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Research in Motion Limited (RIMM)

F4Q08 Earnings Call

April 2, 2008 5:00 pm ET

Executives

Jim Balsillie – Co-Chief Executive Officer

Brian Bidulka – Chief Accounting Officer

Edel Ebbs – Vice President Investor Relations

Analysts

Mike Abramsky - RBC Capital Markets

Jim Suva – Citigroup

Deepak Chopra - National Bank Financial

Jeff Kaval - Lehman Brothers

Andrew Neff - Bear Stearns

Rob Sanderson - American Technology Research

Peter Misek - Canaccord Adams

Michael [Urlacher] - GMP Securities

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Research in Motion fourth 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. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference please press the * key followed by 0 for operator assistance at any time.

I would like to remind everyone that this conference is being recorded today April 2, 2008 at 5:00 p.m. EST.

I would now like to turn the conference over to Ms. Edel Ebbs, Vice President Investor Relations.

Edel Ebbs

Thank you. Welcome to RIM’s fiscal 2008 fourth quarter and year end results conference call. 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 a business and strategic update. Brian will then review fourth quarter results and I will discuss our outlook for the first quarter of fiscal 2009. We will then open the call up for questions. I would like to note that this call is available to the general public by a call in number and web cast. A replay of the web cast will also be available on the www.RIMM.com website. We plan to wrap up the call before 6:00 p.m. EST 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 margins, operating expenses, CapEx, depreciation and amortization, investment income, earnings, earnings per share, channel inventory, seasonality 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 product 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 views with respect to future events and are subject to risks and uncertainties and assumptions we have made. Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements including risks relating to the restatement of our previously filed financial statement as a result of our internal review of historical stock option granting practices and regulatory investigations or litigation relating to those matters, risks relating to intellectual properties, the efficient and uninterrupted operation of RIM’s network operation centers, restrictions on import and/or use of RIM’s products in certain countries due to encryption of our products, the current or perception of agreed to 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 products and services, our reliance on carrier partners, risks related to competition, risks relating to possible product defects and product liability, our ability to effectively manage our growth, risks associated with our expanding foreign operations, foreign exchange risks and other factors set forth in the forward-looking statement 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 except as required by law.

I will now turn the call over to Jim.

Jim Balsillie

Thank you Edel. We are pleased to end the year and fourth quarter with revenue growth over 100% versus the same quarter last year and earnings more than doubling year-over-year. It has been an exciting year at RIM with the introduction of a record number of new devices, numerous new software introductions and a strong focus on expanding our distribution channel. We continue to diversify our customer base and at the end of the year approximately 38% of the BlackBerry subscriber base were non-enterprise while over half of the net new subscriber account additions in the quarter came from non-enterprise customers. CDMA in North American was particularly strong in Q4 with the launch of BlackBerry Pearl 8130 branching across all of our North American CDMA partners.

While we also saw strength in a number of European markets, the out performance in the quarter was largely North American based. The percentage of subscriber account base outside North America was approximately 33% at the end of the quarter.

Demand for BlackBerry products and services in Q4 was strong with approximately 2.18 million BlackBerry net subscriber account additions, which was in line with our February 21, 2008 update but much higher than our December forecast and 32% higher than the approximately 1.65 million subscriber accounts added in Q4. This takes the total BlackBerry subscriber account base at year end to over 14 million.

This growth was driven by a strong showing by our carrier partners throughout December particularly in North America, the ramping of new direct distribution channels and the success of numerous promotions in January and February that mitigated the typical seasonal slow down in the consumer market.

In addition, the heavy promotion of the CDMA Pearl drove high numbers of net new activations throughout the U.S. and Canada. While we saw unusually strong growth in biz during the fourth quarter, it is important to note that we did not see any evidence of slow down in our enterprise business outside of normal seasonal trends.

There has been significant adoption of the CDMA Pearl since it began its ramp at the end of Q3 and with the introduction of different colors and pricing plans during the fourth quarter Verizon Wireless put substantial support behind the launch of the Pink Pearl 8130, leveraging the color exclusive to bring the product to market with programs focused at professional women.

At spring the Pearl 8130 in amethyst and red along with the attractive device and service pricing and the Valentines Day promotions in the national media helped sustain the launch momentum through Q4.

It is also worth noting that we saw the CDMA Pearl drive a very high percentage of net new additions, more than replacements or upgrades. This is consistent with our experience with Pearl on Edge networks and helps explain the higher proportion of net new adds we saw this quarter relative to upgrades.

In general, we see the Pearl family being the strongest driver of net new adds as a percentage of sell through with Curve and the 8800 series driving new adds and significant upgrades.

We are also excited to have announced the CDMA Curve with Verizon and Sprint, which is expected to be available later this quarter and believe that we will see a similar strong take up in this product as we saw with the CDMA Pearl over the past two quarters.

AT&T continued to show unprecedented sales growth in the fourth quarter. Following the momentum created by Black Friday, the Curve 8310 and Curve 8100 played a key role in AT&T’s regional customer holiday promotion which was followed by an aggressive campaign in the New Year that featured the Curve for $99 as part of AT&T National Winters Smartphone Promotion in both national television and regional media. The red Curve was also a central part of their national Valentines Day promotion which included national media and merchandising.

In late January AT&T began offering a $20 per month unlimited messaging plan which has proven very positive for customers interested in using their BlackBerry Smartphones as a text messaging device and led to an increase this quarter in the number of devices sold independent of the BlackBerry service plan. This quarter AT&T also announced the availability of the Pearl 8120 with a range of enhancements including WiFi.

Recently T-Mobile launched the WiFi enabled BlackBerry 8820 and BlackBerry Pearl 8120 with WiFi in conjunction with their Hot Spot at Home offerings. This offering allows customers to make unlimited nationwide calling over any home, corporate or hot spot locations for a $9.99 all you can eat price. During the holiday season they positioned the Pearl 8110 as a must-have product and continued to leverage their offering of multiple colors of Pearl at an attractive $99 price point which led to solid performance in the fourth quarter.

In Canada TELUS embraced the Pearl this quarter with heavy promotional activity including the zero dollar device price point in certain markets. Bell Mobility also saw strong growth after their launch of the red Pearl in the 8130 World Edition in all channels. Rogers launched the BlackBerry Curve 8310 and Pearl 8110 supported by a consumer media campaign utilizing national television and radio to promote the Curve to accurately and quickly post messages and upload pictures to Face Book, My Space and other social networking sites.

In Europe, Vodafone launched the BlackBerry Pearl 8110 in Spain with an aggressive six Euro per month plan and in Italy they launched the 8110 in three colors with a variety of promotional campaigns to support their efforts. They have also saw success with the Pearl and launched an outdoor campaign in large Italian cities called “Fall in love with BlackBerry.”

France [Weak] continued its strong promotion of the BlackBerry solutions and we have seen good momentum with their devices being available across their 1,200 direct and indirect stores with support by pricing promotions as well as marketing campaigns. We have also been working with owners to put together a unique WiFi offering to target their soho and corporate customers with WiFi enabled BlackBerry devices.

This quarter we announced several new products in Latin America including Curve 8310 with CTI in Argentina, Pearl 8120 with Telphonics in Equador and pearl 8130 with our CDMA partner [allusacell] in Mexico.

We are pleased with the support we are getting from our carrier partners throughout the region as well as the media and customer reaction to the product line up.

Asia Pacific Optus Australia launched the Curve 8310 in conjunction with Sony BMG to offer a microSD card preloaded with the latest Alicia Keyes album to target the consumer market and create greater awareness of the multimedia functionality of BlackBerry smartphones.

We also saw good support from Telstra which reduced service pricing which helped drive sales during the holiday period.

In China the BlackBerry 8700 is now available in major cities and we will be rolling it out to more of the regional operators in the coming months. We continue to have a strong relationship with China Mobile and Alcatel-Lucent and we are working closely with our Chinese partners to grow BlackBerry device availability and sales across the mainland.

We are pleased with the progress we are seeing in the expansion of indirect channels around the world. In January we launched with Ingram Micro in both the U.K. and the Netherlands and in February we launched with 2020 in the U.K. and The Phone House in the Netherlands. In addition we continue to expand our relationship with the Carphone Warehouse with exclusive launch of the pink BlackBerry Pearl and the sunset 8100 and a sunset red 8120 in the U.K. and an expansion of our footprint in the retail stores and online. These two products have received prominent placement and are featured in the windows of many of their highest traffic locations.

In North America Best Buy positioned the red Curve 8310 from AT&T in all 400 Best Buy mobile stores on the front cover of February’s buyers guide to further expand our presence in these downstream channels throughout the coming year.

Carriers around the world continue to lower BlackBerry service pricing to drive adoption of the BlackBerry platform. We now have dozens of carriers in many geographies offering sub $20 per month BlackBerry service plans and are working with our partners to support innovative introductory plans for the consumer market.

In addition, Alcatel-Lucent recently announced its plans to develop and distribute a prepaid solution for the BlackBerry platform. This real time solution will integrated into existing carrier networks and will enable customers to track their minutes and data use against the amount remaining and easily refill the account when necessary. We believe a prepaid option will add significant value to our carrier partners and further broaden customer interest in the BlackBerry platform especially in emerging markets.

At Lotusphere 2008 we showcased some of the new BlackBerry platform enhancements for BES 4.1.5. Users will be able to edit Microsoft Word, PowerPoint and Excel files directly on their devices as a result of integrating documents to go by database. In addition, users will be able to use remote email search to retrieve messages no longer stored on the device. They will be able do busy calendar look ups to check the availability of colleagues before putting together a meeting request and advanced enterprise instant messaging to improve address book integration, to perform IM to click to calls and convert IM sessions to calls.

We also added a number of new features to allow for easier administration and monitoring by IT managers.

In January we launched the BlackBerry client for IBM’s Lotus Connections. This new software which will run [neatively] leverages our push phase architecture, security and BES controls to enable Lotus connections in the enterprise. The functionality to allow employee collaboration, internal expert identification and sharing your research across the enterprise is a natural fit with our solutions and we are quite excited about its potential.

During the quarter a number of new partner applications launched for the BlackBerry platform. Sling Media, the maker of slingbox and slingplayer has announced the compatibility between their slingbox classic and the BlackBerry Pearl 8120. This conversion will allow their users to watch their TV and DVR anywhere in the world. A number of partners today recently launched mobile content services to BlackBerry including USA Today, National Public Radio, CNBC and Fox Business News. We are also pleased that the number of downloads on Face Book for BlackBerry has now passed the one million mark.

On the enterprise side, Oracle has launched Oracle Mobile Sales assistance to provide users with easier CRM access on BlackBerry devices and both Pivotal and Goldmine also launched CRM solutions for the BlackBerry platform.

Coming up in May we will host the 7th Annual Wireless Enterprise Symposium in Orlando together with our many partners. WES is always a big hit with customers and partners and we look forward to another intensive lineup of keynote, breakup sessions, case studies, training and technical labs along with some impressive technology exhibitions where numerous partners will showcase a variety of applications and solutions for the BlackBerry platform.

In summary it has been a year of great progress and record breaking accomplishment for RIM. I would like to thank all of those who have contributed to these milestones. We look forward to another successful year ahead with multiple new products and platform launches planned along with further enhancements to BlackBerry software and service options.

The first quarter of fiscal 2009 is shaping up to be strong as carriers replenish inventories following the exceptional sell through experience in Q4 and our CDMA partners gear up for the launch of the CDMA Curve. This strong forecast growth which Edel will discuss in a moment is also particularly impressive and speaks to the strength of our portfolio in that the forecast is not dependent on the introduction of new hardware platforms in Q1.

I will now turn the call over to Brian to update you on the Q4 results.

Brian Bidulka

Thank you, Jim.

Revenue for the fourth quarter ending March 1 was $1.88 billion up 13% from $1.67 billion the previous quarter.

Handheld devices represented $1.52 billion or 81% of RIM’s revenue during the quarter, up from 80% of total revenue during the previous quarter.

Total devices shipped in the quarter were approximately 4.4 million or up from 3.9 million in the prior quarter. Approximately 3.9 million new devices were activated in Q4 either from new customers or from replacements and upgrades, not including phone only sales.

Phone only sales in the quarter increased somewhat as AT&T began offering a voice SMS only package for BlackBerry smartphones in the fourth quarter.

In Q4 channel inventory was drawn down as sell through run rates outpaced forecasts at most North American carriers. The effect of this was the normalization of forward week’s inventory at the end of the quarter. Number of units in the channel increased slightly at the end of Q4 and we expect an increase of forward week’s inventory in Q1 as carriers replenish stocks following the holiday season and as our CDMA partners gear up for the launch to occur later this quarter.

Device ASPs in the quarter were approximately $348. We expect ASPs in Q1 to be slightly lower than Q4 at approximately $345.

Service revenue was $254 million or 14% of revenue for the quarter, up $22 million from Q3. Monthly [r accrued] declined slightly from the prior quarter due to the ongoing growth in BES as a percentage of subscriber account base and as certain carriers reach new price tiers because of the growth in their total BlackBerry subscriber account base.

Software revenue was $63 million at 3% of revenue.

Other revenue including non-warranty repairs and excess rates was $43 million or 2% of revenue.

Gross margin for the fourth quarter was approximately 51% in line with our expectations.

Operating expenses increased by 13%, slightly more than we had forecast last quarter. R&D spending was $105 million or 6% of revenue for the quarter and selling, marketing and administrative expenses increased to $268 million and were 14% of revenue.

Included in operating expenses is stock option expense of approximately $10 million.

The tax rate for the quarter was approximately 29%, slightly lower than our forecast primarily due to the enactment of Canadian federal tax rate reductions in the fourth quarter of fiscal 2008 and some impact of foreign exchange.

Net income for Q4 was $413 million or $0.72 per share diluted. Weighted average diluted shares used in the EPS calculation for the quarter were $574 million. Actual shares outstanding as of March 1 were 563 million. Total options outstanding at March 1 were 16.5 million.

RIM’s balance sheet continues to ebb strong with substantial cash reserves and appropriate working capital balances. At the end of the fourth quarter RIM had approximately $2.3 billion in cash, cash flow and investments. This was up $211 million from the prior quarter.

During the quarter RIM generated approximately $616 million in cash from operations. The primary use of cash in the quarter was capital expenditures of approximately $110 million and the acquisition of intangible assets of approximately $310 million. I would also like to note we will be required to fund our estimated 2008 corporate tax liability in the first quarter, which will result in a cash out flow of approximately $450 million.

From a working capital perspective, trade receivables were up from the prior quarter in line with top line growth and DSOs were up slightly from the prior quarter at 54 days.

Inventory on hand was approximately $396 million versus $340 million in the prior quarter. Inventories continue to be primarily raw material and semi-finished goods to support demand for BlackBerry products.

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

Edel Ebbs

Thanks, Brian. Before we 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 2009 to be higher than Q4 in the range of $2.23 billion to $2.3 billion. We expect hardware shipments to be over 5.3 million units and an ASP of approximately $345.

The increase in volume expected is due to channel replenishment following the higher than expected sell through in Q4 as well as ongoing carrier ramp plans and a continuing strong replacement cycle. We believe we are in the beginning of a new leg in our replacement cycle in which many BlackBerry 8700 users are coming off their 2-year contracts and are ready to upgrade to a new BlackBerry handset.

Software revenue Q1 is expected to increase slightly.

We are targeting net subscriber account additions for Q1 of approximately 2.2 million. In the fourth quarter we had a number of record breaking weeks in terms of net subscriber account additions due to unprecedented and aggressive holiday and post-holiday promotions. We believe that as penetration into the consumer market has grown as a percentage of our business, these types of season marketing programs are more of a factor than in the past.

Some of these post-holiday programs ended in late February and so far in the first quarter we have seen strong net adds but not the record levels we averaged in Q4. We believe that the positioning of the BlackBerry solution as a mainstream offering by our partners in late Q3 and throughout Q4 has led to a new base level of net activations from which we can grow in future quarters.

The absolute growth in quarterly net adds in Q4 was the highest it has ever been in our history and we believe that Q1 is a return to the normalized growth trajectory we have been on the past several quarters.

We believe that the launch of the BlackBerry Curve 8330 with our CDMA partners will drive an increase in the run rate of net new sub adds in the latter part of the quarter and continued extension of BlackBerry into major western European markets will also lead to growth. However, we believe it is prudent to assume that without the level of program stimulation that we saw in the holiday and post-holiday season in North America we will return to a more normal run rate for Q1.

We continue to believe we will experience strong growth in net subscriber account additions in fiscal 2009 as we launch multiple new devices and new software and service offerings with our partners around the world.

We expect gross margins for Q1 to be flat with Q4 at approximately 51%. We expect a total operating expense increase for Q1 of approximately 20% from Q4 levels with R&D increasing approximately 27-28% and sales, marketing and administration expense increasing by approximately 17-18%.

We are planning to expand our R&D capabilities throughout fiscal 2009 and this expansion which is anticipated to begin in the second quarter will increase the base level of R&D expenses in Q2 and beyond.

We expect depreciation and amortization to be approximately $38 million in Q1, higher than Q4 due to ongoing CapEx. We expect capEx to be approximately $180 million in both Q1 and Q2. Investment income is expected to be approximately $19 million in Q1.

We expect the tax rate to be approximately 29-30% in Q1 and to remain at this level throughout fiscal 2009. Beyond fiscal 2009 we would expect to see the rate decrease further due to scheduled Canadian corporate income tax reductions. Please note that the rate could move outside this range depending on foreign exchange fluctuations.

We expect Q1 EPS to be in the range of $0.82 to $0.86 per share.

I will now turn the call back to Jim.

Jim Balsillie

Thank you very much Edel. We are pleased to be entering fiscal 2007 [as stated] with such tremendous momentum in our business. We are looking forward to continuing to leverage our partnerships and strong product portfolio to grow our subscriber base and expand our presence in new and existing market segments.

This concludes our formal call. Due to the large number of people on the call we ask that you please limit yourselves to one question per person. We plan to end the call today shortly before 6 p.m.

Will the operator please come on to handle questions?

Question-And-Answer Session

Operator

Thank you. Ladies and gentlemen we will now conduct a question-and-answer session. If you do have a question please press the * followed by 1 on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received.

Please ensure you lift the handset if you are using a speakerphone before pressing any keys.

The first question comes from Mike Abramsky of RBC Capital Markets. Please go ahead.

Mike Abramsky - RBC Capital Markets

Thanks very much. Could you just give us a little sense of the conservativism in your Q1 guidance? I was listening to your comments regarding returning to more normalized levels following some very strong promotional but you have had so much implied shipment strength here going forward in your guidance and you did 30% quarter over quarter growth Q4. Could you just talk to us a little bit about why you are expecting the guidance and what kind of factors into some of your thoughts?

Jim Balsillie

Well that is a fair comment. We just keep getting into newer and newer ground really in the business and we’re looking at a varying run rate…what are the holiday seasons, what are the buying cycles, what are the new device strategies, what are the programs? With this faster growth we are always heading into sort of new situations and there is an element of uncertainty. We are still pretty early into this quarter and you go through Easter and all that and we don’t have a lot of data like we normally would. We have a pretty good handle on revenue. Subscriberage is sort of [placant] with programs as it carries on with the quarter and it is a fair comment. We are heading to lots of new ground and we could be pleasantly surprised on these things but that is our best level of guidance at this time but there is a lot of new programs and new initiatives and new launches and soon to have new products and yeah there could always be positive things in these areas.

Mike Abramsky - RBC Capital Markets

Thanks.

Operator

The next question comes from the line of Jim Suva with Citigroup. Please go ahead.

Jim Suva - Citigroup

Great. Thank you very much. Can you comment on your increase in R&D? Is it more focused on the infrastructure side as I know you had an unfortunate BlackBerry outage this last quarter or was it more on the product side? Then I have a follow-up.

Jim Balsillie

Well the investment is pretty broad based. Very, very heavy investment on a broad number of handhelds and I think you are seeing that and there is an incredibly powerful road map we are excited about for the rest of the year. So definitely heavy R&D in the handset. There has been very exciting R&D in the road map for BES and there has been new service packs and a new BES architecture coming out as well as Unite!, which is garnering a lot of attention as well as the BES side. And yes we are growing our infrastructure and more high availability and distributed architectures and so when you are growing this fast it is pretty fair to say it is kind of on all fronts. All areas are growing and all areas are getting lots of R&D. They are all equally important. They are all critical organs in the system and critical parts that are requiring enhancement so I wouldn’t weight it to any one. I would put it pretty broad based.

Jim Suva - Citigroup

Thank you. As my quick follow-up I believe you said in your guidance it does not include new product launches if I’m correct. I just want to be clear on that because some people may interpret that to mean that you are actually not going to launch any new products in the next quarter or some people may infer that to mean what you announced is definitely enough to get you through your guidance. Can you just help us understand what you meant by that type of statement? Thank you.

Edel Ebbs

Sure, Jim. I think what we said is that the guidance that we have given for Q1 isn’t based on the launch of a new platform in the quarter. As you saw we announced the Curve for CDMA with Verizon and Sprint so that product is included, but any new product beyond that would not be included and not [scheduled].

Jim Suva - Citigroup

Great. Thank you very much and congratulations.

Operator

The next question comes from the line of Deepak Chopra of National Bank Financial. Please go ahead.

Deepak Chopra - National Bank Financial

Good afternoon. I was wondering if you could talk about how are the carriers going to position BlackBerry in the second half of the year and 2009 with respect to marketing or subsidies and how are they looking to push the market share of BlackBerry substantially higher?

Jim Balsillie

That’s a fair question. I would say there is two elements of positioning; one is predictable I guess and one is particularly exciting. For sure there is a much bigger main stream play going on, much bigger lead up holiday season positioning, and all of the main stream and probably the most pleasing stat for me this quarter beyond obviously sort of the obvious financial numbers…probably my proudest stat is the Face Book on over a million users. This is very viral. It is the demographic of Face Book is known to be quite young and they are a form of collaboration. So if people think of BlackBerry’s for email and you are better to think of it as collaboration and you are even better to think of it as a communications architecture of which collaboration is part of. To sort of shift to some of the newer forms of collaboration, instant messaging and social networking is a real validation of the overall architecture as opposed to just seeing it as now. So the positioning is absolutely and things like the Unite! and the UMA and all that stuff, so it is much more of a main stream thing. It is much more of that kind of holiday thing. So those are very, very good omens for sure. I think the other part which we are seeing pretty interesting activity is deeper B2B, particularly the voice synchronization was pretty exciting for a lot of process re-engineering and shifting to sort of fixed mobile convergence and PBX synchronizing like email. I would say one of the things which is kind of predictable is the more process or re-engineering with almost more of a voice leap to it and you’ve seen even a couple of announcements with Sprint and Verizon this week and take a look at that because those are real clear indicators that the B2B process re-engineering and using voice synchronization and PBX integration is a real sort of B2B transformation trend, along with the web servers we know and the desktop. But the bigger one is the main stream stuff and obviously that is something that has really got our attention.

Deepak Chopra - National Bank Financial

Maybe one last quick question. Could you talk about what the $310 million in intangible assets in the acquisition for the quarter was?

Edel Ebbs

That was a patent acquisition.

Jim Balsillie

I mean it is basically just buying a patent portfolio. Some of them are encumbered in some areas and some are not. It is a lot of fundamental IPR. Very fundamental IPR. It is very, very helpful in having a strong, strong patent portfolio in licensing discussions and we are very fortunate to have been able to acquire and develop a very powerful patent portfolio and we will likely continue.

Deepak Chopra - National Bank Financial

Thank you.

Operator

The next question comes from the line of Jeff Kaval of Lehman Brothers. Please go ahead.

Jeff Kaval - Lehman Brothers

Thank you very much. I was wondering if you could talk to us a little bit about the trajectory that we could expect in operating margins over the next several quarter? Obviously the op ex itself is going up steeply and there is also a bit of a currency headwind. Thank you.

Edel Ebbs

Hi Jeff. Yeah I mean I think you know we don’t guide out more than one quarter. It does get tough. We did mention that we expect to be ramping R&D throughout 2009. I think what it really comes down to is how fast we can really grow the top line while we are also investing for the future. We talked about some of the initiatives we have coming this year in terms of new product and new service offerings and new software that really should help by that but I can’t give a trend line at this point on what our operating margins are going to look like throughout 2009.

Jeff Kaval - Lehman Brothers

Okay thanks. Then you mentioned briefly that there is no enterprise impact. I was wondering if you could go into a little bit further detail in that? Does that include net ads or replacement rates or any particular verticals? Thank you.

Jim Balsillie

Yeah, I think I mean I make these statements with a fair bit of in market feedback but a lot of caution because I want to be right and obviously things are subject to change but I think it is such a productivity tool that in fact I will tell you with the MVS, the mobile voice service, a lot of companies are looking at that precisely because it is such a good cost savings in challenging [it throughout our time]. It saves so much in so many core areas that there is almost infinite because of the economic headwind the better controlled mobility costs, the better control op ex and we are negligible if almost zero capex. So it is kind of people aren’t shutting off their phone in the economic times but they want to do these things in an efficient way. We haven’t seen it. If we do see it we will let you know. We are in such a productivity cycle with this stuff I think the growth drivers are much more sector specific and much more sort of management and execution specific than they are macroeconomic. Don’t get me wrong, there are very intense sector specific forces and there are very intense pressures on management to perform but interest rates going up or down a little bit and stuff like that or credit issues have not seemed to be principle drivers on the factors that are moving our industry and our sector we are in. That could change and if it does change and we start to see evidence that it does change we will absolutely communicate that as quick as possible.

Jeff Kaval - Lehman Brothers

Please do. Keep us posted. Thanks.

Operator

The next question comes from the line of Andrew Neff of Bear Stearns. Please go ahead.

Andrew Neff - Bear Stearns

Just a question…can you give us an update on the rollout of BlackBerry Unite!? What’s going on with that in a little more detail? How you see that having a little more impact just in general?

Jim Balsillie

BlackBerry Unite! is out goaled now and carrier deployments are just beginning. It is very exciting in two segments; the family, sort of the individual/family consumer, and for the cell phone. It fundamentally gives us the power of a BES on a windows machine for free. So it is incredibly attractive to carriers who are looking at 2 and 3 and 4 screens integration strategies with the mobile being defining so it really compliments that. Like when you look at the UMA with T-Mobile that is a 2-screen play right, roll in your local home phone into your mobile, and so creating a broadband synchronization from your PC to your mobile is a big part of that two screens there. Architecturally it is a broadband to mobile which is a lot of the carriers want to tie those together both for the cell phone/[SME] and for the consumer.

Our strategy has really been the communications with BlackBerry. BlackBerry is a communications systems. Both efficiency with seamless connectivity, both security with reliability, but when you get to the family and you got to the soho it was always in the cloud and the PC was kind of an island. So what is the effect going to be? Profound no doubt. Absolutely defining. But when you use it it blows you away. You can take a picture, upload it to your directory at your computer. You can download it, you can share. You can do policy controls. Limit browsing or limit certain kinds of phone calls. Turn on GPS to track somebody if they have permission enabled to the phone for safety, secure wireless family calendars and on and on it goes. It is truly powerful and it applies also to the cell phones too for business stuff.

It is early in its market impact because it is just early. It is a definer. No question. I haven’t met a carrier that isn’t incredibly excited about it because it strengthens there 3-4 screen strategy and it strengthens their strategy of being a platform and their big concern is are they going to get dis-intermediated or be a platform and there is lots of alternative architectures that people are pushing to just dis-intermediated carriers and does the wireless carrier have an important strategic role in the 3-4 screen evolution which again is also a big risk to these phones. So it really supports them in two key strategic thrust areas where there is also a strategic vulnerability or risk on their part where they have to surge or be hurt and we’re part of the strategic surge.

So the level of engagement is very positive but it is early.

Andrew Neff - Bear Stearns

I’ve been told you have launched it in Spain. Are you launching it elsewhere? When do you think the rollout will be?

Jim Balsillie

We’re just rolling out in North America literally this month. And the trial, the [quiet beta] is in trials have been really quite exceptional. The things you can do with this in synching to your music and things like that. It is just so powerful and seamless – you can synch to your music, to synch to your pictures, so many things. I’ll sort of reiterate it is free. You can run it on an old PC. So if you have an Internet connection in the house with a PC and you have a BlackBerry with whatever kind of data plan or WiFi all of a sudden you can kind of have that sort of client server relationship with your BlackBerry and you can also use it with the BES too so you can integrate or keep separate or merge pins with the BES and the Unite! and it still doesn’t preclude you from having your BES stuff in a cloud too. So we kind of let you converge where you want to converge and present them all to your one universal presentation thing with the BlackBerry front end. So North America is imminent and it is all very, very, very exciting and positive for sure.

Andrew Neff - Bear Stearns

Thank you, Jim.

Operator

The next question comes from the line of Rob Sanderson of American Technology Research. Please go ahead.

Rob Sanderson - American Technology Research

Hi. Good afternoon. Thanks for taking my call and congratulations on having a great year. My question has to do with the relationship between assets sold and net subscriber additions. That is something we continually see pick up. I think it was 1.95 in fiscal 2007, 2.12 in fiscal 2008 you just reported. What should we expect going forward for maybe the next few years? Is that going to continue to increase? Related to that is there any way you can help quantify the number of non-data attached units? How do we reconcile that contributor to the growth in that relationship? Thank you.

Edel Ebbs

Sure, Rob. I mean it really has…we have seen a really big ramp up in the number of devices that have been sold through replacements and upgrades. I think as our base grows that has to grow as well. I really don’t see any reason for a significant slow down in that as we go out into 2009. I think as we said on the prepared remarks if you look at the 8700 series the big bulk of people who bought 8700’s are really just coming off their 2-year carrier service contracts now and that makes them ripe for an upgrade and I think by the time those folks are upgraded you’ve already got people with Pearl’s who are going on two years old as well. So I think because we have had such a rapid rate of product introductions over the past 18 months or so that I think it has to keep the replacement rate quite strong.

On the devices that are sold without a BlackBerry service plan, it did increase in the quarter. AT&T this was the first time they offered BlackBerry handsets without any BlackBerry plans attached to them. I can’t give you any exact numbers, but it would be in total in the few hundred thousand range.

Rob Sanderson - American Technology Research

Okay. Thank you very much.

Operator

The next question comes from the line of Peter Misek of Canaccord Adams. Please go ahead.

Peter Misek - Canaccord Adams

Good afternoon guys. A big question really is if you could elaborate a little on the platform that BlackBerry has become. We had an announcement today from one of your partners on XM Radio on the BlackBerry and what is fascinating is this is over cellular and when you talk to the carriers they say this kind of stuff is impossible or very difficult to do and then you are rolling out Unite! which is a phenomenal multimedia platform. Can you help us really understand how come you guys are able to do it and other people can’t?

Jim Balsillie

I think what some people may or may not know is we have 20 years in wireless data and that BlackBerry was launched with the evolution of 7 or 8 generations of wireless protocol stacks that were just sort of broken apart with different interfaces and repurposed elsewhere. We have close to 150,000 or so servers around the world. Then with BlackBerry we’ve got eight years or nine years of BlackBerry hardening and multiple iterations and you have to remember that carriers operate with very, very hard system tolerances. Because there is something that’s not simple and intuitive and reliable the customer stats just plummet and their customer call care stuff just soars and it just collapses all their operational and proxability metrics and carriers operate on incredibly tight metrics. Kind of what we realized is there is kind of an irony in wireless because people thought that the door to the B2B was through the B2C. In fact, we felt that the door to the B2C was through the B2B because we had all this time to harden the protocols and the processes and the leased lines and the procedures selling BES, but you didn’t have the care metrics just perfect because you had an IT director in the middle looking after customers and there was such a high business hour lay on it the keys were obviously security and seamless integration and of course you build your reliability as fully and completely over time and then all that hardening sort of did the overwhelming majority of the work to evolve into the B2C in the cloud in the BES. Then when you look at Unite!, Unite! is just a port, a BES to a Window’s machine. People are getting the benefits of 20 years in wireless data, a couple dozen res of protocol architectures and very hardened and market tested solutions that we migrate to adjacent segments. I think you sort of wrap all that around in the fact that RIM is perfect built for this product, for this market. We’re not trying to leverage some other business. This is not some business of leveraging an app or leverage in a vice or leveraging some other media platform or OS or something like that. We’re not trying to leverage anything. This is a purpose built convergence strategy which really doesn’t have any sort of strategic compromises that you are trying to leverage and we are also highly focused on inherent realities of wireless which is a multi-dimensional scarcity equation where you are trying to optimize an experience in 5-6 factors of scarcity. So I think it is kind of a bunch of unique structural reasons why we are where we are. But it is the scale and early entry and hardening and purpose builtness and focus I think are really the totality of it. Virtually every strategy I have seen in wireless that you really see seriously pushed fundamentally comes from some company trying to do a leverage strategy. They make incursions into wireless as a leverage of the core business to reinforce and support their core business and that comes with all kinds of strategic realities and I would also say strategic trade offs. So I think that is the core distinction between RIM and others though others that are making big plays in the wireless on the leverage base try to represent that their stuff comes with particular value. But with RIM you know what you are getting. You know what the focus is. You know it is sort of a generic universal enabler which focuses on efficiency and reliability. Our motto is making the carrier a platform, not a dis-intermediation. We have no dis-intermediation strategy. The carrier is the channel that gives us a lot of leverage. There is a lot of thought. There is a lot of holisticness in our thinking. It is not just this one element. I think the natures and ways have always made it difficult for people who try to make incursions into our market because they oversimplify the elements and then when they get into it if you are missing a couple of key ingredients you don’t get traction because it is a multivariate game. I know it is a long-winded answer, but it is actually a very good and multifaceted question.

Peter Misek - Canaccord Adams

So Jim, one last thing. As the web goes way more broadband and wireless do you think the carriers have really started to appreciate how much more technologically advanced you guys are than everyone else?

Jim Balsillie

I think so because what is happening with a lot of carriers is you say the web goes more broadband, you have to remember that Shannon’s law is fixed in physics that a bit per unit of hertz and that doesn’t change. So if you 10x the bit rate you 10x the spectrum consumption. For these light spectrum and global propagation they are very expensive to deploy and that is why things like WiFi and side loading are important because they side load the capacity. When you look at somebody saying they do 1mb per second, so it is important to understand that voice with a good codec is 5 kbps so a 1 gb stream is using the capacity of 200 concurrent voice channels. Well those of you in urban corridors can let me know if any of your carriers are sitting around with 200 concurrent channels of latent capacity there to use? So plus when you release for the packaging the energy and thus you deplete batteries and if you try to deplete too much energy too quick you get the very unstable and heating and flaming characteristics of batteries and so you get into several thermodynamic issues, you get into storage issues, you get into size issues, you get into cost issues. So yeah, our carriers are realizing you have to respect the network. The BlackBerry users, as an example, there have been some multimedia launches that have had high profiles in the United States and these high profile multimedia devices use on average 20-30 times the data that a BlackBerry does and yet they get the same or less revenue per device. So the marginal revenue of scarce capacity consumption is off by using a factor of 20, 30, 40 or 50.

So, we have all done sort of microeconomics and the sort of value of marginal increment of something scarce and some do the math and some don’t.

Peter Misek - Canaccord Adams

Thanks Jim. That was fantastic. Have another wonderful year.

Operator

Ladies and gentlemen due to time constraints we have time for one final question. Your last question comes from Michael [Urlacher] of GMP Securities. Please go ahead.

Michael [Urlacher] - GMP Securities

Thank you. It’s great when you go in alphabetical order. My question is if Jim if we could step back from the financial modeling and technical stuff and really look at from a customer standpoint when you think about the teleco customers and the consumers, can you describe for me what you think are the new problems or increasing problems they have that you are trying to solve for them?

Jim Balsillie

Sure, and that is a fair thing. I think the core question for the Telco, there is a couple of core questions, but the principal core strategic question I believe for the Telco is what is my role in this world of voice data conversion with lots of contention in the ecosystem? So if you saw at 3GSM or stuff like that where some of the tech guys are saying we don’t need the carrier or the carrier doesn’t matter and stuff like that…the most strategic issue for the carrier is what is their relevance to the customer because they have been selling an add, voice, with a little bit of pure texting. That has been a principle business but that has been shifting and shifting rapidly. Our strategic offer to the carrier is they become a managed server platform for the market. Others say get out of the way, be a pipe and just make it a really high volume, high coverage, cheap pipe. We think in the nature of wireless has very adverse economic consequences to the carrier and actually very questionable possibilities for the consumer.

So I think that the strategic issue for the carriers is how do they play in the platform game? You see all these text players and all these service guys playing in that. You’ve seen how economic fates can shift. Think of the music industry. They had a known model and then it shifted to sort of a sinking model with the MP3 player and all of a sudden their economic state shifted dramatically and quickly even though they didn’t do anything. The value of the content shifted. So these things can change when new enablers come into the equation and they know that. I think that is the key thing and obviously ours is making carrier platform not a pipe and there is alternative visions out there and that will all play out and it will all be very, very interesting.

They always have to do that in the context of respecting customer satisfaction, spectral scarcity, capEx and their need to interface with all these different players in the ecosystem but not capitulate to them so you have lots of interesting and easy alliances and navigating that strategically, relationship wise, marketing wise, technologically wise, is an incredibly complex and substantial job for a carrier to do and our strategy is to OEM some middle wear to them and virtualized a bunch of processes and have a partnership plan and implementation that assists them for the purposes of BlackBerry to realize that potential and the results show they have very high [rp] low turn from BlackBerry and that’s because they are a platform for the customers.

I think the key thing for the customers right now is really one of discovery in an economic model that is attractive to them. There are lots of things that are being discovered right now and enabling. We’ve seen some exciting multimedia representation. We’ve talked a lot about the PC synchronization model. I think you are seeing a lot of things like social networking involving some texting. I think we are going to see a lot of eCommerce and stored value things. I think what is the price to the customer and how does UMA, where does this play in the PTT? You’ve seen with slingbox and TiVo you can time shift and play shift TV content that you paid for to your mobile and watch it later and that is all very interesting. I think the key things for the customer is what are the enabling possibilities? How are they compelling? How easy and intuitive are they? How much do they cost? What is the whole discovery process and viral process there? I think we’re seeing kind of a burgeoning of that happening. I think for us, Unite!, and the GPX and the UMA and the Better BES and the partnerships with Google and Microsoft, Yahoo, Amazon, eBay, Face Books and My Space and all the PBX things and WiFi and all that are all very important parts of that discovery thing for us, but I think we have to play the customer enabling demand generation on the B2C. Are we in that positioning? Is this what people want to buy? Are we helping the carrier be in the spot they want to be and capitalize on that spot? I think those are generic issues across the industry and we have tried to position ourselves nicely in the enabling discovery value intuitive part for users and the strategic platform position for the carriers. It is pretty distinct from other strategies from the tech industry. We have been doing this, Mike as you know, for 7 or 8 years with this kind of strategy. We got 350 carriers in 135 odd countries and growing.

So I think we are in a good spot, a healthful spot and a distinctive spot. A lot of pressure on operation and execution for us and our carrier partners. It is a constant but that happens when you are growing so fast quarter to quarter and we also keep growing and the sector specific elements as we think they are we are in the spot we want to be.

Michael [Urlacher] - GMP Securities

Jim thank you for that. If I look at my own experience as a user of BlackBerry and watching consumers on the commuter trains and at airports I think the number one issue or challenge consumers have is getting music onto their phones or their device or their BlackBerry. Is that something that seems important or am I kind of off in an alley that is unimportant?

Jim Balsillie

No. I think that very, very seamless synchronization to your PC for everything on your PC would be a very, very nice start. That is something I completely agree with you on. Put that in the category of eminent.

Michael [Urlacher] - GMP Securities

Thank you very much.

Operator

This concludes the question-and-answer session. Ms. Ebbs please continue.

Edel Ebbs

Thank you. In closing I’d like to remind everyone that there is a post view service available at 416-640-1917, pass code 21221696# or you can listen to the call which has been recorded and is available on the Investor Relations section of our web site at www.RIMM.com.

Thank you. We appreciate you joining us today.

Operator

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

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Source: Research in Motion Limited F4Q08 (Qtr End 3/01/08) Earnings Call Transcript
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