Blackberry Storm Batters Research In Motion

The BlackBerry Storm is causing Research In Motion (RIMM Quote) to take on water.

The hottest phone in Verizon's (VZ Quote) lineup is luring customers in for better-than-expected subscriber growth, but the sales seem to be cooling RIM's profits and evaporating its margins.

RIM cut its earnings guidance to around 83 cents a share, below the 87 cents previously forecast and under the 85 cent target held by analysts. The BlackBerry maker says sales for the quarter ending Feb. 28 will be about $3.4 billion, in line with expectations.

But the real shocker is that despite adding as many as 3.5 million new subscribers -- 20% more than expected in the quarter -- gross margins would narrow to 40%.

In less than six months, RIM's gross margins have slimmed from 50.7% to well below the mid-40% range the company had been expecting. Thinner margins on steady sales means costs are rising, and in RIM's case, the costs are rising faster than the company predicted.

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Fears that the warning Wednesday is a sign that RIM's once lucrative high-margin business user base is rapidly eroding as the company enters the consumer market helped send shares down 16% at midday.

Analysts were quick to blame the aptly named Storm for RIM's rocky ride. The new touchscreen phone, which was introduced Nov. 21, hit the 1 million-sold mark at the end of January as Verizon customers flocked to the Apple (AAPL Quote) iPhone challenger.

To keep supplies up with demand, RIM has had to strike deals with its manufacturing partners to insure quicker production. These high-priority requests are also higher-cost, according to one Wall Street analyst who is familiar with the production push. RIM has also had to pay for rush shipments of parts to keep production from slowing. These priority shipments also incur more costs, the analyst says.