Research In Motion F3Q08 (Qtr End 12/01/07) Earnings Call Transcript

Research In Motion Ltd. (RIMM)

F3Q08 (Qtr End 12/01/07) Earnings Call

December 20, 2007 5:00 pm ET

Executives

Adele Ebbs - VP of IR

Jim Balsillie - Co-CEO

Brian Bidulka - CAO

Analysts

Mike Ounjian - Credit Suisse

Maynard Um - UBS Securities

Mike Abramsky - RBC Capital Markets

Paul Coster - JPMorgan

Chris Umiastowski - TD Newcrest

James Faucette - Pacific Crest

Vivek Arya -Merrill Lynch

Deepak Chopra - National Bank Financial

Gus Papageorgiou - Scotia Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Research In Motion third quarter fiscal 2008 results conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference is being recorded today, Thursday December 20, 2007 at 5:00 p.m. Eastern Time.

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

Adele Ebbs

Thank you. Welcome to RIM's fiscal 2008 third quarter 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 Co-CEO, and Brian Bidulka, RIM's Chief Accounting Officer.

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

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

Some of the statements we will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, CapEx, depreciation and amortization, investment income, earnings, earnings per share, and ASPs for Q4 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, continue and similar expressions. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties in assumptions we have made.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements, including, risks relating to the restatement of our previously filed financial statements as a result of our internal review of historical stock option granting practices, and regulatory investigations or litigations relating those matters, risks relating to intellectual property, the efficient and uninterrupted operation of RIM's network operations center, restriction on import and/or use of RIM's products in certain countries due to encryption of our products, the occurrence or perception of a breach of RIM's security measures, our reliance on suppliers and third-party manufacturers, general economic conditions, our ability to enhance our current products and develop and bring to market new product and services, our reliance on carrier partners, risks relating to competition, risks relating to possible product defects and product liability, our ability to effectively manage our growth, risk associated with our expanding foreign operations, foreign exchange risks, and other factors set forth in the forward-looking statements section of today's news release and the risk factors and MD&A sections in RIM's filings with the SEC and Canadian securities regulators.

We base our forward-looking statements on information currently available to us, and we do not assume any obligation to update them expect as required by law.

I will now turn the call over to Jim.

Jim Balsillie

Thank you, Adele. We are pleased to report a solid third quarter with revenue growing 100% over the same quarter last year and earnings more than doubling year-over-year. We continue to see strong growth in the enterprise segment and are making inroads into new markets as well. This performance is a testament to the hard work of our employees and partners and we look forward to continuing our strong record of growth in coming quarters.

Demand for BlackBerry products and services in Q3 was strong with approximately 1.65 million BlackBerry net subscriber accounts additions, which was inline with our September forecast, and was 14% higher than the approximately 1.45 million of subscriber accounts added in Q2.

New products such as the BlackBerry Pearl, 8130 for CDMA and heavy promotion by our carrier partners heading into the holiday season drove strength, especially in the later part of the quarter.

We saw recent efforts in channel expansion, retail programs and carrier support they have proved with Black Friday being our strongest date ever in terms of net subscriber account additions.

The success of these programs was further evidenced by the notable increase in weekend net subscriber account additions, we have seen since Black Friday. This is in contrast to prior years. But we have traditionally seen it slow down in Black Friday, in the weekends following.

So, there is also strong growth in the enterprise business in Q3. And it is clear from the results in this quarter that BlackBerry's platforms have crossed over from being viewed as a primarily enterprise product to being marketed as a strong mainstream offering by our partners. At the end of Q3, approximately 34% of our subscriber base was non-enterprise.

In North America, we saw a continued commitment and support for the BlackBerry Solution from our partners. BlackBerry products were included in numerous AT&T back-to-school promotions in September. And we are heavily promoted and advertised by our partners being up to that is part of the Thanksgiving holiday promotions.

In particular, we saw strength at T-Mobile with their launch of a Wi-Fi-enabled 8320 combined with their HotSpot @Home offering, and the new $9.99 BIS email pricing plan.

Our CDMA partners had an excellent quarter with continued success with the 8830 World Phone and the launch of the next generation BlackBerry Pearl 8130 for CDMA. At Verizon Wireless, in addition to a dedicated BlackBerry Pearl national print and online advertising campaign, Pearl was one of four devices featured in Verizon's next phones now fall line of campaign, which was supported by print and online advertising as well as in-store merchandising.

In conjunction with the launch of the BlackBerry Pearl, Verizon Wireless introduced a $29.99 monthly BlackBerry service plan. This plan which offers customers, unlimited access to BIS e-mail and unlimited browser use has shown excellent result since launch. At Sprint there was a continued success with the BlackBerry 8830 World edition across all channels driven by ongoing promotion and support. In late, November Sprint launch the BlackBerry Pearl 8130 and supported the launch with over 1,500 in-store training events and channel [facing] launch events in cities across the country.

For the first time ever Sprint on retail stores, merchandised around the BlackBerry Pearl 8130 allowing floor stands, counter stands, window clings and other promotional elements in to their store. Sprint also introduced a new pricing plan which includes unlimited BIS e-mail, unlimited browsing, unlimited instant messaging as well as other attractive features for only $30 per month.

In Canada, the CDMA carriers also stepped up their marketing efforts for both the 8830 World Phone and Pearl. Telus has focused on data and made BlackBerry Pearl one of their holiday hero products for 2007 with Pearl being featured in most of their TV ads, radio print, online and outdoor advertising for the holiday season. They have further supported these efforts by offering $15 a month BlackBerry BIS pricing plan. At Bell the CDMA Pearl was launched into all channels and for the first time ever BlackBerry smartphones were featured in Bell's consumer ad campaign along with their other top consumer devices. This launch combined with the continued strong momentum of the 80 -- 8830 led Bell to reach the highest level of BlackBerry service activations ever. Bell supplemented these programs also by offering $15 unlimited emails and instant messaging plans. These efforts have resulted in extremely strong market share performances by these carriers in the quarter. Channel development continues to be a primary area of focus for RIM with all four major U.S. carriers launching BlackBerry smartphones in Q3. There is a great deal of energy put into ensuring product was on the show of our thousands of retail locations across the United States.

The T-mobile master dealers specifically put a strong effort into ensuring both Curve and Pearl were at the forefront for both Back Friday and throughout the holiday season. Partner advertising for the Thanksgiving holiday exceeded our expectations in both on line and print ads reach millions of household heading into the busy retail season. Continued focus on national retailers and trading programs on an expansive network of in-store stocks status in Best Buy, Sam's Club, Cosco, Radio Shack and others has resulted in strong performance improvement in these channels. For example Sam's Club committed to making the BlackBerry Pearl a holiday feature product and so far has seen 400% increase in weekly BlackBerry sell through.

North America was a big driver this quarter with the holiday selling season starting in November. We are also seeing this growth outside North America particularly in Latin America and Southern Europe. Over 33% of our subscriber base is now outside of North America.

In Europe, Carphone Warehouse continues to build on the success of their launch of BlackBerry products, is now expanding their offering to include the Pearl [8820] in a sunset red finish and the Curve 8310 with their proprietary navigator service supported by TeleNav in preloaded. Starting into new-year, we expect to see even more contributions from this channel. Throughout Europe we are seeing strong adoption and brand recognition of our products particularly in Central and Southern regions.

Carrier partner contributions have been significant with mobilkom in Austria placing ads for the Curve 8310 with GPS navigation on city buses, bus stops and streetlights. Vodafone coupled numerous device launches with aggressive advertising campaigns online, at airports and in print and TV media.

In Spain we saw Telefonica launch a new lower BIS pricing plan, which takes support of with an aggressive advertising program and Vodafone Spain launched the 8310 with a [hero] advertising campaign in airports and through print and outdoor ads.

Additionally we've been working with carriers on less traditional mass marketing efforts by hosting events at clubs or arranging networking and business gatherings, to further grow our BASE in these followings in Europe. One of example of this is a series of master class events we have in Spain where about 1,500 Blackberry users attended workshops dedicated to teach them how to get more out of their device.

RIM's success in emerging markets continued in Q3, the Blackberry Curve 8310 with GPS was announced in Latin America Futurecom Brazil held in October. Major advertising campaigns ran in Brazil featuring the 8310 by Claro and TIM. Claro used their VIP customer program Claro [Ace] to announce the 8310 to their top accounts in Brazil and put 8310 displays in the retail stores with fairly aggressive pricing.

TIM Brazil also announced a new pay-as-you-go Blackberry service plan with their advertising campaign. A number of other carriers throughout the region launched the Blackberry Curve this quarter including Telcel Mexico, Mobistar Venezuela, Mobistar Argentina and we are seeing a strong commitment from our partners in the region to advertising and promoting BlackBerry in their market. We were also pleased that our progress in Latin America was recognized with the flat BlackBerry Pro wining Product of the Year by PC World, Latin America in October. Elsewhere in emerging markets, we made meaningful progress in bringing the BlackBerry Solution to Russia through agreements with both MTS and Beeline VimpelCom.

In Asia Pacific, the BlackBerry Pearl 8120, Curve 8310 and 8320 were all launched successfully across the region with strong interest from corporate, small business and consumer segments.

In India, BPL Mobile, a Mumbai based GSM operator launched the BlackBerry Solution and a BlackBerry Curve in late September. In addition, Reliance Telecom launched BlackBerry service in early September across its pan Indian CDMA network with the BlackBerry 8830 World Edition. Owning on our partnership announcement with Alcatel-Lucent, RIM and China Mobile continued to increase awareness of the BlackBerry Solution in the mainland of China, and are finalizing preparations to step up sales for the upcoming 8700 availability.

As part of this strong partnership, RIM was the top sponsor and participant in the inaugural China Mobile User Enterprise Forum held last week in Guangzhou.

In Japan, the introduction of the Japanese text entry and user interface in the quarter is expanding the market opportunity beyond foreign multi-nationals to include large and medium sized Japanese firms. In addition, NTT DoCoMo expanded their distribution of the BlackBerry Solution beyond the major urban centers to now include all regions in the country, and just this month lowered their monthly service by 40% to 3,400 yen, which is approximately US $30.

We continue to increase the use of our BIS platform. This quarter BIS e-mail version 2.4, which simplifies the initial set up procedure for new customers was successfully rolled out. Instead of having to first create a BlackBerry e-mail account new subscribers will now simply input their pre-existing e-mail address and password to connect their BlackBerry smartphones to their sourced e-mail account.

We also added three new premium BIS e-mail partners in the quarter verizon.net, Cincinnati Bell, and GoDaddy. Around the world, we are starting to see growing support across the carrier [CND] for low cost BIS data plans. Carriers continue to adopt tiered and pay-as-you-go service pricing tailored to the growing prosumer and consumer market.

This quarter has been especially notable as carriers like NTT DoCoMo, Verizon, Rogers, and others have introduced some type of introductory working expensive plan. At Verizon and Sprint we've seen the price per data plan drop 25%. At DoCoMo, we've seen a drop by 45%. And the three largest Canadian carriers are all introduced in unlimited e-mail on BlackBerry messenger plan for $15.

The UK has some of the most aggressive pricing opportunities where plan start as low as 2.5 pounds per data plan. In France, Bouygues Telecom launched both the BlackBerry Pearl and Curve into 1200 direct and indirect stores and started offering unlimited e-mail and browsing for as low as EUR9 and [Telephonic and Spain] launched a new BIS plan with EUR5 a month up to 3 megabytes of data.

These changes are significant and that they demonstrate a real commitment by the carriers to work with us to drive greater growth outside the [NM] price market. We have seen evidence that these types of programs drive increased data demand, in many cases carriers see upgrade to higher end data plans over the time.

This quarter, we launched the Face Book application for BlackBerry smartphone that enables us an easy mobile access to Face Book features that were previously only been available with a web browser.

The integration between Face Book and the BlackBerry Solution allows subscribers to leverage our push based architecture to enhance their social networking experience. The rich, native application goes beyond browser based access automatically pushing notifications to the user's BlackBerry handset. Since the launch of this product in late October, you have seen hundreds of thousands of downloads and within the last month a number of carriers have added a virtual preload of the application to the BlackBerry smartphone that they sell.

So there are many opportunities in the prosumer and consumer space. We continue to be very focused on growing our enterprise business. We believe that the enterprise market remains under penetrated and that there are many opportunities for growth both in North America and markets around the world. Demand for the BlackBerry platform in large enterprises remained robust in Q3. And we continuously diversification of our customer base across many industry verticals.

In particular, government continues to be a high growth vertical for the BlackBerry Solution. And this past quarter, BlackBerry devices on Verizon's wireless network were selected by the FBI to be rolled out to approximately 18,000 agents, analysts, and other professionals within the organization by the end of the calendar year. The FBI is using the BlackBerry Solution not only for communication and messaging, but also for taking advantage of the MDS capabilities of the solution to enable a large number of existing applications.

This deployment is the single largest deployment we are going to take in the government sector and we look forward to building on this success. This quarter, we introduced the BlackBerry Professional Software, which is aimed at medium to small businesses. With 30 or fewer users at a cost of $499 for five users, this product provides an inexpensive way for small businesses to get much of their functionality of BES with also need for specialized IT staff. Small and medium sized companies can install this software directly on the email server with no extra hardware necessary. Customers have the option of upgrading to BES as the organization grows, and MDS software is also available with the software to allow the extension of internal applications to employees.

BlackBerry Wi-Fi products continue to generate significant carrier and customer interest. There are now Wi-Fi versions of three BlackBerry handsets the 8820, the Pearl 8120, and Curve 8320.

The new BlackBerry Curve 8320 with Wi-Fi UMA was included in T-Mobile's HotSpot @HomeTV advertising this quarter and has been heavily promoted in print media. Orange brand also introduced the 8320 with UMA support this quarter and support the launch with a national advertising campaign.

The Wi-Fi-enabled BlackBerry devices are gaining traction due to the cost savings and coverage benefits achieved through Wi-Fi UMA service. We are also seeing strong interest in Wi-Fi from enterprise customers and look forward to leveraging this in the coming quarters. Interest in BlackBerry Connect continues to grow with BlackBerry Connect now launched in over 65 countries with over 100 carriers.

Customers can now choose BlackBerry Connect from over 45 different devices. Three new devices were added in the third quarter. The HTC Tilt, Motorola Q9h, and the Nokia E51. Product demonstrations of BlackBerry Connect on both the HTC Tilt and the Motorola Q9h were provided throughout the quarter at events including Gartner ITxpo, CTIA, and Microsoft Exchange Connection. And both devices are now available with BlackBerry Connect through AT&T retail and enterprise channels.

There were several BlackBerry Connect launches in the EMEA region during Q3 with particular emphasis around the HTC Touch and HTC Touch Dual as well as Nokia E51. In addition, the new BlackBerry Application Suite for Windows Mobile 6 is being trialed by several enterprise customers in the UK and in Germany.

In summary, we are pleased with our performance in the third quarter and particularly with the success we have seen since the beginning of the holiday buying season in late November. As we head into Q4 in the new calendar year, we are optimistic about the opportunities ahead for us as we execute on our plans in markets around the world.

I'll now turn the call over to Brian to update you on Q3 results.

Brian Bidulka

Thank you, Jim. Revenue for the third quarter ended December 1st was $1.67 billion, up 22% from $1.37 billion in the previous quarter. Handheld devices represented $1.34 billion or 80% of RIM's revenue during the quarter, up from 78% of total revenue in the previous quarter.

Total devices shipped in the quarter of approximately 3.9 million were up from 3.1 million in the prior quarter. Approximately, 3.1 million new devices were activated in Q3, either for new customers or for replacements and upgrades, not including phone-only sales.

As expected, channel inventory on a four weeks basis increased in Q3 due to the launch of the CDMA Pearl 8130 in the latter part of the quarter, carrier's stocking up for going holiday promotion, and the continued expansion of downstream distribution channels.

Device ASPs were slightly higher than expected at approximately $342. This was due to the mix of handsets shipped in the quarter. We expect ASPs in Q4 to be higher than Q3 at approximately $350. This increase is due to the mix of devices expected to be shipped in the quarter.

Service revenue was $232 million or 14% of revenue for the quarter, up $31 million from Q2. With respect to monthly ARPU, it remained approximately flat with prior quarter. Software revenue was $60 million or 4% of revenue. Other revenues such as repairs and accessories was $37 million or 2% of revenue.

Gross margin for the quarter was approximately 51%, in line with our expectations. Operating expenses increased by 15%, slightly more than we have forecast in the last quarter. R&D was spending was $92 million or 6% of revenue for the quarter, and selling, marketing, administrative expenses increased to $238 million and were 14% of revenue. Included in operating expense is stock option expense of approximately $9 million.

The tax rate for the quarter was approximately 28%, slightly lower than our forecast due to a tax recovery of $10.7 million arising from the favorable resolution of outstanding issue with respect to RIM's investment tax credits relating to prior years.

Net income for Q3 was $370 million or $0.65 per share diluted. Weighted average diluted shares used in EPS calculation for the quarter were $573.7 million. Actual shares outstanding at December 1st were 561 million. Total options outstanding at December 1, was 17.8 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. At the end of the third quarter, RIM had approximately $2.1 billion in cash, cash equivalents and investments. This is up $405 million from the prior quarter. During the quarter, RIM generated approximately $521 million of cash from operations. Primary use of cash in the quarter as capital expenditures is approximately $97 million, which was slightly lower than expected due to the delay of certain expenditures to future quarters.

From a working capital perspective, trade receivables were up from the prior quarter, in line with top line growth, and DSOs remained flat over the prior quarter at 52 days. Inventory on hand was approximately $340 million versus $301 million the prior quarter.

Inventories continued to be primarily semi-finished goods and raw materials to support demand for current and upcoming product launches.

I will now turn the call over to Adele to discuss our outlook for Q4.

Adele Ebbs

Thank you, Brian. Before I discuss our outlook for Q4, I would like to remind everyone that these forward-looking statements reflects management's best current estimates and should be taken in the context of the risk factors outlined at the beginning of the call and outlined in our public filings.

We are forecasting revenue for the fourth quarter of fiscal 2008 to be higher than Q3 in the range of $1.8 billion to $1.87 billion. We expect hardware shipments to be over 4 million units at an average ASP of approximately $350.

The expected increase in volume of shipments is due to ongoing carrier ramp plans and modest channel inventory increase and the continuing strong replacement cycle. Over 40% of our subscriber base remains on devices launched two years or more ago, which we expect will continue to fuel the strong upgrade cycle going forward.

Software revenue in Q4 is expected to increase slightly. We are targeting net subscriber account additions for Q4 of approximately 1.82 million. In the first two weeks of this quarter, we have seen a very high average weekly run rate of over 150,000. We believe that this strong performance is due to seasonal strengths and the continuation of holiday promotions by our partners.

We expect run rates to normalize in the New Year. In the past, we have typically seen a meaningful slow down in the period between Christmas and New Year with a pick up occurring later in January. Thus carriers begin winter promotions and enterprises begin their new budget year.

Well, we expect continued strengths in enterprise in the New Year. And they are all multiple aggressive programs and promotions planned by our carrier partners in January and February. We are cautious in our expectations of their impact on net subscriber account additions. This is due primarily to the uncertainties surrounding the changes in seasonality you might see, given how the mix between enterprise and consumer has shifted dramatically over the past year.

In Q3 of this year, almost half of net subscriber account additions were non-enterprise, versus just over 30% coming from non-enterprise in the third quarter of last year.

We expect gross margin for Q4 to be flat with Q3 at approximately 51%. We expect the total operating expense increase for Q4 of approximately 8% to 10% from Q3 levels, with R&D increasing by approximately 15% to 17%, and sales and marketing administration increasing by approximately 5% to 7%.

We expect depreciation and amortization to be approximately $29.5 million to $30.5 million in Q4, higher in Q3 due to ongoing CapEx. We expect CapEx to be approximately $140 million in both Q4 and Q1.

Investment income is expected to be in the range of $25 million to $26 million in Q4. We expect the tax rate to remain around 30% to 31% for Q4 and to decrease slightly in fiscal 2009. Also please note that the rate could move outside this range depending on foreign exchange fluctuations. We expect Q4 EPS to be in the range of $0.66 to $0.70 per share.

I will now turn the call back to Jim.

Jim Balsillie

Thank you, Adele. In summary, we are pleased with the performance of the business in the third quarter and the success we are seeing in new market segments and channels. The enterprise business continues to grow and we see many opportunities in these new segments that we are well positioned to be capitalized on. We look forward to working with our carrier partners on executing a business plan in the coming year to drive further revenue on the earnings growth.

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 the questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Mike Ounjian of Credit Suisse. Please go ahead.

Mike Ounjian - Credit Suisse

Great. Thanks for taking the question. Clearly a strong consumer adoption in the quarter, and looks like that's continuing, and you are seeing some success internationally, I guess. Jim, how much are you seeing the impact with the international carriers of these more entry-level pricing plans? And was international a big contributor to the consumer strength you had or is that still mostly coming in the US?

And, just a follow up clarification on the balance sheet side. In terms of the inventory turns, looks like some good progress there in the quarter. How should we think about that going forward in February?

Brian Bidulka

I will answer the first one. The pricing was -- it mainly moved the ball down the field kind of where we set it and that's mainly North America and Western Europe. The rest of the markets are in different stages of evolutions. But where the entry plans really made a difference is kind of where we are situated at North America, UK, some of the French line, some of the German line and a lot of Southern Europe. So, disproportionately, it was North America and Western Europe. On the inventory turns --

Adele Ebbs

Yeah. We are just going to take a look at that…sorry, Mike…so, just give us a minute here.

Brian Bidulka

Till then, we'll go on to the next question. When we have it, we'll give an answer on that.

Mike Ounjian - Credit Suisse

Great. Thanks.

Operator

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

Maynard Um - UBS Securities

Hi. Thanks. Just a question on your hardware guidance. I mean, typically, your guidance for hardware has been great. Can you just talk about the visibility you have into the hardware orders looking -- what you are looking for in one quarter? And how far an advanced operators place these committed orders? And is that what gives you that visibility to the number? And any update on the Unite! release? Thanks.

Jim Balsillie

The hardware, yes, you get pretty good visibility into a quarter. We are three weeks into the quarter pretty much, and there is some lead time in bookings just the natural of that, to pen their stuff that flows in the quarter so, you get pretty good visibility into this quarter and then thereafter. So, you are kind of rolling one quarter ahead, once you are three weeks into that quarter. So we do have pretty good visibility in the quarter. There is lots of risks detailed in this aspect that you have to manage adroitly that can affect it. But these sort of happened in the bookings. It tends not -- in the quarter, RIM tends not to be the biggest element of that.

So we got pretty good visibility on that in this quarter and that's why we think we can -- we try to give the best guidance we can of course. The Unite! stuff is eminent, it's deep in a bunch of data stuff and I think you are going to see a fair bit of that not too far into the New Year. And it's really quite meaningful in how we would expand the whole, Blackberry convergence. Things of now you really have the spectrum from the best to the professional software to the Unite! on the Windows blocks to the BIS in the cloud and you can mix and match those convergence pieces.

So it just fell to in wonderful spots in the small SMEs, and the SoHo, and the individual consumers and their families. And it complements the BIS and you can use it concurrent with the BES, so amounts been sort of the, a hard to get out market for a lot of carriers for a long time. So, every indication we are getting is that people are interested in engaging that in even more exciting level, when that part of the equation is so comprehensively sold in with Unite! early not too far into the New Year. It's the plan. We just got a mix, I mean its BES, really it's the BES, according to Windows. You know it has some unique features and it's really got to be reliable or it really comes back at you pretty hard.

Adele Ebbs

I can comment now on the inventory terms, Mike, just one to pull the numbers. I mean, they have been improving I had guess around eight times in Q2, and up to about 8.5 in Q3. I cannot give you a forecast for Q4, but we do have ongoing efforts to try to improve that. I mean we expected to improve somewhat from here and we do have a lot of programs underway to try to manage our supply chain and increase the efficiency there, I hope that helps.

Operator, can we have the next question, please.

Operator

Your next question comes from Mike Abramsky of RBC Capital Markets. Please go ahead.

Mike Abramsky - RBC Capital Markets

Yeah. Thanks very much. Just I wanted to clarify, before I ask a question. Though you said that for guidance you are cautious in your expectations regarding uncertainty in seasonality changes as opposed to any macro-related caution, is that correct?

Adele Ebbs

Yeah, exactly, just given some of the commentary that Jim has made about, with what we had seen around Black Friday is obvious that the, the composition of our net adds in a given quarter is changing very significantly. The real wild card is what does that mean when you're going to a January and February with half year net adds coming from non-Enterprise. And I think we are pretty good at predicting, what happens with Enterprise. And in terms of macro stuff I mean, as Jim can probably comment a bit more but I don't think that was the big factor.

Mike Abramsky - RBC Capital Markets

Okay. Well, I guess my question primarily is that your -- you have come through a year of 100% growth. There are some strong products Curve (inaudible). What do you see some as some of the big drivers of growth next year from a product or a macro or technology like 3G perspective? And then alternatively what are some of the maybe special growth challenges that you will be focusing on?

Jim Balsillie

I would say the big growth items are going to be really taking the broader distribution channel in North America and continues to drive demand and continue to drive execution. And that's why you can be assured, I think we launched 12 pieces of hardware this year, 12 devices I think it would be -- which we would count and they count up at [8]. I think that was the count.

And so you can count on some pretty exciting device strategies in the upcoming year. But I think the element of the Unite! platform and all of that coupled with really driving the retail channels deeper and driving demand in North America continues to be a big play. I think we have a lot more opportunity to drive the channels and the retail channels in Europe like we drove them in North America. And I think that begins to really move above in that respect.

I think we have a lot of the emerging carriers all through out the world and we take a pro call, talk about them that just to have to keep up the miracle of compounding and keep up the execution and the iteration of maturing. And I am particularly excited about the new Argon BES or the next release of BES and the service packs that we're releasing on the enhanced plus new functions. Those seem to really drive the B2B deeper. So, B2B with a new BES and some telephony think broader retail, particularly in North America and Western Europe and just sharing on the just stated iterations in all the other parts of the world.

Yeah. And within the new devices, you're certainly going to see faster air lanes and same packaging and fixed mobile Wi-Fi stuff. And will those be the game changers? Yeah. I think they will all help a lot. Yeah. So I think they are further being enabled in a bunch of different ways. And they all just come together in a way that they are new facts, so you don't want to get too far ahead of yourself. But it's hard enough to be pretty excited about the business right now.

Operator

Your next question comes from Paul Coster of JPMorgan. Please go ahead.

Paul Coster - JPMorgan

Thank you. Adele, you've partly answered my question, I think, but I just want to make sure I understand it. You believe that the risk of seasonality associated with the twist towards consumer is most scared towards the February quarter than the May quarter. Is that correct? And with May quarter, I know that you won't comment specifically on it, but are you seeing any risk in financial services subscriber growth in that quarter?

Adele Ebbs

I mean, we don't -- we haven't guided May. So, I mean the comments on seasonality, I mean, certainly apply to February. But I mean, I think, the fact is, is that we just have a lot more non-enterprise contributing every quarter. So I think that's going to reflect the type of seasonality we see in the quarters going forward as well. I mean, in terms of the financial services there is always, it never is going to be completely insulated. But I mean we are not really seeing much impact right now.

Paul Coster - JPMorgan

Okay. Thank you.

Operator

Your next question comes from Chris Umiastowski of TD Newcrest. Please go ahead.

Chris Umiastowski - TD Newcrest

Hi. Thanks. I guess, Jim I'd really like to know if you can tell us a little bit about the ratio of hardware shipments to device activation. So if I take a look at that ratio over the last several quarters, it looks like it has been somewhere around 1.1 to a 1.16. And this quarter it's around 1.25. And just curious if that's a function of more phone-only sales or what you think is going to happen to that ratio as time goes on? Are we going to just continue to see it rise as more and more of these devices are perhaps not activated on the bells and just over the phone? Or what was your take in there?

Jim Balsillie

Well, the very precise answer I have, but, that is, I don't really know. It's a very fair question. And it's kind of like driving so many different, sort of, veins that are so promising and sort of wondering which will go farther and which will go longer. It's hard one to answer precisely because there is a lot of, gosh, I love this is a phone-only going on and the positioning is pretty amazing. And then when you [truly mean] the UMA kind of Wi-Fi stuff, that's going to take up level even higher there. And for that just spells phone, phone, phone. But then you see as soon as it's a follow up, and then also you see the hot products, there is an upgrade cycle and occasionally people break a unit. So that, sort of, keeps that ratio above one. But then counteracting it is the fact that once it's sold as a phone, their ideal candidates for the carriers to upgrade them to a data plan and as well we are seeing lots of activity. And we'll see more in the BlackBerry Connect side.

So at the end of the day it is a fair question. It is hard to speculate if I had to guess, you are just going to see the ratio pop up a little bit if I had to guess. But then again, it becomes a candidate to sub-data plans for in the carriers (inaudible). There are sell plan. Get them on the data plan. It's wonderful ARPU. It's a big [anterior] to churn. So there is a lot of economics on it. And they sort of know who those people are. So the best I could say is, the ratio is probably going to stay right around where it is. But it can move very quickly with special promos and hot new devices and all that comes up.

At the end of the day, you want to drive all cylinders. You want to drive your BlackBerry Connect. You want to drive the new hardware. You want to drive the subs. You want to drive upgrades. You want to drive because it's all success in revenue and profit for the channel and for the carrier and success [because] success and we sort of push all fronts. And occasionally some push [why] they are faster than the others and shift the ratio on sector specific or product specific or geographic specific or timing specific things. And when you put it all together in amalgam, it's just not that easy to characterize with great precision.

Chris Umiastowski - TD Newcrest

Okay. And tell me is it safe to say that you know internally what PIN numbers you've shipped out to carriers? And at some point in time, you ought to see that PIN number activated on the BES or you get a report back from the carrier that that PIN was sold and it was never activated, so you assume it was a phone-only sale, like how have you been able to track them in the past and what has that data told you?

Jim Balsillie

We get PIN per seen ,and that allows you track which devices are activating. So you know they are activating, and you know which devices are coming through.

Chris Umiastowski - TD Newcrest

If you know PIN per seen, like do you know whether it's still in the channel or do you get a report ever from a carrier that that PIN number was sold but never activated?

Adele Ebbs

Well, PIN per seen is the number that is -- we don't count it.

Chris Umiastowski - TD Newcrest

When it is activated?

Adele Ebbs

Yeah. When it's activated. So we work with the carrier. If you are really asking -- are you asking what phone-only is, and is that…

Chris Umiastowski - TD Newcrest

Yeah. I guess I am trying to figure out. Of the 3.9 that you shipped, I think you said 3.1 activations, right?

Adele Ebbs

Right.

Chris Umiastowski - TD Newcrest

Is the 800 for every channel or do you know how is phone-only, I guess is my question.

Adele Ebbs

Right. So the 3.1 number that we just gave was pretty PIN per seen.

Chris Umiastowski - TD Newcrest

Right.

Adele Ebbs

And then, you have to add to that phone-only sales, and that is a bit of estimate and it's tough. I mean, it's been like we said before, I think we said it must be around 25% at carriers to sell to it that way.

Chris Umiastowski - TD Newcrest

Okay.

Adele Ebbs

Which primarily will be T-Mobile, will be the latest one. So it's in the 100,000 plus, but it's really hard to get a read on the exact number.

Chris Umiastowski - TD Newcrest

Okay. That's helpful. That helps a lot. I appreciate the clarity

Operator

Your next question comes from James Faucette of Pacific Crest. Please go ahead.

James Faucette - Pacific Crest

Thanks very much. I just wanted to look back a little bit at the November quarter. Based on your commentary last call on how the month of September had been, and then coupled with your commentary on November, it looks like October got a little bit weak at least from a net adds perspective. Can you talk little bit about what you think was going on there and if there is anything that we should read through from what happened in October to outlook for the February quarter? Thank you.

Adele Ebbs

Well, I mean, I think, the fact that we had such strong performance in November, with the holiday season and with the CDMA carrier launches of the Pearl, would speak to the fact that November was fair bit stronger than October. And I think that will be normal and to be expected. Again, I think, some of the uncertainty we have in terms of the seasonality impact going into January and February, I mean, are really talking to the same point that -- how our amounts in quarters can be affected. Now we have such a big proportion coming from non-enterprise. And the answer is we just don't know yet.

James Faucette - Pacific Crest

No. That's correct. I guess I am just wondering why you think October was a little bit weaker than September, which seems to have been the case based on your commentary coming out of last quarter, out of the month of September and than coupled with the November commentary?

Adele Ebbs

(inaudible) I think a lot of times carrier programs are not happening until they are getting ready for the holiday season. And then, we can see pretty strong relationship between weakening of ads and what programs are going on…

Jim Balsillie

Yeah. And, there is a lot some of the other things that happened are, there is a real heartbeat to when the channels really kick into gear. And they really kick in on a monthly basis. So if you not 100% ready to go on at the end of the previous month, you can miss as whole month if you miss it by a week in your hardening products and are just getting ready to go. And so, little bit of slip can really just cost you a month. And as probably, as probably big part of it, hardening, the whole UMA thing was just getting hardened in a way there is a lot of stuff on the CDMA that was coming in the channel. There was the special promotions and special prices really hit a little later in that. So it's kind of a momentum construct. I mean every week was a lot stronger than the previous week. And there comes a point where it dips.

And I think that's what we are trying to communicate. I mean the sort of explanation mark on the year that if you have to do anything is Black Friday was a record day and it used to be an unusually slow day. And that's the combination kind of thing, there is a building of momentum and Adele indicated that we are seeing some very positive things in the first few weeks of this quarter. But you are now result tends to be a bit of a low in that kind of stuff in the calendar new year within the B2B and counter cycle it. So we are into just a little bit of newness here for us. It's kind of good newness, but it's a lot of newness and that's the best explanation that we have of it.

Operator

Your next question comes from Vivek Arya of Merrill Lynch. Please go ahead.

Vivek Arya -Merrill Lynch

Thank you. Jim, my question is when I look at the guidance you have given and you are expecting some caution, I just want to understand whether that caution is based on conservatism or is it very based on some bottoms up weakness in any verticals, are you just being conservative or are you being prudent? I guess that's my first question. And then, the second question is when can be expect a touch-screen BlackBerry?

Jim Balsillie

Well, on the second question, we don't really talk about future products or potential future products or rumors, it just gets into place where you really can't get yourself out of. So, probably today is not a good day to change that policy.

On the guidance thing, it's a little bit of the newest thing that I was trying to sort of indicate to. We are experiencing a lot of 100% growth years and 100% quarter stuff and that's something we are really proud of and pleased of and we are heading into some things that there is a lot of positive optionality into it. But it's a little bit unknown for us.

So, how much you have booked in the hardware, but you also get surprising upside in our world and we have some positive things happening and a lot of programs. So, you asked me if it is prudent, sort of a conservatism. I often put those words. Those are the same words that close [siblings] and given how well things are going and given all we know, what we're trying to sort say, okay this is something that we can put a pretty confident stake in the ground. We are not trying to sandbag, but we are also not trying to hang ourselves out there, because that doesn't help anybody.

But again, we are in a sort of a challenging era in these kinds of communications, because there is so much positive optionality and there's lots of balls to juggle, it's kind of like lots of scenarios and the probability, on average you can pick one. You can pick some kind of average, but when you've got to pick one that people can kind of bank on within a range, how far do you play the distribution curve. And it's best when there's a lot of newness, you don't know how positive the upside optionality is, because it's kind of new.

There are some positive things happening in the first part of December and if that carries through in ways that are possible, then we are into an upside situation. But that's not how retail tends to go, but then we have got some strong B2B and we are sort of charting new ground for everybody right here. So, we struggled a little bit on this number because it's a fair question. But we would still want to give you guidance. And now in a time when, guidance is a little more challenging for us, just because of the optionality and the newness that's happening in the opportunity and the growth. And we don't want to just get in to a self fulfilling math calculation.

So, there is an element of bottom up. there's an element of regional planning. We have to do that for supply chain and for our business and for marketing. But there's an element of prudent conservatism to it and we should try to keep our heads down and get the activation from the sales and development and the channels going everyday. And at the end of that quarter, that number drops out.

Operator

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

Deepak Chopra - National Bank Financial

Good evening, Jim. I was wondering if you could talk what you think will happen with gross margins, as your prosumer business continues to ramp up with the next several years and just what do you think the impact of that business will be to your ASPs because it probably started very well over the last two years?

Jim Balsillie

Well, I think we are in a revolution where there's a converged [appliance] that is expected to do more and more. And now, that we have the great good fortune that the strategic articulation of the leading MP3 player is, that they should be converged into a cell phone, drives more sort of feature expectation and more value into this, and we are driving a lot more into the convergence space in that. And so, what that does is, it sort of counter, ASPs have -- its sort of counters ASPs because people want bigger screens.

They want to do more videos. They want to do pictures. They want to do [special] cameras. They want to do more interaction, better browsing, better phone, a long battery life, sleek and stylish. And so, we've seen it the kind of commoditization get counteracted by the innovation and value added, which sort of counteracts the sort of ASP erosion and concurrent with that sort of protects gross margins, with a little bit of pinching on our part just to drive much stronger penetration, because you have to just put them on the table for special programs.

And then as the product mature, you get a fair bit of efficiencies and cost savings and then you still maintain the margin, but the ASP goes down. So you kind of have this one-step forward, one-step back on the ASP based on maturing with new innovations and a nice gross margins with us offering co-op and stuff like that for special programs at special prices, which really drives way better acceleration and way better programs by the carriers, which becomes a very, very profitable thing for them and for us.

So, I think it's smart for us to tactically price for adoption, where it makes sense, has a seasonable platform which is a big lifetime value and there is positive accretion from each sale. But you do sort of a [roll due over] a margin thing. And as long as we have a strong innovation cycle, the ASPs hold out. And as far as I can see on the innovation side that's still going on. But I can sort of see out 18 months. But as lots of thing can happen in this space and what's the long-term play -- let's let the industry pundits talk about that.

Operator

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

Gus Papageorgiou - Scotia Capital

Thanks. Just a quick one. I know you don't give out this number but basically you [sub out] numbers in the quarter and that 32% subs are outside North America. Is it fair to say that about 40% of the subs added in the quarter came from outside North America? Is that roughly accurate?

Adele Ebbs

Gus, we don't give that number. I mean I would say this quarter was maybe a bit disproportionably North America just because you had a lot more of that holiday selling phenomenon happen in North America. But I am not going to give you the exact number.

Jim Balsillie

Yeah. I think the thing we learned this year is the retail programs are really good and we're going to do more of that in more places really fast because that was the real explanation market to Black Friday. We knew everything that was going on well in the company, right with the exclamation mark as well as the Black Friday. And it is interesting because we are growing in a lot of places but then you just get a nice little gaping experience like that in North America, Canada and U.S. And it sort of shifts your ratios back a little bit.

Operator

And with that this concludes the question-and-answer session. Please continue.

Adele Ebbs

Great. Thank you. In closing, I would just like to remind everyone that there is a post view service available at 416-640-1917, pass-code 21221692 pound. Or you can listen to the call which has been recorded and is available in the investor events section of the RIM.com website.

Thanks everybody for dialing in and have a good holiday season.

Operator

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

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