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RIM needs a big quarter to win back investors

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CIOL Bureau
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CALIFORNIA, USA: Research In Motion will need strong shipment numbers for its latest quarter and a robust outlook for the current three months to dispel the growing naysayer sentiment that has hammered its share price.

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RIM won't get much immediate help from its latest smartphone, the BlackBerry Torch, which went on sale in the United States on August 12, giving it only a few weeks to show up in global unit numbers.

Investors will instead parse the Canadian company's guidance for clues to how well the device is faring ahead of a wider rollout.

"A lot of people are stepping back and trying to figure out -- given the timeline it's probably a tough call for this quarter," said Matthew Thornton from Avian Securities. "The overwhelming opinion is looking for evidence of cracks."

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The Canadian company is also expected to update the market on plans for a tablet device that will join a suddenly congested market chasing Apple's iPad. RIM has hinted that its tablet will make its debut some time this year.

The Torch, which couples a touchscreen with a slide-out keyboard and runs a revamped operating system, is designed to appeal to consumers, as well as Blackberry's core base of business professionals.

But analysts have been either mildly dismissive or only moderately excited by the new model. Morgan Stanley, which recently downgraded the stock, estimates RIM sold 80,000 Torches a week and shipped a total of 600,000.

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By comparison, Apple says it had 600,000 pre-orders ahead of its iPhone 4 launch and sold more than 3 million in the three weeks after its June launch.

RIM has hoped the Torch would help turn around the bearish sentiment surrounding the company but the device may have had the opposite effect.

The fading smartphone star no longer has a lock on its core audience, while it still lacks a runaway consumer success like the iPhone or the surging popularity of smartphones based on Google's Android operating system.

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"Whether they can compete against Apple, whether they can compete against Android, those are the two big issues," said Duncan Stewart, head of technology research at Deloitte Canada.

Corporations are increasing allowing employees to use their own smartphone rather than a company-issued BlackBerry, according to a Bernstein survey.

A Gartner forecast predicts the Android operating system -- used by a slew of device-makers including Motorola, Samsung, HTC and others -- will push RIM's OS from second place in rankings this year and challenge Nokia's dominance by 2014.

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RIM's "core strengths of security, keyboard, compression, and battery life have a diminishing appeal to both consumer and business customers in a brutally competitive and rapidly evolving smart phone market," BGC Partners analyst Colin Gillis said. He initiated coverage of the stock with a "sell" rating.

Still, RIM is expected to ship 11.8 million units and add 5 million subscribers in the quarter, according to a Reuters poll of 24 analysts. The average selling price of its devices is seen at $300.50, down from $344 two years ago, and its gross margin at 44 percent, compared with 50.7 percent. The declines reflect a growing reliance on sales of cheaper phones in emerging economies.

The company is expected to post earnings per share of $1.35 in the second quarter and $1.39 in the third quarter, according to Reuters data. Revenue is seen at $4.47 billion and gross margin at 43.9 percent, growing to $4.83 billion and slipping to 42.6 percent in the third quarter, which ends November 27.

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The estimates fit within company guidance for the quarter. Apple shipped 8.4 million iPhones in its last quarter.

"They're losing share in a market that is going to grow 50 percent-plus this year and probably 30 percent next year," Avian's Thornton said.

Another Nokia, Motorola?

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By the end of August, RIM stock had fallen 50 percent from a high in September last year -- a sharper fall than either Nokia, from a November 2007 peak, or Motorola, from an October 2006 peak, suffered when they were knocked from their perches.

Derivative traders are gearing up for a further decline. Some 5.6 percent of RIM's outstanding shares were borrowed, or shorted, at the end of August by investors expecting them to fall further, according to Nasdaq data. That's up from 4.6 percent a month earlier, while the options market is pricing in a 9 percent swing in the stock price come earnings day.

Dundee Securities analyst Dushan Batrovic compared metrics for the three device makers during their falls and found that RIM's fundamentals have so far held up relatively well.

While Nokia's unit shipments had fallen 3 percent and Motorola's plummeted 31 percent, RIM has increased shipments 35 percent. Likewise, device revenues are up 17 percent, versus a 27 percent fall for Nokia and a 36 percent decline for Motorola.

"Investors have punished RIM far more aggressively and far more quickly than we saw with either of Nokia or Motorola," he said.

Deloitte's Stewart echoed the sentiment and said a poor showing would only increase the clamor out of the stock.

"If their sales are dismal, and if their prices are down and their margins are down, then the bears have a very legitimate case," he said.

RIM is also fending off requests for access to encrypted data from India and some Middle Eastern countries, though that issue does not appear to concern analysts, who largely ignore it when discussing the challenges the company faces.

For the third quarter, 16 analysts polled by Reuters expect RIM to ship 12.5 million units and add 5.2 million subscribers, with an average selling price of $301.90 and a decline in gross margin to 42.5 percent.

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