RIM's revenue growth slows in Q2

RIM's growth is slowing as it faces new competition and enters new global markets.

Research In Motion Ltd. (RIM) on Wednesday reported lower than usual revenue growth in the second quarter of fiscal year 2006, just as the company prepares to face new competition and enter new markets.

The Waterloo, Ontario, company generated US$490 million in revenue during the quarter, which ended Aug. 27, 2005, up from $310.2 million in the same period last year. RIM's net income reached $111.1 million, or $0.56 per diluted share, compared with $70.6 million, or $0.36 per diluted share, in the previous year. Also, the company added 620,000 Blackberry subscribers.

The revenue results mark a 58 percent improvement on the same quarter last year. While such growth is impressive by many standards, the figure is lower than the consistently higher rate of growth the company typically achieves, said Elsa Lion, an analyst with Ovum Ltd. A combination of legal troubles and a gap between new products slowed down growth for the company during the summer, she said. For example, in the second quarter of fiscal 2005, ended Aug. 28, 2004, revenue grew 147 percent over the second quarter of the previous fiscal year.

But perhaps a more significant reason for the lagging growth is the company's increasing reliance on foreign markets. In its earnings statement, RIM blamed summer seasonality, particularly in Europe, for the impact on new subscriber additions. Sales in many industries often slow in Europe during the summer when many people take holidays. However, RIM's most important market traditionally has been North America. "The fact that holidays in Spain can affect RIM means they are really reliant on growth in Europe," said Lion.

That may indicate that RIM's market in its base of North America is becoming saturated and the company will face the risks associated with relying on success in new markets such as Europe and Asia. "It's a business in transition in the sense that it's going from a purely North American business to being a truly international business," Lion said.

RIM already offers products to many Asian countries but plans to launch in China by February, according to the company.

While RIM is well-positioned to continue to grow sales in new markets in addition to North America, particularly with a new line rumored to hit the market soon, it will face a slew of new competition. Products running on Microsoft Corp.'s Windows Mobile 5.0 operating system are just starting to come to market. Both Nokia Corp. and Telefonaktiebolaget LM Ericsson have recently introduced new push e-mail services. Other companies such as Visto Inc., Seven Networks Inc. and Intellisync Corp. also offer similar services.

Still, Blackberry is very entrenched in the market and users often have a very strong affinity for the product. Plus, each of the competitors including RIM is likely to have its own advantages and the market is likely to be able to support many of them, Lion said. "There is increasing competition but there are potentially enough customers out there to support it," Lion said.

Despite the slower revenue growth in the second quarter of fiscal 2006, RIM exceeded the consensus revenue expectation of $487 million from financial analysts polled by Thomson First Call. The company also met their consensus expectation for pro forma earnings per share of $0.61, which excludes certain one-time charges, including a provision for an inventory write-down and incremental warranty item, as well as a litigation expense.

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