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Executives

Edel Ebbs - Vice President, Investor Relations.

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

Brian Bidulka - Chief Accounting Officer

Analysts

Simona Jankowski - Goldman Sachs

Mike Abramsky - RBC Capital Markets

Deepak Chopra - Genuity Capital Markets

Peter Misek - Canaccord Capital

Vivek Arya - Merrill Lynch

Research In Motion Ltd. (RIMM) F4Q09 Earnings Call April 2, 2009 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to the Research In Motion fourth quarter fiscal year end 2009 results conference call. (Operator Instructions)

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

Edel Ebbs

Thank you. 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 RIM.com 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 the 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, channel inventory, seasonality, ASPs and foreign exchange related matters for Q1 and beyond, our expectations regarding RIM's near- and long-term tax rates, as well as the effect changes to Canadian tax laws, our estimates of the number of net subscriber account additions and other non-financial estimates, our efforts to manage operating expenses and reduce costs, our product development initiatives and timing, developments relating to our carrier partners, and other statements regarding our plans and objectives. We will indicate forward-looking statements by using words such as expect, plan, 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 have 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 uncertainty of general economic conditions, 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 associated with our expanding foreign operations, foreign exchange risks, our ability to effectively manage our growth, risks relating to competition, 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

We are pleased to end the fourth quarter and fiscal year with revenue subscriber account additions and shipments all up more than 80% from last year. RIM launched a record number of new products during the year and the acceptance of these products outpaced our expectations and led to continued market share growth and record financial results.

The number of devices shipped in the year almost doubled to 26.0 million and there are now over 25.0 million BlackBerry subscriber accounts.

Demand for BlackBerry products and services reached an unprecedented level in Q4 with net subscriber account additions far exceeding our forecast. Approximately 3.9 million BlackBerry Net subscriber accounts were added in the quarter, up over 50% from Q3 and approximately 35% higher than we anticipated back in December. As we mentioned on the last call, the strength of the BlackBerry Net subscriber account additions in December was unprecedented, with many carriers hitting their highest level of Net activations ever and with channel and marketing support for BlackBerry products at an all-time high.

Greater than expected momentum following the holiday buying season, a continued positive reception of new products that were launched in Q3 and Q4, and a breadth of carrier promotions such as the Verizon Buy-One-Get-One program that began the latter part of the quarter, drove this outperformance.

Both North America and international results outpaced our forecast and about one-third of BlackBerry subscriber account base continues to be outside of North America. We saw double-digit subscriber growth in the enterprise market this quarter and the non-enterprise market drove exceptional results given the typical holiday seasonality and the nature of carrier promotions in the quarter. Approximately 70% of net new subscriber accounts came from non-enterprise and these customers now represent approximately half of the total BlackBerry subscriber account base.

As we mentioned on the last call, we saw a number of opportunities to reduce costs in our smartphone portfolio in order to improve gross margin. We are please that RIM’s R&D, supply chain, and manufacturing teams have been effective in reducing costs and improving yields and we expect these efficiencies to begin to be reflected in Q1.

These cost reductions, together with a favorable shift in product mix, have the effect of increasing both hardware and blended corporate gross margins. Based on these improvements, we expect overall gross margin in the first quarter to increase to 43% or 44%.

Some of the factors that will affect gross margins throughout fiscal 2010 are the success of ongoing efforts to reduce build and materials costs, product mix shifts, potential impacts from new product launches, particularly in the second half of the fiscal year, ASP changes, and foreign exchange. Based on our current view and a potential for variation due to these factors, we continue to expect gross margin percentage for the year 2010 to be in the low 40%s.

We anticipate ASP for the first quarter to be lower than Q4 at approximately $350. This is primarily related to the shift and the mix of devices that we expect to ship in the quarter rather than actual ASP declines on individual products.

Given the uncertain economic environment and the desire to drive increased profitability in our business model in fiscal 2010, we are increasing our focus on managing operating expenses and driving efficiency across all parts of the organization.

RIM is faring well in the current and we believe we continue to believe we can grow market share, however we believe it is prudent to turn our attention to making sure that the operations are as streamlined as possible in case of further deterioration in the broader economy.

Carrier inventory in the channel is at the lowest levels we have seen for some time and sell through for both new customers and replacement sales is strong. Carriers are not replenishing inventory to the same levels they previously held and in some cases are continuing to reduce levels, therefore the volume of shipments required for channel maintenance is lower than it would normally be and is similar to volumes we shipped in Q4, despite the strong sell through we saw in Q4 and expect to continue in Q1.

We believe that the majority of inventory adjustments has occurred in Q4 and is beginning to moderate in Q1 and that these lower inventory levels are a response to the weaker macro environment and do not reflect anything specific to BlackBerry.

Storm continues to do well with Verizon and Vodafone and the ongoing promotion of the product resulted in record levels of net subscriber account additions at these carriers. The product continues to be a strong driver of new customers for BlackBerry and has clearly opened up a new market segment.

In Canada both Bell and Telus successfully launched Storm in the quarter with numerous promotions and advertising campaigns which led to these carriers significantly growing their BlackBerry subscriber base.

Storm is now launching in a number of emerging markets, including TIM Brazil, Vodafone India, and multiple carriers in Hong Kong.

We are also pleased this quarter that the BlackBerry Storm was awarded the GSM Association’s Best Mobile Technology Breakthrough Award at the Mobile World Congress in February.

During the quarter we launched the Curve 8900 at a number of carriers, including T-Mobile in the U.S., Rogers in Canada, Vodafone Orange and BT in Europe, Vodafone in India, Intel PCS and TIM Brazil and Latin America.

Prior to the launch of the Curve 8900 T-Mobile had a large number of preregistrations for the device and it’s been well received by customers. Reviews of the Curve 8900 have been excellent with reviewers ranking it one of the best smartphones on the market and describing it as a gorgeous and powerful device. This product is just beginning to ramp and we look forward to growing the number of carriers offering it in the coming months.

The Pearl Flip continues to gain traction and during the quarter T-Mobile reduced the price of the product to $49 and launched an aggressive marketing campaign to support the new pricing. Rogers in Canada continued to promote the product at $49 with an attractive $25 unlimited text, e-mail, and instant messaging plan. The Pearl Flip for CDMA was also launched in Q4 with Bell Mobility offering the product for $29 in Canada.

The BlackBerry Curve 8350i for iDEN is now available in several markets, including the U.S., Canada, and a number of countries throughout Latin America. The unique attributes of the iDEN network, including push to talk, make this an attractive device for many industry verticals as well as the SME markets and we are seeing this product drive strong replacement sales as well as attract new subscribers to this network.

International markets performed well in the fourth quarter. In Europe Vodafone, supporting both the Storm and the Curve 8900 with extensive advertising promotional programs across multiple properties, the Orange launched the 8900 coupled with free Biz on a 35 pound plan, which resulted in the highest sales among their entire post-aid consumer device portfolio.

This past quarter Orange UK also introduced a 5 pound per month prepaid plan which includes unlimited e-mail, instant messaging, and social networking on the BlackBerry Pearl 8120.

British Telecom was also quite aggressive with its launch of the Bold, offering BlackBerry service, bundles minutes, and a free device for just over 20 pounds per month on a 24 month contract, which was also extended to the Curve 8900 later in the quarter.

Latin America continues to be the fastest growing international for BlackBerry subscribers. In the fourth quarter a number of BlackBerry subscriber account milestones were reached in countries throughout the region, with particular strength in Venezuela, Chile, and Brazil, driven by holiday promotional activities, new product launches, and aggressive pricing plans by our partners in these regions.

In Asia, we launched BlackBerry enterprise service and a BlackBerry Bold featuring Korean localization with SK Telecom in Korea, addressing pent-up demand from several multinational corporations in the region and domestic Korean businesses.

In addition, we now have nine carrier partners in India and are investing in new initiatives to increase BlackBerry’s visibility with 30 multi-brand outlets and leading national retail chains in the country.

RIM is continuing to penetrate indirect channels around the world. In North America, Walmart, Best Buy, and Sam’s Club are all offering BlackBerry products to their customers and the BlackBerry offering was recently awarded Vendor of the Year Award in the electronics category by Sam’s Club. At Best Buy heavy marketing of the Storm and aggressive an price point on the Curve 8330 drove strong adoption of our devices and impressive quarterly incremental growth.

In Europe Carphone Warehouse introduce the Curve 8900 and has supported the offering with significant in-store and window displays.

In Asia we are also extending our relationship with Redington India to establish national retail distribution channels for BlackBerry devices. Initially the BlackBerry Pearl, Curve, and Bold will be available in retail and modern trade outlets across nine cities in India with plans for further penetration into broader Indian markets over time.

We are very excited to have launched BlackBerry App World yesterday at CTIA. BlackBerry App World is a one-stop on-device store for users to discover and purchase applications made for BlackBerry. App World launched with a solid mix of applications ranging from entertainment to travel to productivity software and we expect the number of available apps to continue growing as our existing developer community, as well as newcomers, take advantage of this new sales channel to reach millions of customers.

We see a tremendous amount of opportunity for our partners as more and more customers discover the services and applications available for BlackBerry smartphones. Some of the featured applications such as Facebook, Ego, and Slacker are already familiar to many BlackBerry users but are now easier to find. Other applications launched yesterday, concurrent with App World, included Shazam, which allows the user to identify, buy, and share music, and Pandora, which allows the user to customize streaming radio to their specifications.

One of the applications we are excited about, that we will be launching shortly, is Prime Time to Go from Quick Play, which will allow users to take their favorite television shows with them by an app that seamlessly syncs shows to an SD card over wifi and automatically updates new content.

With all the best news, games, social networking, entertainment, and other applications in one easy to access on-device location, we believe App World will open the eyes of BlackBerry users to a world of new ways to enjoy the BlackBerry experience.

RIM has a thriving developer community for many years, with well over 100,000 downloads of our Software Development Kit and the availability of App World will make existing and new software applications more easily discoverable.

BlackBerry offers a number of unique features to customers and developers, including the ability to have multiple apps simultaneously in the background as well as the ability to autostart when the device powers up, the ability to integrate with core e-mail, PIM, phone, and other software features on BlackBerry smartphone.

For example, making an online purchase and then having it shipped to someone listed in your address book. An open API has allowed developers to leverage the native GPS and mapping capability of BlackBerry smartphones in their applications.

Earlier this year we launched Media Sync for BlackBerry which enables simple one-click access to synchronize iTunes or Windows Media Player files directly to a BlackBerry smartphone. Since launch more than 1 million users have downloaded this application.

To support the growing popularity of mobile music on BlackBerry, this summer we are teaming up with U2 as a sponsor of their global U2 360 Degree Tour, which will be the first time the band has toured in stadium venues with a 360 degree design to provide an unobstructed view to the audience from anywhere in the venue.

Additionally, we have added new partnerships with application companies including Slacker, Pandora, and iHeart to bring BlackBerry users and music content together. A relationship with Ticket Master further extends this reach through the combination of the BlackBerry platform’s unique push technology and Ticket Master’s leading position in ticket sales so that BlackBerry users will get easy access to the best seats for upcoming events and concerts.

We are also working with partners such as will.i.am and Dip Dive to extend the boundaries of social networking so that artists and fans can engage real time. With the combination of BlackBerry’s unique platform and these exciting partnerships, it’s never been easier to truly live life on BlackBerry.

On the enterprise side of business, GE Security launched eKEY for BlackBerry to enable real estate agents to open lock boxes from BlackBerry smartphones and other partners have introduced a number of new CRM solutions for BlackBerry including Maximizer’s COM version 10.5 and BMC Remedies Service Desk for BlackBerry.

BlackBerry mobile voice system had one of its best quarters ever in Q4 with enterprise customers becoming increasingly open to exploring new types of cost savings initiatives. With MBS companies can leverage the back-end systems they already have to not only free their employees from the desk phone, but also from the office. We have been working to combine our efficiencies in this space with the expertise and enterprise great knowledge of Cisco’s collaboration software group and are pleased with the early results of this collaboration.

We are looking forward to the launch of the BlackBerry Enterprise Server Version 5.0 in the very near future. After many months of planning and testing it over 1,000 beta sites, BES 5.0 is ready to be rolled out. This latest release delivers on several key corporate IT imperatives including increased manageability, lower total cost of ownership, scalability, and support for very large scale deployment and easy mobilization of hundreds of applications.

BES 5.0 will also introduce a number of highly desired end-user capabilities including file sharing ability for users to securely download files from their corporate network and enhanced e-mail management including features to allow the creation, deletion, and renaming of folders and the assignment of flags for follow-up to messages. This is the most powerful version of the BlackBerry Enterprise Server ever and we believe it will further cement RIM’s leadership position in the enterprise markets.

In May we will host the 8th Annual Wireless Enterprise Symposium in Orlando, Florida. This is always a big hit with customers and partners and we look forward to another intensive line-up of keynotes, break-out sessions, case studies, training, and technical labs, along with an impressive technology exhibition where RIM and its partners will showcase a variety of applications and solutions for the BlackBerry platform.

We are pleased with the momentum of our business as we head into fiscal 2010 and are committed to managing our operations to profitably grow market share and drive leverage of our financial model. We see a number of opportunities for efficiencies in operating expenses throughout the year and will continue to work to reducing build and materials costs on hardware to maximize gross margin potential.

I will now turn the call over to Brian to review our Q4 results.

Brian Bidulka

Revenue for the fourth quarter ended February 28, 2009, was $3.46 billion, up 24% from $2.78 billion in the previous quarter. This is at the high end of our December guidance range and slightly higher than our February 11th update due to higher shipments in the latter part of the quarter.

Revenue for the fiscal year was approximately $11.0 billion, an increase of 84% over the $6.0 billion in the previous year.

Hand-held devices represented $2.88 billion, or 83% of RIM’s revenue during the quarter, up from $2.25 billion, or 81% of the previous quarter.

Total devices shipped in the quarter of approximately 7.8 million were up from 6.7 million in the prior quarter. approximately 7.3 million new devices were activated in Q4, either for new customers or for replacements and upgrades, not including phone-only sales.

Forward weeks of channel inventory at the end of Q4 were down substantially from Q3 and we expect weeks of channel inventory at the end of Q1 to be slightly lower than Q4 levels.

Device ASPs in the quarter were approximately $370, in line with guidance and higher than Q3 due to shifts in product mix.

Service revenue was $415.0 million at 12% of revenue for the quarter, up $54.0 million from Q3. Monthly RPU declined slightly from the prior quarter as the percentage of non-enterprise subscriber accounts grew.

Software revenue was $59.0 million, or 2% of revenue. Other revenue, including non-warranty repairs and accessories was $106.0 million at 3% of revenue.

Gross margin for the fourth quarter was 40%, in line with the update we provided on February 11th. This was at the lower end of the range we guided in December due to lower-margin products making up a greater percentage of shipments in the quarter.

Operating expenses increased by 3% over Q3, slightly less than we had forecast. R&D spending was $183.0 million, or 5% of revenue for the quarter, and selling, marketing, and administration expenses were $406.0 million at 12% of revenue.

Included in operating expenses is stock based compensation expense of approximately $9.0 million.

Investment income in the fourth quarter was approximately $11.0 million, slightly less than expected due to lower yields on our investment portfolio.

Tax rate for the quarter was approximately 30%, in line with our expectations. There was no material impact on the tax rate in the quarter from foreign exchange fluctuations.

The draft Canadian tax legislation that was discussed on the last earnings call was enacted into law on March 12. As a result, there is a net benefit totally approximately $70.0 million to $100.0 million that will be recognized in Q1. This amount is excluded from the earnings guidance we gave for Q1 in the earnings release.

The new tax legislation, which allows room to calculate its taxes in U.S. dollars, will lead to reduced tax rate volatility going forward.

The app net income for the fourth quarter was $518.0 million, or $0.90 per share. This is higher than the February 11th update due to the higher than expected revenue and the slightly lower operating expenses.

Weighted average diluted shares, using the EPS calculation for the quarter, were 573.0 million. Actual shares outstanding at February 28, 2009, were 566.0 million. Total options outstanding at February 28, 2009, were 13.0 million.

During the quarter RIM generated approximately $291.0 million in cash from operating activities, lower than expected primarily due to change in the working capital balances. While DSOs were down from 59 days in the prior quarter to 52 days in Q4, during the past quarter RIM increased efforts to better manage working capital through improvement in cycle times for vendor payment, providing opportunities for RIM to take advantage of benefits such as yearly payment discounts. We plan to continue to optimize our working capital balances going forward.

In Q4 RIM also made capital asset additions of $252.0 million, intangible asset additions of $222.0 million, and business acquisitions of $48.0 million, resulting in a decrease in cash of approximately $250.0 million.

The total of cash, cash equivalents, short-term and long-term investments was $2.24 billion at the end of Q4 as compared to $2.49 billion at the end of the previous quarter.

I would also like to note that we will be required to fund our estimated 2009 corporate tax liability in the first quarter which will result in a cash outflow of approximately $350.0 million.

In addition, RIM’s acquisition, Certicom, closed in Q1, which will result in a cash outflow of approximately $100.0 million.

Inventory on hand was approximately $683.0 million versus $599.0 million in the prior quarter. Inventories continue to be primarily raw materials and semi-finished goods to support the demand for BlackBerry products.

I will now turn the call over to Edel to discuss our outlook for Q1.

Edel Ebbs

Before I discuss our outlook for Q1, I would 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 disclosed in our public filings.

We are forecasting revenue for the first quarter of fiscal 2010 to be similar to Q4, in a range of $3.3 billion to $3.5 billion with units shipped similar to Q4 levels between 7.5 million and 8.0 million.

As Jim mentioned, BlackBerry is enjoying the highest levels of sell through and net subscriber account additions in our history. The current uncertainty in the macroeconomic environment is leading many of our carrier partners to be more conservative than normal, leading to lower levels of inventory being held in the channels.

This, when coupled with the fact that there are fewer new launches happening this quarter with their associated channel fill, the rate of unit shipments has remained constant in Q1 versus Q4.

We once again have a high level of orders already booked for the first quarter, giving us confidence in our forecasted unit shipments.

We expect ASP for the first quarter of approximately $350. This is lower than in the fourth quarter primarily due to product mix with lower ASP products becoming a larger percentage of shipments.

Software revenue in Q1 is expected to be similar to Q4 levels.

We are targeting net subscriber account additions for Q1 in the range of 3.7 million to 3.9 million. We are providing a range rather than an approximate number due to increased complexity in forecasting as the number of BlackBerry distribution channels expand and the proportion of non-enterprise subscribers grown.

Given that an increasing percentage of net new subscriber account additions are coming from non-enterprise customers, we believe our business will tend to see more of a seasonal lift in Q4 relative to both the previous and following quarters.

In addition, we are anticipating that weekly run rates throughout the quarter moderate from February levels due to expected changes in carrier promotions and fewer new product launches.

We have seen some momentum so far in Q1 and taking these factors into account, we are pleased with the subscriber outlook for the first quarter.

We are targeting gross margin for the first quarter of between 43% and 44%. As Jim mentioned, this margin improvement is due to cost savings we have been able to achieve on certain products and a favorable mix shift.

We expect a total operating expense increase for Q1 of approximately 12% to 13% from Q4 levels, with R&D increasing by approximately 21% to 22%, reflecting increases in headcount, including those from the Certicom and Chalk Media acquisitions .

Sales, marketing, and administration expense is expected to increase by approximately 8% to 9%.

We expect depreciation and amortization to be approximately $70.0 million in Q1, higher than Q4 due to ongoing capex and acquisitions.

We expect capex to be approximately $300.0 million in each of Q1 and Q2. The primary areas of spending are expansion of network as a structure and R&D facilities.

Investment income is expected to be approximately $10.0 million in Q1.

We expect the tax rate to be approximately 29% to 30% in Q1 and throughout fiscal 2010. Beyond fiscal 2010 we expect the tax rate to be lower than this range as budgeted changes in the Canadian corporate tax rate are implemented.

We expect Q1 adjusted EPS, which excludes the expected gain related to the new tax legislation, to be in the range of $0.88 to $0.89 per share. GAAP EPS will be higher than this.

Before I turn the call back to Jim, I would like to provide an update on the impact of foreign exchange in our business. As we mentioned last quarter, volatility in the foreign exchange markets can have a significant impact on both revenue and operating expenses. RIM reports in U.S. dollars but has a significant portion of its expenses and revenue in other currencies, primarily Canadian dollars, British pounds, and Euro.

We increased the hedge portion of forecasted revenues and expenses for the first quarter to reduce the effect of foreign exchange movements but it is impossible to be perfectly hedged at any point in time.

We estimate that a 10% appreciation in the U.S. dollar would reduce revenue by approximately $9.0 million and increase pre-tax net income by approximately $6.0 million given the current hedge program and currently forecasted mix for Q1.

I will now turn the call back to Jim.

James L. Balsillie

We are pleased with the growth we have shown in fiscal 2009 and the strong momentum we will see heading into the new fiscal year. With net subscriber base over 25.0 million and continued strong momentum in the number of new customers coming to BlackBerry, we are looking forward to the execution of our plans for the year and continuing profitability to profitably grow our market share.

This concludes our formal comments and we would 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.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Simona Jankowski - Goldman Sachs.

Simona Jankowski - Goldman Sachs

Just a couple of follow-ups on your gross margin guidance. Number one, can you give us a rough, quantitative split up of the contribution of the various income components you talked about to that guidance. In other words, the mix in the cost improvements and I don’t know if there’s any rebates or FX elements of that as well.

And then secondly, what do you view as your normalized gross margins? Is it this level or do you see any further upside or downside as you go into the second half of the year.

Edel Ebbs

In terms of what drove the improvements, the biggest piece of that would be cost savings on the build and materials for hardware. Mix would then be the secondary factor there. Foreign exchange is not a big piece of it.

In terms of a normalized run rate, it’s a really difficult question for us to answer right now. I mean, it’s really hard to have a lot of visibility out more than a couple of quarters. So we are giving you our best kind of guess that we have today in what we said in our prepared remarks.

Simona Jankowski - Goldman Sachs

As a quick follow-up to that, you did mention that you’re going to have a number of launches in the second half of the year. If we were just to isolate the impact of those, would they have, all else being equal, an upward or a downward impact on margin?

Edel Ebbs

Again, it’s a tough one to answer. It really depends on do they launch on the schedule that we’re planning to launch them on today or what kind of cuddle with some old products to new products happen. So again, when I talk about lack of visibility, it’s just difficult to map well how some of those things are going to play out in the second half of the year.

Operator

Your next question comes from Mike Abramsky - RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

Originally you had talked about a land grab and I’m just wondering what inning you think you think we’re sort of in now with regard to that? Do you see this quarter’s results as an example and your guidance of playing that through?

And on your forward-marching guidance, are you still kind of planning to introduce, or do you feel you need to introduce lower-priced devices, or accept maybe lower subsidies from carriers in order to sustain the land grab strategy?

James L. Balsillie

Those are good questions. I think when you talk the gross margin, the most difficult aspect of gross margin really right now is turbulence in currency swings around the world. You just don’t plan on European currencies dropping 20% to 30% within a quarter. Just at the same time you’re accelerating your business. So I think that’s really sort of an external macroeconomic factor that we didn’t foresee when we were on the call just before Christmas that’s really there.

I think the land grab is still there. What we found is our role is definitely as a standard element and the B2B is really there and that’s definitely solidified. But what we’re trying to do is create more and more value propositions to widely deploy them throughout organizations, especially with unified communications and the mobile office and these kinds of strategies. And that’s why you’ve seen a lot of activity with us in unified communications partnerships recently.

So the B2B is still—I would put that in a sort of deeper, deeper penetration but not really a land grab, but it’s a very strategic and critical important growth business.

Definitely there is an enormous transition happening in the B2C, so I think we’re still in early innings. If I had to give it an inning, I would say two down in the second inning. So we’re not quite done the second inning but we’re pretty close. But this is the smartphone and the connected appliance is one of the few strong sectors in the B2C. In the economy out there, we think it’s the new kind of consumption, the new kind of stimulus, the new kind of innovation, where new kind of jobs are going to come from.

So it’s a lot of responsibility on the sector. It’s about tomorrow’s kinds of things and this where a lot of innovation and consumption is. So for us, and we talked a little about some value added services before. I think you’ve seen the app store, I think you’ve seen some of our deals, like Ticket Master and more to come, and you have some of the search deals. And there’s a lot more to come in that area. That’s more active than people realize.

So I think the mix is going to shift. Gross margin is a function of a lot of factors at play, cost and working down the [bombs] but deeper penetration and currency swing, so it’s still a land grab and there’s still lots of variabilities and turbulence but I think we’re navigating it well and we’re well-positioned and it’s very valuable land. Benefits users, benefits developers, and really benefits carriers. So that’s kind of where we are.

Operator

Your next question comes from Deepak Chopra - Genuity Capital Markets.

Deepak Chopra - Genuity Capital Markets

In terms of the pricing environment, what do you see on that front and do you think it will get any more aggressive than what we saw in the second half of last year?

And in terms of replacements, I was wondering if you can provide a bit of commentary on that front in terms of it seems like things continue—people continue to upgrade more quickly than anticipated and what your thoughts are on the overall economy weakness and so on.

James L. Balsillie

It’s a good question. I think pricing is a function of what’s at play and I think we’re segmenting a lot more. And so there is a lot of segmenting in devices and there’s a lot of segmenting in services. You saw a little bit of that in the Biz and the Biz Light. I think you are going to see some more powerful segmenting and some more powerful options for folks in terms of segmenting. But that’s not just a pure price play, that’s really a cost position play for us.

But it’s also important to remember that these are lifestyle devices that people use for a lot of—arguably, a couple of hundred times a day and soon to be more. And so it’s really saving $50 on bomb for something you’re going to use for a couple of years, all day every day, really where people are going to be price cautious. But maybe at a first-time entry point. It’s hard to know.

In terms of replacement it’s tough because so many people are coming new to BlackBerry, that we’ve had this surge, not only with replacement cycle but we’ve also had new users and so the character and the nature of those users, we don’t really know, but we know that they’re coming at a higher rate on B2C even though B2B is still growing.

But among the things you’re going to see is this whole connected music experience, this social networking, this e-commerce. And you’re going to see a lot happening in sort of mobile video and mobile TV and being able to stream and cache and all that.

So will that drive, sort of, people wanting higher-end devices? And we’ve got some—you have to really support the strong and multi-media. So there are just so many pieces at play right now. And we told you in the last call we were going to be able to work down the bomb, we had a quick shift in mix, but there’s a lot more capability that people want in these things.

But the adoption seems to be faster and we have long-term sort of activities for value adding. And I think three months later I think we have a fair bit of credibility in saying those things happened. And we see those continuing to evolve.

But we’re into new ground all the time and to give an excessive sense of certainty is not fair to you and I don’t think it’s fair to us, but we will maintain leadership, we will continue to grab land, we will respect the model. But sometimes it’s better to give one back one step to gain two steps forward. And it’s a function of all that’s at play in different parts of the world.

Like for instance, currency stuff. I mean, that puts some real questions onto EMEA, as an example, strategically, but we’re working down the bomb nicely. And we report in U.S. dollars, which is a very strong global currency in this last quarter. I think far stronger than anyone in the world ever would have guessed. It does some things in Lat Am, it does some things in EMEA, as an example.

Deepak Chopra - Genuity Capital Markets

On the inventory, how long can the carriers stay at these levels? It seems like at a certain point, if the demand stays this strong, they’re just going to have go a bit higher at some point in the summer.

James L. Balsillie

Yes, I mean this is an active part. I mean, I know they’re going to cash manage, but they are very well aware of how profitable BlackBerry is for the business and they’re very well aware of how strategically aligned we are with them, both current and long term.

And they are very well aware of how much they’re growing with us. And that’s evident.

So this goes in the category of penny-wise, pound-foolish to really squeeze the channels. Because your inventory disperses a little bit more when you got much more indirect and you go much more B2C and much more retail. And people are showing that if the item is in the store they will buy it a lot more than if it’s not.

And just cut over to the B2C and be the strategic platform and all that kind of stuff, super strategic, super critical to a carrier. So, this is an active part of management. But a big part of our job is to work carefully with carriers to synthesize strategy because if they just think in isolation, “I need the lowest CPGA possible. I need to cut inventory if possible.” That may be at the expense of super high gross, super profitable high long-term value customers.

So it becomes about integrating strategic things with them. And a big part of our life is not only that, but new channel strategies, new channel training. Also new care strategies with these new complex services and so on. So these kind of operational and strategical elements of relatedness are a big, big part of what we do. Because this is a partnership.

Operator

Your next question comes from Peter Misek - Canaccord Capital.

Peter Misek - Canaccord Capital

Just first a housekeeping, I want to make sure I heard this correctly. Your guidance does to include any channel refill. It includes a draw-down in inventory.

Edel Ebbs

What we said is that we expect forward weeks of channel inventory to get down again a little bit at the end of Q1. So, yes, I would expect that the level would come down slightly.

Peter Misek - Canaccord Capital

Just a follow-up, if I could, on that clarification is that we heard from Best Buy that they just started restocking. Has there been any indication of restocking yet, at all, from any carrier? Any movement on that front?

Edel Ebbs

I don’t know the answer to that. I don’t know if Jim has any insight into what’s going on in the channel in terms of our carriers getting closer to restocking.

James L. Balsillie

It’s a big part. What happens is that they get tight and then you get stung, and then the guys who are in charge of sales start squawking because the cash managers are squeezing the revenue generators. It’s penny-wise, pound-foolish and it really shows up. Because what happens is the channel gets really loud when they run out of a hot product. They are not shy about it.

It’s different with every situation, but it can’t go—it seems to be righting itself. And again, we have to do buffer stocks and we have to be reactive and we have to manage supply and forecasting and a lot of that stuff gets off-loaded to us and that’s a reality. But there’s a point where it just can’t be off-loaded anymore and so I think they’re really at that point where it’s penny-wide, pound-foolish and they’re going to swing back.

Is that going to swing tomorrow? In some respects it is. There are some of them are going to have to take a couple more bumps on situations and miss performing in the channel? Maybe. It’s case by case, almost.

Peter Misek - Canaccord Capital

Just a question on you as a platform and the carriers. There was some debate, primarily by some of your competitors, suggesting that—one in particular—that RIM likes to tell Wall Street, and use it as a marketing, that they are the most profitable service or that they consume less band width than everyone else. I’m wondering, it seems that the technical value of the carriers is that your efficiencies get your partners, etc. Can you walk us how some of these carriers are thinking about you as a platform? Has there been any kind of mind set change in the marketing departments? Have we started to see the carriers? Because your performance in the consumer this quarter was very good. Have we started to see any change there in subsidy or allocation, the view of you as a true partner and platform? Has there been a change there?

James L. Balsillie

Our activities have been consistent for decades. Since we’ve been working with the carrier channel. I guess that’s eight years. So we have been consistent. And perception can change and sentiment can change but we are nothing if not consistent. We are a very consistent bunch and very predictable.

But perceptions definitely change. I would say the overwhelming majority of carriers see us very strategically and absolutely work with us. And I think that’s why. When they really see the profitability. So if a competitor says we’re really profitable for the carrier, I should thank them for the marketing help. If they say we’re really efficient on the network with scarce capacity, again, I should buy dinner for the marketing help because those are absolute truths.

To market that you are most of the network consumption of a carrier I don’t think is a very good marketing plan. Because what you’re seeing is, in this capex environment, when there is scarcity—when you have call performance issues, most of the time it’s a capacity issue. And that’s what happens. You just get stung on capacity.

So, you’re running a 5kbps voice stop and somebody’s trying to stream a TV show for a 100 kbps or a 80 kbps, I mean, you’re taking away 10 to 20 voice calls of capacity. So with the contention comes congest and all this kind of stuff. So if you can compress and you can script and you can buffer and you can side load, and all this kind of stuff, you know, you’re rationing capacity.

And plus, if you’re rationing packets, it’s pretty much a linear relationship between battery life—battery consumption—and packets delivered. There’s also some display consumption, of course, with the color display. So all I can say is carriers do get the element that we’re profitable, it’s the wise carrier that not only correlates that on a CPGA, RPU churn kind of basis, but also interrelates that to the true step function of capex in a scarce capacity function.

And I think in this world, there is and there is going be a lot of reckoning on capex, especially if these smartphones become more and more powerful and these high-speed PC cards are out there and these high-speed networks. Just because you can go faster doesn’t change standard law that it is a fixed relationship of a bit per hertz. I mean, just because you can go ten time faster and consume ten times more packets doesn’t mean you have ten times more capacity. Or a hundred times even.

So I think the role of side loading is going to be very, very important and the role of efficiency management is going to be important for user experience and for network capacity. And this is not like pulling an optical network and just repurposing the whole spectrum on fiber for every strand of fiber. Wireless is different.

And I think conceptually nobody had to pay attention to it but as you see the band width consumption—and not a lot of these carriers own their back call, either, so there is actually a variable cost to back-call packet.

So how you can off-net that but still maintain them as platform customers is a very—I think it’s actually going to be the defining aspect, in many respects, for the success of carriers. So we’re going to stick to our mantra because we know it’s key to success. It’s really great when they receive the message thoughtfully and immediately but that doesn’t always happen.

Operator

Your next question comes from Vivek Arya - Merrill Lynch.

Vivek Arya - Merrill Lynch

Could you please discuss how the product pipeline is looking for the remainder of the year? What new capabilities can we look forward to, to say, to compete with the Palm 3 and all these new android smartphones.

James L. Balsillie

I think we have talked a little bit about where we’re going. I mean the BES 5.0 is a platform play and then all the evolution of Biz and then sort of the Unite break-out pieces with the media sync and others to come. And the new value-add services like App Store and so on and so forth. I think the whole BlackBerry environment and it’s richness and its reliability of our infrastructure truly—and the nature of our service model in the channel, helping them train the care, save queues, help queues, automated help on BlackBerry, channel capacity, in-store training, seating, promotion—these are all very, very important parts of what we do. And develop stuff this kind of stuff. And branding and the U2 part, etc., etc. These are all parts of the whole system.

And then you come into, okay, let’s talk about the access device. And obviously we had a stellar set of introductions late in the calendar year and that’s played a critical role in where we are today.

Suffice it to say we have an exciting road map for the back half of this year. We just try not to talk a lot about them six or seven months in advance. But generally with the carriers, you know, your carrier partners, you’re planning sort of twelve months, pretty firm, right out there, specific launches in the springtime, into the back-to-school, into the holiday season, and then what’s sort of game changing in new ways, early in the next calendar year.

So that’s a very active part of our life. Ongoing but particularly right now but everything is sort of getting reloaded into the summertime. I just can’t get specific right now but lots of packaging, lots of multimedia, lots of new air link. Some surprising things for sure.

And again, I think you’re going to see this sort of smart appliance in the role of the carrier platform, wireless carrier platform emerging sustainably and dramatically and the smart carriers are going to profit tremendously. And that goes back to the earlier question from Mike about sort of what inning are we in. We’re still in the rapidly emerging stage of “land grab” and so we have to keep driving these device innovations.

But we have to drive everything. It’s not just the devices, our system, but it’s also our care and our processes and our relatedness, because this puts a lot more complexity on the care side of the carrier and on the channel side of the carrier. And that’s not the lineage. And they have to bulk up their game there and we have to be with them on that way.

And as we flow more packets in more places we have to scale up our infrastructure and if we have more SKUs we have to scale up our supply chain. I know I’m digressing a bit, to go back on your question, because yes, we have a great line up for the back of the year and for the rest of this twelve months of this fiscal year. The next eleven months, it looks great.

But there’s a lot of responsibilities throughout the whole thing because just a good device doesn’t give a compelling system experience for the user and a profitable satisfied customer for the carrier.

Vivek Arya - Merrill Lynch

And just one perhaps related thing. What’s been the response to the applications to the launch? Where I’m going with that is that some of your carrier customers also plan to open their own application stores. Do you see any risk of the customer being confused or do you see a place for multiple application stores, and what would really be the impact of that application store on RIM’s earnings model later in the year.

James L. Balsillie

I think it adds the—it’s positive, modestly positive. It’s not a big profit driver but it’s a real catalyst for the developers and for users. And it’s kind of a precondition. And I will tell you, the first day has been—we’ve been shocked by the adoption, the flow of apps and new users has been pleasantly surprising.

Honestly, I think if carriers have a store, it’s an awful lot for a carrier to do. Some of them have that. You have to do everything. You have to do the developers, you have to maintain the environment, you have to do all the agreements, have to do the merchandising.

And the truth of it is carriers have—the reality of wireless is the environments are fragmented so they have to do this in multiple kinds of environments. I just think it’s an untenably difficult job for a carrier to do. And it’s inefficient. And it would be as inefficient as them creating their own BlackBerry Enterprise Server.

But, I think the magic lies in letting the carrier drive what they want to drive, which is cut their own deals with developers when appropriate, for a key app, and drive their own apps. Let them have their own store within a store, let them have their branding. Let them have a rep share, let them integrate it with their billing, integrate it with their care. And then the carrier is a strategic platform but we get to do our effort of levering our community across almost 500 carrier and distribution partners in over 160 countries.

And that’s that nuancing that I think we are really well, is the carrier as the strategic platform, but how we interrelate with them is critical. And again, we cracked that model eight years ago and we have stayed consistently invested in it. And it works. And so I think the app store is if you just say, “No, carrier, you’re out of this. Good-bye.” I think that’s got a disintermediation risk which is strategically risky to them, but if you also say to them, “Okay, here you go. You carry it. You run it.” Is that something they can really invest in and support property and does that make it compelling to the users, does that make it compelling to the developers?

And so I think there’s a better place in the partnership model. And we’ve spent a lot of time on it and we’ve got a lot of work because there’s different billing systems and there’s different languages and all that, so it puts a lot on our backs but this is a model we know and trust and it has built over years and again, we’ve been very, very consistent and predictable on it.

Operator

This concludes the question and answer session.

Edel Ebbs

In closing I would like to remind everyone that there is a post-view service available at 416-640-1917, pass code 21252988#, or you can also listen to the call which has been recorded and is available on the Investor Relation section of our website at www.rim.com/investors.

Operator

This concludes today’s conference call.

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Source: Research In Motion Ltd. F4Q09 (Qtr End 02/28/09) Earnings Call Transcript
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