Research In Motion Limited F3Q09 (Qtr End 11/29/08) Earnings Call Transcript

| About: BlackBerry Ltd. (BBRY)

Research In Motion Limited (RIMM) F3Q09 Earnings Call December 18, 2008 5:00 PM ET


Edel Ebbs - Vice President, Investor Relations.

James L. Balsillie - Co-Chief Executive Officer, Director

Brian Bidulka - Chief Accounting Officer


Maynard Um - UBS

Gus Papageorgiou - Scotia Capital

Rob Sanderson - American Technology Research

Chris Umiastowski - TD Newcrest

James Faucette - Pacific Crest Securities

Jeffrey Kvaal - Barclays Capital

Scott Coleman - Morgan Stanley


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Research In Motion third quarter fiscal 2009 results conference call. (Operator Instructions)

I will now turn the conference over to Edel Ebbs, Vice President of Investor Relations. Please go ahead.

Edel Ebbs

Thank you. Welcome to RIM's fiscal 2009 third quarter results conference call. With me on the call today is Jim Balsillie, RIM's Co-CEO, and Brian Bidulka, RIM's Chief Accounting Officer.

After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then review third quarter results, and I will discuss our outlook for the fourth quarter of fiscal 2009. We will then open the call up for questions.

I would like to note that this call is available to the general public via call-in number and webcast. A replay of the webcast will also be available on the website. We plan to wrap up the call before 6:00 p.m. Eastern this evening.

Some of the statements we will be making today constitute forward-looking statements within th meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws.

These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, CapEx, depreciation and amortization, investment income, earnings, earnings per share, channel inventory, seasonality, ASPs and foreign exchange related matters for Q4 and beyond, our expectations regarding RIM's near and long-term tax rates, as well as the timing and effect of proposed changes to Canadian tax laws, our estimates of the number of BlackBerry shipments, subscriber accounts, subscriber account additions, replacement device sales, prepaid plans and other non-financial estimates, our produce development initiatives and timing, developments relating to our carrier partners, new and expanding markets for our products, and other statements regarding our plans and objectives.

We will indicate forward-looking statements by using words such as expect, anticipate, estimate, may, will, should, forecast, intend, believe, continue and similar expressions. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties in assumptions we've made.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements including risks related to the restatement of our previously filed financial statements as a result of our internal review of historical stock option granting practices and regulatory investigations or litigation regarding those matters, risks relating to intellectual property, our ability to enhance our current products and develop and bring to market new products and services in a timely manner, our reliance on carrier partners, the efficient and uninterrupted operation of RIM's network operation centers, the occurrence or perception of a breach of RIM's security measures, our reliance on suppliers and third-party manufacturers, risks relating to possible product defects and product liability, risks associated with our expanding foreign operations, restrictions on import and/or use of RIM's products in certain countries due to encryption of our products, our ability to effectively manage our growth, general economic conditions, risks relating to competition, foreign exchange risks, and other factors set forth in the Risk Factors and MD&A sections in RIM's filings with the SEC and Canadian securities regulators.

We base our forward-looking statements on information currently available to us and we do not assume any obligation to update them except as required by law.

I will now turn the call over to Jim.

James L. Balsillie

Thank you, Edel.

We're pleased to report third quarter revenues of $2.78 billion, up 66% from the prior year, and adjusted earnings per share of $0.86, up from $0.65 per share in the same quarter last year.

Q3 results were in line with preliminary Q3 results reported on December 2nd, but lower than originally estimated primarily due to delays in the launches of certain new products, mix of product shipped in the quarter, and unfavorable foreign exchange rates. We believe that the weakness in the U.S. economy had an impact.

RIM shipped approximately 6.7 million units in Q3, with new products launched in the quarter accounting for a higher than expected percentage of the total. The rate of adoption of our new products in Q3 was faster than we anticipated, and we expect this to continue in the fourth quarter. As a result of the strong demand for these feature-rich products, particularly Storm, the volume of shipments expected in Q4 is higher than Q3, between 7.5 and 8 million units.

The rapid shift in product mix from earlier products to these newer products over a short period of time is causing our gross margin to decline faster than we expected, and the blended gross margin for Q4 is expected to be lower than Q3 at between 40% and 41%. This includes a foreign exchange impact of approximately 1% due to the continued unfavorable relative foreign exchange rates.

We're working closely with our suppliers, manufacturing partners and design teams to reduce costs in our new product platforms and we'll begin to see the effect of these later in the quarter and more fully as we head into fiscal 2010. Based on our current forecast for ASP and product mix, we expect a gross margin percentage for fiscal 2010 will be in the low 40s and that net earnings will continue to grow.

Q3 was a pivotal quarter for RIM, with an ambitious number of products launched. We added approximately 2.6 million net new subscriber accounts in the third quarter, and the total BlackBerry subscriber account base grew approximately 14%.

The growth of net subscriber account additions was tempered by a number of factors that impacted us in Q3. The impact of customers delaying purchases in anticipation of the new devices that were launched in the quarter was greater than we expected, and the actual timing of launches later in the quarter meant that we experienced this overhang effect for longer than we had originally anticipated in September when we set the guidance.

We also saw a high proportion of Bold sales in the United States go to existing customers rather than to net new subscriber accounts, which contributes to the higher-than normal replacement rate in the quarter. Outside of the U.S., Bold sales are split about half and half between new customers and upgrades. We also believe that the weakness in the U.S. economy began to impact net subscriber account run rates in October.

Approximately 60% of net additions in the quarter were non-enterprise and these customers now account for approximately 45% of our subscriber account base. The nonenterprise segment grew well across all geographies and growth in international markets accelerated following the launch of our new products into these regions.

We continue to add carrier and distribution partners around the world, and we now have approximately 425 carrier and distribution partners offering the BlackBerry solution in over 150 countries. The percentage of our subscriber base outside North America increased slightly in Q3.

We saw unprecedented marketing support from our carrier partners in the third quarter and Black Friday was once again a record day for BlackBerry device sell through and net subscriber count additions. This strength is continuing so far in December. Year-over-year percentage increase in net adds on Black Friday was even higher than this time last year, with many carriers achieving their highest level of BlackBerry net adds ever in a single day, despite the economic conditions facing consumers this year.

The response to the BlackBerry Storm launch with Verizon and Vodafone has been exceptional and demand for the devices is even stronger than we had anticipated. Verizon stores sold out initial shipments on the first day and while we have been replenishing supply regularly, we've not been able to meet demand for the product in North America.

On November 21st, the day Verizon launched the Storm, there were lineups at many Verizon stores, and we experienced the highest number of net new subscriber account additions in a single day in our history. The launch was extremely successful in Europe as well, with Vodafone estimating that they sold a Storm device every 13 seconds in the U.K. during the first weekend of sales.

Based on subscriber data so far, Storm is overwhelmingly attracting new subscribers and expanding the addressable market for BlackBerry products, with 75% of the sell through going to new customers in the United States and an even higher percentage going to new customers in Europe. Verizon witnessed unprecedented early demand for the Storm; with over half a million online registrations prior to the commercial launch of the device, and Storm continues to be Verizon's bestselling device.

Both Verizon and Vodafone ran intense marketing campaigns which drove strong demand for the product. This strong demand led to some challenges in ramping production fast enough to keep up in the early weeks of the launch. Volumes are now scaling well, and we anticipate that the supply constraint on Storm will be relieved in the coming weeks, with this product making up a large part of the shipment mix in Q4.

In addition to Verizon and Vodafone, Storm has recently launched with Telus and Bell in Canada with excellent early results.

The BlackBerry Bold was launched in the United States this quarter with AT&T. Prior to launch; AT&T ran a marketing campaign, including a tour with promotions by Michael Phelps and Carrie Walsh to raise anticipation for the Bold. Once Bold was available in early November, AT&T supported the launch with a multimillion dollar marketing and advertising campaign and hosted a number of gala launch events. This was followed by a 12-city enterprise and SMB road show, where business customers interacted with multiple ISVs, who had an opportunity showcase applications they had developed for Bold to potential customers.

The Pearl Flip 8220 was launched mid-quarter with many of our global carrier partners. The Pearl Flip has been particularly successful in Canada, with Rogers aggressively promoting the product and pricing it at approximately $49 and offering BlackBerry service for $15 on top of a voice plan. In the United States, T-Mobile launched the Pearl Flip at $149 and recently lowered the pricing to $99 heading into the holiday season.

We recently launched the Curve 8900 with T-Mobile Germany, Rogers, and Carphone Warehouse. The Curve 8900 has a new streamlined design as well as a high resolution display, a 3.2 megapixel camera with autofocus, flash, and video recording, as well as enhanced media player options. It has both WiFi and GPS, a fast 512 megahertz processor, and a new user interface, all in the thinnest full QWERTY BlackBerry form factor available.

TMobile Germany is offering the 8900 for as low as 4.5 euros with free [biz] e-mail service for the first six months. At Rogers, the 8900 is being offered at $179 with a three-year plan, and through O2 and Orange [inaudible] Warehouse for free with an 18-month plan.

This week Sprint Nextel started selling the 8350i Curve with push-to-talk for iDEN. In addition to being the newest BlackBerry smartphone to use iDEN technology for Nextel Direct Connect, the BlackBerry 8350i includes integrated GPS and WiFi, an internal antenna, a 2 megapixel camera, an advanced media player, as well as a large removable battery for optimal battery life. The 8350i is targeted at the many vertical markets where push-to-talk is a way of life and initial response to this product has been exceptional, with Sprint having a large number of preorders heading into this week's launch.

In EMEA we've seen strong growth in the BlackBerry platform and significant support from our carrier partners.

In addition to the highly successful Vodafone Storm launch, Vodafone had a strong quarter with Bold, particularly in Germany and the U.K. In France, we also had a record quarter with the Bold. Orange invested in a large outdoor campaign that focused on Bold's HDTV and multimedia capabilities, while SFR ran online contests to win a BlackBerry Storm. Additionally, T-Mobile Germany significantly increased customer sales of the BlackBerry solution by promoting the Bold and other products in an integrated marketing campaign.

The launch of the new products and increased carrier commitment during Q3 has stimulated market growth and we look forward to building on this momentum in the region.

Latin America continues to perform well and many carriers throughout the region are supporting BlackBerry products with marketing programs and promotions.

This market continues to be dominated by non-enterprise customers and many carriers are beginning to target the large prepaid market with the BlackBerry solution. There are multiple ways for customers to take advantage of prepaid BlackBerry service, through time or traffic-based service intervals or through a new product initiative called BlackBerry in a Box. This product allows a device to be provisioned for a certain minimum time period after which use you can customize the time intervals for renewal.

With 72% of the world's total mobile phone market being prepaid, we see this as a large future addressable market opportunity, and we expect to continue to customize offerings for these users. We now have over 10 carriers offering prepaid BlackBerry service, primarily in Latin America and Asia, and plan to expand this in the coming months.

In Asia, we're pleased to have recently launched a BlackBerry enterprise solution and the BlackBerry Bold with SK Telecom in South Korea. The initial target market will be multinational corporations as well as large domestic enterprises.

In China, we continue to engage in marketing programs with our partners to raise awareness and demand for the BlackBerry solution and BlackBerry enterprise server software is now available in the region.

In Australia Vodafone is offering the Storm for free with a two-year contract while Optus has rolled out a multi-city marketing campaign featuring the Pearl Flip.

In India, Tata has joined our other carrier partners in launching BlackBerry service and has been offering the Curve 8330 on the CDMA network while Airtel, Vodafone, and Reliance have all launched Bold.

We've seen significant strength in the new products, in particular Bold, throughout many regions of Asia, and we are now seeing healthy growth in the region. We continue to expand our presence in indirect distribution channels and are seeing continued success with existing and potential new retail partners around the world.

Best Buy took center stage this quarter by offering the option to preorder the BlackBerry Storm online and continuing to aggressively promote the product post-launch. In Vodafone's indirect channels, the BlackBerry Storm helped penetrate hundreds of locations in Ireland and the Netherlands that began offering BlackBerry products for the first time.

Q3 represented our strongest sell through to date at Carphone Warehouse, where the Bold, Curve, and Pearl have been given their own prominent display in stores and RIM's Life on BlackBerry campaign has been heavily promoted.

This quarter we are also pleased to have added Target as an indirect channel partner. Target will be trialing BlackBerry product placement in 30 of their stores in the coming months.

Q3 has been a busy time for our platform development teams and independent software developer partners. In late October we held the first annual BlackBerry developers conference in Santa Clara, where over 900 commercial and corporate developers from 27 countries took part in workshops, roundtable discussions, and sessions that highlighted the latest developments to the BlackBerry platform. In addition to workshops and keynotes, the BlackBerry Partners Fund also played an important role at the conference by awarding two grand prize winners with $150,000 investments for further development of their applications.

This quarter we also introduced several enhancements to our broad array of BlackBerry developer tools. The updated JD plug-in for Eclipse gives developers deeper integration with Eclipse and greater version support. BlackBerry MDS Studio 2.0 now supports collective development, mobile application controls, and GPS location and modification, and the updated BlackBerry plug-in for Microsoft Visual Studio adds the ability to integrate and customize mobile applications with core BlackBerry smartphone applications.

The ability to create better applications for the BlackBerry platform also extends to the Web with the introduction of new tools and technologies that will give web application developers the assets they need to build even more customized and interactive web applications for our products. As we continue to evolve the Web browsing experience for our devices, these new tools will allow for better leverage of our push capabilities, security, and network efficiency. Additionally, the BlackBerry Web signals will allow Web developers to push APIs that will enable content providers to push relevant and timely information to BlackBerry smartphones based on user's preset preferences.

Additionally, this technology is being used by news sources like Fox, Reuters and AccuWeather and other providers are actively testing the technology. We also recently announced the planned acquisition of Chalk Media, the developer of Mobile chalkboard, which is an award-winning application suite that enables rapid creation and secure tracked deployment of media-rich pushcasts to BlackBerry smartphones. Integration of this functionality into the BlackBerry platform is compelling both for enterprises to deliver training and other educational programs to employees and for content providers to easily deliver products and services to end users.

This BlackBerry developer conference also gave rise to two substantial distribution initiatives for BlackBerry applications. The BlackBerry application storefront, the new on-device application center, will facilitate wider reach for carriers and developers in reaching their target markets as well as making it seamless for customers to find and purchase new applications for their BlackBerry devices. Developers will be able to set their own price for the application and retain 80% of the revenues generated. We have already started to accept applications from developers and look forward to taking this initiative live.

We are also working closely with our carrier partners to provide them with an aftermarket ondevice opportunity through the BlackBerry Application Center. This unique offering will provide carriers with a way of customizing their portion of the Center and present a catalog of software downloads to their customers natively on the device. Some carriers have this capability already and have used it to offer Facebook and other types of software, and we plan to expand availability in the coming months.

Social networking continues to be an important offering on the BlackBerry platform. We are uniquely positioned to provide a native push-based experience to our customers. MySpace for BlackBerry smartphones launched in mid-November with 400,000 downloads the first week of availability and over 1 million by the end of the first month, which is an all-time high for both MySpace and RIM. We have also surpassed the 5 million mark for downloads of the Facebook application, which is double the number we had last quarter.

During Q3, BlackBerry Mobile Voice System added customers in diverse industries including manufacturing, health care, biotech, energy, finance, transportation, entertainment, and education. The core MVS value proposition of increased employee productivity and reduced wireless expense resonates well with enterprise customers during these challenging economic times. Allowing customers to mobilize their existing PBX equipment with rip and replace upgrades truly enables information technology groups to do more with less. RIM is uniquely positioned to continue to leverage our enterprise presence to enable fixed mobile conversions in a meaningful, inexpensive, and compelling manner.

Q3 was a quarter of transition for RIM, with a record number of new, feature-rich products launched and a dramatic expansion of our addressable market. The momentum we are experiencing with these new products and strong holiday sales are laying the groundwork for a record number of shipments in the fourth quarter and we believe that we have never been in a better position to take advantage of the sectoral shift to smartphones that is occurring in the market.

I will now turn the call over to Brian, who will review Q3 results. Brian?

Brian Bidulka

Thank you, Jim.

Revenue for the third quarter ended November 29th was $2.78 billion, up 8% from $2.58 billion in the previous quarter. Hand-held devices represented $2.25 billion or 81% of RIM's revenue during the quarter, in line with the previous quarter.

Total devices shipped in the quarter of approximately 6.7 million were up from 6.1 million in the prior quarter. Approximately 5.2 million new devices were activated in Q3, either for new customers or for replacements and upgrades, not including phone only sales.

Forward weeks of channel inventory at the end of Q3 were down slightly from Q2, and we expect channel inventory at the end of Q4 to be lower than at the end of Q3.

Device ASPs in the quarter were approximately $337. This was lower than originally estimated due primarily to the impact of the strong U.S. dollar on device ASPs outside the United States.

Service revenue was $361 million or 13% of revenue for the quarter, up $28 million from Q2.

Monthly ARPU declined slightly from the prior quarter.

Software revenue was $62 million or 2% of revenue.

Other revenue, including non-warranty repairs and accessories, was $107 million or 4% of revenue.

Gross margin for the third quarter was 45.6%, lower than originally estimated and in line with our pre-announcement. Primary factors leading to a lower than originally expected gross margin were unfavorable foreign exchange impact on device ASPs, which we estimate reduced gross margin by approximately 1%, and the mix of handsets shipped in the quarter, with new generation handsets making up significantly more of the total shipments than expected.

Operating expenses increased by 4% over Q2, slightly less in dollar terms than we forecast last quarter, but similar as a percent of revenue. This favorability was due primarily to a positive foreign exchange impact and lower marketing spend due to delays in product launches.

R&D spending was $193 million or 7% of revenue for the quarter, and selling, marketing, and administrative expenses increased slightly to $383 million or 14% of revenue. Included in operating expense is stock option expense of approximately $10 million.

Investment income in the third quarter was approximately $30 million. This was higher than normal due to a gain on an investment of approximately $13 million that was realized in the quarter.

The tax rate for the quarter was approximately 41%, substantially higher than our original forecast primarily due to the unfavorable impact of the appreciation of the U.S. dollar relative to the Canadian dollar. The impact of the unfavorable tax rate was approximately $0.14 per share and was primarily the result of the significant depreciation of the Canadian dollar in Q3 and its effect on RIM's U.S. dollar denominated assets and liabilities held by RIM's Canadian operating companies that are subject to tax in Canadian dollars.

There are proposed changes to the existing Canadian laws that will allow RIM to calculate its fiscal 2009 Canadian tax expense based on the U.S. dollar, which is RIM's functional currency. While we elected to adopt these rules in Q3, we cannot recognize the related tax benefit for U.S. GAAP financial reporting purposes until they are formally enacted. Once the new rules are enacted, the incremental tax expense in Q3 will be reversed, additional tax benefits from prior quarter in fiscal 2009 will be realized, and future tax rate volatility will be reduced. We expect the proposed rules to be enacted some time in calendar 2009.

Excluding the impact of foreign exchange on our tax rate beyond the guided 29% to 30% discussed in the last earnings call, adjusted net income for Q3 was $477 million or $0.83 per share diluted. GAAP net income was $396 million or $0.69 per share diluted.

Please note that the adjusted earnings per share does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. This non-GAAP financial measure should be considered in the context of RIM's GAAP results.

Weighted average diluted shares used in the EPS calculation for the quarter were $573.5 million. Actual shares outstanding at November 29th were 565 million. Total option outstanding at November 29th were 13 million.

RIM's balance sheet continues to be strong, with substantial cash reserves and appropriate working capital balances. During the quarter RIM generated approximately $566 million in cash from operating activities which was offset in part by capital asset additions of $196 million. Intangible asset additions of $135 million result in an increase in cash and investments of $249 million.

The total of cash, cash equivalents, short-term and long-term investments was $2.49 billion at the end of Q3 as compared to $2.24 billion at the end of the previous quarter.

From a working capital perspective, trade receivables were up from the prior quarter in line with the top line growth. DSOs were higher from the prior quarter at 59 days. This increase was due to sales that were weighted towards the latter part of the quarter, as well as longer payment terms for nonNorth American customers.

Inventory on hand was approximately $599 million versus $513 million in the prior quarter. Inventories continue to be primarily raw materials and semi-finished goods to support demand for BlackBerry products.

I will now turn the call over to Edel to discuss our outlook for Q4.

Edel Ebbs

Thanks, Brian.

Before I discuss our outlook for Q4, I'd like to remind everyone that these forward-looking statements reflect management's best current estimates and should be taken in the context of the risk factors listed at the beginning of the call and outlined in our public filings.

We're forecasting revenue for the fourth quarter of fiscal 2009 to be significantly higher than Q3, in the range of $3.3 billion to $3.5 billion. We have a high percentage of orders already booked for the fourth quarter, giving us confidence in our forecast in these less-certain economic times. However, we have widened the guidance range due to the difficulty in forecasting the impact of foreign exchange in the current volatile markets and ongoing uncertainty in predicting the impact of a weakening global economy beyond what we see today.

We expect hardware shipments to be between 7.5 and 8 million units at an ASP of approximately $370, up from $337 in the third quarter, due to the higher proportion of premium products expected in the mix. The growth in shipments will be driven by demand for new products, particularly Storm, as we continue our production ramp to meet the strong demand we are experiencing and to alleviate any remaining stock out situations. We are also forecasting large shipments of Bold, Curve 8900, and the iDEN Curve 8350i for Q4.

Software revenue in Q4 is expected to increase slightly.

We are target net subscriber account additions for Q4 of approximately 2.9 million. As Jim mentioned, December has been a very strong month for BlackBerry net subscriber account additions, with many carriers hitting their highest levels of net activations ever and with channel and marketing support for BlackBerry products at an all-time high.

We are forecasting a seasonal step down in the run rate of weekly net subscriber account additions in the latter part of December and into the new year, reflecting the typical buying patterns of the consumer segment as well as uncertainty about consumer and enterprise post-holiday spending. While there are a number of carrier programs running throughout the quarter, there is a higher concentration of them planned for February, which we expect will allow run rates to increase somewhat in the last few weeks of the quarter.

We are targeting gross margin for the fourth quarter of between 40% and 41%. As we mentioned on the last call, gross margin was expected to decrease as we launched new premium product platforms. These premium products, especially the BlackBerry Storm, have been more successful than we expected sooner than we expected. As a result, these products have transitioned to a high percentage of the product mix earlier in the product life cycle than is typical. This has had the effect of a steeper decline in gross margins than we originally anticipated.

As volumes ramp and we take advantage of the opportunities for cost savings that Jim mentioned earlier, we expect margins on these handsets to improve as they grow as part of the mix. Given our current view on expected product mix and ASP for fiscal 2010, we believe that gross margins will be similar to Q4 levels or slightly better in fiscal 2010.

We expect a total operating expense increase for Q4 of approximately 11% to 13% from Q3 levels, with R&D increasing by 2% to 4% and sales, marketing and administration expense increasing by approximately 16% to 17%. The increased volume of shipments forecast for Q4 allows us to leverage operating expenses. As discussed in the last earnings call, while we expect OPEX to continue to grow on an absolute dollar basis, we believe that OPEX will likely decrease as a percentage of revenue in Q4 and in fiscal 2010. We remain committed to managing gross margin and operating expenses to drive profit growth in the coming quarters.

We expect depreciation and amortization to be approximately $60 million in Q4, higher than Q3 due to ongoing CapEx. We expect CapEx to be approximately $275 million in Q4.

Investment income is expected to be approximately $14 million in Q4.

We expect the tax rate to be approximately 29% to 30% in Q4, and in fiscal 2010 we expect to see the rate decline slightly due to scheduled Canadian corporate income tax reductions.

Based on this tax rate guidance, we expect Q4 fully diluted EPS to be in the range of $0.83 to $0.91 per share. Should the Q4 tax rate be outside this forecasted range due to foreign exchange fluctuations or passage of the draft tax legislation Brian mentioned earlier, we will break this out separately.

The recent volatility in foreign exchange markets can have a significant impact on both revenues and operating expenses, as we saw in Q3. RIM reports in U.S. dollars, but has a significant portion of its expenses and revenue in currencies other than the U.S. dollar.

We have a hedging program in place to hedge a portion of the net exposure between these revenue and expenses, but this does not completely neutralize the exposure. We have recently begun increasing the hedged portion of forecasted revenues and expenses to reduce the effect of foreign exchange movements [break in audio] impossible to be perfectly hedged at any point in time. For Q4, we estimate that a 10% appreciation or depreciation in the U.S. dollar would have approximately a $40 million impact on revenue and a $10 million impact on net income given the currently forecasted mix for Q4.

I will now turn the call back to Jim.

James L. Balsillie

Thank you very much, Edel.

We're pleased to be entering the fourth quarter building on the momentum of a strong Black Friday and holiday buying season. Despite the current turmoil in the economy, we believe RIM is well positioned to take advantage of the industry shift to smartphones that is occurring and to grow its share in this market segment.

This concludes our formal comments, and we'd like to open the call up for questions. To allow as many people as possible to participate, please limit yourself to one question per person. We plan to end the call today by approximately 6:00 p.m.

Would the operator please come on to handle questions?

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Maynard Um - UBS.

Maynard Um - UBS

I just want to clarify your guidance. Are you assuming you're going to see a normal seasonal step down through December into January or towards the end of December and then into January, and then February you're seeing a pick back up because of the higher concentration? What I'm trying to understand, I guess, is just how much conservatism you're building into the month of February, where typically we would see a bounce back.

And then if I could, just how long does the [HRO] agreement go on for with Verizon and Vodafone?

Edel Ebbs

I'll answer your subscriber question first. So, I mean, what we've built into the guidance, obviously we've had a very strong December up to this point. You would normally see a slowdown from the sort of Christmas on into January, and we have that type of seasonality built in.

In terms of February, we're expecting it to still be a good bit slower than December, but in the latter part, when some of the carriers start the Valentine's Day promotions and there's a higher concentration of those running, we would expect that run rate to be higher than what we were seeing, say, in January.

Does that help?

Maynard Um - UBS

That does. But as you go back into January, you're expecting greater than seasonal declines that you've seen historically?

James L. Balsillie

I think I understand your question, Maynard, and I think the answer principally lies in what Edel said that we have a high percentage of orders already booked in the fourth quarter. So there's elements of seasonality, but we have particularly good visibility because of extended orders for the hot new products.

So I would say we've tried to take an especially prudent approach to guidance on our revenue this quarter, beyond seasonality, and what we're guiding, we have a particularly good proportion of the orders already in the book.

Maynard Um - UBS

And then just on the HRO agreement, how long does that go on for, Verizon and Vodafone?

James L. Balsillie

Well, there's elements of different versions and extension of that, but that product, we're just seeing volumes that are really quite surprising and backlogged orders, and it really extended high deliveries, certainly well throughout Q4. And there's varying ways to sort of carry on that HRO agreement. I think this is a - we're in the very early part of the first inning in this relationship and it all looks very good, so there's lots of legs on that HRO agreement to go.


Your next question comes from Gus Papageorgiou - Scotia Capital.

Gus Papageorgiou - Scotia Capital

I just want to talk about the gross margins a little bit. Can you just also - I know you discussed a little bit of the influences on gross margin. I was wondering if you could also just touch on warranty costs and impact on the gross margin? I mean, are warranty costs for the new products higher than what you normally saw?

Also maybe, is there any difference on the gross margin geographically, so devices sold in different regions, do they carry different gross margins or are they uniform across all geographies?

And then finally, just can you talk a little bit about pricing? I mean, you've seen very good success or better than expected success on these devices. Were there terms in the agreements that if you surpassed certain volumes, the pricing would come down?

Edel Ebbs

Gus, on the warranty question, there's really, I mean, we have a standard policy in how we handle warranties for new products, and there's been no change in that policy.

In terms of pricing on international versus North America products, I really - within a particular region, the pricing on the products is typically the same, but in some international markets the pricing may be a bit higher on an ASP basis than it would be in a North American market. Sometimes that's tied to volume.

And what was the third question?

James L. Balsillie

I think it was geographic differences in pricing and no, the focus now really is - no, the pricing is really attractive and it's very established with these products. The key for us is to work the costing down, and I think we feel very positive.

I think the adoption of the new products was stronger than we expected and the interest and that continues to accelerate. I think we normally get a slower ramp to work down the [inaudible], but this is kind of - the switchover to new products is faster than we expect, which is actually a very, very good trend, especially in this environment.

The issue is it just shifts the margin structure, because normally you get a quarter or so to sort of work that in, and we have to work it in right out of the gate. And so we feel very good that we can work to improve the gross margins. And like I said on the last call, we have a substantial number of new indirect revenue sources from the BlackBerry platform which you’re going to start to see coming into gear.

So the margin structure shifted because of the new products. We believe we can improve the costing of these, which is very traditional. We don't believe - there is no special pricing reductions on volumes that we have right now. And it's fairly generic across regions, you know, subject to volume, the margin structures around the globe.

Gus Papageorgiou - Scotia Capital

Just a clarification. Part of my question was I would assume that you built in volume discounts if carriers exceed certain volumes on sales of the devices, and I'm wondering since you saw such a strong success, would that success trigger price discounts sooner than you expected?

James L. Balsillie



Your next question comes from Rob Sanderson - American Technology Research.

Rob Sanderson - American Technology Research

It's been awhile since you had an update on the expectations for your monthly service revenue. In the past you've talked about range, how they're different between [inaudible] and biz and what the higher ends and lower ends of those ranges might be depending on volumes. Do those historic ranges still apply and you're trending to the lower end over time or are we looking at new low ends for those ranges on your monthly recurrings?

Edel Ebbs

I mean, I think, you know, those ranges, as we talked about before, some of those had thresholds built in that when carriers passed a certain threshold, you know, in the size of their subscriber base, there would be discounts on what the monthly rate was.

I believe Brian said in his comments that, you know, monthly ARPU on a blended basis is just down slightly this quarter, and that's been pretty much what we've been seeing over the past several quarters. And that's really driven, you know, as much by shifts in the product [inaudible] in the subscriber base towards non-enterprise as anything else. You know, we have introduced some lower tiered plans in certain markets, you know, where we get a lower monthly fee, but that's still part of that blended number. And when those users upgrade to a full biz plan, then it goes back into our typical 3 to 5 range.

Rob Sanderson - American Technology Research

Well, that's on the current period, but I'm asking more about what should we expect in the coming years as the volumes start to pick up again - you know, lower ends of those historic ranges we've discussed or do we see new lows on the low ends?

Edel Ebbs

I think it depends on what, I mean, what timeframe you're talking about here. I mean, we're still, you know, not near the low end in most of those buckets today. You know, I mean, it depends on what your volume assumptions are going to be over the longer term, but I don't see this as something that's, you know, a near-term issue other than the normal declines that we've been seeing on a quarterly basis as a result of mix shift.

Rob Sanderson - American Technology Research

Got it. So, yes, I think trending as we've seen and no significant step downs because of new commitments with carriers.

Edel Ebbs

Not currently. I mean, there's things over time that we may, you know, decide to do, but, you know, those would be things we'd communicate once they were in place.


Your next question comes from Chris Umiastowski - TD Newcrest.

Chris Umiastowski - TD Newcrest

I want to really just dig in a bit more on the gross margin line. The first question is, could you break out the margin that you're expecting on hardware? I think the way you break it out in your K is [inaudible] hardware and other, along with software and services being buckets. And I think the software and services has been about 84%. The hardware and other has been in the 40s and it looks like it's the major responsible factor for the big decline. Is it safe to say your hardware margin is now low 30s?

Edel Ebbs

We don't, I mean, we don't break them out, as you know, to that degree of granularity. I mean, I think it's safe to say that the majority of the move down in blended gross margin is due to a decrease in hardware gross margin, if that helps you. I'm not going to give you any more.

Chris Umiastowski - TD Newcrest

Yes. And we also talk, I mean, Rob just asked about the ARPU, so I think that does clarify it and that's good. Maybe you could talk a little bit about how the Storm launch affected you in the quarter as well and how the continued success of Storm into Q4 is affecting your margins, because it sounds to me like you're saying it's getting introduced faster than expected, the margins are lower upfront and they usually get higher. I know in the past you've talked about how that happened with the Pearl.

It seems interesting to me, like you're saying you could get the margins up in time, but you're also guiding into fiscal 2010 to be basically flat or slightly higher. I think a lot of people would have expected that if your comments were accurate about working the margin back up that you'd see quite a big change in margin in 2010 towards the upside, and I'm wondering why we're not seeing that in your commentary.

James L. Balsillie

Your comments are very fair, Chris, and really, we're in a time of great upheaval really in the global economy, so what can we bring to the table with very level high levels of certainty? And what do we have really good visibility on and what do we give reasonable estimates on?

At the core, we have very good visibility into our top line of Q4. And there are, on the certainty pieces, forget about potential things, where they're often very positive things that happen with us because we're not introducing new products particularly this much as quarters, so we're not facing that kind of change.

So we're trying to communicate very high comfort on our opportunities on the top line this quarter, which is really a remarkable amount of growth given all the dynamics in the market that you've seen and from chips vendors into the wireless and all the different players.

As well, as I said on the last call, this is very much a bit of a land grab phase going on in the wireless market, and we're very, very pleased with the adoption of our products and the leadership position we have and, in many respects, the leadership position we're extending. And these are things we know.

The other thing we know is that traditionally we've worked down costs over time, and we seem to have some early positive indicators on that. The other thing we've indicated is that there are some new revenue streams coming in on the BlackBerry platform which we're working diligently on which are very complementary, not the least of which is the ap store, but many other things that help our business.

So I think one could, you know, we obviously aim to enhance the margin. I believe there's opportunity there. Will I guide it now? Do we feel we're in a very, very stable place where we are? Yes. Do we have a very torqued top line? Yes. Do we have opportunity to enhance the model over time? Yes.

But I think we're very strong and stable in extending our position. There's a land grab going, which we're doing well. Our products are loved. And the value of platform leadership I think is great and far greater than people imagine. And the absolute specifics of the model will clarify over time.

So we're giving you indicators, but there's so much in flux right now. And I'm not going to give you a false sense of clarity, but I will say our products are adopted, our order book and our low case on margin is very stable, and there are lots of chances for enhancement. And that we're in a good spot with a great team and a great set of opportunities before us, very unprecedented in this company.

And I'm just not going to give you false clarity and I'm not trying to guide beyond where we are today. But, you know, in spite of the challenging times, I personally and we all as a team feel remarkably good about where we are and what we're performing. Yes, we've just got to get new revenues going more and we've got to get the costs down, but those are things that are real opportunities, but the core aspects of the business are very strong and stable.

Chris Umiastowski - TD Newcrest

I just want to finally make sure in the margins that we understand co-op marketing. Can you explain how that affects your accounting?

Edel Ebbs

Well, it's co-op marketing, so it's sales and marketing expense. Rebate activity would be in cost of goods sold, and ASP.


Your next question comes from James Faucette - Pacific Crest Securities.

James Faucette - Pacific Crest Securities

I just wanted to ask a follow up question on the products, one in reference to the question, I think, from Maynard in terms of the Storm. When does the window open that we could start to expect that product to end up at other carriers outside of Verizon and Vodafone or perhaps a product like that, firstly.

And secondly, when you talked about that there were more than or the best of an expected transition to new products and also seeing a bit of economic hit on the legacy products, can you just give your guess as to as far as the shortfall for the November quarter, what portion was attributable to the economic environment and, if you had to guess, what portion was attributable to the delay [break in audio]?

James L. Balsillie

A very fair comment and this is my sense on it. I think the shortfall in subscribers was half and half, but I think principally the revenue was - I would give a much stronger proportion to the delay in the products. The way, you know, otherwise, why are we just rocking it out so strong in December and with orders so stuffed in January, February? The economic climate, if anything, has tightened.

So we didn't know at that time, you know, but once - so we guided based on what we knew. But the results of the new products and the strength in December has been, I mean, we can't be more delighted, really.

So you have to say that it was principally delay in new products. I mean, you look at the products we introduced. It was a flurry of new products. And what happened is you get an overhang, you schedule launches, and the channel holds off existing products for purposes of all the big push, and when you lose two to four weeks, that chunks right out of, you know, if you do the time under the curve of adoption of an adoption curve, the calculus of it is you lose a fair bit of volume just on those last couple of weeks of a quarter just based on how you're to ramp. And we're running that.

So I would give a disproportionate weight to the delay in products, though that didn't explain the reduction in subs in October, which subsequently responded very nicely in November and very nicely in December. So I think the sub thing was more an economic thing, in my view of it. But the overall top line was much more of a product delay.

But what happened - and you asked about it, you know, markets and next versions and all that kind of stuff - the quality of our product portfolio has really created a global buzz. And the success of the, you know, don't forget the Sprint push-to-talk, which we are delighted by how Sprint's performing. You see the Bold performance with tremendous results, and then the Storm. You know, BlackBerry's a platform, and we have a very, very capable set of handset design teams.

So if you knew the road map of products and the unique designs and the evolution and the enhanced componentry and the enhanced performance and how special it is for different partnerships, you would see a rich road map for '09 and '10 that would blow you away.

So I'll just put it this way - we have exciting roadmaps in these carrier partnerships. The commitment is to accelerating the whole BlackBerry platform with very exciting end designs and a stronger BlackBerry platform. And even those there's economic environments, I think they're sector-specific catalysts there within our hands to control and drive.

And my expectation is they want, you know, they'll pay a little bit more for the devices but they want a lot more features, so we've got to work down the cost to maintain the margin percentage, so the absolute margin is still very good. And I think the model's going to improve with enhanced services over time. And so there's a lot of moving parts, but the fundamentals I feel very, very good about.

James Faucette - Pacific Crest Securities

And I guess just, if I could, just to clarify, then, on the Storm, I mean, you do expect that product or similar products to be at other carriers? I mean, any sense as - can you give us a more specific in terms of dates for that?

James L. Balsillie

I can't comment on specific stuff, but it's a very deep and special partnership worldwide with Verizon and Vodafone, and we also create special partnership with other carriers, respecting our commitments to others. So I just can't talk particular. Some aspects are very special to some and others, but each carrier is coming out with very special roadmaps, and you're going to see, you know, I think there's a real heartbeat.

Though there's interesting things in the first half of the year, I think we're going to really ride these products for awhile, and you're going to see a remarkable cycle into the autumn of next year slingshotting off of what all these new products is going to give us in the first half.


Your next question comes from Jeffrey Kvaal - Barclays Capital.

Jeffrey Kvaal - Barclays Capital

Jim, Edel, Brian, could you help us understand if there are any one-time factors that are involved in the unit forecast for the fourth quarter? Like are there pushouts from November or is there a destocking in the inventory of the distribution channel, anything along those lines?

Brian Bidulka

Nothing that I know of. No, this is flow. This is flow.

Jeffrey Kvaal - Barclays Capital

And then secondly, CapEx, $250 million a quarter, plus or minus. Is that going mostly to the [inaudible], to the new buildings? Do you expect that to continue? How should we think about that?

Edel Ebbs

Yes, Jeff, it's primarily [inaudible]. I mean, there's parts of it going to, you know, IT-type stuff and to the network operations, but the biggest piece of that is still facilities.

Jeffrey Kvaal - Barclays Capital

Okay, then should we expect that to slow in fiscal '10?

Edel Ebbs

I mean, it's tough to guide out that far. I mean, it can be very lumpy and things can slip from one quarter to the next. I wouldn't be forecasting dramatic decreases.

Jeffrey Kvaal - Barclays Capital

And then on the gross margin element, should we be expecting the 3G mix to be increasing in fiscal '10? I mean, I would imagine yes. And, if so, where are the levers that you can pull in the new products to improve the margin?

James L. Balsillie

Yes, that's a very fair question. The 3G mix is clearly intensifying, though a lot of the rest of the world is still very interested in Edge and Edge evolution, so it's sort of using Edge as a 3G evolution off of a [inaudible] chipset, so they're lower cost. But I think you'll see a trending towards 3G.

I think it's clearly lower componentry costs, really. I mean, these products, these high-performance 3G products are dramatically more expensive to build currently. And it's been our tradition that when we enter these things, they're expensive and you've got to work them down, and I think we've got to work it down. And I think that's inevitable. It'll work down; to what degree and what percentage is a good question.

Jeffrey Kvaal - Barclays Capital

Other handset vendors haven't talked about lower gross margins on 3G, though, Jim. Is there something specific that's going on with you or they may be able to hide it with greater volume?

James L. Balsillie

I don't know. If you look at the rest of the cellular phone industry, we've seen some margin guidance that you can really reflect on a little bit. I don’t think we're in any - I think whether they say it's competition or whether it's cost based on it, you know, I think you have to realize that we're in that high-end segment and we've got true leadership in that area. And, you know, I don't know. I mean, you can talk about the other ones.

I mean, all I can say is I know the cost to make these hot new products with the displays and the componentry and the processors and all you get out of them, and they're selling great and they love them. They currently cost more than the established Curves and Pearls, but those products we worked down over time on their cost, too.

But what I would say is we've never seen such a shift in mix to new products so quick. That’s the part that sort of caught me. I didn't expect the adoption to be so strong so fast. So it's an evolution that's very, very quick. So it tells me the industry's in rapid transition right now, rapid transition to the platform imperative and the performance imperative of these smartphones, and the more, you know, broad deployment of smartphones, but that has lots of consequences.

But there's rapid transition and we're being really taken through a leadership position in that stuff, and it's putting some flux in our normal trends. But overwhelmingly the trends are positive, but one of them is the devices cost a little bit more to make and the shift from old to new is faster than we expect and that's caused some shifts in the model but, you know, in this period of time. But we see a lot of ways to enhance that, and I've tried to give you two. But it'll play out.


Your last question comes from Scott Coleman - Morgan Stanley.

Scott Coleman - Morgan Stanley

Jim, I'm wondering if you can help us understand what percentage of units this quarter were from new products and also help us understand what's going on with some of the older products as well? How are carriers and consumers using the new products differently than the old products? Is it helping drive ARPUs higher or is the demand more from better screens, better cameras, but not necessarily driving data ARPUs higher for the carriers?

James L. Balsillie

Sure. Well, I don't have the specific percentage of new products, but I would say it's over half what we're running now. I mean, in terms of this quarter. A lot of those products were coming in later in the quarter.

However, it is important to know that the Curve is still the number one selling cell phone in the United States, so it's still selling very, very well, and Pearl is doing well, too. But what we're going to see - what we're seeing at the end of the quarter and in December are really strong just new streams of Bold and Storm, which take up over half the units. But that's why our top line's growing so well, even in a very prudent case that we're offering now.

So it's a very quick, you know, out of the gate, basically, transitioning to well over half the sales new products.

Scott Coleman - Morgan Stanley

Right and I understand that, but I'm trying to understand if from our perspective if users are using the new devices differently in a way that's helping the carriers garner higher ARPUs themselves?

James L. Balsillie

Yes. No. And I sort of figured that was the second part of the question. I only got the first part of it.

And so if I got the first part - which I hope, I think I did - on the second part, there is a rapid shift in how people use these devices. You know, in essence they came out that some people sort of saw these as a music synch devices, and BlackBerry had a lot of messaging lineages. Now what's happening is multimedia and messaging and rich [waves] are there and Web 2.0 is there. So we gave some indications of the rapid adoption of wireless social networking. Like that is becoming the new way in many respects. You know, all these, you know, these new search and GPS apps.

So are carriers getting, I mean, you know, are carriers making more money per user? My dealings with carriers is that they like making more money per user; the greater players, its deeper penetration of voice data relationships and their base. So would they like to make more money on the people currently on data? Sure, of course, and they have strategies to do that. But principally this is about cutting over the smartphone with the data relationship to mainstream.

And BlackBerry, as you see by the ads and promotion and the nature of net new subscribers on Storm, I think we're a principal catalyst of that cutover in very, very early stages, where we can't keep product on the shelf.

So what does this mean? It means that people say, you know, I carry an Internet appliance on my belt. I carry my social networking, messaging environment on my belt. I carry my Internet surfing. I carry a multimedia machine, where I can, you know, V CAST music and navigate on GPS. And the carriers are allowing open platforms with app stores, but also putting their own channel, you know, proprietary apps like, you know, the VZ Navigator and V CAST music and stuff like that.

So are we in a rapid evolution? Absolutely. Is what these platforms promising, you know? Irrefutably. And the goal of the carriers is, if they can create an environment where this becomes a very common if not principal interface to people's data relationships and multimedia relationships and messaging relationships, quite frankly, it radically enhances their economics, especially with a model like BlackBerry, where we OEM through carriers so they're a services platform and they have market protection on particular designs so that they can market around and rally around.

So the answer to your question is absolutely, yes. Absolutely yes. And, you know, there's no question, and you're seeing it in the competing platforms. The question is: Will the carriers be a services platform or will they be disintermediated? And our strategy and our commitment and our vision is the carrier is a services platform and they OEM BlackBerry, and people literally will have dozens if not hundreds of apps and consume principally - this is the principal basis to consume their multimedia. And this is happening on early trends.

I forget. There was some data when they did the upgrade of the Storm patch and the dramatic percentage that activated V CAST services on the Storm. It was staggering, like it was a very high percentage. So, you know, we're heading into new realms here. We're heading into new realms - new models, new applications.

And so what can we say? We've got leadership. We've got very good bookings for this quarter, which gives us strong growth. We have a rich product road map with very, very strong carrier-aligned relationships, and we have complementary new revenue streams coming onboard. And those are the certain pieces that I can give you in a very, very turbulent high growth and highly dynamic and highly contended sector.

I like what we've achieved in the year, calendar year. We have a lot more to be done and I'm not trying to give you false clarity here, but we do have some foundation points which are immovable and I think those, you know, we can build from and we can extend from. So absolutely there's tons of new apps. Absolutely there's tons of new use. Absolutely there's new indirect models everybody's coming at.

And I can assure you, just as I said this time last year, the industry's going to look very different, you know, by December '08 than '07, and I think that's fairly accurate. I think you're going to see an equally different and equally enhanced set of opportunities by this time next year.


Ms. Edel Ebbs, there are no further questions at this time. Please continue.

Edel Ebbs

Thank you. Just before I finish out, I just want to clarify a point on my response to Chris Umiastowski's question on co-op marketing. So rebates actually go through - show at the ASP and flow through revenue, not through cost of goods sold.

In closing, I would like to remind everyone that there's a post-use service available at 4166401917, Passcode 21252987#, or you can listen to the call, which has been recorded and archived on our website at

Thank you very much.


Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. Please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!