Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Edel Ebbs - Vice President, Investor Relations.

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

Brian Bidulka - Chief Accounting Officer

Analysts

Tavis McCourt – Morgan Keegan

Mike Abramsky - RBC Capital Markets

Jim Suva - Citigroup

Peter Misek – Canaccord Adams

Ittai Kidron – Oppenheimer

Vivek Arya – Bank of America/Merrill Lynch

Chris Uvistosky - TD Newcrest

Maynard Um - UBS

Jeffery Kvaal - Barclays Capital

Research In Motion Limited (RIMM) F4Q10 Earnings Call March 31, 2010 5:00 PM ET

Operator

Welcome to the Research In Motion fourth quarter and year-end fiscal 2010 results conference call. (Operator Instructions) I will now turn the conference over to Edel Ebbs, VP of Investor Relations. Please go ahead.

Edel Ebbs

Thank you. Welcome to RIM's fiscal 2010 fourth quarter results and year-end conference call. With me on the call today are Jim Balsillie, CEO and Brian Bidulka, CFO. After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then review the fourth quarter results and I will discuss our outlook for first quarter of fiscal 2011. We will then open the call up for questions.

I would like to note that this call is available to the general public by a 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 product shipments, revenue, gross margin, operating expenses, CapEx, depreciation and amortization, earnings and ASP’s for Q1 fiscal 2011 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 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 relating to our intellectual property rights, our ability to enhance our current products and develop new products and services, risks relating to competition, our reliance on carrier partners, third-party manufacturers, third-party network developers and suppliers; risks relating to network disruptions and other business interruptions, our ability to manage our production facility, security risks, risks associated with our international operations, our ability to manage growth 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 Balsillie

Thank you, Edel. We are pleased to be reporting record results for the fourth quarter and full fiscal year 2010. Year-over-year shipments of BlackBerry smart phones increased over 40% to 37 million units. The BlackBerry subscriber base grew 65% to over 41 million with approximately 17 net new subscriber accounts added during the year.

Revenue grew 35% and net earnings increased 30% over the prior year. During fiscal Q4 we made great strides in penetrating international markets and growing market share while maintaining our leadership position in the hotly contested U.S. smart phone market. We are pleased that BlackBerry continues to be the number one selling smart phone brand in the United States and accounted for five of the top ten individual smart phone models shipped in calendar Q4 According to an industry analyst recent survey of the top ten converged devices in North America.

Demand for BlackBerry smart phones in the fourth quarter was strong with record net new subscriber account additions of 4.9 million which is above the high end of the range we forecasted in December, up over 10% quarter-over-quarter and almost double the number added in the same quarter last year. Units shipped in the fourth quarter were slightly below the range we forecasted back in December and ASP was approximately $311. Lower than expected unit shipments were primarily due to a customer change in inventory policy which led to a reduction of inventory levels of certain products in this quarter.

This inventory adjustment when coupled with the success of the BlackBerry 8520 at the lower ASP caused revenues to land slightly below the range we expected at the time of our last earnings call. Gross margin was higher than anticipated due to a product mix that includes a higher than expected percentage of Bold 9700 and Curve 8520’s. EPS were in the forecasted range.

As we head into the first quarter of fiscal 2011 we expect BlackBerry smart phone shipments of between 11.2 million and 11.8 million to drive strong revenue and earnings performance and we expect to add between 4.9-5.2 million net new BlackBerry subscriber accounts. Global demand for BlackBerry smart phones is robust and leading to some tightness in our supply chain with respect to certain components, particularly the Curve 8520. However, these risks are already reflected in the shipment guidance for the first quarter and the supply chain and product teams are working hard to eliminate any tightness going forward.

ASP continues to be primarily mix driven an in Q4 the BlackBerry Curve 8520 was particularly successful in markets around the world. We expect this success to continue in the first quarter and therefore expect ASP in a range of $305-310 for the first quarter. As we have mentioned on prior conference calls there is not a direct relationship between ASP and gross margin percentage. In fact they can often go in opposite directions as we saw in the fourth quarter.

Looking out to the full-year fiscal 2011 we are currently expecting ASP in Q2 to be similar to Q1, increase somewhat in the second half of the year due to new, higher ASP product introductions and expected product mix. In addition to the Curve 8520 and the BlackBerry Bold 9700 also have strong momentum in markets around the world and contributed positively to the high gross margin percentage in Q4 and the outlook for 44.5% gross margin in Q1.

In Q1, gross margin will continue to be primarily mix driven and we expect quarterly gross margin percentage to moderate somewhat to the low 40’s throughout the remainder of the fiscal year due to product mix and new product introduction cycles. We have a number of exciting new hardware and software products planned for launch in fiscal 2011, several of which are anticipated to drive strong growth in shipments in the second half of the year. Efforts to drive operating efficiency across the business are ongoing and we expect to continue to benefit from these activities with strong earnings growth in fiscal 2011.

The globalization of RIM’s business was a huge driver of growth in the fourth quarter and we expect this trend to continue. The success in international markets is being driven by the growing appeal of BlackBerry products to new demographics, particularly the text centric youth segment who are drawn to BlackBerry smart phones by a number of factors including ease of typing on the Qwerty keyboard, the viral effect of BlackBerry messenger and attractive pricing particularly as more carriers offer prepaid pricing packages targeted at this market segment.

Additionally, the BlackBerry brand continues to grow both in terms of overall value and appeal to these new market segments. In Q4 approximately 48% of revenue came from outside of North America and approximately 38% of BlackBerry subscriber base is now from international markets. The tremendous success of attracting entry level smart phone customers to BlackBerry is an important strategic development program and the percentage of non-enterprise subscribers in our account base continues to grow at a rapid pace.

As more and more customers from new market segments including students, young working adults and other first time smart phone buyers choose a BlackBerry model as their very first smart phone we create new opportunities to generate long-term loyalty to the BlackBerry platform throughout their lives. This puts us in a position to market incremental value added products and services based on the BlackBerry platform to these customers as well as to upgrade them into other BlackBerry smart phones in the future.

In the United States Sprint had a strong quarter with significant promotion of both the BlackBerry Tour and BlackBerry Curve smart phones. The BlackBerry Tour achieved the highest customer satisfaction rating of any device in RIM’s portfolio and the BlackBerry Curve became the most successful device in the history following a $49 BOGO promotion on the 8330 and the launch of the new 8530 in an exclusive purple color at an attractive price point.

AT&T continues to build on their momentum from last quarter in both consumer and B2B channels offering aggressive pricing throughout Christmas with 50% off their entire BlackBerry smart phone portfolio as well as featuring the BlackBerry Bold 9700 in their Valentine’s Day promotion.

At Verizon, BlackBerry Curve and BlackBerry Storm continue to benefit from steady sell through trends and during the quarter Verizon focused on expanding their enterprise focus with BlackBerry through a new streamline ordering portal for BES that enables easier activation for new enterprise users. In February Best Buy and Radio Shack featured the 8500 series for multiple carriers during their Valentine’s Day promotions which led to our best ever quarter at Radio Shack and throughout national retail channels in general.

Boost Mobile’s Curve 8330 successfully launched at Best Buy and was the hero prepaid device for February at Radio Shack, included in national TV, in-store, online and print placements throughout the month. All three Canadian carriers ran BlackBerry promotions throughout the quarter and Telus in particular has been successful with their tiered BlackBerry pricing program including the student 35 plan which offers unlimited social networking on BlackBerry smart phones.

In Europe the strong momentum from Q3 continued with many of our carrier partners hitting new record sell through levels again in Q4. In the U.K. Orange included BlackBerry as your pay as you go Christmas gift campaign, leading to record results during the holiday and propelled the Curve 8520 to finish the quarter as the number one pay as you go device in their portfolio. The Bold 9700 also did very well at Orange, consistently ranking in the top three post-paid devices.

[O2] also set a record in terms BlackBerry smart phone sales with strong performance of the Curve 8520 and Bold 9700 which benefited from specialized promotions. They continue to show support for BlackBerry and offered a special promotion for public sector employees that resulted in an increase in adoption in local government and health carrier verticals in the region.

France continues to be a high growth market for BlackBerry with all three major carriers running promotions on BlackBerry products and driving record sell through. As to [foreign] leverage the Storm II and Curve 8520 is part of a core product hero campaign over the Christmas holiday combining promotion of BlackBerry messenger and social networking applications with an attractive capped data plan.

Orange meanwhile launched a large outdoor marketing campaign with thousands of billboards and [Greek] focused its marketing efforts on the Curve 8900 for January and the Bold 9700 for February. We also aggressively grew our presence with distributors in Europe and this last quarter BlackBerry Curve smart phones became the number one selling smart phone product at Car Phone Warehouse and Phones for You, closely followed by the BlackBerry Bold 9700. In France, Phone House also had its best quarter ever with BlackBerry smart phones and they are currently featuring the Bold 9700 on the cover of the buyer’s guide.

Latin America continues to be a high growth market for BlackBerry products with double digit increases in Q4 solidifying our leading position in smart phones in the region. Both the Bold 9700 and the Curve 8520 were launched by additional channels throughout the region and were supported by carrier marketing activities as well as our own integrated marketing efforts focusing on BlackBerry messenger 5.0, App World, social networking plans and the Love What You Do campaign.

Across the region, Telefonic in Venezuela, Telco Mexico and Claro Brazil among others ran Christmas and Valentine’s campaigns highlighting the 8520 and 9700’s. Telco Mexico also promoted BlackBerry smart phones during their Super Bowl commercials and Claro Brazil ran strategic product placement programs in primetime TV.

We continue to build on our success in the Middle East with the availability of a variety of tiered data plans and significant carrier advertising campaigns and incentives that are driving record growth. Carrier partners including Etisalat and [inaudible] as well as a number of Egyptian carriers that launched in the quarter continue to promote BlackBerry products and are contributing substantially to the strong market position we have in the region.

BlackBerry smart phone adoption in Asia continues to grow as we diversify the product offering with new Bold, Storm and Curve products and expand our tiers and prepaid price offerings and benefit from the viral nature of BlackBerry messenger. Highland in Indonesia has seen exceptional sequential growth over the past three quarters and since the launch of BlackBerry messenger 5.0 in Q3 we have enjoyed an increase in carrier support and consumer adoption in these markets. Panel expansion in the region is a key area of focus to further extend our success in the region and we are working closely with price points to increase our points of presence and expand our range of distributors.

China represents an exciting opportunity for growth for BlackBerry and we have been moving forward with our plans to expand in the region. In mid-march BlackBerry was selected as the official smart phone sponsors of the Shanghai World Expo 2010 and BlackBerry products and services will be used by Expo managers and staff to communicate and access key information and data while on the go. Additionally an application to provide news feeds from the Shanghai Daily was launched as a free download in BlackBerry App World, concurrent with the show.

We continue to build our relationship with China Mobile and increase penetration across a broad range of verticals including financial, legal, banking, professional service and manufacturing. We look forward to announcing more details our plans in China in the coming months. Prepaid subscribers continue to increase as a percentage of the subscriber base with Asia Pacific, Middle East and Latin America leading the way. While overall prepaid subscriber base is still small the growth rate is quite substantial with the number of prepaid subscribers in Q4 growing by 30% sequentially over Q3.

We are also beginning to see prepaid BlackBerry smart phone offerings make their way to North America with T-Mobile offering BlackBerry as their only prepaid smart phone offering and Sprint offering BlackBerry smart phones through their subsidiary Boost Mobile. We are continuing to explore opportunities to offer these and more pricing tiers to drive adoption of BlackBerry smart phones across broader market segments including prepaid.

Last month we announced BES Express to address small and medium sized businesses as well as consumers who wanted to receive corporate emails on their BlackBerry smart phones. BES Express which is available as a free download allows SMB’s and consumers to cost effectively and securely synchronize data between Microsoft Exchange and BlackBerry smart phones. The solution delivers a low cost, secure, easy managed way for SMB’s to wirelessly enable exchange for consumers who have a personal BlackBerry smart phone to connect to their corporate email at no incremental expense to the enterprise. This solution further expands the market opportunity for BlackBerry and provides a cost effective way to extend the BlackBerry solution to all employees within companies in our existing large enterprise base as well as to appeal to new, cost sensitive small and medium sized businesses.

BES Express software has been available for download from our website and through select channel partners ever since the beginning of March. We are pleased with the very high number of downloads to date. We look forward to updating you further on the results of this new initiative in the coming months.

At Lotusphere 2010 we announced a BlackBerry client for IBM Lotus Quickr and a new version of IBM Lotus Connection and further solidified the relationship that RIM and IBM have in supporting enterprise customers for more than a decade. This agreement expands distribution channels for BlackBerry and enterprise markets and helps us meet the growing market demand for enterprise social networking and collaboration solutions that allow workers to more easily and effectively participate in team projects while outside of the office or away from tier desk.

The BlackBerry mobile voice system which synchronizes BlackBerry smart phones with corporate PBX continues to generate significant interest from enterprise and carriers. During Q4 in North America T-Mobile ran a marketing campaign to provide MVS to enterprise customers at no charge when the customer purchased the minimum number of BlackBerry smart phones. This program led to an increased adoption of MVS by T-Mobile customers in the quarter and we look forward to working with T-Mobile and other partners on programs like this in the future.

Mobile World Congress was a great show for RIM again this year. During the conference BES 5.0 was awarded the GSM best enterprise product and service award. RIM hosted the first ever European [inaudible] per day with over 700 delegates in attendance. During developer day we previewed the upcoming Web Kick Browser and unveiled our version for Super Apps, a new breed of mobile applications that leverage the unique capabilities of the BlackBerry platform to deliver an always on, contextually relevant experience that is tightly integrated with the native in-box, phone and other applications. The response from the developer community has been overwhelmingly positive and we are running our first two developer challenges this year leading up to the 2010 BlackBerry developer conference in September.

App World continues to grow both in the number of apps available for download as well as the number of countries and languages it supports. The App World storefront is now available in close to 50 countries in six languages and the diversity of applications for businesses and consumers continues to grow with more and more regional specific application developers using BlackBerry API’s to produce apps that customers download and use every day.

We are also pleased to announce that last week RIM acquired Viigo, a leader in up to the minute content and service for smart phones. Prior to being acquired by RIM Viigo was a highly respected company within the BlackBerry partner ecosystem and we are excited to welcome them into the RIM family. The Viigo employees will work with existing teams to further enhance the BlackBerry platform and bring their knowledge of our application environment and their real-time content delivery expertise to the BlackBerry platform.

BlackBerry brand value continues to grow and was recently recognized by U.K. based Super Brand as the third most influential brand in the region, up from 43rd last year. The Love What you Do campaign has been expanded to Australia and parts of Latin America and has led to positive increases in all of the consumer metrics we track.

In Q1 we will be launching extensions of this campaign focused on BlackBerry messenger as a way to help carriers and retail channel partners capitalize on the increased interest in the viral effect of BBM. Earlier this month we announced the expansion of our manufacturing capabilities for BlackBerry smart phones to include a facility in Sao Paolo, Brazil. In partnership with Flextronics, this facility will expand RIM’s production capacity and enable us to better meet the needs of our carrier partners and end users in Brazil and throughout Latin America. This will also provide more than 300 new jobs in Brazil and deepen RIM’s commitment to the Brazilian market.

We are pleased with our record performance in fiscal 2010 with strong growth in market share both in the United States and globally. The addressable market for BlackBerry has expanded substantially in the past year and we have a tremendous opportunity for sustained growth in fiscal 2011 due to the launch of new products and services, continued expansion of our distribution capabilities, ongoing constructive alignment with our partners and focused execution of our plans.

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

Brian Bidulka

Thank you Jim. Revenue for the fourth quarter ended February 27th was $4.08 billion which was slightly higher than the $3.92 billion reported in the previous quarter and slightly below the guidance we provided on the December conference call. As Jim mentioned this was primarily due to carrier inventory reduction and a lower than expected ASP due to product mix.

Handheld devices represented $3.3 billion or 80% of revenue during the quarter as compared to $3.2 billion or 82% in the previous quarter. Devices that were shipped in the quarter were higher than Q3 at approximately 10.5 million units. Approximately 10 million new devices were activated in Q4 by either new customers or for replacements and upgrades, not including phone-only sales. We estimate that the forward weeks of channel inventory at the end of Q4 were lower than Q3 and absolute level of inventory came down significantly and was lower than our expectation at the time of the last earnings call.

We expect channel inventory in Q1 to come down again, both on a four week and absolute basis. Device ASPs in the quarter were approximately $311, slightly lower than expected due to product mix. Service revenue was $641 million or 16% of revenue for the quarter, up $74 million in Q3. Monthly ARPU was similar to the prior quarter. Software revenue and other revenue accounted for the remaining 4% of sales in the quarter.

Gross margin for the fourth quarter was 45.7%, higher than the guidance we provided in December due to mix of handsets shifting in the quarter leading to higher hardware gross margins as well as service revenue being slightly higher as a percentage of overall sales. As Jim mentioned earlier, there is not a direct relationship between ASP and gross margin percentage as we saw in Q4.

Operating expenses in the fourth quarter were $851 million or up 8% over the comparable Q3 levels. R&D spending was $267 million or 6.5% of revenue for the quarter, in line with our forecast. Sales, marketing and administration expenses were approximately $500 million, up approximately 7% over Q3. Operating expenses include stock based compensation expense of approximately $16 million.

The tax rate for the quarter was approximately 30%, in line with our forecast. Net income for the fourth quarter was $710 million or $1.27 per share diluted. Weighted average diluted shares used in EPS calculations for the quarter was 561 million. Actual shares outstanding at February 27th was 557 million. Total options outstanding at February 27th were approximately 9 million. RIM did not repurchase any shares during the quarter.

Total cash and cash equivalents and short and long-term investments increased by approximately $461 million to $2.87 billion at the end of Q4 as compared to $2.41 billion at the end of the previous quarter. During the quarter RIM generated approximately $776 million in cash from operating activities. This was offset by capital asset additions of approximately $258 million.

In Q4 accounts receivable were approximately $2.6 billion and DSO’s decreased to 58 days from 63 days in the prior quarter primarily due to timing of sales in the quarter. Inventory on hand at Q4 was approximately $622 million versus $613 million in the prior quarter. Inventories continue to be primarily raw materials and semi-finished goods to support demand for BlackBerry products.

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

Edel Ebbs

Thanks Brian. 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 expect to ship between 11.2-11.8 million units in the first quarter of fiscal 2011 and to be in a range of $4.25 billion to $4.45 billion. ASP in Q1 is expected to be lower than Q4 at approximately $305-310. As Jim mentioned product mix is the primary factor affecting device ASP. Beyond Q1 we expect ASP to remain at a similar level in Q2 with an increase expected in the second half of the year as new, higher priced products are launched and become larger parts of the product mix. ASP continues to be mix driven and can be challenging to forecast as a slight change in the forecasted mix of shipments of one BlackBerry smart phone versus another can have an impact on the ASP in the quarter.

This same dynamic also applies to gross margin as slight shifts in mix can also move this metric around. We are targeting gross margin for the first quarter to be approximately 44.5%. As we look out beyond the first quarter of fiscal 2011 we expect quarterly gross margin percentage to remain strong in the low 40’s throughout the fiscal year. This moderation from Q1 levels is primarily due to expected shifts in product mix and new product introduction cycles.

We are targeting net subscriber account additions for Q1 in a range of 4.9-5.2 million. Total operating expenses are expected to increase in Q1 by approximately 3-6% from Q4 levels. We expect R&D to increase by approximately 6-10% and sales, marketing and administration expense to increase by approximately 2-4%.

In the first quarter we expect depreciation and amortization to be approximately $90 million and we expect CapEx to be approximately $250 million. In the second quarter we expect CapEx to be similar to or just slightly above Q1 levels. The primary areas of spending are expansion of network infrastructure and facilities for R&D and IT operations.

We expect the tax rate to be approximately 28% in Q1 and we expect a similar rate throughout fiscal 2011. This is lower than fiscal 2010 due to a reduction in the Canadian corporate tax rate that is coming into effect and that we have mentioned on previous earnings calls. We expect Q1 EPS to be in a range of $1.31 to $1.38 per share diluted. This does not include the impact of any share repurchases under any share repurchase program that may occur during the quarter.

I will now turn the call back to Jim.

James Balsillie

Thank you Edel. We were pleased with our strong performance in fiscal 2010 with record results and continued strong execution in North America and international markets. We are excited about our growth prospects in fiscal 2010 and look forward to reporting back to you on our progress throughout the year.

This concludes our formal comments. We would like to open up the call for your questions. Please limit yourself to one question per person. We plan to end the call today at approximately 6 p.m. Will the operator please come on to handle questions?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tavis McCourt – Morgan Keegan.

Tavis McCourt – Morgan Keegan

A clarification, can you repeat the devices activated? Secondly, I wonder if you could talk about right now obviously the mix is heavily skewed towards the Curve form factor. How long do you think you can keep growth going without a significant contribution from various touch screens and when would you expect that to happen?

Brian Bidulka

Just to repeat that was 10 million new devices that were activated excluding [inaudible].

James Balsillie

There is a great product roadmap for the year. Obviously we can’t talk about products that haven’t been launched but Edel talked about the ASP’s are mix related and there are going to be new products that are going to change mix and if you saw what we were doing with the platform and you saw our roadmap and you saw our carrier channel programs and you saw the international engagement I can’t talk about what is not announced but I love our roadmap for this year. We have guided a really strong Q1 based on just what is going on now. You are just going to have to stay tuned. We brought on a lot of development capability, a lot of platform extensions. This is a really quite frankly enhancing game in what you can do with the specialized devices and enhanced platform capabilities, B2B and B2C.

Our alignment with the carriers has never been better. Our ecosystem has never been better. All I can say is stay tuned. You are going to see some stuff by the call this time next quarter you are going to see a lot of stuff in the fall. If you saw the roadmap you would be blown away.

Operator

The next question comes from the line of Mike Abramsky - RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

Can you talk a little bit about North America? I think net momentum was actually down this quarter and what you plan to do to increase momentum there?

James Balsillie

North America, it is a very, very important marketplace. Again, you get changes in different carriers and different products and different inventory management styles and plans. You have different ASP and promotion type stuff. If you looked at the mix and saw the details you would be very, very pleased. If you saw the roadmap and the launch plans these different carriers have with us you would be very, very pleased.

A lot of it can be put down to mix on the revenue side. It could be inventory management. You have to remember the subs are something I pay close attention to. The subs are fine. That is a very good measure of health with obviously margin and EPS if that matters and if you saw the plans these guys have and you saw the platform extension stuff we have going you would love it. So be careful when there is sort of one-time things or mix things or inventory adjustment things that you don’t misconstrue it. Look how strong the nets were. We have a really strong Q1 and Edel guided some good stuff and growth through the rest of the year in spite of quiet summers. I think the market is expanding. We are doing very, very well. If somebody wants to misconstrue something they can but North America is doing very, very well. Occasionally you get a tweak by a carrier here and there or a shift here and there but I like how everything is aligned. I love our roadmap. I love our engagement and plan. You are going to see it all in play very, very soon. We guided to growth in Q1 and Edel has signaled some things for the rest of the year. Business is really, really strong. Don’t misconstrue something that shouldn’t be misconstrued.

Operator

The next question comes from the line of Jim Suva – Citigroup.

Jim Suva - Citigroup

Could just help us quickly understand what is it about the customer inventory change. How much of an impact that was this quarter and is it now behind us or is this going to impact next quarter? Is there a reversal of it? Exactly how it flowed through the sales and impacted EPS. Jim, Mike gave us a nice demo at Mobile World Congress with your new browser and the web kit it looks pretty strong there. Any commentary around is that going to be backward compatible, and the timing on it? It seems like the competitive nature specifically for the consumer where you are starting to see a lot of growth increase and I think people are kind of looking forward to unleashing what Mike brought out at Mobile World Congress.

James Balsillie

I will try to make sure I hit everything. Inventory is one-time. Then you have some shifts in policies there and then you have some changes in mix. That took it down a bit on the top line but other things did better. The nets did better than we expected. So you look at the leverage in the model and you look at margin and you look at the nets we did fine. It is a one-time thing. You are going to see every one of them has great programs they are unleashing. I am talking North America and the level of engagement around the world is amazing. It is a one-time thing and that is the way it goes. It is not something structural and it is not something you can do twice because somebody else may do it but it is possible. Things are pretty lean. You have to remember we did daily activation numbers by everything. There is no channel game. It just doesn’t happen because you get your activations and by device and by carrier. It is a very real-time feedback loop.

So the programs look great. The devices are strong. Again, North America is hotly contended but we are in a great spot and it is still doing fine. The activations and the nets are great. The roadmap and the products are great. What Mike showed at Mobile World Congress stay tuned. We have the [WES] in late April. You are going to see a lot there on all aspects of the whole element of the BlackBerry experience. We have got all these design slots around the world we have invested in. These people have been very, very busy. All the carriers are really aligning in all kinds of excellent promotions and programs to launch. Quite frankly we launched a lot of things at [Davcom] Super Apps, Gaming, open GLES type stuff, concierge, media capabilities, what you are going to see is really quite amazing and what is so exciting is how well aligned we are with the carriers that they are strengthening in this in a constructive way an ecosystem of applications and content B2B and B2C are happy with this because it is not just an intermediation model.

To answer your question you are going to see all these capabilities come out. Just stay tuned for when. You are going to see a lot of stuff at [WES]. On the inventory stuff and flow stuff it is very strong. It is one-time adjustment stuff and other parts compensated. But you have the mix changes and the margins stayed the same and the nets were better than we expected. These are the elements that can move around in our game. But to interpret it as any kind of weakness from my point of view is misconstruing it but people are free to interpret it as they wish.

Operator

The next question comes from the line of Peter Misek – Canaccord Adams.

Peter Misek – Canaccord Adams

A couple of questions on currency. What extent did currency impact ASP and what sort of currency impact do you see in your guidance?

Edel Ebbs

There was really no major currency impact on ASP in the quarter. We have a fairly extensive hedging program as well and have actually increased the amount of hedging we have been doing in terms of managing FX exposure. So again in Q1 I think we are in a pretty good position to weather any normal kinds of moves in the currencies.

Peter Misek – Canaccord Adams

In terms of the guidance the assumption is you continue to remain fully hedged, correct?

James Balsillie

No. It wouldn’t be fully hedged. Reasonably hedged.

Operator

The next question comes from the line of Ittai Kidron – Oppenheimer.

Ittai Kidron – Oppenheimer

I wanted to dig in a little bit more on your international traction. You have done a very good job in the last couple of quarters of diversifying your revenue and your revenues moved from around 30% international to now 43% if I got the number right. Can you give us a little more color though may be on a breakdown on a net add or shipment standpoint how should we view that and should I interpret your guidance for the second half with gross margins somewhat declining and ASP’s improving given the change in mix? Should I interpret that also to mean you expect North America to be somewhat stronger as you go into the second half of the year?

Edel Ebbs

On the last one, on the gross margin side of things, as Jim said there is a lot of activity going on with the U.S. carriers and a lot of new product launches planned both in the U.S. and around the world. So there are definitely quite a broad number of geographies that are participating there. In terms of what is contemplated in terms of new products in the gross margin, definitely we have a lot of stuff planned later in the year and as we talked about before when you launch new products there should definitely be some initial gross margin activity there. That is built into the expectations that we talked about earlier on the call.

In terms of the geographic mix you were asking about I believe the actual number wasn’t quite as high as what you said, I think 38%. Let me confirm that but I think it was 38% international revenue. In terms of subscribers it was very, very strong outside North America. Let me pull the exact number for you because I think 38% is…

Ittai Kidron – Oppenheimer

As you dig that number up how should I interpret what sounds to be a strong decline in net adds in North America? Correct me if I am wrong. I am just trying to tie a few data points around it seems like a lot of traction internationally is from your low ASP devices. It sounds like traction internationally is extremely strong and so when I look into the second half I am just trying to understand some of the working assumptions here. It sounds like you are expecting a replacement cycle here in the U.S. not as much as net add activity and a lot of net add activity outside of North America, is that a right way to think about your business as we move through the year?

Edel Ebbs

I wouldn’t say so. No. We still think there is a lot of room for growth in North America as well. Before I finish your question it was 48% of revenue outside of North America and 38% of the base outside of North America. We did a net add breakout. I think your assumption it is low ASP products that is driving international certainly 8520 has been successful and has helped as a catalyst in some of those markets but Bold 9700 is also doing extremely well and that has also been a big factor here and that is one of the things we pointed out as to why the gross margin has been so strong.

The 8520 also has a great gross margin but the 9500 has been also a big part of the mix. I would not say what we are expecting later in the year is fully dependent on international and what you would call lower ASP penetration.

Operator

The next question comes from the line of Vivek Arya – Bank of America/Merrill Lynch.

Vivek Arya – Bank of America/Merrill Lynch

What new kind of users do you think your new portfolio will appeal to? How do you see the expansion of your addressable market? As I look back when RIM launched the Pearl a few years ago that was a substantial expansion of your addressable market. When you think about the new portfolio do you think it could have a similar impact on your addressable market? Secondly, do you think RIM is prepared to handle the potential entry of Apple’s iPhone into Verizon?

James Balsillie

To answer the first one, the sector we are in is expanding rapidly. There are new users on all fronts. I think the social, prepaid and the Curve model have really just nailed entry markets and international markets and they just grow up to more and more capabilities over time so that is a phenomenal place to start and it is developing great use. Quite frankly it also for entry level is respecting network scarcity which is a big issue in a lot of these markets. You have entry level users. We have great B2B plans. Higher ASP are clearly there is strong media strategies and sophisticated user strategies in these higher end products.

You have heavy, heavy major carrier alignment in these strategies. So I think you are going to see that happen. I am not going to speculate on what other companies are going to do and other carriers. We have 530 [out of 170] countries. It is growing. The channel programs, B2B and B2C are super intimate. These companies and carriers have different programs but our whole thing is very strong alignment with their strategic being a platform to their customers. Very high respect of their network scarcity. Highly profitable customers both on the revenue and the cost and the rich interface with the ecosystem. It is working. Carriers like that. They like it around the world and the ecosystem of content and applications like it and that is why you are seeing the growth we are representing. That is why we are signaling continued growth. We have definitely had competitors come and go. You have to remember whenever one thing happens there is always a reverberation effect. You can’t just examine these things in isolation.

You can say the same about any carrier in any circumstances but our brand and our value and the benefit to carriers and users has been demonstrated in all these elements we have signaled. I see every one of those elements only strengthening going forward both in an absolute market growth and the new users and I think our competitive hand on a relative basis is strengthening. If you saw what was going on with the devices, the platforms and the deliverables that you are going to see throughout this fiscal year you would realize not only are we the strongest competitor and a really established player but we are strengthening.

Operator

The next question comes from the line of Chris Uvistosky - TD Newcrest.

Chris Uvistosky - TD Newcrest

I will try this and see if it works. I think a lot of people are asking and wondering about the net adds in North America and the math seems to suggest net adds did go down sequentially. I know Jim you said that you are very satisfied with the way net adds are shaping up. If we could just keep the discussion to net adds which I think is a good leading indicator for your business in North America because obviously international is going very well, what is going on in North America in terms of net adds?

James Balsillie

North America is fine. North America is doing really, really well. The net adds have done really good. I don’t know how you are thinking that. The other thing is sometimes you have different carriers doing different things so if you have a certain number of carriers hitting on all cylinders and extend it and you have one or two that said okay we want to crank it up to a whole different level or take it back to where it was and those are all imminent plans that is cause to feel very, very good. Clearly when you sort of model out your quarters and all that you don’t count on everybody doing 100% of everything of what they are saying they are doing but you say that adds up to something pretty good so let’s just give it the best estimate we can.

North America is fine on a nets basis and quite frankly strengthening. I think we guided that in what Edel said. I think you are misconstruing it.

Chris Uvistosky - TD Newcrest

The math that I did that I think a lot of people who will be doing this last quarter you said 35% of your base was outside of North America. This quarter you said 38% so it is just delta math.

Edel Ebbs

Part of that is rounding. We do round those percentages and it is pretty sensitive. Net adds were up in North America last quarter.

Chris Uvistosky - TD Newcrest

That is exactly what I am looking for so I appreciate that. If I can ask on international what are you doing in terms of manufacturing in South America and tapping the Brazilian market? It looks like that seems to be the standout market where there is a huge population and a huge opportunity but the retail prices are really high.

James Balsillie

Latin America is going very, very well and we mentioned that. Probably our highest growth area in the world for us in sort of a larger type of area by a fair bit. So it is really, really doing well. Other parts have done really, really well and Brazil has done okay and you are right they have got tariff structures so we have this new manufacturing plant that supports the local manufacturing price point. So we expect the pricing to be much, much stronger in the very, very big Brazilian market. One could count on that to be one of many, many growth drivers we have going on and also in that region that manufacturing can service other markets like Argentina, Chile and so on. There are a lot of reasons to feel very, very excited and good about Brazil and the whole Latin America region.

Operator

The next question comes from the line of Maynard Um – UBS.

Maynard Um - UBS

Can you help us understand how we should think about the August quarter and seasonality given the growing international mix? Your gross margin guidance of moderation seems to imply the mix of hardware won’t change at least through the August quarter so I am wondering if that is the right assumption. If I can just follow-up on the inventory question there was a view I think out there that inventories in the channel were really low and that there should be a rebound quarter but you kind of guided inventory down again next quarter. I am wondering if these are reasonable levels of inventory to fill the demand you are seeing or if you think the channel will have to replenish at some point to more reasonable levels?

Edel Ebbs

The channel inventories are at an extremely low level. I think when we launch a new product it is definitely going to be channel sell and that kind of stuff I do think that lean inventories are here to stay. I don’t think you are going to see them returning to where they would have been a year ago or anything like that so I wouldn’t suggest you build anything like that into your expectations. In terms of seasonality, Q2 is always a difficult quarter because of the summer and in terms of predicting it and if you throw a new product launch and that kind of thing into the mix it does get tough and that is why we only give full guidance one quarter out.

We have typically not seen a ton of summer seasonality. We do see it in certain geographies but we have had some quite strong Q2’s and then we have had some where we have seen more of a seasonal effect. It is a little early to predict at this point as to what we are going to see in Q2. So we have kind of given you as much as we can on that quarter.

Maynard Um - UBS

To the question of visibility you talked about the ASPs in the back half. How firm is your pricing for your roadmap in the back half? I am trying to understand how to think about new product ASP in the context of competition and industry pressure.

Edel Ebbs

In many cases when you are doing a new product for a partner there is pricing concentrated already. That would be set in up front. What the overall pricing scenario in the market looks like 6-8 months from now you could always be surprised but given the visibility we have today and the indications we have in our expectations for the market we have given you the best view that we can.

Operator

The next question comes from the line of Jeffery Kvaal - Barclays Capital.

Jeffery Kvaal - Barclays Capital

I was wondering if you could comment a little bit on the ARPU trajectory? It sounded like you are talking a lot about growth in the prepaid market. What should we think about in terms of the ARPUs? Obviously that was down and that is what we suspected and any quantitative commentary there would be helpful. Secondarily, what kind of impact does that have on your margin structure?

James Balsillie

Are you talking ARPU for carriers or for our stock fee?

Jeffery Kvaal - Barclays Capital

For your own…

James Balsillie

There is segmentation but they tend to grow up to higher levels so I mean it can change around based on segmenting for lower users. It is a mix. I don’t know, did you guide a number?

Edel Ebbs

No. We did say it was flat in Q4 but we don’t provide guidance.

James Balsillie

There is a mix to it and it is growing but once people enter in a lower they often upgrade to a greater level over time. That will undertake its natural evolution and there are a lot of rich new services that quite frankly you are going to see some of them unleashed this year that have a really positive potential on the value added side beyond that. It is one of those mix kinds of things. You get some mix that segments down. You get some new services and upgrades to bring it up and Edel has guided to stable. That is a pretty good place to go and the most important thing is to continue to expand the subscriber base and enriching the platform experience. That is exactly what we are doing on a global basis.

Jeffery Kvaal - Barclays Capital

Is there a margin implication for the lower tier plans?

James Balsillie

Not in any material way because they tend to be based on use. If somebody is on a big social plan you are just doing messaging and Facebook that is a pretty light consumption on the network and it is a lighter infrastructure load. The whole infrastructure is growing pretty substantially because people are using it a lot. BlackBerry are pretty light load on the network and they are also compressed and efficient on even heavier load apps. It scarcely matters. They are light load on infrastructure to.

Jeffery Kvaal - Barclays Capital

Does that suggest that even in established pricing tiers there is pricing pressure or not pricing pressure? How should we think about that?

James Balsillie

Nothing of any materiality worth disclosing beyond any normal commercial interplay. Everybody has commercial interplay where people want that in every part of the business it is sort of a normal thing. There is nothing beyond guidance or nothing beyond the normal dynamic at play here.

Operator

Ladies and gentlemen this concludes the question and answer session. Ms. Ebbs please continue.

Edel Ebbs

Thank you operator. I would like to thank everyone for joining us on the conference call today and remind everyone there is a replay available on our website at rim.com/investors. Thank you.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.

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

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

This Transcript
All Transcripts