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Here’s the entire text of the Q&A from Research In Motion’s (ticker: RIMM) fiscal Q3 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you. One moment please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question please press the “*” followed by the “1” on your touchtone phone. You will hear a tone acknowledging request. Your questions will be pulled in the order that they are received. Please make sure to lift the handset, if you are using a speaker phone before pressing any key. One moment please your first question. Your first question comes from Andrew Lee of TD Newcrest. Please go ahead.

Q - Andrew Lee

Hi Jim, if you could talk about the comments on the impact of NTP litigation on the sub numbers, just to reclarify why wouldn’t it slow down the replacement cycle or the up tick of carriers in general? In other words, how does the revenue number still stay the same given that the sub act seems to be impacted in larger shipments?

A - Jim Balsillie

Well I mean, we’re just reflecting what we’ve seen in, in the first few weeks of December and we get week-by-week sales and we get week-by-week activation, so we’re just really extrapolating what we’ve experienced so far in the quarter and sales and shipments are remaining very strong and profitability is staying very solid and then so, none of that has changed. We still expected strong sub growth over the quarter, so if you look at the growth numbers, they are still a very healthy growth in that number. We’ve just become a bit more conservative in our growth size over the quarter but the actual shipments and replacements and sales and software and all that seems to be, is absolutely staying perfect, really we’ve just seen slightly less growth than we had anticipated for subs, who knows that may pickup now that, the developments we’ve seen, the very positive developments in the PTO and the Court’s scheduling and the imminent announcement of the workaround, that’s the stuff people may wanted to see, so, that, some of that probably was just differed and we’ll see how it pops in the New Year.

Q - Andrew Lee

Competition from Palm’s and Microsoft’s new device or Windows Mobile 5 wasn’t mentioned as a reason, is that at all factoring into your lower sub growth?

A - Jim Balsillie

Well, 5.0 is not over yet and so it is been out and, I mean we have a Treo-based product coming out, I mean I am not seeing a lot of Palm OS in the enterprise these days, I think we’re seeing a lot of activity in Symbian and, and we’re seeing a fair, some Windows Mobile 4.0, may be Palm, may be they, I think they shift in more than windows mobile I am not quite sure in the direction there, but not I’ve seen, we haven’t seen 5.0 in the market yet and, there is no difference in the Palm stuff that I’ve seen in the market. No and I, I must say I’ve talked to quite a number of customers so that is really come up with the fact you know.

Q - Andrew Lee

Thank you.

Operator

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

Q - Maynard Um

Thanks, I just want to touch just on the litigation impact to subscribers, I mean. Do you have a sense of where the companies are moving to other solutions or is this really companies holding of purchase pending the litigation outcome and creating sort of a pent up demand as we go forward. Then, I just thought I take a shot if you would, on the shared number of BESs hold in the quarter? Thanks.

A - Jim Balsillie

We don’t report the number of BESs anymore just because we cluster them so much, more. So, in a sense it’s much more counts than it is individual BESs by the shift of the sort of way. So, I think we talked a couple of quarters ago that that just doesn’t make as much sense to report. What I’ve received from customers is definitely there is some concern and they are very, very comforted by the PTOs, incredibly strong statement in their office actions next week or last week. And, we are getting ready to brief on very, very simple and straight forward workaround. So, that stuff is really calmed. I would it caused, in certain accounts, some concern where they stalled and probably in a few accounts they might have had a contingency plan. But I am not aware of a lot with them going ahead with a contingency plan. They might have put in the small pilot. But that’s pretty normal. That was a normal competitive environment longtime ago. I mean most of them kept a small pilot of fiber tin on just an alternative system, just to test it and we were the overwhelming percentage of what they do, and that’s been a constant for us. So, I think that the big concern was, would there be an interruption and the fact what the PTO did, and the fact that we have workaround that we are getting developed to in that late minor shipments, I think that went a long way to calm things. I am sure some customers might have done something; I think more than anything they just held on for a week or two, and said, “Okay, let’s just see, how the dust clears?” And so, will it pop in January and then we guide back up or something, I don’t know.

Q - Maynard Um

Thank you.

Operator

Your next question comes from Daryl Armstrong of Smith Barney Citigroup. Please go ahead.

Q - Daryl Armstrong

Thank you very much, I would also like ask a litigation question. Just wanted to get a sense, in terms of what, what would provide you with comfort that the US Patent Office there, strong endorsement of your position, will be considered by judge Spencer as he ultimately makes a decision and then also in terms of the workaround, any of that, that entity decides to contest that. What is the process for determining, going through the process, to determine whether or not it infringes or does not infringes on the patents? Thanks.

A - Dennis Kavelman

Well, well we can’t and as you know Daryl I’ve briefed you, in quite a bid of detail on the workaround stuff.

Q - Daryl Armstrong

Right.

A - Dennis Kavelman

But on this stuff, the, I mean definitely anyone’s free to sue anybody anytime. So, it would be new proceeding; they would either speak out contempt proceedings or a new trial. And, but, I’d tell you, I mean it’s really, at the workaround is different at the absolute fundamental aspect, without affecting user impact. Because it’s a core and will be quite clear about it in the very near future. And so really, I mean, now obviously it is our view that this is material new information, the development of the PTO. And US PTO shows difference to the Courts by creating this expedited team. We have no more information than anyone else from the US PTO. Other than what they write in their words. And the words are very clear and so, everything I’ve said is exactly what they’ve written in their own words. We know, no more than you do, if you read their office actions. And fundamentally, our view it is, this is very persuasive and the PTO is responsive to the Court. And we hope that the judge will consider this significant and material. But no I can’t guarantee that he’ll listen to it, no I can’t. We have the DOJ is obviously involved in this and there is public and government interest. This is material and they are part of the briefing schedule, and that’s very rare of the DOJ, he is involved in these kinds of things and we do have a workaround in NTP can’t challenge that but at a point, I mean, we start compounding so many probabilities here. But, no I can’t say the whole the probability is zero. However, we do have gradations of workaround. So, our current workaround doesn’t have any visible user impact, but on the email environment. But, we can certainly; we’ll lay our latent fleet in it, other more extensive workaround. So, you just keep invoking until you are safe, and it’s holding a software switch. So, definitely anyone is free to pursue suit against anybody anytime, I can’t stop someone from doing that.

Q - Daryl Armstrong

All right, thank you very much for answering my question.

A - Dennis Kavelman

You’re welcome.

Operator

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

Q - Jeffery Kvaal

Thanks very much, I would like to turn to the pace of adoption based on the 8700 launch a little bit, I was a little bit, the impact on net handset is a little bit higher than I would have thought given the pace of the 8700 launch and it’s timing. I am wondering if you could clarify a little bit about how the promotions work and why the delay by a month or so we have, it’s a relatively sizable impact on, on net ads in the quarter or in the month?

A - Jim Balsillie

Well, I mean our, our plan was to get it in from mid October both the, the 7130e and the 8700 and so really what happened was is though and that was forecast and planned in it and through our certification requirements and development timelines. And it is important to understand that this is a remarkable new product where we absolutely develop the whole code and partnership with the Intel and phenomenal performance, we, if fundamentally we didn’t get the, the boosters of that until into December and so, that’s quite frankly that the, our growth remains, very much real and very much solid, it’s just a question of degree and, and loosing 3 or 4 weeks or 5 weeks of a new growth product is really what, what we didn’t get those, turbo charges if you will and into, into December. So, that’s fundamentally what it is, but I will say the products getting rave reviews, I will tell you the absolute serge of interest we’re seeing an edge around the world and, and in the Europe, I mean we’ve absolutely seen a serge in growth in Europe. And so, this is very, very encouraging and, that’s how it happened we, you loose 4, 5 weeks of turbo charges and that’s why we, we pre released a few weeks ago sub-editions, but like I said, I mean we have not modified guidance on revenue profitability, we didn’t modified that at all in this, in these, in these calls and we still don’t.

A - Dennis Kavelman

Jeff, I was going to add one thing to that, I think that in addition to not gain the turbo charge on the launch of the new product. There’s a lot of anticipation around the new products that, that sort of had the double effect of over hanging some of the existing products that would have normally been solved in its place. So, we not only did not get the growth from the new one, we get a bit of a void and people waiting for the new one. So when I had, when we had previously done that the September expectations, as Jim said we are looking towards the end of October beginning, November that moves out towards end of November and you have, the November sub-editions where the reasons for the shift down to the 645 that we had, we had in Q3.

Q - Jeffery Kvaal

Okay do you have any stock outs or components constraint on the 8700 at the moment?

A - Jim Balsillie

I think, we definitely seeing very strong demand for the product and we’re definitely hustling to keep up with supply for the 8700 and the 7130e. Definitely all the, the hot new products the 7100i, 8700 and the 7130e we are definitely hustling on the production and logistics and supply chain part of that so, I mean we’re keeping up with it but it’s a big challenge and we can certainly go down that path, they’re all 3 high demand products and there’s all kinds of strength in the channel and transitioning to new designs and new products and supporting and training and fulfilling the channel for component part about that, its nothing show to magic with the engineers and the logistics folks are doing but, by all means that’s an ongoing challenge.

Q - Jeffery Kvaal

Okay, thanks Jim and Dennis

Operator

Your next question comes from Rob Sanderson of American Technology Research. Please go ahead.

Q - Rob Sanderson

Hi thank you. A couple of housekeeping, we got dropped from the call, it sounds like in drawing back in a number people actually got dropped in the call so, just a couple of housekeeping first, you probably disclosed us, but can you give us the number of non North American subscribers in the quarter/

A - Jim Balsillie

That wasn’t given at all Rob, I dint provides the break out, I can tell or give you an anecdote just, going through number in front of me that we are, Europe and International we’re seeing continued very good growth. So, in the context of Q3 and certainly in the Q4 guidance than what we’ve seen so far this month, a real bright light has been International sub-ads and sales but I can’t provide you…

Q - Rob Sanderson

Would you say International is growing; faster percentage, wide a lot amount of numbers, is that fair?

A - Jim Balsillie

Yeah that’s right, as the overall base International continues to be bigger piece.

Q - Rob Sanderson

Okay and, and then a couple of questions through the guidance, just a stock option expense is not included in Q4 but it is Q1, is that right?

A - Jim Balsillie

That’s right we’re, we’re required to begin expensing in the, in Q1 ’07, so that’s when we have done it and we put an estimate of a $0.03 per share and that’s what it builds into that range.

Q - Rob Sanderson

Okay and then you say that the Q1 guidance is GAAP, does that mean, there is a litigation reserve expected, or you are not expecting litigation in your guided number.

A - Jim Balsillie

No that is, yeah its, we can’t, the way you do the litigation expenses as you’re accrue them in the current periods, for your estimates going forward. So, any potential additional litigation expenses or resolution or anything like that, what I said before was we’ll account for that when it happens and currently for 450 as the amount that we have, we’re holding as an estimate.

Q - Rob Sanderson

Alright thank you, and then finally just a, the real question Jim could you just, I mean we’re all beaten the dead horse term litigation but could you answer 2 questions, 1 give us, you gave us some sense of words, some of your customers are telling you what about your carrier partners, are they comfortable with the, the workaround contingency, is that unanimous or some varied and then, how do you really, you are guiding down here the next quarter, you are leaving some subscribers on the table, maybe opening, keeping the door open for, for some competitors to get a little bit more momentum then they otherwise would, how do you balance sort of that opportunity cost I guess, just by going forward and getting back to the, the settlement negotiation.

A - Jim Balsillie

Well we’ve already tried to be reasonable and its then, that hasn’t changed and so at the core, we remain and I think we are, you said it very clearly in the, in the, in the op-ed piece on Wall Street Journal, so we continue to speak to be reasonable and we continue to try and do the appropriate thing for all of our stake holders. I think carriers have been fine, I mean some of them briefed on the workaround, some are in the process of being briefed on it. It’s very straight forward so, that has been a real particular problem. I think competitively the competition is always been there, you, when we launched BlackBerry they were 30 middleware providers, players in, in the space, they will continue to be. We provide a very comprehensive platform its 150 go on to 250 carriers around the world. We have 15 BlackBerry connect devises as well as probably about 15 of our own. We support all the protocols, WiFi, Mobitech site and GSM, GPRS, and CDMA/1xRTT, EV-DO, going and so, its gives you all the protocols, all the geographies, all the devices, the platform extension, notes exchange, group-wise presumer, secure, scalable, reliable, manageable, I can go on and on. And all the virtualized execution gap so, key support into 2, 3 and 4 of customer care and channel program and health services. We have literally 1000’s of people providing us value everyday and its not like we are major ISP trying to leverage on ISP store, its not like we’re the leading handset vendor trying to leverage the handset position. Its not like we have started up who can deliver on this, so that’s been strategy, that’s been our core value proposition, all the stuffs, been around before and so, at the end of the day, we are servicing our customers, we are talking to our customers, we are servicing our carriers, we are talking our carriers, we are seeing a very nice pop in the international sales, North American sales are still strong, we’d like them to grow more and we think the recent clarification will help, but at the end of the day I mean its not like we have been tried to be pragmatic won’t continue to try to be pragmatic, we will.

Q - Rob Sanderson

Alright, thank you guys.

Operator

Your next question comes from Tim Long of Banc of America. Please go ahead.

Q - Tim Long

Thank you, just back to net ads from that again if you can, this will be kind of the third quarter were we are at the low end or a little bit below what you guys expected and I, and I hear this product delays in NTP and it doesn’t sound like competition, it’s an impact. Just talk a little bit Jim about, maybe economic and a look at the macro here, obviously there is certain parts of the world, particularly Europe, in some countries were the enterprise that’s buys the environment, it’s very challenging right now, yet you do say that international has grown pretty well so, just, just give us your sense of what you are seeing on that font and particularly in some of the economies like Germany and UK where other enterprise type vendors have had, a real tough time, are you seeing any impacts there, is that limiting upside in some of these economies, or is it just not an impact for, for…

A - Jim Balsillie

I mean, its good, its good question. Because in many respects, when we are such an overwhelming proportion of the market. I mean in a sense, you are not really, you’re only sort of competing with yourself. And so, we are not seeing a lot of competitive stuff out there, I think the #1 thing, I mean definitively we are seeing a real invigoration in Europe, mainly through the interest in the product that’s got the high-speed network. I think the carriers are getting into carrier programs with us, I think there has been some clarification on the degree of how supremely secure BlackBerry is and we have to work through that, through government certification agencies I think the certification and interest in new EDGE platform and how that contrast UMTS, our planned UMTS stuff in 2007. So there is a lot of activity going on, but we are the overwhelming leader, there is no question and we are absolutely putting the foot on the gas on that. I think its, that enabling this convergence is a very, very multifaceted process. But we are getting very good traction, we’ve got good sales overwhelmingly in the lead and we are doing all the things to multiply the stuff and what you see is, literally the sub basis in a lot of these countries are 3 times what they were, 6,7,8,9 months ago. So that’s the same trajectory we had in the United States when we launched, we just have to focus on the fundamentals for, 2 or 3 years, and all of a sudden they pop. And so, I am not seeing it with in a macro economic context, I am seeing it with in a set of sector specific complexity, execution issues. When you are doing a convergence product, you got to interrelate the handset vendor, the switch vendor, the carrier, the ISP coupled with the enterprise environment and there is a lot of localization issues, and sometimes in SI’s. We know this game, because we don’t threaten any of the ecosystems and we virtualized the gas and we partner well. This is a process we’ve seen before, and it’s, I think they are playing out wonderfully in Europe. So…

Q - Tim Long

So it’s safe to assume across all country even where there might be enterprise weakness. So that your, so that the BlackBerry growth is growing through enterprise weakness that exist in UK generally.

A - Jim Balsillie

Yeah, we are not seeing it with in a macro economic, we think its sectors specific complexity issues, and that’s really it. And then sometimes it sector specifics FUD, whether it’s a litigation threat or whether its some competitor potential companies that GM going to think of this and then you got to sell through that, or some element of a network upgrade or a new handset or something, and those are the elements that you just sell through. But I would not put in a macro economic context and I don’t think that reflects it at all. We are seeing tones of launches through out Asia and Europe, we are seeing accelerated sales and we see we have to sell through the FUD in US. But you know what I mean I am finding it resoundingly straight forward to sell through it, you just got to do it, you just got to do it.

Q - Tim Long

Thanks.

Operator

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

Q - Deepak Chopra

Good evening. I was wondering if you guys can talk a little bit about the replacement cycle. It seems like its accelerating here, I calculated to be about 15 months or so. And how did that compare to what you’ve said it in the past and what you expect on, I mean, in the future. As well, Dennis, the call thing, and I was wondering if you could provide some OpEx and margin guidance for the next two quarters if you can repeat that as well?

A - Jim Balsillie

Yeah, I think on sort of address the people dropout there is going to, there is post-view service and it is going to be on the rim.com website, you can get everything there, real quickly I said OpEx was going to go up 11% to 13% in Q4 and 9% in Q1. And R&D was going to be up 12% and 6% respectively and sales and marketing is going to about 12% each quarter.

Q - Deepak Chopra

And margins?

A - Jim Balsillie

Gross margins, I think gross margins would stay at 56 to 58, and then be 55 to 57 in Q1.

Q - Deepak Chopra

All right thank you.

A - Jim Balsillie

But you can get, pick it up of the post view there is a post view call as well at 416-640-1917 and the reservation is 2111-7894, but you can get just email and Dan shall get that to you as well. And, your question on the upgrade cycle?

Q - Deepak Chopra

Yeah, replacements cycle and what are the trend lines you are seeing?

A - Jim Balsillie

Well, I mean I think, we have been talking about for quite a while and with all these new products I don’t think it’s a surprise that there is a lot of existing BlackBerry users out there who really want to go to either the, depending on the network the 8700, the 7130 or the 7100i. We are seeing strong upgrade, different percentages in all those different carrier channels but they are all there and, you see real spikes in upgrade cycle when we do these new product launches. We set for while that we think these products are more than just a cosmetic changes, major, major shifts in improvements and speed and capability and all that stuff. So, I mean, I try to be clear, we think strong handset upgrades and replacements, are something we are going to benefit from certainly over the next few quarters, but we are going to continue with new products through next year. So, I think it’s, it’s, pretty hard not to want one of the new one.

Jim

Okay, so we are at 6’o clock, I think we’re going to wrap to call there. I’d like to thank everyone, for your continued support and please have a good holiday and we will talk to you in the New Year.

Operator

Ladies and Gentlemen, this concludes the conference call for today and thanks for participating. Please disconnect your lines.

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Source: Full Transcript of Research In Motion’s F3Q06 (Qtr Ending Nov 26, 2005) Conference Call - Q&A (RIMM)
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