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BlackBerry Limited (NASDAQ:BBRY)

Q1 2015 Results Earnings Conference Call

June 19, 2014 8:00 AM ET

Executives

John Chen - Chief Executive Officer

James Yersh - Chief Financial Officer

Analysts

Maynard Um - Wells Fargo

Colin Gillis - BGC Financial

James Faucette - Morgan Stanley

Tim Long - BMO Capital Markets

Mark Sue - RBC Capital Markets

Daniel Chang - Deutsche Bank

Richard Tse - Cormark Securities

Richard Kramer - Arete Research

Simona Jankowski - Goldman Sachs

Amitabh Passi - UBS

Steven Li - Raymond James

Stan Kovler - Citi Research

Deepak Kaushal - GMP Securities

Mark McKechnie - Evercore

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the BlackBerry First Quarter 2015 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we’ll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Thursday, June 19, 2014 at 8 a.m. Eastern Time. I will now turn the conference over to Mr. John Chen, CEO, BlackBerry. Please go ahead, sir.

John Chen

Well, thank you very much, Ron. Good morning, everyone. And welcome to our first quarter -- fiscal 2015 first quarter results call. I’d like to first turn the call to James Yersh; our CFO to make some introductory remarks and Safe Harbor statement that everybody loves to hear.

James Yersh

Thanks, John, and good morning, everyone. After I read our cautionary note regarding forward-looking statements, John will provide a business update and I will then review the first quarter results. We will then open up the call for questions.

This call is available to the general public via call-in numbers and via webcast in the Investor Relations section at blackberry.com. The webcast can be accessed through your BlackBerry 10 smartphone, your personal computer, or your BlackBerry PlayBook tablet. A replay of the webcast will also be available on the blackberry.com website. In order to let as many people as possible ask questions, please limit yourself to one question.

Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the U.S. Private Securities Legislation Reform Act of 1995 and Canadian securities laws.

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.

Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are appropriate in the circumstances.

Many factors could cause the company’s actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the company that are discussed in the Risk Factors section of our annual information form, which is included in the company’s annual report on Form 40-F and the company’s MD&A, copies of which filings maybe obtained at blackberry.com.

These factors should be considered carefully and you should not place undue reliance on the company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

I’ll now turn the call over to John.

John Chen

Thank you. After hearing the statement -- forward-looking statement, I have nothing to say. Okay. Thank you everybody and good morning again, and welcome to our call. I am very pleased to report that we continued to make significant progress on our plan to return BlackBerry to growth and profitability.

In Q1, all financial metrics show stabilizations or improvement. The revenue came in at $966 million, relatively flat compared to last quarter, adjusted gross margin of 48%, up from 43% last quarter, due to favorable portfolio and revenue mix. The GAAP EPS was a profit $0.04 a share, adjusted EPS loss was $0.11 a share.

Cash at $3.1 billion, up from $2.7 billion at the end of last quarter. The overall cash actually increased by $429 million, after accounting for the real estate proceeds of $287 million and the tax refund of $397 million, which we do not consider that as part of the normal operations. Our cash burn in the quarter was $255 million, which is down by over two-third compared to the last quarter.

Adjusted for the one-time events, the decline in the [SaaS] [ph] revenue came in at lower end of our range roughly about 11%. Channel inventory declined further by 22%. James will take you through the financial in a lot more detail.

So I would like to spend a few minutes on what we accomplish from the product and strategy side of the equation for the quarter Q1, and provide some forward-looking conversation about Q2.

So we had -- we have a very good product roadmap across the board. I am very pleased with that, in enterprise, in device, in BBM and in QNX. And it has the very robust rollout between now and the end of the year, which I am going to get to a little later.

We are executing against this plan and I will have some proof points too. Here are some examples of what we have accomplished and achieved in Q1. On BES front, the enterprise server front, we have a very strong uptick of the EZ Pass program. Over 2,600 customers have registered with us. We have issued 1.2 million plus, meaning, more than 1.2 million licenses, and over 10% of those licenses were traded in from competitive MDM platforms, most notably, from Good Technology and Mobile Iron.

The EZ Pass is important to our future monetizations. I am more than happy to discuss much further with you on that, which included the up-selling from the Silver license to Gold license, the very secure version, and the new value-added service like Identity Management.

To qualify for our EZ Pass, which by the way I was told just now they are going to run all the way to the end of the year, to qualify for the EZ Pass the customer must sign up for our key support.

With BES 12, we have six beta customer installation completed in Europe and North America, and we have six more in the plans starting July. Feedback has been very positive regarding our features, functionality and stability.

Now moving onto our Z3 launch, which we code-named Jakarta, we actually call it Jakarta. There were nearly about 900 press article and coverages predominantly positive in Indonesia, which was the first country we launch.

This indicates that the BlackBerry brand is strong in Indonesia and the BlackBerry device and BBM are very popular with the people there. Demand looks strong as inventory ran low during certain periods, we never ran out, we ran low on certain periods. Volume forecast are now running ahead of our expectation.

We also launched Z3 yesterday in Vietnam and a number of additional countries are coming in the next week, including India, where our early indication is showing extremely strong support and interest.

Moving on to BBM, we are very pleased that we have released BBM Protected ahead of schedule this week and the reception has been very strong. We now have a pipeline of opportunities, include 15 existing best customer that has participate in the beta program and more than 450 increase within the first 24 hours.

During the quarter, we closed a strategic investment in NantHealth. We are currently working on the partnering agreement. I’ll give you maybe a minute on NantHealth. NantHealth provides a cloud-based intelligent healthcare platform used to connect physicians, patients, payers, researchers and clinical labs. The platform is installed in 250 hospitals today and connecting -- and connects more than 16,000 medical devices.

The investment fits into our vertical strategy. What is exciting about it is the potential to cover all aspects of our portfolio using the -- for the next-generation of this application from devices to QNX, to Secure BBM, to the Secure Enterprise Server, as well as the NOC.

Last but not least, we announced Project Ion for the Internet of Things opportunity, which of course involve a secure public cloud platform powered by the QNX technology, as well as the Blackberry Secure Enterprise Mobility Management. Project Ion will also focus on building a very strong ecosystem of carriers and application partners alike.

Yesterday, we announced a major partnership with Amazon for mobile apps on Blackberry 10.3, which is coming out this fall. This will add more than 240,000 Android apps including popular consumer apps.

Going forward the significance of this agreement will allow free BlackBerry up and our resources up to go after secure enterprise class applications. This partnership addressed the key issues with customer adoption of Blackberry 10 devices, which was the availability of an expensive application ecosystem. The Amazon Appstore will be preloaded with the Blackberry 10.3 app and available through a maintenance release for all existing Blackberry 10 devices.

Now I will spend a minute on looking forward for this quarter. We obviously will continue on our strong execution of the product roadmap. In Q2, we are planning a Blackberry Security Summit Event in July. Most likely in New York City, I don’t think we have secured a venue yet, but we would like to do it in New York City.

In September we will host an event to showcase our device portfolio for the FY ’15. We are launching a brand new device called Passport in September in London. Most of the information has been leaked to website. So you guys could go and check that out. This will be followed by the Classic coming out in November.

Other major releases planned for FY ‘15 including the BBM for Windows in July. In September, we intended to release the BBM Meetings. In November we will release our BES12 and QNX cloud will come in in December. As you could see we have a very, very busy product rollout schedule, almost every month, but the month of August, to celebrate everybody is going away everywhere.

In the past quarter we came up with a comprehensive monetization plan for BBM and value-added service. The focus is on enterprise in developing -- in developed markets and consumer in developing markets. We have an overall revenue target of $100 million in FY ’16 -- FY ’16, BlackBerry FY ’16.

The principal drivers, first, is the eBBM Suite for secure collaboration, including secure messaging, voice and data, more to say about that in the future. Second, is our mobile payment system, BBM Money is already launched and is available in Indonesia.

We are -- we also announced most recently our agreement with EnStream, which is a joint venture of Bell, Rogers and TELUS, the three major telcos in Canada. This venture supports mobile payments on behalf of Royal Bank of Canada, TD Bank Group, CIBC, Desjardins, is that, I cannot pronounce it correctly, okay, MasterCard and Visa.

On the BES front we will launch our new value-added services targeting enterprise. One of the first services will be Identity Management capability.

So to summarize, all areas of our business are looking -- making very good progress. Financial objectives are on track and strategies are on track, and bottom-line we feel good about where we are and what it will take to get BlackBerry back to cash flow breakeven at the end of FY ‘15 fiscal -- our fiscal year ‘15 and to profitability sometime in the fiscal year ‘16.

So, I would like to now turn our call -- mic -- the call to James for a detail review of our financial performance. James?

James Yersh

Thanks, John, and I’ll start with the income statement. Revenue for the first quarter was $966 million versus $976 million last quarter. Hardware represented 39% of revenue compared to 37% last quarter.

We recognized revenue related to approximately 1.6 million devices in the first quarter, compared to 1.3 million in the previous quarter. Service revenue represented 50% of revenue, compared to 56% last quarter. This quarter the company also settled all outstanding amounts with carriers in Venezuela.

Software represented 7% of consolidated revenue versus 6% last quarter. Gross margin for the quarter was 46.7% on a GAAP basis. Adjusted gross margin, excluding restructuring costs was 47.9%, up approximately 500 basis points from last quarter.

GAAP operating expenses were $431 million. Adjusted operating expenses were $504 million, down from $577 million last quarter. Amortization expense was $81 million in Q1.

GAAP net income was $23 million or $0.04 per share. This includes non-cash accounting gains on the value of the company’s convertible debts and income of $287 million and pre-tax restructuring charges of $226. Adjusted loss was $60 million or loss of $0.11 per share.

The tax recovery in the quarter was approximately 9%. Going forward, we expect the quarterly recovery to be about 10% as the company anticipates utilizing all the available loss carry back amounts during this fiscal year.

Now moving on to balance sheet and working capital performance. Our balance -- our cash balance increased by $429 million compared to last quarter. Adjusting for items not part of normal operations, we used $255 million of cash in the first quarter. This represents a decline of 68% compared to last quarter. The largest non-recurring item was an income tax refund of $397 million.

We also closed on the sale of our Canadian real estate portfolio at a price of $287 million. We received proceeds of $227 million in the first quarter and we will receive the remainder in Q2.

We also close on the sale of additional real estate in the quarter and received proceeds of $60 million. Reduction in cash used was attributable to strong collections in AR, as well as lower inventory related outlays.

Purchase obligations and other commitments amounted to approximately $1.8 billion, with purchase orders with contract manufacturers representing approximately $317 million of the total of 46% decrease from the previous quarter.

Total cash, cash equivalents and investments was approximately $3.1 billion. Taking into account strategic investments in the business, we do not expect our cash balance to fall below $2.5 billion at any point in fiscal 2015.

That concludes my comments. And I’ll send it back to John.

John Chen

Thank you. Ron, we are ready for the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Maynard Um with Wells Fargo. Please go ahead.

John Chen

Hi Maynard.

James Yersh

Good morning, Maynard.

Maynard Um - Wells Fargo

Hi guys. Good morning. Can you hear me?

John Chen

Yeah.

James Yersh

Yeah.

Maynard Um - Wells Fargo

Okay, great. So my calculations weren’t too far off from being gross margin breakeven on hardware this quarter versus your previous target of getting a profit by the end of the fiscal year or early next. Can you update us on when you expect to get the profitability?

And then just secondly on the services side, I estimated that last quarter alone more than half of your services revenue came from consumer and presumably a good portion from the emerging countries. So if your Z3 is successful, your services revenue on the consumer side would be adversely impacted. So I’m just curious how you plan to manage through this and in terms of the services side, I guess, how should we think about that revenue decline over the next few quarters?

John Chen

Great question.

Maynard Um - Wells Fargo

I think it was much better than expected this quarter?

John Chen

Great question, Maynard. So on the hardware, you are correct. I think you are -- I don’t know what your calculation model is but I will have to see it because I can use it. We are getting very close to making money or at least breakeven on hardware. Not quite there yet but close and so I think our timing of what we talk about, sometime in 2016, it will be a right time -- it will be the right timing.

So the other questions about the Z3 being successful and that might negatively affect our SaaS fee. We actually don’t see that because there’s a lot of the Z3 in these countries. Actually, I would call it additional handset or people using our handset, winning over others because it was a phone that we are selling at $179. So that’s not exactly the same group of people but of course there will be overlap that I would admit to that.

This is the reason why -- but the bigger picture of this is as the BB10 get more successful, we’re seeing that right now. And with the Amazon announcement in our partnership there, I would expect BB10 to get even more successful, that’s at least the concept. As we get there -- this is why the VAS, the value added service under the BES and other BBM is so important for us because then that way it will cover the [SaaS] [ph] and it will give us a platform to continue to add more value added services that the consumer as well as enterprise will pay for.

Operator

And your next question comes from Colin Gillis with BCG Financial. Please go ahead.

John Chen

Hi Collin.

James Yersh

Good morning Collin.

Colin Gillis - BGC Financial

Hey gentlemen. Great quarter.

John Chen

Thank you.

James Yersh

Thank you.

Colin Gillis - BGC Financial

John, you talked about BBM and you mentioned that $100 million number for BlackBerry’s fiscal ‘16. Can you just give us a sense as to how that target grows? Is there going to be much seasonality do you expect in that business?

John Chen

No, I will not. I’m trying. This is not a one-time perpetual thing. Maybe we’ll start growing lower in the beginning just because of the element of time. And then after that we’re hoping to expand the monthly subscription base. So no, it is not, I don’t think there is any [socialization] [ph]. I think I’m hoping for steady subscription.

Colin Gillis - BGC Financial

And then just in terms of selling versus sell-through. The gap between those two numbers narrowed quite a bit in the last quarter. When do you expect them to be on parity?

John Chen

I don’t know the answer to that question, honestly. I mean, I will love there to be on parity. We are working hard at it. I really don’t know. I mean, it’s not because I don’t want to answer it. I don’t think that I have a clear model in my head. I’m just pushing, first reducing inventories out there as much as we can, opening up new channels and distribution agreement. So maybe change James has some ideas.

James Yersh

Collin, the only thing I was going to say John mentioned, for example, couple of new launches in the back half of the fiscal year. Of course, we’ll have channel fill and sell-through to follow after that. So parity and conceptually as John had said, we’re kind of focused on that but new products of course will increase channel inventory first with sell-through to follow after.

Colin Gillis - BGC Financial

Okay. Makes sense. Lots of positives. Thank you.

John Chen

Thank you.

James Yersh

Thank you.

Operator

Your next question comes from James Faucette with Morgan Stanley. Please go ahead.

John Chen

Hi James.

James Yersh

Good morning James.

James Faucette - Morgan Stanley

Good morning guys. A couple of questions from me. First, you highlighted in your press release and prepared remarks that you had about $1.8 billion in purchase commitments of which about $370 million was purchase orders. Can you explain the difference between those two? And I guess, I’m wondering how much of those purchase commitments are historical and for older products versus how much are for new products. I’m just trying to get a sense of how much of that $1.8 billion you may have to eventually pay out without really much opportunities to generate revenue against them?

John Chen

Okay. I’ll let James answer the question.

James Yersh

So James, the answer is in terms of the $1.8 billion that includes the purchase orders with the CMs of 317 as I said. But it also has, for example, the interest on the convertible debenture. It has the royalty payment that we are contractually obligated to pay as well as, for example, what’s new this quarter for us is some lease obligation given the sale leaseback.

As far as the 317 itself goes, that is our view to demand for the existing suite of products. So I'm not sure how you are defining historical versus what we’re selling today but effectively the portfolio as it stands today, those are the commitments that we’ve given our manufacturing partners for that demand that we see.

James Faucette - Morgan Stanley

Great. And then John, you mentioned that you started to roll out some BES12 beta deployment. How large are those -- how large is that the BES12 database, and I guess maybe more importantly how large would you like it to be by the time BES12 becomes generally available?

John Chen

Good question. We have 30,000 plus installation of the BES10, 80,000 installation altogether from the BBOS7. So I don’t know the exact count of it. Obviously the 1.2 million is low in my book. I don’t know how big I should be looking at but next time we see each other, I’ll come up with an answer to that question. But I would expect it to literally in tens of millions, it has to be.

James Faucette - Morgan Stanley

Okay. Great. Thank you very much.

John Chen

Thank you.

James Yersh

Thanks.

Operator

Your next question comes from Tim Long with BMO Capital Markets. Please go ahead.

John Chen

Hey Tim.

James Yersh

Good morning, Tim.

Tim Long - BMO Capital Markets

Good morning. How are you doing? Just one -- two ones here, one is pretty quick. James, can you just give us a sense on BB7 and BB10 mix. And then on the services side, I think it looks like you beat by maybe 50 million or so, which is probably a good deal less than what was initially owed and I’m sure there was other payments suppose to come from Venezuela. So maybe if you could just talk about the gap there and are there any implications on what happened there potentially with other markets given there is probably some under payment going on there or -- and/or how do we look at the Venezuela market going forward as it’s just a little different service revenue environment for BlackBerry? Thank you.

John Chen

Okay. Let me answer the question about the market. And I’ll turn the call to James. Venezuela is a great market. And this is a reason why we would like to settle all the payment with the carriers and you all know, everybody on the call knows that Venezuela’s government and the -- economy down there, and the situation are not in the most cash rich conditions. However because BlackBerry is so important to them that we’re very pleased that we could sit down with the government and the three carriers to settle this and the agreement includes going forward robustly working in the market together and building subscriber.

So very pleased to have not only the cash itself which we love but the market itself, but you hit it right on on that there are other markets in -- I know Argentina is going for the same thing but they love us. So we’re going to sit down and see what we could do there. And I think that’s about it. And Argentina’s the other one I remember now. But anyways, I’ll turn the question back to James.

James Yersh

Okay. So Tim, just to finish up on what John said in terms of revenue. From Venezuela, specifically the impact was about $30 million on service revenue. The rest of it in terms of the gap and let’s call the overperformance, I think was the word that you used with just due to us holding the line and being able to control the decline, okay. Your first question in terms of the mix in the revenue effectively was about 65% BB10 and 35% BBOS.

Tim Long - BMO Capital Markets

Is that on the sell-in?

James Yersh

The recognized number, that’s the revenue.

Tim Long - BMO Capital Markets

Okay. Thank you very much.

James Yersh

Thanks.

Operator

Your next question comes from Mark Sue with RBC Capital Markets. Please go ahead.

John Chen

Hey Mark. How are you?

Mark Sue - RBC Capital Markets

Yeah. Thank you, gentlemen. Good morning. You are doing a lot of new things and some of which will take some time to impact the financial model on a targeted basis going forward. At a high level from your traditional enterprise customers, do you feel that the core enterprise customers are deciding to stay? Is there still some hesitation or do you feel from the discussions that there is a behavior change and they have started to embrace the strategies of that model, not the near term but also the longer term in terms of how they are abiding to your new strategy and vision?

John Chen

Yeah. A very good question, Mark. We have ran a number of call it the BlackBerry experience days around the world, Toronto, London, New York and a lot of different cities. And we’ll continue to do that going to Asian countries now in the next couple of quarters and Middle East. Where we have the ability to go, those places we have great receptivity. For example, my understanding we have 250 customers came to our London events about a couple of weeks ago and where we laid out our strategy, our roadmap, our enterprise, offerings and stuff, I personally spoke to a lot of people and have met a lot of customers, very big names.

So the answer to your question, when we have a chance to lay out our plans and visions, the majority of the time, we get them to support us to stay there. What I have found is people like to stay with BlackBerry. They were concerned a little while back and I need to try to regain back their confidence. I cannot tell you 100% that is the case. Some of the cases unfortunately when I showed up is it’s a little too late.

And however, because of the breadth of our product, a little too late is we could gain some back. I have situation where I was able to stop people roll out, especially in the BES world, in the MDM world, our competitors, partly because of the EZ Pass Program. And I want to spend a minute on the power of the EZ Pass Program. Because we accept licenses paid us already of the old BB7, 5 and 10 and we also allowed trading for competitor licenses, customers, if they buy into our robustness and security, they are not -- they are going to cause them no more money to use our new technology versus they have to leave us and go out and pay yet a bunch of other licenses to other people.

So that’s a very powerful argument. I have stopped, stop is a wrong word, I have -- I was able to convince a number of major customers that they should have at least tried out our BES12. It cost them nothing to do so and BES10 and 12 and I was successful in some cases which of course, I’m peace with that. So I don’t know -- I'm sorry to give you a very long answer but I don’t want to tell you that yeah, we’re gaining everybody back. I think that will be an over-exaggerated statement. But on the other hand, I think my success rate is ticking up.

I think quarters like these and the ability to reach them allows the market to return some confidence in us. It will even help. So this thing will hopefully have positive effect. Am I making sense to you, Mark?

Mark Sue - RBC Capital Markets

That’s helpful. Some people are no longer crossing their arms. You’re actually getting some people to knock?

John Chen

Yes. Although -- definitely, we have a name of major win in the quarter on BES and in some cases handsets. I mean, yesterday, I think our colleagues in India announced that we won a major law firm’s rollout on BB10, so across the server. So Europe is very strong for us. Germany is very strong for us where companies are very high and very focused of security. We have much better win rate. So we are winning out there, but I can say you this is overwhelming successful and that would be -- as I said, that would mislead you. That was not the intent.

Mark Sue - RBC Capital Markets

That’s helpful. Thank you. Good luck, gentlemen.

John Chen

Absolutely.

Operator

Your next question comes from Daniel Chang with Deutsche Bank.

John Chen

Hi, Daniel.

Daniel Chang - Deutsche Bank

Good morning, guys. John, as you start to depend more on the Android ecosystem to fill the gap on your platform, how will encourage developers to support your platform?

John Chen

For the enterprise apps developer, especially with our Internet of things vision, they are very keen and working with us, mostly because of the security nature of all our components. And by the way, I am very keen working with them, because I want to go in the vertical space. For the more consumer-oriented, I think I have gotten nothing but positive response to our yesterday’s Amazon Appstore connectivity. So there is a lot of BB10 World app providers that are skewed to a little bit of consumer’s angle. I am encouraging them to work with our Amazon partners.

Amazon developer ecosystem and the tools they have and the ability to reach out to a lot more people and customers are really welcome thing for our own developer space. So everybody -- I mean, I like to think that everybody wins in this. My developers, I help them to open up the market, whatever they do help my BB10 World because of the Amazon relationship. Amazon loves it because they got more subscribers so to speak and user base and more searches. And so I love it, because I don’t have to spend the money on the consumer side and I could focus on my enterprise side. I think it’s -- and then enterprise loves it, because there will be more focus. And so I don’t -- I haven’t found a negative angle to this, very pleased with the team that was able to pull this off. I mean, obviously, these are major, major negotiations.

Daniel Chang - Deutsche Bank

Thanks, John. If I can have a follow-up with you, James. Just curious on how many previously recognized devices you think are still in the channel and when can we expect that to be cleared out?

James Yersh

Well, as John had mentioned in his prepared remarks, channel inventory was down about 26% or so. So depending on the model that you’re running, given more sell-through it, it’s maybe another quarter or a little more. It’s timed very well with the launch of the new products to the back half of the year, Daniel.

Daniel Chang - Deutsche Bank

Okay. Thanks, guys. Good luck.

John Chen

Okay, thanks.

Operator

Your next question comes from Richard Tse with Cormark Securities. Please go ahead.

John Chen

Hey, how are you?

Richard Tse - Cormark Securities

Hi. Good, how are you? John, you gave us some metrics on BBM in 2016. Can you give us similar…

John Chen

You do like that, right? Because I have been asked -- every time I figure that this -- instead of you asking, I will just give it to you.

Richard Tse - Cormark Securities

Well, thank you for that. Can you give us some similar metrics on the QNX side, the size of that business and what do you think that could scale to?

John Chen

Not right now. I am working that. Not right now. It’s a royalty-based and the royalty usually lags about couple of years after the design wins. And I am working, that’s the one next thing that I am going to be work on and to see whether I could expand that a lot more, but it’s still be a lager in terms of what revenue comes in. On the other hand, when revenue comes in, the margins are very high.

Richard Tse - Cormark Securities

Okay, great. Thank you.

Operator

Your next question comes from Richard Kramer with Arete Research. Please go ahead.

Richard Kramer - Arete Research

Hi. Thanks. I’m trying to square your comments about the interest in the new devices with the move in purchase obligations from $586 million last quarter to $317 million as well as the inventory dropping by more than half. Are you suggesting that given despite this interest, there is just going to be trough until you get these new products out? And second question, can you give us a sense of the number of BBM users you’ve got today and how we work through this transition to getting people pay for subscriptions? And maybe last question about the EZ Pass subscribers, are any of these revenue generating today and how long with the free of charge period last for someone who is transitioning an EZ Pass? Thanks.

John Chen

Okay. Let’s see. You have to remind me. You threw a lot of questions on that. You have to remind me. And so whether there will be a trough? Yes, I would suggest, I think we timed it reasonably well. The Passport and the Classic device which by the way the Classic devices are generally immense amount of interest in our BES. Both of those devices comes out in the second half of the year, I mean the calendar year and it’s going to be more like September to November timeframe for those two devices comes out. So those will ramp up.

And we have, like James said earlier, we are in about another quarter of going through the inventory which is now a lot less than we started with about seven months ago. And we still have productions going and we’re -- actually that three will ramping that up because of demand. So I think it’s balanced out. There will be a trough. I would say there will be a trough. And I hope it’s not a dramatic one. And then, we will hopefully come back with the stronger new rollout, right. And so that’s number one.

The second question is about…?

Richard Kramer - Arete Research

How many BBM users have you got today?

John Chen

We have registration of a 160 million, monthly active users a little bit over 85 million, and we expect that number to push above 100 million MAU probably by the end of this calendar year. And the reason is we are waiting for the Windows to release -- version to release and the Nokia preload to happen. We also made a lot of changes to much easier to invite connectivities in the last few weeks and so a lot of good things is happening there. So -- and you have a question regarding revenue on that.

Richard Kramer - Arete Research

Yes. How do you generate subscription revenue from that once you’ve got people using a free connectivity service?

John Chen

You’re talking about BBM now, right?

Richard Kramer - Arete Research

Yes.

John Chen

That’s okay. I will give more than that. So my team here is waving at me and saying, no, you didn’t ask for BBM, you asked for BES. I will give you the answer to that question. I like to expand it more into the mobile payments side of the equations and there are some consumer-oriented play, but we don’t -- it’s important in a sense of it has to keep the interest level high. The revenue numbers isn’t exactly -- will not turn the dial so to speak, but there will be channels advertising for example, but we gave it to people that traditional advertising placement firms to put in the channel. We don’t do channel advertising ourselves. And of course, there will be stickers and stuff like that, but those are really small numbers at this point. And mobile payments is probably the big thing, secured voice, probably downstream and the enterprise use of that is more -- is a bigger focus of us.

As far as the BES is concerned, today when they turn in -- when the 1.2 million turn into exchange for the new upgrade, they don’t have to pay anything, they will have to pay us support fees starting January 1 of 2016, but this would be a very strong base for us to upsell a lot of things, including the gold because everybody trade in for the silver which is $19 a year, but they don’t to have pay that. Now when they expand in their enterprise to cover iPhone, iPad, Android, and whatever they like to cover and win those, then of course each device is $19 a year. And then we would like to provide them a capability to really up the game in security and when that happens, then they have to trade in for the gold and the gold is $60 a year subscription. Then we obviously will recognize some of those $19 value of the silver.

And then there are lot more ideas behind it. The whole strategy is to create a big enough pace so we could offer value-added services that are on the monthly subscription base that will cover decline of the theft over time, plus some more.

Richard Kramer - Arete Research

Okay. Thank you very much.

John Chen

Absolutely. Thanks, Richard.

Operator

Your next question comes from Simona Jankowski with Goldman Sachs. Please go ahead.

John Chen

Hey, Simona, how are you?

Simona Jankowski - Goldman Sachs

Hi, doing well. Thank you. Just wanted to ask you a couple of more clarifications on the 1.2 million BES licenses, do you have a sense for of those customers who converted, how many additional non-BlackBerry devices they might have in their organizations that you’d have the possibility to upsell to?

John Chen

No, I don’t have that number. But obviously as time progresses, you know that it’s a very mix -- even as my BlackBerry users, there are mix, people are using iPhone, iPad, I see a lot of combination of BlackBerry devices and iPad out there, and maybe people will use, some people might be using a Windows phone, so some people may be using Android phone. I don’t -- I really don’t know, but safe to say that if you look at the BlackBerry share of the market, although in the regulatory industry so lot higher, and you look at everybody else in the market, and the CIO can securely manage with one infrastructure for the BES12, I think they will be very enticed to move everything on to it. So that’s the general -- that’s my thinking about it. And I tested out with enough big company CIOs that nobody had challenged me on that.

Simona Jankowski - Goldman Sachs

Okay. And for the BES12, what is your estimate of how big your enterprise driver installed base is right now? And I guess I think you consider within that some of your BES subscribers as well that are actually within enterprises, so do you have an estimate for that?

John Chen

Yes. If you think about us having 50 million subscriber out there today, I know you guys -- some of you’re looking at BES differently than the way I look. I look at the BES, I always think that today look the people stay with BlackBerry because they are enterprise user, high productivity of security, I would say 80% of that 50 million is this perfect base for us. That’s my calculation.

Simona Jankowski - Goldman Sachs

Okay. And then, just lastly, can you give us a little more detail on how you monetize mobile payments?

John Chen

Yes. I have to be very careful, in some cases it is transaction. We have charge per transaction basis. So reason I’d be careful is there are contractual agreements that we signed that I am unable to disclose the financial arrangement. But safe to say, it’s transaction base. I like the transaction base. I don’t like the one-time thing.

Simona Jankowski - Goldman Sachs

Okay, great. Thank you very much.

John Chen

Sure. Thanks.

Operator

Your next question comes from Amitabh Passi with UBS. Please go ahead.

John Chen

Good morning.

Amitabh Passi - UBS

Hi, guys. Good morning. How are you? James, I had one for you and the one for you, John. Just on the working capital side, as you have all these device launches planned for the rest of the year, how should we think about working capital gyrations as most of this risk now being assumed by Foxconn or would it depend by device? And would you need to rebuild inventory? And then John just for you, I am still trying to understand this announcement yesterday on the Amazon Appstore, you talked about freeing up resources on the consumer side, can you give us any help in terms of are the tangible incremental OpEx savings you can garner out of this still? You’ve already got R&D at $196 million, sales and marketing at $227 million. So just trying to understand whether if any quantifiable benefits from this announcement?

John Chen

Okay. First, James take a first slot then I will go ahead.

James Yersh

Okay.

John Chen

Okay. Go ahead.

James Yersh

Okay. Definitely to the question around the [NPI] (ph) launches and the investment working capital, everything is in Foxconn as I think we talked about before, it is device by device to answer that one. So we will have to make some investments in the back of the year, but we have changed our model and it goes to the discussion we’re having about the contractual obligations for example. We have kind of shortened the lead time about which we have to make that so it allows us to be more nimble. So we can more prudently manage those investments as well.

John Chen

Yeah. I’d also like to add a statement on that particular question. Our arrangement with Foxconn in some cases they help out in distributions, in a lot of cases that it is our distribution network. So it will cause -- we will still cause those money.

James Yersh

Yeah.

John Chen

And we just have to spend it judiciously. I don’t think, people should think that Foxconn is paying the bill. Foxconn is basically -- Foxconn is backstopping our inventory exposure should we be wrong and looks like so far so good.

The question about savings, I’m really at the tail-end of our restructure programs. Right now everything that I’m doing is judiciously starting to lay the groundwork for revenue growth for next year.

The freeing up resources is not so much as to cut costs. The freeing up resources is so that we don’t do so many things at the same time and we go deeper in what we do. And so that really is the more of a model. Now would that be saving along the way? Yeah, probably, but we will not -- I’m not looking to take $500 million of OpEx to $400 million for example, I actually don’t think its necessary for us to do that to return to profitability in FY ‘16.

Amitabh Passi - UBS

Got it. Okay. Thank you.

John Chen

Thanks.

James Yersh

Thanks.

Operator

Your next question comes from Steven Li with Raymond James. Please go ahead.

John Chen

Hi, Steven.

Steven Li - Raymond James

Hi. Just a couple of clarifications. Can you hear me?

John Chen

Fine. Yeah.

James Yersh

Yeah.

Steven Li - Raymond James

Okay. So, James, so on Venezuela, if I understood you correct me. So $30 million of services revenues was collected and recognized?

James Yersh

Correct.

Steven Li - Raymond James

In the May quarter?

James Yersh

Correct.

Steven Li - Raymond James

And so what would be the guidance for the next quarter, would it be a bigger decline because of that collection?

James Yersh

Well, I think, you…

Steven Li - Raymond James

(Indiscernible)

James Yersh

Well, if you take that out of it then I think we’re trying our best to of course control the decline. We did have some success this time. But going forward, it is probably something that we would have been experiencing in the past. But I think the way you’re thinking about it with the kind of Venezuela being unique to this quarter and then taking the model off of that is the right way to think about it.

John Chen

Yeah. Right.

Steven Li - Raymond James

All right. So take out the $30 and then…

John Chen

Apply the normal, you take out the $30 and apply the normal reduction…

Steven Li - Raymond James

Yeah.

John Chen

…but we’re hoping to back it up somewhat to others.

Steven Li - Raymond James

Yeah.

John Chen

Thanks.

Steven Li - Raymond James

Okay. Great. And John, a clarification on earlier question, you said, 50 million subscribers? What was 80% and what was 20%?

John Chen

The 50 million subscribers, 80% is in business side -- on the business side.

Steven Li - Raymond James

80% is on the business side, okay.

John Chen

Yeah.

Steven Li - Raymond James

And then just one last question, the EZ Pass metric, the 1.2 million licensees, was that at quarter end or is it a current number?

John Chen

We’re close enough at quarter end.

Steven Li - Raymond James

Okay.

John Chen

Because they came in with number of 1.2 million plus. So, yes, close enough at quarter end.

Steven Li - Raymond James

Okay. Great. Thanks guys.

John Chen

Absolutely. Thanks.

Operator

Your next question comes from Ehud Gelblum with Citi Research. Please go ahead.

John Chen

Hi.

James Yersh

Good morning.

Stan Kovler - Citi Research

Hi. Thanks. Good morning. It’s actually Stan Kovler calling in for Ehud. Just a couple of questions first on the balance sheet to clarify, so the cash burn you mentioned this quarter the $255 and the comparison to that is $784. I think last quarter you reported that the cash burn was $838? So just curious what the change was in that?

As far as questions, one on the BES situation there, how you’re thinking about the third-party ecosystem, you started to mention that a little bit with enterprise developers for IOT? A lot of the other MDM competitors also have ecosystems for the enterprise apps, in-house apps and some third-party apps that they’ve started to talk about to bring on the platform and perhaps you can give us an update on how many you have there?

And on the units, the unit shipments of 1.6 million, obviously the Z3 sell-in there, excuse me, I am battling with cold.

John Chen

All right.

Stan Kovler - Citi Research

The -- in terms of the run rate there, I mean, how do you think about the steady run rate of unit shipments that you need to kind of stay profitable and get there by our estimates, seems like the gross margin there, profitability was probably around negative 10% still for that, so closer to breakeven? But how many units do you think you need to ship per quarter to get to breakeven on a devices side that would be helpful?

John Chen

Well, you got 10%, right. So everything goes the same and ASP doesn't change, isn't that going to be 1.76 million.

Stan Kovler - Citi Research

Well, thanks for confirming the 10%, correct.

John Chen

No, I’m sorry. I was just playing with you a little bit. I hope you’re doing better with your cold. So the answer to your question is, I always tell people that because of the high end nature of phones and I think we have a model that for next year we ship 10 million phones for the year, we will be profitable on phones. That’s been the model that we’re going after, okay.

And regarding the IOT, it’s early for us. I mean, we have a lot of partners. I remember a few of hundreds of them. But it’s still very early for us. And the one thing you probably should think about is, we’re not going to just try to do it one at a time. We will provide that ecosystem, that application APIs as well as the tools to do so. We’re hoping to connect with some -- my view is there is nothing -- I’m not saying anything about making any announcement, but I’m hoping to get some really bigger ecosystem to join in with us. I don’t have anything else to talk about there and I have to defer to James about a cash burn.

James Yersh

I don’t recognize to Z38. I know there was a lot of discussion when we were in New York with a hood about this. Definitely, there was a lot of noise in around real estate sales and how to normalize those out. So I know we’ll be talking later on over the next couple of days so let’s take that offline and we can work through the accounts there.

John Chen

Yes. I think the key that highlight there is we’re running at, let’s call it 784, you could call it 800, but our cash burn now is firmly within control. We have a quarter of 255. It will go down from there. Okay, I promise that we’re going to get to -- not promise, promise is not in the forward-looking statement term. I expect to be cash flow breakeven or positive from operations by the end of this fiscal year we’re in.

Stan Kovler - Citi Research

Got it. That’s very helpful. So the baseline is 255 on the cash burn, even though that actually included the benefit of the real estate, but despite that, still that’s the baseline for improvement.

John Chen

No, we took out the benefit. If I included the benefit of the real estate, if I included the benefit of the tax return, we actually made 430 million, but I don’t think you’ll let me get away with that statement.

Stan Kovler - Citi Research

Got it.

John Chen

The cash burn is 255 net of all these one-time thing.

Stan Kovler - Citi Research

Got it. Thanks for color.

John Chen

Sure.

Operator

Your next question….

John Chen

Go ahead. I’m sorry. I have a shareholder meeting coming up, so five more minutes.

Operator

Your next question comes from Deepak Kaushal with GMP Securities. Please go ahead.

Deepak Kaushal - GMP Securities

Hi, guys. Thanks for taking my question. I appreciate it’s the last minute. Just two quickly parts to this. First, restructuring charges of $226 million in the quarter for core. That seems like it’s more than the core budget set out by the prior management team. I’m just wondering what your expectations are going forward for the restructuring charges program?

And then the follow-up on that, on the cost and services and software, last year it was roughly $475 million. Can you give us a sense of fixed versus variable costs? I presume most of the fixed costs are associated with running the NOC, the network operating center to provide better services. Can you give us a sense of that? And if you guys have any plans of reducing that fixed costs or what that might be on a sustainable basis going forward.

James Yersh

Okay. Sure. Deepak, I’ll take the first one. The $226 million in the quarter is larger I think than the previous budget. I think, those are the words that you used. A lot of those charges by the way are non-cash and you’ll see the breakdown when we get to the filings. For example, we didn’t record a non-cash loss in terms of the real estate disposal, so that’d be one difference I can point you too. But the breakdown in the filings will show you kind of where the $226 million is coming from. Hopefully, we get that out this afternoon.

John Chen

Right. So the question of the majority of the fixed cost -- majority is the NOC fixed cost, the network cost and the variable cost is actually much smaller component of it.

Deepak Kaushal - GMP Securities

Okay. And are there any plans to bring that fixed cost down? Are there any opportunity…?

John Chen

Work-in-progress. It’s important that because our customers expect us to continue to invest in NOCs and because they look at -- they view that especially by government customers, they view it as a very important aspect of our security ecosystem. So I have to be very careful in how I address the cost reduction on that. So I don’t have any update at this point but it’s a good question and part of the thing on my list of hundreds to do. It’s on my list of doing.

Deepak Kaushal - GMP Securities

Okay. Well, thank you for that. I appreciate the time for taking my question.

John Chen

Sure. Thank you.

Operator

And your next question…

John Chen

We take the last question please.

Operator

Your next question will come from Mark McKechnie with Evercore. Please go ahead.

John Chen

Hey Mark.

James Yersh

Good morning Mark.

Mark McKechnie - Evercore

Hey John, thank you. I appreciate you taking the call. The one question I want to ask you. I wonder if you can describe some of the EZ Pass win, you said you had some win-backs from good and Mobile Ion. Give a little more detail as to what’s going on there and do you see a lot more of those going forward?

John Chen

I only reported that because of, I ask the team yesterday, we had win-backs actually from almost a lot of people. There are over a 100,000 licenses trading from a number of competitors. These happen to be the name I recognized on the top of the list. So there are no specific thing about that. So I expect because our offering -- as we -- as I said earlier that as we as a company get better in terms of visibility, viability, which I believe were there.

The CIOs trust BlackBerry more than a lot and the fact that we have a very, very strong secure protocol, everything we do as a -- secure standards that CIO would rather stay with us. As I said the window that I opened in the past that gets our customers to move, I’ll consider moving away. It has to do with the fact that they believe the company's liability was in question.

I think as we sit down and talk through them and as I said earlier as we show it in our financials and the progress, the customer said, thank God, I mean, we don’t want to change and why do we want to change. And so it’s a fact that we were offering to exchange competitor license for free, that was a big thing. Most people by the way, when they even have a competitor’s MDM, has BlackBerry MDM already.

So they don’t want many infrastructures. So there is some advantage to our sales and go-to-market. Because of interest of time, I apologize, I have to go to our shareholder meeting, let me conclude this particular call. I have a prepared thinking statement about that. Obviously, I hope you guys share our small celebration of successful quarters. We are very pleased with the progress and the teams have worked very, very hard.

I strongly believe we could -- meet the milestone that we laid out earlier about generating cash flow from operations by the end of this fiscal year and starting to get into profitability of the fiscal year ‘16. Our initial focus -- we only took seven months by the way. Our initial focus when we first came in was due to supply chain management, the balance sheets improvement and I think we've done quite a bit of good work on that.

We then start fixing the distribution channels into Q4 quarters and some of you don’t like it obviously. But I thought it was tremendous progress that we made and that helps drive the margin improvement. And now most of my time now is not only speaking to customers, is to really focus on growth, on laying down the path to growth. And while keeping an eye on -- still on the expenses and all that and cash flow and so forth.

And I believe we execute a couple of quarters like this. We definitely will meet all the goals and return us to profitability in FY ‘16. So we’re looking forward to seeing you all in the quarter and updating you on the progress in 90 days. So thank you very much for joining us today. Have a good day.

Operator

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

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Source: BlackBerry's (BBRY) CEO John Chen on Q1 2015 Results - Earnings Call Transcript
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