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RIM shares take beating on lowered guidance

It isn't the turnaround Research In Motion Ltd. was looking for.

April was supposed to mark the beginning of RIM's big comeback. Armed with a new product in a new category (the BlackBerry PlayBook tablet computer) that runs on vastly improved software, the Waterloo, Ont., company looked poised to wrestle the attention away from its main competitors in the mobile market, Apple Inc. and Google Inc.

Instead, a profit warning from the company this week – which further lowered already weak guidance issued just a month ago – has shone the spotlight on RIM for all the wrong reasons. On Friday, the day after RIM said its earnings per share this quarter will be at least 7-per-cent lower than its previous estimate, its stock was savaged and several analysts turned sour on the company. In Toronto, RIM shares fell 14.4 per cent, hitting their lowest level since last September.

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The primary reason behind RIM's lower forecast is the company's transition to a new line of high-end smart phones, which RIM is expected to unveil during its annual conference in Orlando next week. Those products are delayed by a matter of weeks. RIM said Thursday that it will regain those sales in the rest of the fiscal year, and hasn't lowered its full-year profit guidance.

But several analysts decided they didn't agree with RIM's contention that it was just a temporary setback.

Mike Abramsky, an analyst with RBC Dominion Securities and previously one of RIM's biggest boosters, cut his price target for RIM shares from $90 to $55 (U.S.). At least three other analysts also chopped their outlook on RIM shares. In a note to clients, Bernstein Research analyst Pierre Ferragu wrote that RIM management "recognized BlackBerry was suffering from competition in the U.S. for the first time last night."

The overwhelmingly negative swing in sentiment now puts immense pressure on RIM to deliver something special during the company's annual BlackBerry World conference next week. The company is expected to show off a number of new devices and services, including phones with more responsive touch screens, better graphics performance and an upgraded operating system.

In addition, RIM is also expected to release more information about an improved version of the PlayBook that, unlike the current model, comes with cellular connectivity.

All of that, RIM executives hope, will help the company regain its lost momentum in North America.

RIM's sales in overseas countries continue to grow briskly. But the market for smart phones in the U.S., which represented nearly 40 per cent of RIM's sales last year, has become even more difficult to predict. It is unclear whether consumers will opt for expensive, ultra-powerful phones when they can instead purchase a cheaper phone and a tablet computer. And those who do go for high-end phones are increasingly opting for Apple's iPhone or for one of a variety of phones that run on Google's Android system.

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The uncertainty, coupled with a delay in getting new handsets to the market, contributed to RIM's lower guidance.

"I think they were just caught a little flat-footed in terms of how people are making decisions in this market," said Joe Compeau, a lecturer in information systems at the Richard Ivey School of Business in London, Ont. "Nobody knows how this is playing out and the sales are all over the map."

To capture consumers' and investors' attention again, RIM must offer a device that represents a significant departure from its traditional smart phones, Mr. Compeau said. "They have got to come out with a phone that doesn't look like any other BlackBerry they've ever developed."

But it may well be that, barring a truly revolutionary product announcement, there's little RIM can do to counter negative analyst sentiment, in large part because the entire mobile device market is in a state of what RIM co-CEO Jim Balsillie called "hyper-turbulence."

"This isn't about new products and new demos. This is about a whole competitive marketplace," said Deloitte technology analyst Duncan Stewart. "The sector is far less predictable than it used to be."

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