certainly ways that we can get back there," said Edel Ebbs, the vice president for investor relations for Research In Motion.

It has been a mixed season for technology stocks this earnings season. Dell Computer (Nasdaq:DELL) missed earnings last quarter due to "strategic pricing actions" according to Brian Gladden, Dell senior vice-president. This raised fears that the company's turnaround was stalling out despite the return of founder Michael Dell. Competitor Hewlett Packard (NYSE:HPQ) beat earnings and raised guidance last quarter due to the weaker dollar and stronger growth from non-U.S economies.

Bottom Line
Strong earnings and revenue growth was not enough for the shareholder base of Research In Motion as a slight miss in estimates, lowered guidance for next quarter and concern over increased marketing expenses sent the shares down over 25% by mid day Friday, September 26, from Thursday's close of $97.53.

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