By Brian Graney (TMF Panic)
June 30, 2000

Summary: The jury's still out on whether Research In Motion's spend now, profit later strategy will work. However, spending has become the toll that many of today's high-growth companies must pay if they want to become tomorrow's industry leaders.

Investors in wireless mobile communications products developer Research In Motion (Nasdaq: RIMM) had a few things to scratch their heads about this morning as the company posted its fiscal Q1 results. For almost every positive, there seemed to be an equal and opposite negative. Call it Newton's Third Law of the New Economy.

As expected, the company that brought the world the BlackBerry wireless e-mail device reported breakeven results for the period compared to earnings of $0.03 per share last year. Top-line growth was 67% year-over-year, but only 5% sequentially. However, the uninspiring sequential revenue growth masked the market penetration gains made by BlackBerry-related products. Toying with the firm's revenue mix figures, BlackBerry revenues posted a 28% quarter-to-quarter gain on a dollar-basis, rising to $13.55 million from $10.58 million.

In and of itself, the earnings drop was not a surprise. In April, the company guided investors to expect a jump in marketing and research expenses in coming quarters as it attempts to defend and expand upon the still-small beachhead it has built for itself on the wireless data front. True to its word, selling, marketing, and administrative expenses on a dollar-basis more than doubled from the previous quarter, while R&D costs ramped up 22%. But on the bright side, some of the impact was eased by a gross margin that rose to 45% from 40% last quarter.

The results sent the sell-side analyst community zigging and zagging as well. Seeing the springtime forecasts in black-and-white for the first time, a pair of analysts reined in their price targets and forward earnings estimates, while two other sell-siders picked today as the day to start coverage of the company with rather optimistic ratings. But even though increased spending is putting the hurt on the bottom line in the short-run, the positives outweighed the negatives this morning and RIM's stock managed a nice 10% gain. However, the jump fell short of making up for all of the pre-earnings jitters, and RIM's stock is set to finish the week down around 25%.

That the market can have wishy-washy tendencies in the short-term is nothing new, but it's something that RIM investors are seeing up close right now. The main reason that this company's stock is being pushed around like a Yankee fan at Fenway Park has to do with the fact that the jury is still out on its current spend-to-grow strategy. In general, many investors have soured on companies that sacrifice short-term profits for better long-run strategic positioning. Witness the recent intensifying of the long-standing Amazon.com (Nasdaq: AMZN) back-and-forth.

However, for a company like RIM that is operating in a technology scrum such as today's wireless data transfer world, spending now to grow later is probably the rational choice. Whether its through acquisitions, stepped up internal development efforts, or even outsized stock option grant programs to attract the right people, companies trying to become the leaders of tomorrow in high growth, cutting edge industries will always confront higher spending than firms in mature sectors. Like Newton's laws of the physical world, that is an incontestable law of the business world.

Your Turn:
Do you think RIM's spend today, grow tomorrow strategy will yield high returns down the road? Post your thoughts on the RIM discussion board.

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