Research in Motion (NASDAQ:RIMM) has historically maintained a strong profit margin of 40% on its BlackBerry smartphones. However, over the past two years, its margin has slipped slightly to 37% due to increased competition from Google’s (NASDAQ:GOOG) Android-based smartphones, Motorola Mobility (NYSE:MMI), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) in the rapidly expanding smartphone market.

Rising input costs and declining smartphone prices are going to keep the pressure on BlackBerry’s margins for the time being. In its updated guidance for fiscal year Q1 2012, RIM expects the smartphone sales to be at the lower end of the range of the 13.5-14.5 million units sold that it guided in March,^[1] and this will likely result in slower market share growth. RIM also expects a shift in the mix of devices shipped towards handsets with lower average selling prices. Both of these factors will negatively affect its profitability.

RIM has an opportunity to rebound with Blackberry 7 OS, its latest operating system for its smartphones and the two new phones based on the upgraded OS. While we estimate BlackBerry’s gross profit margin will decline to under 28% by the end of our forecast period, Trefis members predict a smaller decline to just under 33%, implying a potential upside of ~10% to our price estimate for RIMM’s stock.

We currently have a Trefis price estimate of $68 for Research in Motion’s stock.

Declining BlackBerry Prices, High Input Costs

RIM has had to constantly reduce BlackBerry prices due to increasing competition. We expect the pricing to decline from $345 in 2009 to $283 in 2011, and further to $195 by the end of our forecast period. When RIM introduced BlackBerry Storm to match up against the iPhone, its manufacturing costs were higher than its other BlackBerry products as well the iPhone.

RIM Pins Hopes on BlackBerry 7

The Blackberry 7 has a few improvements over preceding versions like faster performance for touch-screen navigation, web browsing, video and gaming and support for Near Field Communication (NFC) technology. (See Can BlackBerry 7 Revive RIM’s Smartphone Push?)

A strong OS is crucial for the success of smartphones, and the powerful iOS with its popular browser experience and apps ecosystem has made iPhone the most desired smartphone to date. If RIM can do the same with BlackBerry 7, this can help push higher its market share higher and hopefully stem the slide in its profit margins.

Our complete analysis for Research in Motion.

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