By Hugo Miller
April 13 (Bloomberg) — Research In Motion Ltd. Co-Chief Executive Officer Jim Balsillie said the BlackBerry maker is reducing supply costs as surging growth provides him with leverage to press for bargains during the recession.
“Being a strong growth company in a challenging environment makes you an important customer,” Balsillie said in an interview at his office in Waterloo, Ontario. That is probably helping RIM to elicit better terms from the companies that make equipment for its BlackBerry phones, he said.
Shrinking expenses, coupled with fresh sources of revenue such as the App World application store, may help the device maker bolster profit margins and thrive in the worst global recession since World War II. RIM’s partner carriers have offered discounts on the Storm and other new models to attract customers reluctant to spend as they wait out the slowdown.
This month, RIM said gross margin, the percentage of sales left after production costs, will expand this quarter, signaling the company is absorbing the impact of introductory offers. Before that, the stock had dropped about 12 percent over two months as investors fretted about the effect discounts would have on margins, following RIM’s February prediction that fourth-quarter profit would come in at the low end of targets.
“Their volumes are increasing by leaps and bounds, which has to increase their purchasing power,” said Nirav Parikh, senior vice-president and equity analyst at TCW Group Inc. in Los Angeles. “The margin step-down has already occurred and the stock has been punished duly.” TCW has about $110 billion worth of assets under management, including RIM shares.
RIM fell 18 cents to $64 at 4 p.m. New York time in Nasdaq Stock Market trading. Apple Inc., maker of the rival iPhone, climbed 65 cents to $120.22.
RIM’s five biggest suppliers account for almost 90 percent of its production costs, according to data from relationship- mapping software Connexiti. Electronics manufacturer Elcoteq SE makes up a third of RIM’s costs and relies on the company for 20 percent of annual sales.
“Markets are getting more difficult and everyone is trying to minimize costs,” said Elcoteq spokesman Carsten Barth. “We obviously always try to help our customers because if they are successful, we are successful.” He declined to comment specifically on RIM.
Elcoteq, based in Luxembourg, is joined by Jabil Circuit Inc., a electronics maker, and by chipmakers Marvell Technology Group Ltd., Multi-Fineline Electronix Inc. andQualcomm Inc., according to Connexiti. Anaheim, California-based Multi- Fineline, which makes flexible circuit boards for RIM, also has experienced “pricing pressure” and is pushing back on its own suppliers, spokesman Lasse Glassen said.
“Our job is to continually offer our customers globally competitive pricing,” saidBeth Walters, a spokeswoman for St. Petersburg, Florida-based Jabil. She declined to comment on the company’s relationship with RIM. Marvell spokeswoman Diane Vanasse declined to comment, as did Qualcomm spokeswoman Emily Kilpatrick.
RIM and rivals such as Cupertino, California-based Apple are vying for subscribers as the pool of spending dwindles. Sales growth of smart phones, handsets with Web and e-mail functions, will slow to 3.4 percent this year, about one-sixth the pace of 2008. The market overall probably will drop 8.3 percent, according to research firm IDC.
“BlackBerry adoption continues to be strong in light of tough macroeconomic headwinds,” said Shaw Wu, an analyst at Kaufman Bros. LP in San Francisco, who rates the stock “hold.” That shows the appeal of RIM’s e-mail technology, he said.
Sales in the three months through February jumped 84 percent from a year earlier, bolstered by premium models like the Storm and the Bold. Those should help fatten margins as the relative costs of developing and introducing those phones shrinks, Balsillie said.
Keeping profit margins high will be difficult given how fickle consumers constantly expect new devices, said Jonathan Goldberg, an analyst at Deutsche Bank Securities Inc.
“To keep consumers upgrading they have to stay on the Hit Parade or innovation treadmill indefinitely and that may prove to be beyond RIM’s abilities,” he said. “We see these issues creating margin pressure over time.” San Francisco-based Goldberg rates the stock “hold.”
RIM, which is sponsoring this summer’s worldwide tour by Irish rockers U2, expects its partners including U.S. carrier Verizon Communications Inc. will continue to offer discounts to attract customers, Balsillie said.
“There’s no question promotions really help,” he said.
The company also expects to generate more cash through App World, which opened last week, and now offers about 1,000 programs. Application developers get 80 percent of the royalty from every download, while RIM will split the remaining 20 percent with its carrier partners.
New revenue sources like that and the company’s phone- ordering partnership with Ticketmaster Entertainment Inc. “are going to come in to enhance” gross margin, Balsillie said. The company projects a margin of 43 percent to 44 percent this quarter.
Matt Thornton, an analyst at Avian Securities in Boston, said he expects App World to be a similar success to Apple’s App Store even if it hasn’t generated the same hype.
“This is very high-margin revenue. It won’t be a massive contributor to the bottom line in the near term but is a nice profit stream,” said Thornton, who rates the stock “positive.”
The Web site’s offerings include Internet-based radio, stock-quote software and Livestrong, a calorie-tracking program linked to cyclist Lance Armstrong’s cancer fundraising foundation, said Balsillie, 48.
RIM plans to push its consumer business, which now accounts for half of totalsales, as aggressively as it drove its enterprise business in the past, rather than worrying about striking an optimum balance between the two, Balsillie said.
“You’re just full on,” he said. “Pedal to the metal.”
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