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Research In Motion Limited (RIMM)

F4Q07 Earnings Call

April 11, 2007 5:00 pm ET

Executives

Adele Ebbs - Vice President, Investor Relations

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

Brian Bidulka - Chief Accounting Officer

Analysts

John Bucher - BMO Capital Markets

Brantley Thompson - Goldman Sachs

Gus Papageorgiou - Scotia Capital Markets

Peter Misek - Canaccord Capital

Maynard Um - UBS Securities

Jeffery Kvaal - Lehman Brothers

Deepak Chopra - National Bank Financial

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Research In Motion fourth quarter fiscal 2007 results conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded this Wednesday, April 11, 2007, at 5:00 p.m. Eastern Time.

I will now turn the conference over to Adele Ebbs, Vice President of Investor Relations. Please go ahead.

Adele Ebbs

Thank you, Operator. Welcome to RIM's fiscal 2007 preliminary fourth quarter and year end results conference call. I am Adele Ebbs, RIM's Vice President of Investor Relations. With me on the call today is Jim Balsillie, RIM's CEO, and Brian Bidulka, RIM's Chief Accounting Officer.

Today’s call will focus on a discussion of RIM's preliminary results for the fourth quarter. These results are preliminary pending the filing of RIM's restated financial statements as a result of the recently completed review of RIM's stock option granting practices. While the review is now complete, the special committee and its advisors, together with the company and its external auditors, continue to do the work necessary to complete the restatement of RIM's previously filed financial statements and to file its interim financial statements for the second and third quarters of fiscal 2007.

We do not expect a material change to these preliminary quarterly operating results or to our preliminary year end results as a result of the restatement.

After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then review fourth quarter results and I will discuss our outlook for the first quarter of fiscal 2008. We will then open up the call for questions.

I would like to note that this call is available to the general public by a call-in number and webcast. A replay of the webcast will also be available on the rim.com website. We plan to wrap the call up today by 6:00 p.m. Eastern.

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 RIM's review of its stock option granting practices, including statements regarding preliminary determinations and current expectations, our expectations and estimates with respect to revenue, gross margin, operating expenses, regular stock option expense, CapEx, depreciation and amortization, investment income, earnings, earnings per share, and ASPs for Q1 and beyond, our expectations regarding RIM's near- and long-term tax rates, our estimates of the number of BlackBerry subscriber accounts, subscriber account additions, replacement device sales, and other non-financial estimates, our product development initiatives and timing, developments relating to our carrier partners, new and expanding markets for our products and other statements regarding our plans and objectives.

We will indicate forward-looking statements by using words such as expect, anticipate, estimate, may, will, should, forecast, intend, believe, 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 and uncertainties relating to RIM's review of its stock option granting practices, including further determinations made by RIM's special committee, outside advisors and others based on findings of fact and analysis; unanticipated developments and delays relating to the restatement and regulatory legal and other developments regarding stock option grants; risks relating to intellectual property; our ability to enhance our current product and develop and bring to market new products; our reliance on carrier partners to grow our BlackBerry subscriber account base and to accurately report subscriber account additions, activations, and deactivations to RIM on a timely basis; risks relating to competition; risks relating to possible product defects and product liability; our reliance on suppliers; our ability to effectively manage our growth; risks associated with our expanding foreign operations, general economic conditions, foreign exchange risks, and other factors set forth in the forward-looking statements section of today’s news release and the risk factors in MD&A sections and 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.

I will now turn the call over to Jim.

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James L. Balsillie

Thanks so much, Adele. We ended fiscal 2007 with a strong fourth quarter and are pleased with the results. Revenue grew 11% sequentially, in line with our expectations, and grew 66% year over year. Earnings were at the high end of our previously guided range and subscriber account additions exceeded our expectations. We are excited to have added more than one million net subscriber accounts in a single quarter for the first time, and at the end of Q4, we had a BlackBerry subscriber account base of approximately 8 million users.

Pearl continues to do exceptionally well and is available through over 90 carriers around the world, and the 8703 for CDMA continues to show strong adoption and the response to the recent launch of the BlackBerry 8800 has exceeded our expectations. Performance is excellent across all geographies and we are seeing international markets really pick up the pace.

For a business update, we added approximately 1,020,000 BlackBerry net subscriber accounts during the quarter, which was higher than our December forecast of 950,000 to 975,000, and significantly higher than the 875,000 subscriber accounts added in Q3. As anticipated, we saw strong sales throughout the holiday season, particularly with Pearl in the consumer space.

While we did see a slowdown as expected in the weeks following the holidays, the extent of the pick-up in late January and February was stronger than we had anticipated. Carrier programs such as mail-in rebates and the launch of the White Pearl with T-Mobile and the launch of the 8800 at AT&T all served to stimulate demand in January and February.

International markets were also performing well and approximately 28% of our subscriber base was outside North America at the end of Q4.

The ramp of Pearl since the launch in Q3 has been excellent and continues to drive penetration into new segments. Approximately 80% of Pearl purchases in the past quarter were brand new subscribers to RIM and the introduction of colored Pearl, such as the white version at T-Mobile and the red version at AT&T, have served to further segment the market. Pearl is now available from over 90 carriers around the world and growing.

We are also continuing to see strong phone-only sales of Pearl in the range of 20% to 30% at carriers such as T-Mobile U.S.A., who are choosing to offer Pearl without a data plan.

The 8703 on CDMA networks has also continued to do well. Verizon has been offering marketing and promotional programs to support the product, including a $100 mail-in rebate and a major advertising campaign that included full-page ads in the Wall Street Journal, USA Today and other prominent publications. Verizon also continued to expand its focus on BlackBerry into its retail and indirect channel. Sprint is having good success with the 8703E and BlackBerry now holds the top spot in terms of market share in Sprint’s PDA/smartphone category.

We are excited about the product roadmap for CDMA and we look forward to launching new products with these partners in the coming months.

The BlackBerry 8800 launched on schedule in the quarter with AT&T in the U.S. and was announced with approximately 30 carriers in the rest of the world. This is the fastest global ramp we have ever had for a new product launch and the rollout across these multiple markets has been a success.

In the early days of availability in the market, we have been seeing very high levels of upgrade sales in excess of 50%. Now that we are a few weeks in, we are seeing the mix shift somewhat towards new subscribers. However, we do expect upgrade rates to remain reasonably high as the replacement potential for the existing base of GPRS and older edge devices is substantial. The GPS capabilities on the 8800 are especially attractive to customers and AT&T has been running a national online and print ad campaign highlighting the embedded GPS features.

AT&T also held two large-scale customer events in New York City and San Francisco to support the launch and followed these up with an 18-city road show featuring the 8800 and a number of key application partners.

The 8800 is performing very well in Europe, where it has opened up doors to new enterprise accounts and expanding our reach into existing installations. Vodafone has also been promoting the GPS capabilities of the 8800 and has offered free trial offers of the service in the U.K. and Germany.

I would also like to note that even with the success of the 8800, 8700 sales are remaining strong at the majority of carriers.

BlackBerry is making excellent progress in Latin America -- over 40 carriers have been added to the region since the end of fiscal 2006. We added almost 10 carriers in this past quarter alone. These carriers have been especially aggressive in quickly launching new products, such as Pearl, across their properties.

In the past quarter, Movistar Ecuador and Movistar Uruguay announced the BlackBerry Pearl. Personal Argentina launched the BlackBerry Pearl and supported it with their single largest device marketing campaign ever. Digicel launched Pearl in 12 of the 22 Caribbean properties. Cable and Wireless launched the BlackBerry Pearl in Panama, St. Lucia, and Antigua, and Telcel had the Pearl launch event in Mexico City with journalists and local VIPs to announce and see the BlackBerry Pearl. Telcel followed up on the success of its initial Pearl launch with the launch of the White Pearl in a number of properties, and plans to offer the Red Pearl in the near future.

Growth in India in recent quarters has been strong with the availability of a number of new devices from Bharti Airtel and the launch of BlackBerry by Hutch India, which was supported with a promotional campaign in Q4. Marketing activities include TV ad campaigns and promotional placements in high-traffic areas, especially in key metro areas of Delhi, Mumbai, and Bangalore. In addition, Bharti Airtel introduced an aggressive new BlackBerry Internet service plan to drive sales growth in retail and price sensitive segments. These successful sales and marketing initiatives, along with the introduction of the BlackBerry Pearl 8100 and 8800 is creating strong momentum in BlackBerry adoption across India.

The number of carriers offering BlackBerry continues to grow and we now have over 270 networks supporting BlackBerry around the world. New carriers this quarter include CLARO in El Salvador, Guatemala, Nicaragua, Paraguay, Uruguay, DoCoMo U.S.A., Vivo Brazil, Fastlink Jordan, China Mobile Hong Kong, and Vodafone in Bahrain, Indonesia, and Malaysia.

The combination of Pearl being in markets for the full quarter and aggressive carrier pricing models for BlackBerry Internet service is driving a very high growth rate in our non-enterprise subscriber base. BIS now represents 27% of the subscriber account base. We expect this growth to continue due to a number of factors, including channel expansion, continued aggressive carrier service pricing, new lifestyle and multimedia applications, and new hardware platforms targeted at this segment.

Our reach in indirect channels is expanding. Last quarter, we added approximately 1500 new points of presence with Big Box and specialty retailers such as Best Buy, Costco, Radio Shack and Comp USA. We are also expanding online and marketing activities with existing e-commerce dealers such as InPhonic, Amazon, and Let’s Talk, and fostered a new relationship this past quarter with Wireless Business Solutions, WBS, a group devoted to building rewards microsites with over 100 Fortune 500 companies as customers.

We are continuing to see carriers offer aggressive pricing plans for BIS with reduced tariffs, special introductory pricing promotions, and pay-as-you-go plans. The new plans launched in the quarter include Dobson in the U.S. with a full BIS for $30 a month, SunCom in the U.S. with $15 local BlackBerry plan, Orange France with a EUR9 a month plan, Vodafone U.K. with a 5 pound BIS plan, and TIM with a unique plan where all calls and text messages are free between a pair of black and white Pearls purchased together. T-Mobile Germany has also continued to be very aggressive with a EUR4.95 BIS pricing in its markets.

While BIS is performing remarkably well, we have not lessened our focus on the BlackBerry enterprise service. We now have approximately 100,000 BlackBerry enterprise servers installed and in use with our customers around the world. Subscriber growth in enterprise is being driven primarily by growing awareness of BlackBerry as a platform for applications beyond e-mail, small and medium sized business programs, and geographic expansion.

We continue to build out BES functionality and this past quarter, we shipped BES 4.1.3, which offers MP3 attachment support to allow unified messaging attachments to be played directly on the device and PDF file viewing improvements to provide a true-to-life PDF viewing experience.

Another important growth area for BlackBerry in the enterprise is PBX integration through Ascendant systems, which we acquired just over a year ago. Ascendant has been central to our strategy of delivering core BlackBerry value propositions of security and ease of use to enterprise mobile voice.

During the past quarter, we had our highest level of Ascendant shipments since the acquisition and we are beta testing an integrated BlackBerry phone application, which leverages the Ascendant server platform and enables enterprises to securely authenticate mobile callers and extend corporate phone system functions to BlackBerry. Our strategy is to wirelessly enable all underlying PBX instant messaging and unified communications platforms, making BlackBerry an increasingly differentiated wireless offering.

BlackBerry continues to grow as an applications platform with the adoption of Pearl and the launch of GPS enabled BlackBerry 8800. We have seen a great increase in the use of wireless applications beyond e-mail from our partner community. The rapidly growing applications include turn-by-turn navigation from Telenav, Telmap, and Garmen; travel companion and concierge services such as World Mate, Pocket Express, and Zagat To Go; real-time news and information feeds, such as Financial Times, Reuters, and ABC News, as well as multimedia applications like BlackBerry TEV from Sony Innovations and Quickplayer Audiocast.

In the enterprise segment, we have also seen strong growth in the adoption of third party solutions for sales force automation, field service automation, business intelligence, wealth management, and continuity of operations planning applications.

At CTIA this past month, Michael Lazaridis announced the BlackBerry Java developer environment, which was downloaded by more than 125,000 registered developers. The BlackBerry JDE includes an extensive set of Java APIs and provides developers with access to almost every functional component and application on a BlackBerry smartphone, including camera APIs, support for numerous audio formats for routing playback, XML and web services to simplify communications with existing Internet applications, BlackBerry messenger APIs, CPS APIs, and free access to BlackBerry maps for use in application development.

The announcement received broad coverage in trade media with PC Magazine quoting: “Wireless e-mail became the platform to enable all the wireless data applications we have been dreaming about for the past two decades.” CNET reported that: “Sure, CRM software on your smartphone is handy but soon, BlackBerry addicts will have access to applications that are much more consumer-oriented.” And InfoWorld commenting that: “The new APIs may result in the availability of capabilities that may attract new users to the BlackBerry.”

The sixth annual wireless enterprise symposium is coming up May 7-10, and we are excited about the more than 100 application sponsors sponsoring the program and the multitude of sessions that will explore the latest in wireless security, administration tools and end user support, as well as showcasing new development and application ideas for third-party developers and end-users, and ROI potential of wireless technology. For more details on the web, they can be obtained at www.attendwes.com.

The BlackBerry Connect group made significant progress in Q4 with the launch of Connect version 4.0 and a major presence at numerous trade shows, including 3GSM in Barcelona and CBIT in Germany. There are now over 50 BlackBerry Connect enabled phones available in markets around the world. The launch of BlackBerry Connect 4.0 was a key accomplishment, as it provides a number of extra features to our partners beyond what has been previously available.

New features include enhanced attachment handling capabilities, enhanced Internet browsing by the BlackBerry browsing service, additional enterprise grade functionality, including support for Novell Groupwise, two-way wireless synchronization of address book, tasks, and memos, behind-the-firewall Internet browsing capability, over-the-air activation of provisioning, remote control of e-mail settings, and advanced security features, such as support for AES encryption and enhanced wireless IT policy support.

BlackBerry Connect 4.0 will launch on Windows Mobile 5.0 devices with subsequent launches on Windows Mobile 6.0 when available, both across Europe and Asia-Pacific carriers. Symbian devices will follow later in the year with Nokia’s plans to offer 4.0 for both E61-I and the new E90 communicator.

In terms of business outlook for fiscal ’08, Adele will give detailed guidance for Q1 a little later on the call, but let me say that we expect this strong momentum in our business to continue. Overall, we look forward to further extending the market opportunity for RIM and its partners in the coming year.

I will now turn the call over to Brian to review the financial results for the fourth quarter.

Brian Bidulka

Thank you, Jim. I will now provide an overview of our preliminary results, and as Adele mentioned, these results are preliminary pending the restatement associated with the stock option review.

As previously disclosed, we had originally anticipated updating our filings prior to our year end on March 3, 2007. Despite our best efforts, we determined that additional time is required. With respect to timing, we are working with our external advisors and will file our restated U.S. GAAP financials and become current with our other filings as soon as possible.

The accounting impact on RIM's most recently filed Canadian GAAP statements does not result in a material adjustment and therefore the company does not intend to restate the previously filed Canadian GAAP financial statements.

I would also like to note that we do not expect a material impact from this restatement on fiscal 2007 or fiscal 2008 operating results.

Revenue for the fourth quarter ended March 3rd was $930 million and revenue for fiscal year 2007 was $3.04 billion, up 47% over the prior year. Handheld devices represented $683 million, or 73% of RIM's revenue during the quarter, down slightly from the 75% of total revenue in the previous quarter. This decrease in percentage was due to higher-than-expected service revenue and a delay in shipment to a couple of carriers scheduled for late in the quarter.

Total devices shipped in the quarter of approximately 2 million were up from 1.8 million in the prior quarter. Sell-through in the quarter was strong with approximately 1.75 million devices being activated, which means we are selling almost two devices for each new subscriber account added. We expect this high level of upgrade sales to continue to grow as our subscriber account base grows.

Total global channel inventory increased by approximately 250,000 units. Some carriers took shipments in the quarter or were choosing to keep higher levels of inventory due to very strong demand for certain product.

Based on our sell-through forecast, weeks of inventory were down slightly quarter over quarter and we expect this trend to continue into Q1.

As expected, average device ASPs decreased slightly to approximately $336. This was due mainly to the percentage of the lower ASP Pearl and the hardware mix. We expect ASPs in Q1 to be flat with Q4.

Service revenue was $172 million, or 19% of revenue for the quarter, up $30 million from Q3. Monthly ARPU in the quarter is higher than in Q3 due to one-time pick-up in service revenue relating to prior periods. That was in the single digit millions of dollars. Revenue recognition criteria for this item was only met in Q4. Excluding this, ARPU would have been approximately flat over Q3.

Software revenue was $49 million, or 5% of revenue and consisted of BES and fees, as well as TSupport contracts. This is slightly higher than anticipated due to the completion of certain marketing programs and strong performance of TSupport.

Other revenue, such as repairs and accessories, was $26 million, or 3% of revenue.

Gross margin for the fourth quarter was 53.5%, which is slightly above the expected 53% guided on the last call. The strength relative to our forecast was mainly due to product mix with hardware revenue slightly lower and software and service revenue slightly higher than expected.

R&D spending was $67 million, or 7% of revenue for the quarter, in line with our forecast.

Selling, marketing and administrative expense was increased by 14% to $167 million versus $146 million in Q3, or 18% of revenue. Sales and marketing expense was less than forecast due to lower-than-expected spending on branding programs and marketing in the quarter. Administration expense was higher than forecast as we incurred legal, accounting and other professional costs in connection with the voluntary internal review of our stock option granting practices and related accounting, and in connection with the restatement of our historical financial statements resulting from that review. A similar level of administration expense is also included in the forecast for the first quarter of fiscal 2008.

Tax rate for the quarter was approximately 27%.

Preliminary GAAP net income for Q4 was $188 million, or $0.99 per share diluted. Excluding regular stock option expense of $4.9 million, preliminary adjusted net income was $192.8 million, or $1.01 per share diluted.

Weighted average diluted shares used in the preliminary GAAP EPS calculation for the quarter were 190.3 million. Actual shares outstanding at March 3rd were 185.9 million. Total options outstanding at March 3rd were 6.4 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. At the end of the fourth quarter, RIM had approximately $1.4 billion in cash, cash equivalents and investments. This was up $93 million in the prior quarter. During the quarter, RIM had generated approximately $174 million in cash from operations. Uses of cash in the quarter included capital expenditures of approximately $88 million.

From a working capital perspective, trade receivables were up from the prior quarter and DSOs increased at 50 days from 45 days in the prior quarter. Going forward, we expect DSOs to increase somewhat as payment terms are trending longer in the industry, particularly in international markets as the percentage of our business outside North America grows.

Inventory on hand increased by approximately $40 million as we continue to purchase additional raw materials and build semi-finished goods to support demand for current and upcoming product launches.

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

Adele Ebbs

Thanks, Brian. Before I discuss our outlook for Q1, I would like to remind everyone that these forward-looking statements reflect management’s best current estimates and should be taken in the context of the risk factors listed at the beginning of the call and outlined in our public filings.

We are forecasting revenue for the first quarter of fiscal 2008 to be significantly higher than Q4, in the range of $1.025 billion to $1.075 billion. We expect hardware shipments to be over 2.25 million units and to be a larger percentage of sales in Q1 due to the continued success of Pearl and the ongoing ramp of 8800, existing customer demand for replacement and upgrade devices, and new products that are scheduled to launch in Q1 and early Q2. Where revenue falls within this range is dependent on the timely launch of these products.

We expect software revenue to increase modestly in Q1.

We are targeting net subscriber account additions for Q1 to be in the range of 1.125 million to 1.15 million. So far in Q1, we have seen net subscriber account additions tracking on average around 89,000 per week. Extrapolating this for the entire 13 weeks of the quarter would get us to approximately 1.16 million, at the high end of our range. However, this 89,000 run-rate includes the carrier quarter end week of March 31st, which is always abnormally strong, and the remainder of Q1 includes a number of holidays, such as Memorial Day in the United States and bank holidays elsewhere. Holidays have a meaningful impact on the run-rate that we see weekly. For example, as expected we saw a dip in net subscriber account additions last week with the Easter holidays in North America and other markets.

Based on these factors, we do not believe it is prudent to assume that this 89,000 run-rate will be achievable every week for the remainder of the quarter. People should also recognize that this difference of 10,000 amounts to less than one day of subscriber additions.

Also, as we mentioned previously, we do have some new product launches scheduled for Q1 and the timing of these launches may impact the subscriber account additions in the quarter.

We expect gross margin for Q1 to be approximately 52% to 53%. This is slightly lower than Q4 due to the expectation of a higher percentage of hardware revenue in the mix. Going forward into the summer, we expect gross margin to stay within a similar range to Q1.

We expect a total operating expense increase for Q1 of approximately 11% from Q4 levels.

For R&D, we expect it to increase by approximately 13% in Q1 and continue to be approximately 7% of revenue. Further out into fiscal 2008, we expect R&D expense to decrease somewhat as a percentage of sales.

We expect sales, marketing and administration expense to increase in Q1 by approximately 9% and to be flat as a percentage of revenue at approximately 17%. Q1 is typically a heavy spending quarter for sales and marketing, with a number of trade shows, as well as the wireless enterprise symposium occurring this quarter. As we mentioned last quarter, we continue to expect marketing and administration expenses to decrease as a percentage of sales throughout fiscal 2008.

We estimate regular stock option expense to be approximately $5 million in Q1. This expense does not include the impact of the restatement that will occur as a result of the stock option review. The gross margin and op-ex guidance provided on this call does not include regular stock option expense. Our GAAP financial statements will have stock option expense allocated to appropriate cost of sales and operating expense accounts.

Beginning with the Q2 fiscal 2008 results, we will no longer be reporting an EPS number adjusted for regular stock option expense, but we will continue to provide the actual amount of the stock option expense incurred in the quarter.

We expect depreciation and amortization to be approximately $25 million to $26 million in Q1, higher than Q4 due to ongoing CapEx.

We expect CapEx to be approximately $100 million in both Q1 and Q2.

Investment income is expected to be in the range of $16 million to $16.5 million in Q1.

With respect to tax, we expect the rate for Q1 to be approximately 30%. For the remainder of fiscal 2008, we also expect it to remain at this level and to decrease slightly thereafter.

We expect Q1 GAAP EPS to be in the range of $0.99 to $1.07 per share. We expect adjusted EPS, excluding normal stock option expense, to be between $1.01 and $1.09 per share. When we report results in Q1, it will be the last quarter we will report an adjusted EPS number reflecting stock option expense. We will report GAAP EPS only and will provide the actual expense incurred in the quarter so that people can calculate the impact on EPS themselves.

As we mentioned earlier, while the stock option review is now complete, we continue to do the work necessary to complete the restatement and to become current in our filings with securities regulators. In the meantime, we will continue to provide bi-weekly updates on our affairs as required by the alternative information guidelines of the Ontario Securities Commission. Unfortunately, we are unable to comment further on the stock option review or the restatement on this call, but we encourage you to read RIM's bi-weekly status updates, including the one issued this afternoon, which was combined with RIM's earnings release.

With that, I will turn the call back to Jim.

James L. Balsillie

Thank you very much, Adele and Brian. In summary, Q4 was another record quarter and we are entering the new fiscal year with tremendous momentum in our business. The outlook for the first quarter fiscal 2008, with revenue, earnings, and subscriber account growth again forecast at record levels, reflects our market leadership position and the opportunities ahead of us.

This concludes our formal comments. Due to the large number of people on the call, we ask that you please limit yourself to one question per person. We plan to end the call today by approximately 6:00 p.m.

Would the operator please come on to handle questions?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from John Bucher of BMO Capital Markets. Please go ahead.

John Bucher - BMO Capital Markets

Thank you. A question for you on the potential impact the new BlackBerry Connect 4.0 software could have on your BlackBerry subscriber growth rate. I think the understanding is that most of the current BlackBerry Connect users are BIS based rather than BES based subs, and with the new features that are available on BlackBerry Connect 4.0, in particular the security and synchronization features, do you think there is the potential for the availability of this new software to be a catalyst for BlackBerry subscriber growth? Is that factored into your thinking in your commentary on the hardware mix shift for next quarter and for the rest of the year? Thank you.

James L. Balsillie

Thanks, John, that’s a fair question. Clearly in the business there is a tremendous amount of optionality in the business, and BB Connect and BB built-in is certainly one of them. It is not factored in the guidance how this is going to drive the change in mix, but clearly there is some optionality there. You are going to see it does absolutely give a lot more enterprise features. You are going to see some very aggressive stuff going on in terms of the BB Connect and built-in. Stay tuned for all the partners and all the activities at the wireless enterprise symposium and times around that.

We have seen an interesting dynamic because the relationship with the carriers is intensifying because the profitability of BlackBerry subscribers is so strong, and the rallying around the BlackBerry platform is strengthening -- has strengthened really considerably in the past quarter, but there is also a desire for device diversity.

There absolutely is -- you are going to see some really impressive and positive things happening in the BB Connect, both for BES and BIS, and I think in the BB built-in too, and I think you are going to see some real demonstration of that probably around and before the WES. I think we are going to see some positive developments.

We have had some of the leading smartphone type companies who, beyond that are not BlackBerry companies, report in many of their carriers that the dominant use of the smartphones they sell are activated on BlackBerry through Connect. They may want more sales than that but it opens up some very interesting optionality in the business and it really strengthens partnerships. It has been a very good strategy for us in a whole bunch of ways, spoken and unspoken.

Operator

Your next question comes from Brant Thompson of Goldman Sachs. Please go ahead.

Brantley Thompson - Goldman Sachs

I was wondering if you could give us a little more color on a few things. Number one, how should investors be thinking about the degree of operating leverage you guys are targeting over the course of the year, and management’s goals related to that?

Number two, you mentioned that some of the Pearl phones were 20%, 30% being sold without data plans. I just wanted to clarify; is that on T-Mobile specifically, and is there a way for us to handicap of the device sales that happen, how many of those are happening with data subscriber attached? Thanks.

James L. Balsillie

There is remarkable, really exciting leverage in the business plan. There are some things that -- this is by far the most exciting time in the industry for us. There is also leverage going on but there is tremendous investment. I gave some indication. We are up to 270 carriers now and in each one of them, we have tremendous performance. You have heard about the device roadmaps we have. We also have quite a number of very powerful devices imminent into the market. Then, there has been some commentary, and Mike’s spent a fair bit of time on the application partners and what is going on there. As well, you are going to see some very exciting media capabilities on the BlackBerry and BIS and BES and the PBX type stuff.

So the reason I am touching on that is we are definitely experiencing momentum and acceleration. Yes, there is leverage in it but there is also a tremendous amount of investment in scaling because it is such a rapidly emerging space. We are guiding over $1 billion in sales and yet in many respects, we feel we are at just the beginning of this business.

Mike and I were talking over the weekend and we could not be more excited for the next 10 years where this is going to go. We feel like we are on the second inning of a nine-inning game and yet it has been so exciting the first inning-and-a-half. You feel you are just at the beginning.

So yes, there is leverage and there is also growth. We balance giving you performance in a proven model but we are investing enormously aggressive in the future. I can only tell you guys that what you have seen to date in my view, you are just going to see a turbo-charging in all aspects of functionality and devices and partnerships and every aspect of the business through the rest of this year. It is enormously exciting.

The other thing which is very interesting which you talk about the Pearls, they are pretty much -- I think that is fairly tied to T-Mobile, but what is interesting is, you go into the stores and they say this is the best-performing phone period, as a phone. So both in style, and you are seeing colors and you are going to see a lot of that in media, it is considered the preeminent phone. Of course, we are considered the preeminent data platform.

What is also interesting is we did this sort of variable BIS plan in Europe and it quickly 3, 4 x’d our BIS sales. Then what happened is they started on a moderate plan but the usage was so attractive they, in the overwhelming majority of the cases, they went to the maximum plan very, very quickly because of the compellingness of use. I think T-Mobile is learning some very interesting lessons about that point number one, which should be intriguing. We talked about some of these Vodafone plans and stuff like that.

Point number two, there is now a great up-sell property opportunity to now sell data plans and test data plans through these user bases. So yes, there is so much optionality in the business. Currently, in many respects you could say that that 20% is just scratching the surface as to what could be phone only sales, and then that is a latent platform sale. Now T-Mobile is trying to sell data into those guys that have bought a phone, and you can do segmented plans but you can also sell it as a good phone. And then we have other kinds of phones coming along and other kinds of application partners.

It has never been more interesting. It has never been -- there has never been more near-term opportunity and long-term optionality. Mike and I never -- it has never been this fun and interesting and we have a pretty high water mark for fun and interesting.

Operator

Your next question comes from Gus Papageorgiou of Scotia Capital Markets. Please go ahead.

Gus Papageorgiou - Scotia Capital Markets

Just on what you were commenting on, Jim, I wonder if you would tell us a little bit more about how the carriers are viewing RIM and the BlackBerry platform. It seems to me that it has historically been viewed as a niche application for business. Lately, as a result of the success of the Pearl, are you seeing the carriers trying to move the platform more into the mainstream and becoming more active in doing that? What kind of discussions have you had with the carriers? What kinds of trends are you seeing?

James L. Balsillie

It is a timely question because it is like a switch went off sometime. We were talking about this at the board meeting today. It is like a switch went off sometime in the last two or three months. It is hard to explain. It is like whether you are niche or you are a good friend who became the most coveted friend or something.

In our world, we just keep focusing on the fundamentals and we believe in the long-term outcome but we are not really driven by this sort of externalities. But it is hard not to not notice. It is like a light went off.

I like to think that it is because we have been pointing out the profit potential. One partner, they are almost $3 billion run-rate on BlackBerry revenue and we are trying to double it within the next eight or nine to twelve months. So that is high margin, $3 billion revenue. Arguably, two-thirds of it is EBITDA. When you guys do your models and how you multiply that and put a peg on it for a carrier, these carriers are starting to realize that a reliable platform with a trusted partner who sells through you to make you a strategic platform and respects the consumption of your network, those all sound like nice business case things but the bottom line of it is, you make a lot of money on it and it is a sustainable model.

I like to think it is just -- there is a real intense focus on carriers for profit right now and they have seen that the strategic BlackBerry platform is not just a browser pipe model to disintermediate them. It is a true strategic platform and it is proven in the money.

But then also, we have had carriers where we have great devices and these are kind of amusing stories where you show up with a few different colors of certain BlackBerry and they go “wow, look at these four or five colors -- now you’re innovating”. So in a sense, these to me are kind of last mile things where now we have to get the packaging and the styling and the coloring right and we have to get their awareness up a notch, but all the fundamentals and reliability in the platform has been baked in through the year.

So there is no question there has been a light gone on almost universal around the world. It is just the strangest thing. What used to be a hard push into really get an awakening has now become effortless and almost in response to their awakening and really summoning us to do now.

There is no question it has gone to mainstream. There is no question it has gone full-on consumer. It could be that we have hit a more consumer market. It could be that -- it is like one of those plants that you have to nurture for three or four years and then all of a sudden, it grows like crazy over a short period of time.

I never know in this business. You just focus on the fundamentals and then things you trust will come, but I did not expect them to turn this fast so quickly, to embrace us so strong. But then again, in many respects, they took longer to fully embrace us than I expected, but then when they came around, they came around further and farther and faster than I expected. It is just one of those things.

But at the end of the day, what it does is something very dramatic to the acceleration possibility and the addressable market possibility for us, but we also have to keep driving the value innovation equation. That is why these multimedia things and these BIS things and these BES things and these marketing program things and these partnership things and these carrier launch and these channel things, they matter. They matter a lot because that translates into channel execution and essential value proposition to the user, which means that they pay their bills every month, they pay more money and they leave less, which is an exponential profit model for the carriers.

But you know what, we sort of chuckle at it, actually, because it is like wow, it took longer than we expected but it has come on faster and harder than we expected. It is one of those things.

Operator

Your next question comes from Peter Misek of Canaccord Capital. Please go ahead.

Peter Misek - Canaccord Capital

Thank you. Jim, you alluded to the media platform. Can you help us understand that on the consumer side, exactly how the carriers are planning to roll that out and how you are planning to roll that out? If you could also help us out, a lot of discussion on how on the enterprise, you guys are becoming a data platform. Maybe if you could give us some concrete examples of that, that would be great. Thank you.

James L. Balsillie

Well, those are two very, very good and very different questions. I will do the second one first because I remember it better. Something like 70% of the BlackBerries are on MDS, and so the applications -- and we talked a little bit about them -- for CRP and CRM and GPS and IT management and all that, they are going like crazy and the whole platform extension, I think people who are even close to the story may not know even 10% of what BlackBerries are really being used for out there. It is that powerful.

Then what is happening is this whole PBX thing has become incredibly powerful because it is arguably the most valuable corporate asset that is totally not managed and controlled because all cell phone calls are not routed and managed through any IT infrastructure, and 75% to 80% of PBX calls go into voicemail. So in a functioning organization, that is just -- it takes us back where e-mail was five, six, seven years ago.

As well, I would really reiterate there is amazing evolutions also happening from BIS in a data platform, both in e-commerce ways, stored value ways, certainly the GPS. We have seen a lot of stuff like Yahoo! Go and e-mail and IM and search, and we have a new BIS release coming in very imminent also, and you are going to see some striking levels of carrier intimacy in that.

So as a data platform, the IT security officer separates behind the firewall and not behind the firewall for purposes of maintaining their store. But for purposes of the user, they are just saying do the packets get to me that let me do what I want to do, whatever that is I want to do, and am I in SMB or am I Soho or am I on enterprise, or is this my personal life or my work life?

We are this big convergence platform that allows everything that you want and that makes us so powerful in the channels because they can -- it is one set of hardware, but the platform can go over the air, whatever environment somebody wants. Because to get the carrier, to get the channels interested you have to address most of the segments that walk in the store, enterprise and non-enterprise, different e-mail environments, different IM environments, different devices, different stuff, MySpace and all that kind of stuff. If you cannot capture your leads most of the times, then the store cannot dedicate tension and work like that.

Now, on the media player, just a little bit of a sense of that, you are going to see some staggering, some very exciting things in the media player in the not-too-distant future. We have shown some good ability to play movies. We have shown some ability to play music. We have MP3 and MPEG and all of that kind of stuff. You have memory sticks. We have better displays. We have better batteries.

Again, I have said this before and I will say it again; Apple has done the industry an enormous favor because they basically told the world expect a media player as a software feature on a good smartphone. As the leading smartphone appliance company and platform company, we could not buy that kind of validation for $100 million. I think everybody is going to see their phone -- we played a lot for working people to see a talking device was also a messaging device and a bit of a workflow platform, and that is a work in progress but an exciting one.

Now, the reality is with componentry and synchronization engines and all that kind of stuff, is that people are now going to see these, understand that you expect your phone to also be your media appliance, and arguably your only media appliance that you carry with you outside of the home.

Then, of course, we are not too far from WiFi type stuff, so you have fixed mobile convergence stuff in there. And the optionality of each one of these is dizzying but you put them in totality, all you do is just sit there and go this is the greatest job in the world.

Operator

Your next question comes from Maynard Um of UBS Securities. Please go ahead.

Maynard Um - UBS Securities

Thank you. First, if I could, a clarification on what I presume are one-time administrative expenses. What was the dollar amount, and are those inclusive or exclusive of the $10 million Canadian from Jim and Mike?

And then the question; given your cash balance, and presumably nearing filing with SEC and the Canadian Government, can you just share your stance on potential share repurchases or stock splits, or does the formal investigation preclude you from those types of actions? Thanks.

Adele Ebbs

On your first question, we have not broken out what the amount is. I think it is safe to say the impact on net income was in the single digit millions, but that is about all I can tell you.

On the question about stock splits and buy-backs and all those types of things, those are things that we would have to press release if they have been approved but again, I cannot really tell you much about our plans there at this time.

James L. Balsillie

Those are things that we are clearly looking at and assessing on an ongoing basis. Definitely we have done some buy-backs in the past and we have done splits in the past. We are not religious about hording or anything like that. We take these things very seriously. As a board, they are deliberating on them and definitely that is something that we assess on an ongoing basis, how we make sure that the stock is priced appropriately so that it is successful to shareholders, and the capital is optimally deployed for the shareholders. There is no horde mentality or anything. We have bought them back in the past. We have done some strategic acquisitions and these are things we keep on going on with.

Operator

Your next question comes from Jeffery Kvaal of Lehman Brothers. Please go ahead.

Jeffery Kvaal - Lehman Brothers

Thanks very much. First, I wanted to know where Dennis might be this evening.

James L. Balsillie

Dennis? Well, Dennis was just working on -- Dennis was working a lot on some of the finance stuff on a bunch of the key carriers. What has happened is as we went to 270 carriers, one of our COOs, Don Morrison, came into my office and said “I’m really enjoying these 25 direct reports that I have as you’re looking for 100% growth in the business” and really, on the execution side, as the sales grow and the revenue grow, we launch these carriers, we really need more operating drive in the company. That is the area that he has been focusing more and more on, and that is what we are really pushing him on now.

Jeffery Kvaal - Lehman Brothers

Okay, great. Secondly, would you talk a little bit about gross margins by division? Talk about them in specific number terms, but are they stable within each of the segments that you disclosed?

James L. Balsillie

Adele or Brian.

Adele Ebbs

Jeff, it is primarily mix related. Like in hardware, for example, the mix can have an impact, as we’ve talked about in the past. We do not break it out, as you know. I think we have talked before that there is some scale in the service business and you see that over time in gross margin. Software is pretty stable.

Jeffery Kvaal - Lehman Brothers

Great, and then lastly, you guys came in a little lighter on units this quarter than I think you might have expected, and there was also some inventory build in the channel. Anything in particular going on there that we should be thinking about? You guys are also talking about a big selling quarter for May and beyond as well.

Adele Ebbs

On the inventory side of things, I think the units increased by 250,000 units, but on a run-rate basis, if you look at how fast the sell-through is growing on a weeks basis, it really has stayed the same. We think it is at a comfortable level.

In terms of what was going on with the shipments in the quarter, there were some shipments scheduled late in the quarter with a couple of carriers, actually, that just got pushed out into Q1.

Operator

Your next question comes from Deepak Chopra of National Bank Financial. Please go ahead.

Deepak Chopra - National Bank Financial

Good evening. I was wondering if you could talk a little bit about momentum in international markets versus North American markets. I saw this quarter it picked up quite a bit. What are the trends you see there for the next year or so?

James L. Balsillie

That is a fair question. It is like -- the funniest thing happened is though the emerging markets are growing fast, it is like the turbo charge has happened in North America and Western Europe. It is like there is -- I would have expected the real acceleration to be coming from emerging markets and new carriers, et cetera, but it is almost like -- I don’t know. Maybe it’s for the first two or three years you see it as a great B2B thing and then the niche B2C thing, and they just go after low-hanging fruit, but something has happened with most of the North American carriers and most of the Western European carriers that they see us as a core product for the broad markets.

I kind of have to say moving into a wider part of the pyramid of sort of relevance in our main North American and Western European markets has been the main momentum shift in the last two or three months. It is not just we are bringing on new carriers and they have great business plans and we are all excited and we are localizing and we are launching, we are doing programs and all that great stuff and it is a huge amount of fun.

The dial is really starting to get moved by the big players and the longer standing players, like was commented earlier by Gus, it is almost like you are moving a little out of a niche segment to a main meal segment, and that changes everything in terms of feature products and hero products and broad this and broad that.

I think that is generally where the momentum is coming from, is our biggest and most long-standing partners who have a different approach. That is why I was metaphorically talking about that neighbor/friend thing who thought you were okay and all of a sudden thinks you are the greatest thing going for whatever reason. There has been a shift in perception.

We don’t really think we have changed so much. Maybe we have a little bit, but there has been an awareness of our longstanding partners that maybe we can put a zero on the level of activity and results we get from RIM if we put our shoulder more to it, because they are all under very, very strong pressure to drive EBITDA. So if you are a catalyst to their success quotient, there seems to be that real focus on income for carriers beyond penetration right now, as they have hit the thresholds of penetration.

Our hottest markets, U.S. and the key Western European countries in the last two or three months. We are seeing big opportunities there and we are pushing hard on them, not to the exclusion of the other ones but we think they are the ones that can really move the big numbers.

Deepak Chopra - National Bank Financial

Extending that, at what point do you think consumer will outstrip enterprise, given just the overall size of the consumer market globally?

James L. Balsillie

Though we are incredibly focused on the enterprise and it is growing really fast and the platform play is solid and the reliability and the availability and the security and the partnerships and all that kind of stuff is super solid, and we have a couple of surprises to really bring to that equation, which I think we are going to do some enormous delighting.

If you really knew what we were doing on the consumer side to just open up that big market, I am hard-pressed not to see that just being such an engine because we are so far ahead of the alternatives and it is such a big addressable market and it is so straightforward for us to fulfill into it. And there is an irony, which I sort of talked about on this call before, and I will maybe wrap up with it on this, is the door to the consumer is through the enterprise, not vice versa, in my experience because the service reliability and the support reliability, at least in that you have an IT department supporting 500 users on an enterprise, even if there is some QA issues, et cetera, et cetera, but if you have a product with any element of reliability from a data platform, and you have 500 relatively unsophisticated users calling into your call center because of that, that absolutely crushes a carrier’s customer satisfaction, profitability and support metrics.

So the irony is though enterprise is our huge history and we are staying focused on it, we have had six or seven years of training wheels to get the system right to arguably also support, through the same channel and through the same carriers, and fundamentally much the same platform, the non-enterprise market, and that is a pretty big market it and of its own right, just in total people.

If I had to bet, I don’t think it will be too long before consumer outsells enterprise. I think it might be a little sooner than people imagine but it is just going to be race of who is growing more extra fast.

Adele Ebbs

Operator, I’m showing a little after 6:00, so I think that we need to wrap up.

Operator

Would you like one more question, or --

James L. Balsillie

No, we’re done. We’re good.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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