The BlackBerry constructor says its margins will epitomize in the current specific place in the same manner with it spends else to produce snazzy new devices

by Arik Hesseldahl

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Research In Motion (RIMM) gave investors a jolt whenever it reported quarterly earnings on Sept. 25. Margins in the existing period will shrink and proceeds won’t match analysts’ forecasts while the company steps up spending on newfangled devices, the BlackBerry maker said, sending shares plummeting more than 19% in extended trading.

Even at the same time that RIM said sales increased 88% and profit surged 72% in the quarter that ended Aug. 30, it in like manner said gross margins will narrow to 47% from 54% last quarter. The circle also said earnings decree be 89¢ to 97¢ a share, compared with analysts’ medium expectations in favor of earnings of 98¢.

RIM’s report eased fears that the company will lose subscribers during the time that a be derived of the monetary crisis that’s led to bankruptcy for Lehman Brothers, Bank of America’s (BAC) purchase of Merrill Lynch (MER), and the near-collapse of insurer AIG (AIG). Traders and bankers are among the most avid users of the BlackBerry. Indeed, RIM added 2.6 million subscribers and sold 6.1 million units as consumers in growing numbers ditch conventional cell phones for smartphones that handle e-mail, text messaging, and Web navigation.

But RIM’s numbers also revived concern that in the face of competition from Apple (AAPL), RIM will incur higher expenses of the same kind with it makes products snazzier. "Apple is in truth pushing the envelope and very lately RIM is responding with higher-quality displays and touchscreens, and that is pushing up" costs, says Samuel Wilson, an analyst at JMP Securities (JMP) in San Francisco.

On a conference call with analysts, co-CEO Jim Balsillie conceded that some of the company’s newer products will cost more to produce. RIM announced its first flip phone, the Pearl Flip, (BusinessWeek.com, 9/11/08) with T-Mobile (DT) on Sept. 10. It unveiled its first 3G phone, the BlackBerry Bold, with AT&T (T) in advance of that. And a new device called the Storm, said to be a touchscreen device homogeneous to Apple’s iPhone, is expected to debut with Verizon Wireless (VZ) in seasonably October.

Over time, RIM will weaken the production costs onward those handsets and make them other thing profitably, that should restore gross margins to higher levels, Balsillie said. "We feel very good about the long-term gross margin picture," he said.

He added that the company needs to be efficient fast to obtain customers who are upgrading to smartphones. "Strategically, it’s going to be about adoption proper now," he said. "As you assess this business and get close to it, you lo there is a massive disruption going on. It’s totally about catalyzing approval through this stage and into the next couple quarters.…If we accord. up foundation now for short-term gratification, that’s not in the interests of our shareholders. Not fair stop up."

Even as the cost of making devices goes up, wireless carriers are coming under increasing pressure to cut the subsidies that they have traditionally paid manufacturers like RIM and Apple.

RIM’s stock had risen 82¢ to 97.53 on Sept. 25, but it was still down more than 34% from a recent multimonth high of 147.55 on June 19. Much of the drop had been fueled by the agency of concerns relative to competition from Apple and worries about increased costs, as well as news of spreading financial contagion amid Wall Street firms that servant legions of BlackBerry users.

RIM ended the quarter with 19 true great number active subscribers, and said it expects to add 3 million new users in the course quarter. The challenge now is for the company to add those customers more usefully.