Research In Motion Limited (RIMM) F2Q10 Earnings Call September 24, 2009 5:00 PM ET
…with respect to revenue, gross margins, operating expenses, CapEx, depreciation and amortization, investment income, earnings, channel inventory, seasonality, ASPs, and foreign exchange related matters for Q3 and beyond; our expectations regarding RIM's near and long-term tax rates, as well as the effect of 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 and 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 our intellectual property rights, risks relating to the uncertainty of general economic conditions, our ability to enhance our current products and develop new products and services, our reliance on carrier partners and third-party manufacturers, third-party network developers and suppliers; the efficient and uninterrupted operation of RIM's network operations centers; risks associated with our international operations; foreign exchange risks; 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
Thank you, Edel. We are pleased with the results for the second quarter of fiscal 2010, with revenue of $3.5 billion, up 37% over the prior year and adjusted earnings per share of $1.03. It was a busy with two new BlackBerry smartphones hitting the market, the BlackBerry Tour for CDMA networks and the BlackBerry Curve 8520 for GSM networks. The product and go-to-market teams were also busy gearing up for a number of exciting new fall and winter product launches.
In addition, we continued to grow the number of partners offering BlackBerry products and services and there are over 500 carriers and distribution partners offering BlackBerry products in over 170 countries around the world. Approximately 3.8 million BlackBerry net subscriber accounts were added during the quarter, up over 45% from the same quarter last year and in line with expectation. Net subscriber account additions in the quarter were at the lower end of the range we gave in June, primarily due to a higher percentage of Tour going to existing customers for upgrades. The BIS subscriber base has grown steadily over the past couple of quarters and in Q2, over 80% of net new subscriber account additions came from non-enterprise customers. This is being driven by the ongoing focus of North American carriers of marketing BlackBerry products to the consumer and SMB segments and the success of our efforts to penetrate these market segments through channel development, price tiering, branding, and marketing programs and the expansion of the BlackBerry value proposition.
With respect to the enterprise market, we expect that our efforts to introduce advanced features, such as the mobile voice system to our enterprise customers, as well as the availability of new products over the next several months will reinvigorate the growth in this market segment.
In many international markets, growth in enterprise net additions slightly outpaced those of non-enterprise customers this quarter and at the end of Q2, just over a third of the BlackBerry subscriber account base was outside of North America.
Looking into the remainder of the year, we are extremely excited about both the new products we have teed up to launch in the second half of Q3 and the runway we are seeing for our existing product portfolio. We expect to ship between 9.2 and 9.9 million BlackBerry smartphones in the third quarter.
Our carrier partners continue to maintain low levels of channel inventory and we do not anticipate carriers returning to more normalized levels of inventory in the near-term. We continue to be successful in aggressively driving cost efficiencies in our product platforms which gives us flexibility to offer products priced to address new market segments and to grow market share as we head into the holiday buying season.
The success of new products such as the Curve 8520, which was specifically designed to be a lower priced BlackBerry device, and lower pricing on certain existing products in preparation for the upcoming new product launches, is expected to lead to an ASP in Q3 of approximately $320 and a strong gross margin of approximately [inaudible] percent. The scheduling of new products for later in the quarter and the risks associated with getting new products out on time is also contributing to the lower ASP as most of these products have a higher average selling price but are not expected to be shipping for the full quarter.
We are also planning to launch a new integrated marketing campaign, including a brand campaign across various media in Q3 to support our plans for driving demand from BlackBerry smartphones within new groups of customers, as well as within existing consumer and enterprise segments.
In July, we launched the BlackBerry Tour 9630 across all of our North American CDMA carrier partners. With a striking design and exceptional performance, the new BlackBerry Tour offers a compelling choice for the growing number of wireless customers looking to upgrade their existing BlackBerry smartphones as well as for those converting from a cell phone to a [smartphone] for the first time.
The BlackBerry Tour supports high-speed 3G EVDO REV A networks in North American, as well as 3G UMTS HSDA and quad-band edge GPS GSM networks abroad, featuring a 3.2 mega-pixel camera, GPS, an advanced media player, as well as many other features, this device is perfect for work and entertainment.
The Tour has been well-received across multiple segments, including enterprise and government, where it has been especially attractive as an upgrade device, as well as with consumers.
CDMA carriers continue to drive strong demand for BlackBerry products and services in Q2. Sprint delivered significant growth this quarter across its entire BlackBerry portfolio. The BlackBerry Tour was launched by Sprint and supported with an aggressive media campaign and attractive retail pricing. This launch, when coupled with new promotional campaigns featuring Pearl and Curve and a promotion where the Curve 8350 I was offered by Sprint for $99, drove strong growth at this carrier in the quarter.
Verizon continued to aggressively promote BlackBerry products and services with the continuation of the buy one get one campaign in June and then the launch of a buy one, get any campaign in August. These campaigns, when coupled with strong existing products, attractive pricing and the launch of the new Tour continue to grow our presence at Verizon and we look forward to announcing some exciting new product and application initiatives with them over the next couple of months.
We also launched the new BlackBerry Curve 8520 for GSM networks during Q2. The BlackBerry Curve 8520 is the first BlackBerry smartphone to feature an innovative new touch sensitive track pad, which makes scrolling and selection smooth and easy for a great navigation experience. The 8520 is also the first BlackBerry smartphone to feature dedicated media keys, smoothly integrated along the top of the handset, giving customers an easy and convenient way to control their music and video.
T-Mobile launched the Curve 8520 in the United States this quarter and the product became their top-selling device in national retail by the end of the quarter. Walmart also enhanced its already large in-store BlackBerry product presence to include a new Curve 8520 at an aggressive price point under $50 and is now offering BlackBerry accessories at more than $1800 store locations throughout the United States.
In the U.K., sell-through was particularly strong at Carphone Warehouse with the reintroduction of Vodafone service plans and key launch initiatives around the Curve 8520, with an exclusive violet-colored device and tie-ins to London Fashion Week, as well as significant online marketing.
The Phone House has also launched the device across its stores in France where carriers like [SFR] are offering the device for one Euro with a EUR49 or higher rate plan. This device, which is priced attractively to penetrate broader market segments and the prepaid market launched across many of our direct and indirect channels globally this quarter and is driving [inaudible] in new markets for BlackBerry products and services.
AT&T continues to promote the BlackBerry solution with focus on corporate and SMB channels through aggressive handset pricing and promotions. BlackBerry smartphones were chosen as the exclusive handset vendor for AT&T’s are you mobile campaign with direct mail and other marketing targeted at small business.
Additionally, AT&T has reached out to many large accounts during the quarter with their 25 city BES 5.0 tour and received some very positive feedback from IT administrators.
Rogers also focused on SMB this quarter through a national print and radio campaign and offered a $50 credit on BlackBerry smartphones to new small business customers.
In Europe, strong demand for the BlackBerry Curve 8900 drove good performance in the quarter and was augmented by the launch of a new Curve 8520 with carriers in the latter part of the quarter. Vodafone U.K. launched the 8520 for free with any service plan over 25 pounds and promoted the product as the centerpiece of a recent marketing campaign.
At Orange, both Curve 8900 and Curve 8520 were launched with pay-as-you-go pricing and the Curve 8900 was the top-selling prepaid product at Orange in July. T-Mobile Germany has been increasing its consumer focused efforts to grow BlackBerry product penetration through an aggressive long-term promotional campaign featuring the BlackBerry solution.
In Southern Europe, TIM, Telefonica, and Orange all drove strong sell-through of BlackBerry products despite the seasonal weakness expected during the summer in this region. We are pleased with the performance we are seeing in Europe and expect a combination of aggressive carrier promotions, wider distribution, and brand recognition across the continent to continue to drive strong growth in this area throughout the remainder of this year.
Latin America continues to outperform with double-digit growth during Q2 and the launch of new products and service offerings targeted at both consumers and enterprise customers.
Excitement around BlackBerry products and services in the region has never been higher and they are a significant catalyst in the coming months that we believe could accelerate this growth.
The BlackBerry Bold continues to be a strong performer in the region and the continuous rollout of the BlackBerry Storm and Curve 8900, combined with the introduction of AppWorld and more prepaid and BIS social offerings, have positioned the BlackBerry solution well for continued strong growth in the second half of the year.
In Mexico, [TelTel] participated in heavy promotion of the Curve 8520 with pre-launch events and TV commercials, including some featuring the device during half-time of the World Cup soccer qualification.
Venezuela remains a strong market for BlackBerry products and services with Telefonica organizing a number of enterprise security focused events and launching the Curve 8520 in the quarter, supported by a strong integrated marketing effort.
During Q2, there were also a number of connect with the experts events targeting SMB and enterprise clients in major cities throughout the region.
Given the success of this promotion, the program has been expanded to additional cities and will run throughout Q3.
In Mexico, TelTel introduced a BlackBerry [mail plan] that includes a voice package combined with unlimited BlackBerry push email service for about $11. In Asia, we continue to launch with new carriers and expand or indirect distribution channels. We are pushing forward in India with broader distribution and partnership with groups such as Reddington and through new product launches, including the Curve 8520, which successfully launched with Bharti AirTel this quarter. We are also seeing excellent subscriber growth in markets such as Indonesia and Thailand and look forward to replicating this experience in other markets in the region.
During the past quarter, we established RIM China Limited with offices in Beijing, Shanghai, and Guangzhou and achieved foreign invested commercials enterprise status. We continue to work hard in cooperation with our partners to advance our strategy of deeper penetration within multinational and domestic markets and attract new -- additional new enterprise customers.
RIM also recently participated in PT Wireless Expo in Beijing where there was a RIM booth offering demonstrations of the BlackBerry solution and a showcase of applications designed by local software partners.
In the Middle East, we continued to build on our success with partners such as EMS, which have allowed us to significantly expand our presence in both indirect channels as well as carrier retail throughout the region. [Eddy Selat] has been running a promotion offering three months free BIS service and is supporting the promotion with print and online advertising and direct marketing.
In addition to BIS promotions, a number of carriers in the region have also been running promotions to prospective BlackBerry enterprise solution customers by offering free devices, software, and installation for BES customers who activate 30 or more employees.
Some markets in the [Middle East], such as Saudi Arabia and Kuwait, are among the fastest growing countries globally for BlackBerry products and services. BlackBerry products and services have been benefiting from inclusion in a number of back to school promotions in the latter part of Q2 and early Q3.
For example, Telus introduced a new lower rate student 35 plan which has significantly increased BlackBerry device sell-through at Futureshop and Best Buy, while T-Mobile in the United States is showing excellent results with the launch of the BlackBerry 8900 into over 4,000 Radio Shack locations.
Back to school this quarter has been most -- our most successful yet with carriers outside North America, many of whom are offering fall promotions featuring BlackBerry products for the first time.
In France, all three carriers featured a special rate plan concurrent with the launch of the Curve 8520, which targeted generation Y consumers with a lower price BlackBerry service plan that is making BlackBerry smartphones more affordable and attractive to this large market segment.
Orange in the U.K. is also getting involved in back-to-school promotions featuring BlackBerry smartphones by putting together a four-week push across 32 universities in the U.K. to offer special promotions on BlackBerry devices and free gifts to freshmen students. In North America, we have been working closely with AT&T’s premiere student group to target campuses via Facebook, campus publications, and direct mail. In addition to carrier initiatives, we have also had strong traction with our efforts to incorporate BlackBerry products and services into university infrastructures with schools using the BlackBerry solution with their administrators, faculty, and students to communicate a wide range of announcements and to facilitate group project interaction.
There have been several introductions and announcements over the past few months that are significant to the BlackBerry developer community. We recently introduced BlackBerry Web development plug-in for Eclipse and the BlackBerry plug-in for Microsoft Visual Studio Version 1.2, which offers new and enhanced tools for web application development. These additions to the BlackBerry development tool portfolio aim to bring together the best of Java and web development for the creation of web applications that are integrated with core BlackBerry smartphone functions for seamless, intuitive, and robust user experience.
A few weeks ago, we hosted a webinar for developers on these and other aspects of the development process and received positive feedback from the attendees. Our developer community has now grown to more than 175,000 and we are very excited about the number and quality of applications that have been launched to date and that are scheduled to be released in the coming months.
We are also pleased to be hosting our second annual BlackBerry developer conference in mid-November in San Francisco. The event was so successful last year that we have added additional days and workshops to this year’s schedule and have focused sessions o the two main themes of taking your application to the next level and new technologies and tools to help build and deploy applications.
BlackBerry developers will be able to participate in workshops, keynotes and panel discussions on topics ranging from looking to the next generation of web APIs to integrating widgets with native applications for BlackBerry smartphones.
AppWorld Version 1.1 has now been launched in 30 countries and is available in numerous languages with thousands of applications and plans for more in the future. To complement our on-device BlackBerry AppWorld offering, we recently launched a web-based version of the application that lets users browse by featured items, top downloads, categories and sub-categories, as well as search for applications by name or price. Each application page features a description, pricing details, size of download, screenshots and reviews and users can also view details on device compatibility and language availability.
Since the launch of AppWorld in April, we have seen a high level of adoption of multimedia social networking, e-commerce, gaming and location-based applications and services with more than 20 million downloads of social networking applications like Facebook and MySpace, over 7 million downloads of Internet radio players like Slacker and Pandora, and over 4 million downloads of IM clients. Even more importantly, we are seeing that these apps are not just being used once or twice and then discarded but are actually being integrated into the daily lives of our customers through frequent activity.
We look forward to further enhancing the user experience of AppWorld over the coming months with better integration with our carrier partners and new billing options to make it easier than ever for customers to buy applications for BlackBerry smartphone.
BES 5.0, which was launched in May, is receiving excellent reviews from customers, media, and industry experts and [inaudible] BES 5.0 won best messaging application at the global messaging 2009 awards.
With built-in high availability and automated fail-over, IT administrators can now automate server alerts and then fail-over to a standby server to guarantee a high degree of up-time and continuity of service.
In addition, the new group and role-based administration and easy-to-navigate web-based administration consoles allow IT administrators to make changes to their network from wherever they have Internet connectivity.
Over the summer, RIM continued to build the value of the BlackBerry brand by launching a multi-tiered co-marketing campaign with the band U2. The campaign included a new television ad and digital marketing push promoting the new U2 mobile album and gave RIM the exclusive marketing rights as the official presented sponsor for the U2 360 degree tour which began in Western Europe and is now touring throughout North America.
In Q3, RIM will continue to build awareness and purchase intent for BlackBerry products and services globally by investing in an integrated marketing campaign that helps expand the appeal of the brand to people from all walks of life while supporting the introduction of our products and services.
We believe this new campaign will drive greater awareness and brand value and will leverage the already strong BlackBerry brand to drive strong sell-through into the holiday season and beyond.
This past quarter we acquired Torch Mobile, a leading supplier of open-source web kit based solutions. With the integration of web kit, we will be able to offer a browser solution that will assist third-party developers in leveraging their current portfolios and accelerate the time-to-market for new applications. With this solution emerging as an industry standard for smartphones, we look forward to Torch’s contributions and enhancements through the BlackBerry platform and the many benefits this will bring to our end user experience.
I am also pleased to announce that today Antonio Viana Baptista was appointed as the eighth member of RIM's Board of Directors. Antonio brings with him a wealth of experience and knowledge, most recently at Telefonica, where he held Chief Executive role since 1998, including CEO of Telefonica Spain, Chairman and CEO of Telefonica Mobile, and Telefonica International. We look forward to having the benefit of Antonio’s international telecom experience in Europe and Latin America on our board as we continue to grow the presence of BlackBerry products and services in broader market segments and expand our leadership into markets around the world.
Antonio is an independent director as defined under applicable securities laws and stock exchange rules.
As we head into the third quarter and seasonally strong holiday buying period, we are looking forward to increasing the traction of BlackBerry smartphones and services in new market segments and building on the strong brand we have built over the past several years to drive the next leg of growth for the company.
I will now turn the call over to Brian to review Q2 results.
Thank you, Jim. Revenue for the second quarter ended August 29th was $3.53 billion, which was slightly higher than the $3.42 billion reported in the previous quarter and in line with the guidance we provided on the June conference call.
Handheld devices represented $2.9 billion, or 81% of revenue during the quarter, similar to the $2.8 billion, or 81% in the previous quarter.
Total devices shipped in the quarter were higher than Q1 at approximately 8.3 million units. Approximately 7.9 million new devices were activated in Q2 either for new customers or for replacements and upgrades, not including phone only sales. We estimate that four weeks of channel inventory at the end of Q2 were slightly lower than Q1. We are not expecting a rebound in channel inventory levels in Q3.
Device ASPs in the quarter were approximately $345, in line with guidance.
Service revenue was $501 million, or 14% of revenue for the quarter, up $50 million from Q1.
Monthly ARPU declined from the prior quarter as a percentage of non-enterprise subscriber accounts grew substantially and certain carriers achieved volume discounts.
Software revenue was $61 million, or 2% of revenue.
Other revenue, including non-warranty repairs and accessories, was $98 million, or 3% of revenue.
Gross margin for the second quarter was 44.1%, in line with the guidance we provided in April and higher than the 43.6% in the first quarter [due to reductions in raw material costs] as well as the shifts in the product mix, as we discussed in the last earnings call.
Operating expenses in the second quarter were $902 million, up 13% over Q1
R&D spending was $236 million, or 7% of revenue for the quarter, in line with our forecast.
Included in Q2 operating expenses is a one-time charge relating to the settlement of litigation with Visto that we announced on July 16th. Of the total payment of $267.5 million, $163.8 million or $112 million net of tax was expensed as a litigation charge, the remainder of the payment was recorded as an intangible asset.
Operating expenses also include stock-based compensation of approximately $13 million. Investment income in the second quarter was approximately $8 million. Tax rate for the quarter adjusting for the litigation charge was approximately 28.5%, in line with our forecast.
GAAP net income for the second quarter was $476 million, or $0.83 per share diluted. Adjusting for the Visto settlement, adjusted EPS for the second quarter was $1.03 per share diluted, as compared to adjusted EPS of $0.98 per share diluted in the prior quarter. This was at the high end of our guidance range.
The press release we issued earlier today provides a detailed reconciliation of Q2 GAAP earnings to adjusted earnings.
Weighted average diluted shares used in the EPS calculation for the quarter were 574 million. Actual shares outstanding at August 29th were 568 million. Total options outstanding at August 29th were approximately 10 million.
Total of cash, cash equivalents, short-term and long-term investments increased by approximately $79 million to $2.5 billion at the end of Q2, as compared to $2.42 billion at the end of the previous quarter.
During the quarter, RIM generated approximately $564 million in cash from operating activities which was offset primarily by capital asset additions of approximately $300 million, intangible asset additions of approximately $180 million, including the amount relating to the Visto settlement.
In Q2, accounts receivable were approximately $2.4 billion and DSOs increased to 61 days from 59 days in the prior quarter, primarily due to timing and geographic mix of sales in the quarter. Inventory on hand was down slightly in Q2 to approximately $573 million versus $634 million in the prior quarter. Inventories continued 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 Q3.
Thanks, Brian. Before I discuss our outlook for Q3, I would like to remind everyone that these forward-looking statements reflect management’s best current estimate 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 expect to ship between 9.2 million and 9.9 million units in the third quarter and for revenue to be in the range of $3.6 billion to $3.85 billion. This growth is being driven by strong sell-through of BlackBerry products and services and new product launches that are scheduled for the latter part of Q3. As in any quarter with a high number of new products scheduled for launch in the latter part of the quarter, there is more uncertainty around the timing of shipments given the dependence on achieve certifications and risk of slippage in launch time tables.
As Jim mentioned, ASP is expected to be lower in Q3 at approximately $320 primarily due to a number of mix related factors. First of all, the Curve 8520, which was designed to be the lowest price BlackBerry smartphone in the product portfolio, has been doing extremely well in markets around the world and will be shipping for a full quarter for the first time in Q3. Additionally, the prices on certain products have been lowered to prepared for the launch of new products into the market but since many of these higher ASP products will not launch until later in the quarter, they will be a smaller part of the mix and will have less of an impact on the overall ASP.
While the launch of these higher ASP products earlier in Q3 would have partially offset the ASP decline in the quarter, we expect that the Curve 8520 and similar products will continue to sell well and be a high percentage of the mix beyond Q3.
We are targeting net subscriber account additions for the third quarter in the range of 4 million to 4.3 million. Again, the range is somewhat wider than normal due to the risks associated with product launches being scheduled late in the quarter.
We are targeting gross margin for the third quarter to be approximately 43%.
Total operating expenses are expected to increase in Q3 by approximately 7% to 8% from Q2 levels. We expect R&D to increase by approximately 6% and sales, marketing, and administration expense to increase by approximately 6% to 7%. The increase in sales and marketing expense is being driven primarily by new product launches and a new integrated marketing campaign that will start during Q3.
In the third quarter, we expect depreciation and amortization to be approximately $85 million and we expect CapEx to be approximately $275 million. The primary areas of spending are expansion of network infrastructure and facilities.
Investment income is expected to be approximately $8 million in Q3. We expect the tax rate to be approximately 29% to 30% in the quarter and throughout fiscal 2010. Beyond fiscal 2010, we expect the tax rate to be lower than this range as budget changes in Canadian corporate tax rates are implemented.
We expect Q3 EPS to be in the range of $1.00 to $1.08 per share.
Before I turn the call back to Jim, I would like to provide an update on the impact of foreign exchange on our business. As mentioned in prior quarters, volatility in the foreign exchange markets can have a significant impact on both revenue and OpEx. RIM reports in U.S. dollars but has a significant portion of its expenses and revenues in other currencies. While we have hedged a portion of forecasted revenues and expenses for the current quarter to reduce the effect of foreign exchange movements, it’s 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 $17 million and increase pretax net income by approximately $7 million, given the current hedge program and the currently forecasted mix for the third quarter.
I will now turn the call back to Jim.
James L. Balsillie
Thank you, Edel. We are pleased with the strong financial performance so far in fiscal 2010 and the outlook for the third quarter. We have a strong portfolio of products as we head into the holiday buying season and we look forward to continuing to grow the presence of BlackBerry products and services in markets around the world.
This concludes our formal comments and we’d like to open the call up for questions. 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?
(Operator Instructions) Your first question comes from Mike Abramsky of RBC Capital Markets. Please go ahead.
Mike Abramsky - RBC Capital Markets
Thanks very much. Can you talk a little bit about how you see the ASP trending forward if you kind of remove the effect of what you said was the interim product mix issue due to the timing of higher ASP product mix?
James L. Balsillie
Well, I think the natural effect is going to be there’s going to be a higher ASP, you know, somewhat when you get the full quarters on the ASP but what we are experiencing now is a very, very strong demand in units but we are also seeing efficiency in component cost and we are passing through some of that into the market as we promote this. So basically we are seeing costs come down with ASPs but then it looks at your mix of products -- you know, there’s no question our goal is to get more and more mainstream and get more and more volume, as we talked before. This is a -- kind of a land grab and although we didn’t talk a lot about this on the call, we talked before, there’s a great set of value-added services stuff which you are going to see a lot of unveiling, the capabilities, some of them at our developer conference in early November.
So the key for us is ASPs, it’s a mix thing right now but there is some component cost savings. But we are also coming up with higher end devices and you are going to see more of those launched in the quarter as opposed to the 8520, which is a very high performance but lower cost unit and -- but we are also seeing margins preserved, so the long-term trend is more capability per dollar and it’s a question of how much people want to put in versus how much they want in price but there’s some pretty high-end devices we’ve got teed up. We’ve also got some lower cost ones so it’s -- you know, and we maintain, we try to maintain our margins through that so it really becomes a function of timing and mix.
Mike Abramsky - RBC Capital Markets
And just as a related follow-up, do you see -- do you have a sense of what the elasticity is internationally of products like the 8520 now on that kind of ASP?
James L. Balsillie
Yeah, it’s pretty powerful and it’s pretty positive. And Edel talked about the dollar swings and all that. I mean, there was some headwind there for a little bit when the dollar was so strong and the Euro was so soft earlier in the year but some of that is reversing right now so there’s no question there’s a -- you know, as you go into these broader markets, there’s some elasticity. But there’s also a lot of functionality you can pack in. And again, the thing I kind of want to stress is now that you’ve got this consolidated smartphone, what can you do with it, so I really see the services platform being an increasingly important part of what drives people to buy though it is right now and how we can earn some fair returns on that, so -- but for right now, for sure there’s elasticity and that’s when you get the BOGO type offers from Verizon and all that and you see a great pop in that, and that’s why the volume is good and the overall margin is good but you get some ASP pressure. But it’s a good decision not just for this quarter but we believe for the long-term strategy.
Mike Abramsky - RBC Capital Markets
Your next question comes from the line of Jim Suva of Citigroup.
Jim Suva - Citigroup
The outlook on the unit number is extremely impressive -- 9.2 to 9.9. And considering the mix shift of what’s going on with the 8520, is there really any reason to think that when things get more linear like past this quarter, I know you typically don’t guide for more than one quarter out, but the February quarter, that ASPs should not come back up or with this land grab, are we just looking at a structural lower price for RIM who has pretty much been keeping its ASPs around the $340 level?
James L. Balsillie
Well, I mean, you know, this is cutting through to mainstream so I think it’s very important to pay attention to that. And so when you are land grabbing, and remember my comment, we are preserving margin, so what is fair to the market and what is fair there, so gosh, it’s hard to sort of justify taking margins too high when you are going more mainstream and there’s programs people are investing in and carriers are having and we have a channel strategy with carriers that are very cooperative and so you can't be disproportionate here, so I think there’s going to be naturally high -- well, we do have some naturally higher end devices but I think a lot of this stuff is how do you -- you know, what is that new middle ground which is there still is a middle market but that middle market requires a lot more features than it used to be. That’s why the traditional cell phone market was so squeezed in the middle because it’s not that there isn’t a middle market, it’s that there’s -- is they want a smartphone, what they want a very powerful services platform with it, so we are definitely still in a land grab and we are definitely still getting good margins on this but we absolutely invest in it and fair price into it and also build a services platform and you are seeing some very early indications of that, but you are going to see much more of that at our dev conference. You will start to see the platform pieces introduced then, so the wise person I believe sees this as a rapidly expanding market where the benefit of establishing and holding a lead position will accrue many, many years of benefit and so skim pricing now I think is penny wise, pound foolish plus it’s unfair partnership strategy with the carriers in the ecosystem. You could do it but I think you are penny wise, pound foolish. We are still in a rapid expansion mode and we are still trying to invest into it, although we do get a return on our current sales.
Jim Suva - Citigroup
But with the linearity, ASPs though should mathematically come up a little bit though?
James L. Balsillie
They could mathematically come up a bit but you never know how component prices may come out, come down and you never know how mix may come and it may trend to more mainstream where your lead stuff is well-priced and well-returned but it may not be your volume leader because -- I really want to make it clear that this stuff is going much more mainstream and we are teed up to go much more mainstream here. And this is what we have worked on in our device portfolio, in our carrier alignments, and our services platform B2B and B2C, and this strong investment around the world. And so if this crosses over, as I think we are doing, we have a sustained, very, very good position, very prosperous position that puts us in high alignment with the carriers, high alignment with the application ecosystem, and very, very profound value proposition to users.
So I just -- I appreciate you are looking for trends. I just don’t think you get insight into short-term machinations because a little bump here or there or something a little more, a little less, priced a little high, a little lower, this SKU, that SKU a little bit, if you over extrapolate it you will mislead yourself. At the end of the day, this stuff is becoming way more powerful in the services platform, it’s going way more mainstream and our view of the world is you can monetize that new service of stuff and you can -- you battle the carrier at your peril. But you overwhelmingly must please customers and so that’s how we think and there is so much dynamism along the way that -- I get to the point of conjecture on this. I mean, you’ve just got to remember what happened last year and how that quarter went and many of these things as they cut over to a different level, we were pleasantly surprised and I am not changing Edel’s guidance and all that but we are positioning and investing for success here and that’s everything. Or the world will take you by and you are a nice niche player and that’s not what we are planning here.
Jim Suva - Citigroup
Thank you very much.
Your next question comes from the line of Gus Papageorgiou of Scotia Capital.
Gus Papageorgiou - Scotia Capital
Thanks. Jim, just further on to your comments about [inaudible] and the 8520 specifically, can you give us a little sense, I mean, smartphones are going mainstream and that [does mean] prices have to come down and I just want to know, what is the carrier reaction to devices like the 8520, which seems to be a pretty attractive ASP? Would it be fair to say that the carriers are actually more excited about devices like that versus higher end devices like the Bold or the Storm?
And then secondly, if you are looking -- if we’re looking at an ASP of roughly 320 and the 8520 is a kind of a lower end product, I’ve got to think that the ASP is below that and in that price category, how do you think you stack up competitively against other smartphone suppliers?
James L. Balsillie
Well, I would say there’s a couple of things to mention there. There is no question this stuff is going mainstream but you also have to remember, when you make your [assertion that prices] have to come down, do remember that there is an intense consolidation of consumer electronics at play right now. And so you see peripherals that are being absorbed as software features in a smartphone under pressure but you can drive a lot of value into these things. You know, they are cameras, they are personal navigation devices, they are -- and you are going to see these as plasma TVs very, very soon, as well as personal media players and social networking and personal game machines and phones, and you are going to see some very, very rich enabling in that capability, so I can see a scenario where you say to be mainstream, is this a bit of an expensive phone or is this the cheapest plasma TV personal navigation device, personal game machine, et cetera, et cetera, imaginable and how do you sort of harvest all that richness together?
So this is -- there is an element of price elasticity and there is an element of competitive but the BlackBerry brand and the BlackBerry value proposition really stands very, very high for very, very well-earned reasons. And so when you look at the price versus the competition, we very much priced for powerful and beneficial alignment with the carriers pushing into the channels with appropriate cost of acquisition strategies and so on and so forth but at the end of the day, you have to deliver on a set of promises and I think that’s why as a combined smartphone plus the BlackBerry data services platform and how we have scaled that and the efficiency and benefits of that, I think that really commands a special position for BlackBerry and it shows in our sales, in our growth, and our results and I think we are just beginning to see the benefits of that because you are seeing carriers having a lot of scarcity of network issues and network quality issues and CapEx issues and I think this whole side-loading, this whole scarcity management and quality of service, though it gets valued now is going to come right at a premium and the push and the security and the B2B and you are going to see a lot of the richness of what we are talking about. Some of it but not all of it is going to be unveiled at the dev con, so we are not really stung by the lower, lower end. What our focus is is what does it take to fairly work with the carrier to address the elasticity points? The questions on elasticity points are probably a little fairer than the competitive response points because if you want to [inaudible] [elasticity] demand and you want someone to invest, you’ve got to invest fairly and price fairly but recognize it creates premium customers and premium experiences as well built with the carrier partners.
So -- but again, you have a lot of moving parts here and once people get in this Gen X and Gen Y, once you see the different products we have coming, you see how you can move to higher end and there’s higher media and higher UI and higher packaging and a lot of pretty exciting things that these bring, so -- and they tend not to leave when they are there and they tend to grow up with you and upgrade and we think there’s going to be a rabid, a voracious appetite for much richer kinds of services and when you see our dev con and you see what we are doing in the platform, you are going to realize that this is not just about apps -- this is about availing much, much deeper platform and service capabilities so that you can have a redefined kind of application experiences and I can't tip my hat too much on that stuff but at the end of the day, it translates into a customer, a client who is really, really happy and really, really ready to consumer heavily and get their peers and friends to consume heavily. And we think we are doing that very, very well.
Gus Papageorgiou - Scotia Capital
Okay. Thank you.
Your next question comes from Tavis McCourt of Morgan Keegan.
Tavis McCourt - Morgan Keegan
Thanks for taking my question. I think two kind of follow-ups on the guidance, Edel, if you’re there -- the 9.2 to 9.9 million, it would seem to suggest a pretty mild channel [inventory] build. I just wanted to confirm that. And for this quarter, your channel inventory on a weeks of inventory basis probably went down a bit. I wanted to confirm that and you would think coming out of a recession or at least a stabilizing recession, maybe the carriers would start rebuilding some channel inventory as you guys clearly aren’t seeing that. Are you hearing anything to make you think at some point that will change?
No, you’re right that channel inventory did come down a little bit in the quarter and we are not really seeing [any indication] that carriers are looking to build and in some cases, some of them are still becoming even more lean. So yeah, you’re right that there hasn’t been any real change there. I mean, in terms of what we are seeing longer term, it’s really hard to know. Right now I think they are comfortable and seem to be operating their businesses and doing quite well with BlackBerry with the levels they have so at this point, we’re just not seeing any change built into our forecast.
Tavis McCourt - Morgan Keegan
Great, and then on your own balance sheet, the inventories were down sequentially, which I think seasonally is a little bit strange to think about given -- heading into the holiday season. Was there anything specific there that would cause that?
No, not really, Tavis. I mean, we’ve been talking for a couple of quarters about working hard to manage working capital and all that kind of stuff, so -- but there’s nothing really to read into it beyond that.
Tavis McCourt - Morgan Keegan
Okay. Thanks a lot.
Your next question comes from the line of Maynard Um of UBS.
Maynard Um - UBS
Thank you. Can you just go into a little more detail about price elasticity? I mean, your unit growth at midpoint implies 15% which is actually pretty strong but it is still trending below the historical levels and you’ve still got -- you’ve got ASP cuts by some operators, you’ve got your lower ASP guidance. I actually would have though you would see much stronger unit elasticity. Can you just talk about the relationship there and when you think we start to see the benefit I guess of that more mainstream ASP pricing to show up in the volumes? Thanks.
James L. Balsillie
Well, I think we are living it right now, to be perfectly honest, and we are not even into the sort of holiday season and -- I mean, we’ve got a lot of hero campaigns lined up. We’ve got a great roadmap. We have very powerful value propositions. We have incredibly high compatibility with the carriers strategically and Edel talked about some of these marketing brand campaigns, which the carrier feedback we are getting from it is very, very positive. So I really, really like our strategies and I really, really like our execution and I know we are doing all the right things and you just -- you know, you can only control inputs and outcomes are what they are and people try to guide to the best of their ability and -- but if these plans -- but obviously we’ve got a lot of execution risk, you’ve got timing, you’ve got certification and if you lose two or three weeks in a quarter, I mean, those of you remember, I mean, during last year products were two or three weeks late or a month late, and what happens is it shortened up what you had in September, October, November and then all of a sudden everything just ripped through November December and January and everyone -- and so who knows what’s going to happen?
But what I do know is that based on some of the elasticity stuff that we are in now, it’s very, very promising and based on the hero program and based on the plans for the holiday season and our ad campaigns and our channel campaigns, this is really poised to go to another level and then -- and you have to make sure you invest into it, so -- you know and then Edel has the tough job of not over-promising but not sand-bagging and -- but you are in a place where there’s a lot of things that could go very right.
But you’ve also got risks and execution risks and if you miss a week or two in a quarter of a hot launch, it doesn’t change your strategic success and it doesn’t change your Q4, but it can do some things in Q3 that can lead people to over-conclude things. And then you are whip-sawing the place, expectations, that is.
You know, this is an evolving time but it’s a wonderful time because you know, the space is expanding rapidly, we’re in a leadership position. We’ve got great channel partners, we’ve got an unbelievable hero product roadmap, and quite frankly we are taking an application services strategy quite frankly as far deeper than anyone else in the industry is choosing to do. I mean, that’s what BlackBerry was originally -- a deep, rich integration to make it sort of profoundly valuable but simple. And we are doing that in a bunch of other areas and you are going to get indications of that, so -- and you are not going to -- and you are only getting a portion of it in November and more of it is going to unveil at WES and more, much more the year after.
So to answer your question, I just look at core strategic inputs and core strategic positioning and strategic imperatives because if you start running for very short-term machinations, I think -- you know, you really sell short the future. But I would also have to tell you -- don’t think we have clear prescience in terms of how these machinations play out. But you absolutely know that strategically that it’s quite irrelevant, though it is of course very important to perform and give expectations and guide and [inaudible] -- you really don’t know for sure but what you do know is that if you have amazing products, amazing services, amazing channel campaigns with carriers, in a rapidly expanding space where you’ve got leadership position, it’s dream situation and no matter what, you don’t under-invest and you don’t under-position because the benefits sustained are -- I don’t want to mess up Edel but I mean, there’s a lot of things that can go right in what we do.
Maynard Um - UBS
Great. Thank you.
And your final question comes from Jeffery Kvaal of Barclays.
Jeffery Kvaal - Barclays Capital
Thanks very much. It seems as though you have come in a little bit light on your OpEx spending for the quarter and that the guidance for the November quarter also implies an OpEx up-tick that is lower than what you have done in the past. Could you walk us through the thought process there? Thank you.
Most of that, Jeff, is just sales and marketing related and timing of spend, sometimes related to launch activities. The ramp-up in Q3 is really a lot of this branding campaign that we talked a lot about that’s going to be hitting in a number of markets shortly in the next few weeks. So that’s really all that is going on there. Sometimes it’s just the timing of some of these things moves around and that’s really all there is to it. It’s just a little bit difficult sometimes to forecast it right on.
Jeffery Kvaal - Barclays Capital
Well, don’t get me wrong -- operating margin [inaudible] that, but Edel I guess it does raise the question of how much of the -- how much are you pushing on the 8520 and other new devices this quarter? I mean, will you be pushing less on them than you might have with two devices in prior November quarters?
No, I don’t think that’s true. I think we are getting more efficient in what we are able to do. I think that getting into hero programs and things like Jim talked about with some of the carriers is allowing us to leverage some of our own spend, more than maybe we used to be able to in the past.
Jeffery Kvaal - Barclays Capital
Okay. And then it sounds as though we should not -- so you are targeting a gross margin in the November-ish range, that if ASPs go up, that would not really drive an up-tick in the gross margins?
Not necessarily -- I mean, it’s all driven by mix. ASP and gross margin, all of the products have different, slightly different profiles so it really depends on the mix so a change in ASP doesn’t necessarily mean that gross margin moves in the same direction.
Jeffery Kvaal - Barclays Capital
Okay. All right. Thank you very much.
Operator, I think that’s all we have time for today.
Yes, that concludes the question-and-answer session.
Thank you. In closing, I would like to remind everyone there is a post view service available at 416-640-1917, passcode 21289982#, or you can listen to the call which has been recorded and is available on the investor relations section of our website at www.rim.com. Thank you.
Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect.
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