Research In Motion Limited F1Q11 (Qtr End 05/29/2010) Earnings Call Transcript

| About: BlackBerry Ltd. (BBRY)

Research In Motion Limited (RIMM) F1Q11 (Qtr End 05/29/2010) Earnings Call June 24, 2010 5:00 PM ET


Edel Ebbs - VP, IR

Jim Balsillie - Co-CEO

Brian Bidulka - CFO


Ittai Kidron - Oppenheimer

Maynard Um - UBS Securities

Ehud Gelblum - Morgan Stanley

Matt Thornton - Avian Securities

Jeff Kvaal - Barclays Capital

Jim Suva - Citi

Vivek Arya - Bank of America Merrill Lynch

Gus Papageorgiou - Scotia Capital

Mike Abramsky - RBC Capital Markets


Welcome to the Research In Motion first quarter fiscal 2011 results conference call. (Operator Instructions)

I will now turn the conference over to Edel Ebbs, VP, Investor Relations.

Edel Ebbs

Thank you. Welcome to RIM's fiscal 2011 first quarter results conference call. With me on the call today is Jim Balsillie, Co-CEO and Brian Bidulka, CFO. After I read the required cautionary note regarding forward-looking statements, Jim will provide a business and strategic update. Brian will then review the first quarter results, and I'll discuss our outlook for the second 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 webcast. A replay of the webcast will also be available on the website. We plan to wrap up the call before 6:00 p.m. Eastern this evening.

Some of the statements we will be making today constitute forward-looking statements within 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 ASPs for Q2 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'll now turn the call over to Jim.

Jim Balsillie

Thank you, Edel. We're pleased to be kicking off fiscal 2011 with a strong footing with unit shipments for the first quarter of approximately 11.2 million and the shipment of RIM 100 millionth BlackBerry smartphone.

Earnings per share in the quarter were at the high end of our expectations and grew more than 40% over adjusted earnings per share in the same quarter last year. We added 4.9 million net new BlackBerry subscriber accounts for a subscriber base of approximately 46 million at the end of the quarter. Unit shipments in Q1 were impacted by later-than-anticipated shipment of certain new products scheduled for the latter part of the quarter.

Revenue for Q1 was at the low end of the range we forecasted in March, primarily due to the slightly lower than expected shipments and the resulting product mix that favored lower ASP products. Product mix also led to the higher-than-expected gross margin in the quarter. Channel inventories remained relatively flat in Q1 and we're not anticipating a significant increase in weeks of channel inventory in Q2.

BlackBerry smartphones are available through over 550 carrier and distribution partners in over 175 countries, and international markets continue to be a strong driver of growth. We saw ongoing success in our efforts to increase BlackBerry penetration in enterprise, consumer and prepaid markets around the world during the first quarter.

Net subscriber account additions outside North America were particularly strong in Q1 and approximately 40% of the subscriber account base is now outside of North America. We are expecting second quarter BlackBerry smartphone shipments in the range of 11.6 million to 12.1 million and to add between 4.9 million and 5.2 million in net new subscriber accounts.

Forecasting the second quarter is challenging given that we're planning two significant new product introductions that will likely bridge the end of Q2 into Q3. The specific time of these launches will have an impact on how much of these products shipped in Q2 versus Q3. These products also have higher ASPs, so a shift in the percentage of these products in the mix for Q2 also has a meaningful impact on our revenue and earnings forecast.

We have an exciting line of products, services and promotions expected to be introduced between now and the end of the fiscal year, and we believe that these together with the introduction of new tiered service pricing in the U.S. and around the world are setting the stage for an acceleration of growth in Q3 and beyond.

We believe that this will lead to a meaningful increase in run rate of shipments and sell-through in the second half of fiscal year versus what we have been in recent quarters.

In the first quarter, we launched two new smartphones, the BlackBerry Pearl 3G and the BlackBerry Bold 9650 for CDMA. The 9650 is the newest addition to the award-winning Bold family and is the first Bold world phone to operate on CDMA networks in North America and run internationally on GSM networks. The 9650 also offers premium features, including Wi-Fi, GPS and optical trackpad and a fast 528 megahertz processing speed.

We are pleased with the initial sell-through at both Sprint and Verizon where the Bold 9650 has been in market for a few weeks now. Reviews of the Bold 9650 have been outstanding with strong acknowledgment of the device's features, design and build quality.

BlackBerry Pearl 3G is the smallest and lightest BlackBerry smartphone ever, weighing just 3.3 ounces in an elegant candybar form factor. This smartphone is targeted at the large percentage of the global phone market that is accustomed to messaging from a traditional alphanumeric keypad and offers a very attractive on-RAM [ph] for those users as well as providing an upgrade opportunity for the large base of existing BlackBerry customers who favor the SureType keyboard and Pearl design.

The premium 3G Pearl experience allows users to benefit from the high-speed 3G UMTS/HSDPA networks, while they also benefit from a Wi-FI b/g/n support, one of the highest pixel density screens on the BlackBerry smartphone, support for up to 32 gigabyte microSD card and many more of the features that users expect from a fully-loaded smartphone.

In April, we hosted the ninth annual Wireless Enterprise Symposium in Orlando with over 5,000 attendees, over a 100 breakout sessions and very positive feedback from customers and partners who attended.

At WES this year, we also previewed BlackBerry 6, the next generation of the BlackBerry user experience featuring crisp graphics, seamless animations and deep customization capabilities. With redesigned core applications and new enhanced multimedia experience, this new UI will change and enhance the way BlackBerry users interact with their smartphone.

BlackBerry 6 will also incorporate the new BlackBerry WebKit browser with best-in-class efficiency, fidelity and ease of navigation. We expect BlackBerry 6 to be available before the end of September.

During Q2, Verizon continued to promote BlackBerry smartphones through a global promotion with attractive pricing on Storm, Curve and Tour devices. The new CDMA Bold 9650 was also recently launched at Verizon, and starting in July, Verizon will be running a campaign to support the launch, which includes a tour of major U.S. cities where subscribers who are eligible for upgrade would be invited to participate on special discounts and will be offered promotional credits and discounts from application partners such as Skype and Slacker.

Verizon will also target the enterprise segment of the BlackBerry solution through a new initiative that allowed the purchase of BES Software License on their MyBiz and Verizon Enterprise Center web portal and featuring these offerings in the quarterly software promotions.

Sprint continued to increase their BlackBerry subscriber base in Q1 through initiatives such as the BOGO program on Curve 8530 and the launch of new Bold 9650 across all channels. Sprint also introduced BlackBerry service through its Virgin prepaid brand in addition to the existing availability of BlackBerry on its Boost prepaid platform.

At T-Mobile, the Bold 9700 continues to do well supported by a mix of print and online media campaigns that complement the advertising and marketing programs we recently launched promoting BlackBerry Messenger.

BlackBerry Mobile Voice System also continued to be a part of the T-Mobile offering and it's being supported with various training initiatives throughout the different sales channels to push awareness of the new MVS capabilities that were launched at WES in April.

An exciting development in North America this quarter was the industry-leading data pricing move by AT&T with the replacement of all-you-can-eat data plan with new usage-based plans that better reflect the true cost of network usage and reward customers for using the network more efficiently.

The BlackBerry platform has been proven to be more efficient in terms of network usage than most other platforms and we expect this move to be positive for BlackBerry smartphone adoption. The majority of BlackBerry smartphone users will be able to subscribe to the lower-priced $15 per month plan, while many customers on competing platforms may need to subscribe to the higher priced $25 plan.

In the U.K., O2 also launched a similar plan where they have eliminated unlimited data options and replaced those plans with usage-based pricing tiers. The Enterprise market continues to be an important segment, and at the end of the quarter the BlackBerry solution was deployed in over 90% of the Fortune 500 with approximately 80% having an installed base of 500 or more devices.

The BlackBerry platform continues to be the platform of choice for corporate deployments, and this position has been reiterated recently by a number of corporate customers across multiple industries that have evaluated and undertaken trial of alternative solution, but abandoned these and reaffirmed their commitment to BlackBerry.

In addition, there is a new opportunity evolving in the corporate market where enterprises are choosing to support user-purchased personal devices for access to corporate data. As the adoption of these personal liable devices accelerates in the enterprise and the SMB, we continue to build on the flexible BlackBerry platform to fit the growing needs of the workplace.

Later this year, we expect to introduce a solution to allow enterprises and end-users to manage BlackBerry smartphones more effectively as corporate assets. This extended functionality for the BlackBerry platform will allow organizations running a BES or BES Express to secure and control the enterprise portion of the BlackBerry smartphone and simultaneously allow the end user to have an independent control of the rest of the device when used for personal reasons.

This solution would extend to many of the core BES capabilities such as remote enterprise-wide corporate data access controls, access to third-party applications and features such as blocking or copy and paste from the corporate side of the device to the personal side.

Demand in the U.K. remained strong this quarter with multiple carriers choosing BlackBerry smartphones as the peer device for both pre and postpaid offerings. These and other efforts during the quarter culminated in BlackBerry achieving the largest share of smartphones sold in the U.K. during the calendar Q1, with the Curve 8520 being the most popular prepaid device and the second-most popular on postpaid.

This success was largely attributable to the strong support of our carrier partners, including O2 who targeted customers with numerous promotions on BlackBerry smartphones, BES Express, BBM and a prominent position of BlackBerry in the O2 buyers guide.

T-Mobile U.K. also dedicated a large marketing budget to BlackBerry with prominent in-store displays, a dedicated BlackBerry zone on their website and Hero status in May across major channels.

EMEA continued to perform well in Q1 with the Netherlands, the UAE and South Africa showing particularly strong growth. In the Netherlands, we continue to increase our market share with the Bold 9700, attaining the highest volume postpaid handset in the nation, thanks in part to promotions from all three carriers in the region.

In the UAE, BlackBerry continued to lead the market with Etisalat introducing an aggressively priced social networking plan and du launching BlackBerry smartphones into the prepaid channels. And this success was mirrored in Kuwait, following the introduction of the Curve 8520 during the quarter.

In South Africa, the Curve 8520 was strong with both MTN and Vodacom setting new records for BlackBerry subscriber growth through creative marketing programs such as “Do You Speak” [ph] Blackberry campaign targeted to South African students.

In Latin America, the BlackBerry Bold 9700 was launched during the quarter, further solidifying the BlackBerry platform's leading position in the region and complementing the already successful Curve 8520. Many carriers in the region featured BlackBerry smartphones in Mother's Day campaigns with special bundle devices and rate plans.

Telcel in Mexico ran a Hero campaign around the Bold 9700 and featured different colors of the Curve 8520 in the Mother's Day promotion. The RIM's BlackBerry Messenger branding campaign had been well received in many of these markets and carriers in Brazil, Colombia and Mexico and other countries are leveraging this campaign with window displays and other promotional activities.

We are pleased with the continued strong growth we are seeing in Asia Pacific and especially Southeast Asia where BlackBerry devices are the smartphone of choice in many markets. This is being driven by strong carrier adoption of tiered and prepaid pricing plans, the prominence and viral nature of BBM and the wide portfolio of BlackBerry smartphones available in the region.

We're also expanding our channel reach and retail focusing in Indonesia [ph] in partnership with Brightpoint in order to expand the number of retail points of presence throughout he country and also working closely with them in neighboring markets such as Malaysia, Thailand and the Philippines.

Over the past few months, we launched several new products and partners in India, including the Pearl 3G, the white Bold 9700, Storm 9520 and Curve 8530. Additionally, we launched BES Express and worked with Vodafone on our try-and-buy offer to further incent voice-only customers to upgrade to a data plan.

We believe there are tremendous opportunities in Indian market and are beginning to see strong adoption of BlackBerry Messenger among certain market segments, which we plan to capitalize on to further drive growth in this region.

In China, we recently made our first step into retail markets with the introduction of the BlackBerry Curve 8910 through Digital China's nationwide retail network with over 300 points of presence. The Curve 8910 will be optimized to enable access to popular services like Sina Weibo, QQ and Fetion in addition to multimedia and messaging capabilities.

In May, we also introduced our first device offering on China Telecom's EV-DO 3G network and started offering the BlackBerry Storm through Chinese enterprise channels. BlackBerry Solution will be marketed through China Telecom's e-Surfing 3G service and will initially be launched in 16 provinces.

Additionally, we expanded our mobile applications initiative in the region by announcing RIM's participation in $100 million affiliate BlackBerry partnership fund in China, which is a joint effort between BlackBerry Partners Fund China, China Broadband Capital Partners and North American BlackBerry Partners Fund.

We continue to drive penetration of the BlackBerry platform in the prepaid segment. In Asia-Pacific and EMEA, prepaid growth remained strong as we have seen for the last few quarters, but we're seeing increased penetration of prepaid in many other markets, including North America.

BlackBerry is now available through both the Sprint prepaid channels. And in Canada, TELUS launched BlackBerry smartphones in the Koodo prepaid channel with an attractive $10 and $15 per month rate plan. And Bell launched new BlackBerry Grab and Go bundle that allow their customers to buy a sealed package and activate the device on their own.

Social networking usage continues to grow on BlackBerry smartphones, and BlackBerry subscribers are among the most active with popular social networking sites. We recently released the native Twitter for BlackBerry app into beta and within a few months has become the most prevalent platform for tweeting in any smartphone brand.

The application allows for seamless integration between other native BlackBerry applications and Twitter to offer real-time messaging and notifications as well as the ability to tweet, utilize friend picker, post tweets, forward and re-tweet as well as many other features.

The Facebook app also continues to grow on BlackBerry with millions of users added each quarter and over half of our carrier partners preloading the application on BlackBerry smartphones. In the upcoming month, we expect to further integrate social networking application into the BlackBerry platform to bring an even better user experience.

BlackBerry Messenger continues to be a unique and valuable application for attracting new users to the BlackBerry platform. To leverage the success, we recently launched a new BlackBerry Messenger advertising campaign in North America, the U.K. and major markets in LATAM and are experiencing a dramatic uplift in our BBM penetration in these markets as measured by incremental usage as well as activation by new users.

In Q2, we plan to continue our focus on driving awareness and adoption of BBM in all of our major markets and are planning a significant advertising media campaign in our top 12 markets in North America.

April was the first anniversary of the launch of the BlackBerry App World, which is now available in over 60 countries in six languages around the world and has been downloaded by over 20 million subscribers with approximately 1 million apps downloaded everyday. We expect the success to accelerate with the upcoming launch of App World 2.0, which is expected to incorporate key features, including support for carrier and credit card billing, barcode scanning, a top new application view and many other features.

In addition to improvements in the app, App World 2.0 users will also enjoy more functionality in the App World website, enabling them to create an App World account, purchase content from the store and sync content with the BlackBerry smartphone via a side loaded connection.

The concept of BlackBerry Super Apps continues to drive excitement in the BlackBerry developer community. We've been working closely with the developer community to help them understand how they can take advantage of the unique BlackBerry APIs and services and to challenge them to create innovative, addictive and highly-engaging apps that can become an important part of the users' lives.

One way of doing this is through the Super Apps Developer Challenge that would launch this quarter to reward developers that demonstrate true innovation to apps that are designed to change the way people work and play.

Developers are being rewarded through prizes valued at over $1.5 million that include funding for go-to-market services and application promotion. The first round of recognition will happen at the BlackBerry Developer Conference in September.

We're pleased that RIM has been recently ranked ninth in the Annual Gartner AMR Top 25 Supply Chain Award rankings, which recognizes supply chain management excellence. We worked diligently over the past few years to improve our value chain, and this award is validation of our strategy and our ability to scale and power some of the best companies in the world.

During the quarter, we also completed the remaining portion of the 1.2 billion common share repurchase plans, authorized by RIM's Board of Directors last November. The total number of shares repurchased since November was 18.2 million with an aggregate cost of approximately $1.2 billion.

Today, RIM's Board of Directors approved a new repurchase program, authorizing the company to buy back approximately 31 million shares over the next 12 months.

We're pleased with the ongoing strength of BlackBerry adoption around the world. We're heading into an exciting new product cycle beginning in late Q2 which we expect to leverage through focused execution and ongoing constructive alignment with our partners to drive an acceleration of growth in the second half of the fiscal year.

I will now turn the call over to Brian to review Q1 results.

Brian Bidulka

Thank you, Jim. Revenue for the first quarter ended May 29 was $4.24 billion which was slightly higher than the $4.08 billion reported in the previous quarter and in line with the guidance we provided on the April conference call.

As Jim mentioned, shipments in the quarter were impacted by slightly later than expected shipment of the new Bold 9650 and Pearl 3G, as well as a lower than expected ASP of $300 in the product mix that included less of these new higher ASP products.

Handheld devices represented $3.35 billion or 39% of revenue during the quarter, as compared to $3.3 billion or 80% in the previous quarter. Total devices shipped in the quarter were higher than Q1 at approximately 11.2 million units. Approximately 10.5 million new devices were activated in Q1 either for new customers or for replacements and upgrades, not including phone-only sales.

We estimate that both four weeks and the absolute level of channel inventory at the end of Q1 were similar to Q4. We expect channel inventory in Q2 to remain similar to Q1, both on our four weeks and absolute basis.

Device ASPs in the quarter were approximately $300, which was slightly lower than expected due to product mix, reflecting delays in shipment of certain higher ASP products.

Service revenue was $693 million or 16% of revenue for the quarter, up $53 million from Q4. Monthly ARPU was down from the prior quarter due to growth in the adoption of bills [ph] and the success of certain lower-priced service plans.

Software revenue and other revenue accounted for the remaining 5% of sales in the quarter. Gross margin for the first quarter was 45.4% higher than the guidance we provided in March due to mix of handsets shipped in the quarter leading to a higher hardware gross margin as well as service revenue being slightly higher as a percentage of sale.

Operating expense in the first quarter was $865 million, up slightly over the comparable Q4 level; R&D expenditure was $288 million or 6.8% of revenue for the quarter, in line with our forecast. Sales, marketing and administration expenses approximately $483 million down slightly over Q4. Operating expenses include stock based compensation expense of approximately $16 million.

Tax rate for the quarter was approximately 28% in line with our forecast. Net income for the fourth quarter was $769 million or $1.38 per share diluted. The impact of shares we purchased in the quarter was approximately $0.01 per share. Weighted average diluted share due to the EPS calculation for the quarter was 558 million, actual shares outstanding at May 29, were 552 million. Total options outstanding at May 29 were approximately 8 million; during the quarter RIM repurchased 5.9 million shares.

Total of cash, cash equivalents, short terms and long term investments increased by approximately $400 million to $3.27 billion at the end of Q1 as compared to $2.87 billion at the end of the previous quarter. During the quarter, RIM generated approximately $1.12 billion in cash from operating activities, which was offset by capital asset additions of approximately $226 million and the repurchase of common shares of approximately $410 million.

In Q1, accounts receivable were approximately $2.6 billion and DSO decreased to 57 days from 58 days in the prior quarter, primarily due to timing of sales in the quarter.

Inventory on hand in Q1 was approximately $555 million versus $660 million in the prior quarter. Inventories continue to be primarily raw materials and semi-finished goods to support demand for BlackBerry products.

RIM reports in U.S. dollars but has a portion of its expenses in revenue in currencies other than the U.S. dollar. Volatility in foreign exchange markets can have an impact on both revenues and operating expenses. To mitigate this risk, we have a hedging program in place to hedge a portion of the foreign exchange exposures. As a result of our hedging program in Q1, we did not see a significant impact on revenues or expenses from foreign exchange fluctuations.

Given the current forecast of mix for Q2, we do not expect a significant impact on revenue or net income from foreign exchange with a plus or minus 10% move in the U.S. dollar having a negligible impact on revenue or expenses.

I'll now turn the call over to Edel to discuss our outlook for Q2.

Edel Ebbs

Thanks, Brian. Before I discuss our outlook for Q2, I'd like to remind everyone that these forward-looking statements reflect management’s best current estimates and should be taken in the context of the risk factors listed at the beginning of the call and disclosed in our public filings.

We expect to ship between 11.6 million and 12.1 million units in the second quarter and for revenue to be in the range of $4.4 billion to $4.6 billion. ASP in Q2 is expected to be similar to or slightly above Q1 levels. I did mention product mix as the primary factor affecting device ASP, and forecasting ASP for Q2 is particularly challenging given the variability that can result from shift in the mix, due to the timing of new product launches in the quarter.

We continue to expect ASP to increase in the second half of the year as new higher priced products become a larger part of the total product mix. We are targeting gross margin for the second quarter to be approximately 44%. As we said in the last call, we expect quarterly growth margin percentage to remain strong in the low 40s throughout the second half of the fiscal year.

We are targeting net subscriber account addition to the Q2 in the range of 4.9 million to 5.2 million. This reflects the potential for a decrease in activity in European markets throughout the seasonally slower summer months, as well as the timing of scheduled new product launches in the quarter.

These new products are anticipated to drive an increase in net new subscriber account addition run rate once they are in the market. The timing differences between sell-in and sell-through may shift more of this benefit into the third quarter.

Total operating expenses are expected to increase in Q2 by approximately 7% to 10% from Q1 levels. We expect R&D to increase by approximately 6% to 10%, and sales and marketing and administration expense increase by approximately 7% to 10%.

In the second quarter, we expect depreciation and amortization to be approximately $100 million, and we expect CapEx to be approximately $350 million. In the third quarter, we expect CapEx to be slightly lower than Q2 levels.

The primary areas of spending continue to be expansion and network infrastructure in facilities for R&D and IT operation. We expect the tax rate to be approximately 28% in Q2 and throughout the remainder of fiscal 2011. We expect Q2 EPS to be in the range of $1.33 to $1.40 per share diluted. This excludes the impact of any share repurchases that may occur during the quarter.

I'll now turn the call back to Jim.

Jim Balsillie

Thank you, Edel. Adoption of the BlackBerry platform in markets around the world continue to drive strong results and open up new opportunities. We're looking forward to the introduction of innovative new products later this quarter and throughout the remainder of the fiscal year and plan to continue to focus on building strong partnerships, delivering quality products and leveraging the unique capability of the BlackBerry platform to drive profitable growth in fiscal 2011.

This concludes our formal comments. We would 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.

Will the operator please come on to handle questions?

Question-and-Answer Session


(Operator Instructions) Your first question today comes from Ittai Kidron of Oppenheimer.

Ittai Kidron - Oppenheimer

I wanted to dig in into your expectation of, as you mentioned acceleration of growth in the second half. Can you give us a little bit more color as to what you expect really to drive this? Is it mainly international markets that you expect some big step up, a big recovery here in the U.S., some hero campaigns? I mean, if you could give us a little bit more color on what you mean by that.

And also, how should that be measured? Is that year-over-year growth in devices should accelerate as a percent when you mean acceleration? Can you be more specific in what is the financial item or performance item we need to look at when you say acceleration?

Jim Balsillie

Well, we have specific Hero campaigns certainly in the United States, major and bigger campaigns than we ever had before. And we certainly have launches throughout the world. So yes, they're major hero campaigns, they're committed, it's both the products, the shipments, the promotion campaign, they're very substantial. And we also are rolling these out around the world.

So we have normal execution issues to ensure we manage those in terms of timing and all of that. And we would like to get a certain amount of certain products in this quarter, and then it's a cut off between this quarter and next. There's always an issue of timing. But the commitment, the scale, the strategic positioning, the innovation is fantastic. And there's global plans on these products, some of them throughout the world.

You're seeing constructive alignment's got a renewed value, efficiency's got renewed value. And these are the kind of products that allow you to have your cake and eat it too. They offer premium performance, the ability to have enterprise and consumer on the same device, high efficiency, and yet carrier platform extension.

And we might have a couple of surprises up our sleeves in addition to that. So yes, we feel fantastic about the business. We feel fantastic about the product set. The hero campaigns, they're great, tremendous imperatives on execution of course. And these are all measured in degrees of acceleration and degrees of new levels of performance and sales. But we feel very, very strong and optimistic about what you're going to see coming out of us throughout the rest of the fiscal year.

Ittai Kidron - Oppenheimer

Can you give us a sense of magnitude on new products, how much are they impacting the August quarter? How much of that is taken into the guidance?

Jim Balsillie

Well, part of it is, and I think it was mentioned in the comments that some of these are high ASP. And we're now one month into this quarter, and so we’ve got two months left in the quarter. And how much of that you can get in this quarter is an important question, and how much of that changed the mix.

And it's a quiet summer season, but there's all kinds of back-to-school. So, definitely some of this stuff is planned for this quarter. You bet.


Your next question comes from Maynard Um of UBS Securities.

Maynard Um - UBS Securities

I just want actually a clarification on the ASP trends. Just on ASPs, with the full quarter of the 9650 in the August quarter, shipments of new higher ASP products in later part of this quarter, and then seasonality presumably strong in 8520 I'm just curious why your mix actually wouldn't help your ASPs up sequentially.

And then a question just on the competition. You used that BlackBerry built-in to allow non-BlackBerry devices to kind of hook into the BES. I'm just curious if you might have plans to create something like a sandbox application for other platforms, other OSSs, and I guess what the challenge is in doing something like that might be?

Edel Ebbs

Maynard, this is Edel, I'll take your first question. I really wish forecasting ASP is that simple. But there's really a lot of moving parts in there, and I did say that it could be slightly higher in Q2 and it's really going to be a function of how much of the new products are shipped in the quarter, and then what the mix of the remaining products are.

Even though we talked about the potential for somewhat of a slowdown in parts of Europe, that's not the only place where the 8520 sells well or the 8530 for that matter. So I think it's a lot more complicated formula than just that. But in the guidance, we did say that it could be slightly higher than this quarter and we're just going to wait and see how much some of these other products shift.

Jim Balsillie

Yes, on the competition, the enterprise side is just going through a tremendous set of opportunities. I think that they're rethinking a lot of architectures, cloud and mobility and unified communications and companions and tablets, I think there's a lot of that going on right now. And we did the built-in program, the BES, there is several hundred thousand BESs out there when you consider BES Express and BESs also.

They're not really coming out maybe for BlackBerry built-in; there used to be a time they were. The security issues are still important but the consumerization of IT is also important. They're much more interested in things like sandboxing, of dual profiles as we say, personal and corporate and so that you can still have your control, but you can have your non-enterprise part. The unified communications NBS is huge with WiFi. How one works tablets and companions into this is super-strategic to them.

Push based application architectures like with Widget and also being able to have enterprise app stores and consumerization of elements of what users want. And then making sure you support cloud services. So to answer your question it hasn't been something that has been pushed in and a lot of our stuff we'd like to interrogate the boot ROM, it's not had any security compromises and I think they're aware of that.

But I wouldn't strategically be super averse to it if it became something markets were pushing for. But if it's a half measure, it's a no measure in terms of enterprise requirements. And I can't say that they've come at me with that as a request, they come up with lots of requests, but I can't say that's one that's been the CIO. They're basically saying we love what you got, we love what you do and let's get it deployed, if it's NBF, let's get it working on all the different IP PBX Platforms, if it's dual profile, let’s get 6.0 out, if it's new form factors that would get them going. If it's other kinds of companions or things that may work with it, how you're going to architect that?

So it just hasn't been on the agenda.


And your next question comes from the line of Ehud Gelblum of Morgan Stanley.

Ehud Gelblum - Morgan Stanley

Just a couple of quick questions. If you can go a little bit more into the detail on delay in the new Pearl and 9650, what caused the delay. So it still didn't come out with Sprint at the time when Sprint appeared to be, after you announced at your Analyst Day. So that seemed to be on time. Verizon followed up a little bit afterwards, but can you go into a little bit when you were expecting them to come out versus when they did and why.

And then, Edel, on international units, can you just confirm for us that international actually grew? The only number we have, sort of, international North America is that 40% number of subscribers you gave. I know there's a lot of rounding going on, but when you try and back into the number of actual devices, you sort of get that possibly international devices may have been relatively flattish. If you can give us a sense as to how much international devices grew, and how much U.S. and North America devices grew?

And the last thing is again just a follow up on previous question, the guidance of 11.6 to 12 million units, what exactly does that presume with respect to the launch of these new products, because presumably, they both have BlackBerry 6 and the new WebKit browser. So, does your 11.6 to 12.1 assume that they come out August 20 or does that assume that they can out September 10 or 15?

So if I were to pick a date what would I assume therefore?

Edel Ebbs

That's a lot of questions, Ehud, okay. The last one is freshest. Yes, I mean in terms of, I mean I can't give you that kind of detail, it's a combination of a couple of products like I said and there’s timing issues where one of them is set for a certain date and that mean if the other one goes on time it may not have any impact at all.

So it's a really hard question to answer and I'm not going to give a whole lot more detail that that. Obviously as Jim said we're expecting these products to launch this quarter, but I'm not going to give you any more in terms of what they're expecting or how many units or anything like that.

Your first question was on the product delays. And there is different certification cycles, as I said, 9650 launched at Sprint and then at Verizon and if they are certified by one carrier doesn’t mean they will certify at the same time on the other one. So I mean it's really just kind of normal stuff in getting through certification. And I missed you middle question.

Jim Balsillie

The growth in international. International is growing very, very well. We feels great. I mean the international and the carriers are planning major extension in international, they're doing tiering plans and deeper channel and quite frankly the constructive alignment strategy is working fantastic throughout the world. And you throw in these hero campaigns for new product launches and key carriers in the U.S. If you saw what we're coming along with for the back half of this calendar year, what's lined up and queued up, there is always lot of execution. We have to execute well. International continues to be fantastic.

I think you're going to see a real swing in the United States. There's always little timing things, but none of these are what I would put in the category of long-term strategic, they're just operational execution timing things. And they are issues we've passed before. Sometimes you get a little more, some times you get a little less, you'll always take more than less; you'll always take earlier over later, but it doesn't change anything in the strategic point of view.


Next question comes from the line of Matt Thornton of Avian Securities.

Matt Thornton - Avian Securities

Just one point of clarification. I think this one was alluded to on a previous question. The two devices that we're talking about, straddling the end of the August quarter, I assume those are both OS 6.0 and these are both higher ASP parts. Did I understand that correctly?

Edel Ebbs

We hadn't commented on the software, on the product that you gave detail on features, but we think that they are higher ASP products.

Matthew Thornton - Avian Securities

Okay. Then just a couple of quick follow ups if I could, I guess one for Edel; on the ASP, was there any impact there from FX? I know it netted out to no impact at revenue. But did we see any impact on FX that was offset through the other revenue line?

Edel Ebbs

No, there is nothing material there.


Your next question comes from the line of Phil Cusick of Macquarie Capital.

Phil Cusick - Macquarie Capital

Thanks. Can we focus on OpEx a little bit, I've seen the ad campaign around the city and it looks good. But should we be looking for a gradual increase in sales and marketing and then on the R & D line as well, that's been creeping up as a percentage of revenue. Is that sort of things that are getting ready for this whole new product launch cycle, and as I kind of drop back down as revenue ramps up, or is that something we should think about this as the new level. Thanks.

Edel Ebbs

Definitely on sales and marketing and R&D, I mean, we have our plans in place to execute over a longer period of time. And it's not necessarily reflective of what's going on in the top-line of a particular quarter. I think as, Jim alluded to, we're expecting a pretty strong back-half of the year and while we continue to plan to spend on some of these sales and marketing activities that are doing so well, and continue to spend on R&D, you know, as a percentage of sales, that's really a function of it’s top-line growth that Jim’s talking about, and how well we execute on that.


Your next question comes from the line of Jeff Kvaal of Barclays Capital.

Jeff Kvaal - Barclays Capital

To follow up on Phil, should we assume that there would be some operating margin pressure to measure it with the gross margin tick-downs in the second half of the year?

Edel Ebbs

Well, that's a tough one, I mean the guidance we're giving on gross margin, we're saying, given the pretty vague number there because it's just so dependent on mix, and it really does follow on to the question that Phil just asked, what the top-line looks like is going to be a big factor there.

So that's a hard thing for me to give a whole lot of certainty on right now. Certainly we're targeting to improve operating margins, but it's really going to be a function of the top-line.


Your next question comes from the line of Jim Suva of Citi.

Jim Suva - Citi

On the acceleration that Jim talked about of new products in the second half of the year, just to make sure I'm clear, I assume it's fair then to assume also a corresponding increase in SG&A marketing. I think that's pretty logical, if you have some pretty wild products coming out.

And then just a clarification. I assume that EPS guidance does not have stock buyback built in because the timing of that will be subject to market conditions and your discretion.

Edel Ebbs

The EPS guidance does not have any buyback built into it. In terms of the sales and marketing, yes, I think that obviously you want to back up big product launches and big plans in the market with support from sales and marketing, but we're also expecting a lot of support from our partners on these products.

So while we're going to be out in the media and doing a lot of marketing around BlackBerry concurrent with this stuff, we are also expecting, and our carrier partners have plans to do a lot of marketing on these products as well. So there's sort of a compounding effect there in terms of the brand we get into the market.


Your next question comes from Vivek Arya of Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

Jim, I think the fundamental question that a lot of us and investors are grappling with this, what will help RIMM regain U.S. market share? But it seems that AT&T channel is very strongly aligned with Apple. And Verizon and Sprint seem to be aligning with Android. So where does that leave RIM?

So the specific question I have is, what will motivate customers to buy a BlackBerry 6.0 product instead of say the new iPhone 4.0 or new Android products? Other than network efficiency, what kind of differentiator should we focus on?

Jim Balsillie

Well, I mean, be careful about your implicit assumptions in your question, or shall I say explicit assumptions in you questions. Yes, I think you guys just have to watch and see what the plans are.

I think there's a lot of implicit and explicit assumptions, and that maybe should be examined. And part of that is the question of how powerful is their innovation is a good question, what’s the timing of it, it's a good question. I think an important question to ask is, how much does constructive alignment matter to a carrier, because that's been just an enormous issue throughout Europe and Asia, and definitely coming on in Europe.

And I think how much does efficiency matter, and when you look at these pricing plans, I think that that should tell you something. So I mean, you watch and see. I mean, we have unprecedented campaigns and device programs and commitments in our history. And I'm just not going to talk anything more about our products and our launches until their time.


And your next question comes from Gus Papageorgiou of Scotia Capital.

Gus Papageorgiou - Scotia Capital

Jim, I know, in the past you said you spent a lot of your time on media. Are we going to see a kind of revolution in your media strategy in the second half of this year?

Jim Balsillie

Yes, the way we see the media strategy, it's great, everybody on the outside is going to really talk in a beautiful way. Once you see the new App World, we talked about it, and once you see the new platforms, like you'll be all very surprised. And I said this on the last call, you'd be really surprised by it, and I'll think you'll just be amazed that how it's a quantum leap over anything that's out there. Point number one.

Point number two, how this both leverages media that's out there. And I also know that constructive alignment with media matters, because if you think this intermediation by carriers has got them scared, go talk to media companies who are concerned about commoditization.

And so I think focusing on beautiful innovation, focusing on efficiency in a world where innovation is valued, and design, focusing on efficiency when there's scarce resources and focusing on constructive alignment where you have very powerful stakeholders who have a decision, do they basically allow their business to be eroded, or do they invest heavily in those that have highly aligned strategies. And I don't think you'll have to wait too long to see tangible and powerful manifestations of this. And you bet, I think the immediate consumption side of this in different form factors, in very tangible commercial and technical ways is poised for re-definition here.

And I think we have some credibility, because we played re-defining goals in this mobile computing in the past. And so I couldn't be more, I just wish I could wind the clock forward a few weeks, because I think I said it on the call. Was it the last call? And you would all say, I get it now. And I think we talked a little bit about it back then to say when you see the pieces come together, you'll say, now I see what they were doing.

And it's really powerful. And we are still sustaining very, very well. I mean the international stuff is great, there is some timing stuff as there is always, and there's some powerful extension and re-engagement stuff happening in the United States. I can't say much more, but I couldn't feel better.


And our next question comes from Mike Abramsky of RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

How do you characterize the potential for the upgrade cycle from existing BlackBerry users and some of these new products you're expecting? Do you think that intentions to upgrade a change, now that there's a number of competitors in the market that obviously have been out there going very strongly, and do you think that that could be any headwinds, the upticks?

Jim Balsillie

Well, our BlackBerry user world is pretty tight and I think from the BES side and from the BBM and from the form factor and from the brand and the capabilities, and we talked about that. I think that's pretty bright. The other thing is, you have to remember that you guys talk a lot about competition, that's all fair, but you do realize that the whole feature phone market is evolving to a smartphone market.

And we're having some shifting in consumer electronics into sort of the architecture of the smartphone. So, yes, you definitely want to say, what's happening with the divvying up of the pie, but you also got to ask how big is the pie and how valuable is the pie.

And so, are there more users, and is a platform user more valuable and what share of those you are getting. So it's very dynamic, very turbulent an ecosystem, and so I think upgrade position is extremely strong. We're still growing that subs.

You saw how where we're growing. We're still having 5 million subs a quarter. Like I mean, you got to remember that, like those are net, those aren't gross.

We're still growing to 12 million devices, and I know there's ranges and all that that Edel’s guided. But I also think there are turbochargers in the wings here, both in organizational transformation. It's a business productivity, but also in how people are consuming media, and how are the content players going to build rich media for those that work with them versus don't work with them.

So there's lots of forces at play. I think the upgrade thing is pretty strong, but like I said before, this is much more of a kind of a land grab where the customers are so valuable, the space is growing so fast, you of course want to keep the customers you want and upgrade them, but this is much more about the sort of feature phone coming into the smartphone and the smartphone being consolidated, a lot more consumer electronics, and are you seeing is that the place to go?

And I think that's much more where our thinking's at. But I think we are in very good shape on the upgrade side. But I think the opportunities and the contention is really much beyond that.


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

Edel Ebbs

In closing, I'd like to remind everyone, there's a replay of this call available at 416-640-1917, passcode 4310298#. Or you can listen to the call which has been recorded and is available on the investor events section of our website. Thank you.


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

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