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Executives

Edel Ebbs - Vice President, Investor Relations.

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

Michael Lazaridis - President, Co-Chief Executive Officer, Director

Brian Bidulka - Chief Accounting Officer

Analysts

Jim Suva - Citigroup

Maynard Um - UBS Securities

Mike Abramsky - RBC Capital Markets

Rob Sanderson - American Technology Research

Scott Coleman - Morgan Stanley

Jeffery Kvaal - Lehman Brothers

Simona Jankowski - Goldman Sachs

Research In Motion Limited (RIMM) F1Q09 Earnings Call June 25, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Research In Motion first quarter fiscal 2009 results conference call. (Operator Instructions) I will now turn the conference over to Ms. Edel Ebbs, Vice President, Investor Relations. Please go ahead.

Edel Ebbs

Thank you. Welcome to RIM's fiscal 2009 first quarter results conference call. I’m Edel 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 a business and strategic update. Brian will then review first quarter results and I will discuss our outlook for the second 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 webcast. A replay of the webcast will also be available on the rim.com website.

We plan to wrap up the call before 6:00 p.m. Eastern this evening.

Some of the statements we’ll 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, channel inventory, seasonality, and ASPs for Q2 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 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 related 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 litigation relating to those matters; risks relating to intellectual property; our ability to enhance our current products and develop and bring to market new products and services; our reliance on carrier partners; the efficient and uninterrupted operation of RIM's network operations centers; the occurrence or perception of a breach of RIM's security measures; our reliance on suppliers and third-party manufacturers; risks relating to possible product defects and product liability; risks associated with our expanding foreign operations; restrictions on import and/or use of RIM's products in certain countries due to encryption of our product; our ability to effectively manage our growth; general economic conditions; risks related to competition; foreign exchange risks; and other factors set forth in 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.

James L. Balsillie

Thank you, Edel. We are pleased with our solid first quarter results with revenues of $2.24 billion, up 107% from the same quarter last year and earnings more than doubled year over year. We continue to grow our market presence and now have over 375 carriers around the world offering BlackBerry products and services. Our market share continues to grow and in first calendar quarter of 2008, according to IDC, our U.S. share increased substantially and was more than double that of our nearest competitor, whose share decreased significantly from the prior quarter.

In May, we hosted the Seventh Annual Wireless Enterprise Symposium, which had record attendance of more than 5,000 people, with attendees coming from 90 countries and representing 390 wireless carriers. There were representatives from over 350 BlackBerry alliance partners in attendance and for the first time, we held a two-day carrier summit, with breakout sessions discussing the opportunities, strategies, and potential profit in the wireless data space.

Topics included pricing strategies, merchandising approaches, managing the customer lifecycle, and targeting specific market segments.

The feedback from carriers on this event was overwhelmingly positive and we look forward to continuing to work with our carrier partners to help them maximize the profitability of their business model.

In Q1, we added approximately 2.3 million BlackBerry net subscriber accounts, which was in line with our April forecast and was 6% higher than the approximately 2.2 million net subscriber accounts added in Q4. This takes the total BlackBerry subscriber account base to over 16 million.

We continue to see strength in North America and the heavy promotion of the BlackBerry Curve 8330 by our CDMA partners in the latter part of the quarter drove high numbers of net new subscriber account additions and upgrades throughout the U.S. and Canada. We also saw growth in international markets, particularly in Latin America and the U.K. The percentage of the subscriber account base outside of North America at the end of the quarter was approximately 33%.

Growth in new market segments is strong and almost 60% of net subscriber account additions in the quarter came from non-enterprise users, and these customers now represent over 40% of our total base.

The enterprise business is performing well and we see growing interest in enterprise application enablement, with features such as BlackBerry mobile voice service.

The new BlackBerry Bold was announced this quarter during the Annual Wireless Enterprise Symposium and received an exceptional response from carriers, from customers, partners, and the media. The Bold combines the best features of RIM's award-winning device portfolio into one smartphone and adds new features, including tri-band HSDPA, enterprise grade WiFi, and GPS, 1-gigabyte of onboard memory with a side-loading Micro SD slot for additional memory, a 624-megahertz processor, and a stunning new half-VGA display with industry leading pixel density.

The device features a new user interface, and the combination of the faster processor together with the efficiency of the BlackBerry architecture gives Bold users an exceptional mobile web browsing experience.

The Bold is designed to appeal to power users and deliver an incredible user experience without sacrificing security, reliability, and manageability that are hallmarks of the BlackBerry brand. Media reviews of the Bold have been quite positive. For example, Laptop Magazine said “In two words, it rocks. RIM really packed the heat.” PC Magazine reported “The new screen is simply gorgeous. The UI is familiar to any BlackBerry user but some elements use 3D effects and translucency. The thing feels fast, really fast.” And CNET said “So just how bold is it? Let me tell you -- I was absolutely blown away. I can pretty much say I’ve never seen a better looking display on a smartphone. Colors pop off the screen and it’s really amazing how sharp and crisp everything looks on the display. Clearly I’m pretty amped about this smartphone.”

As we disclosed in May, the BlackBerry Bold will be available from carriers around the world beginning this summer, with specific launch dates varying by carrier. We’ve already made the Bold available to carriers for testing. It is performing well and meeting all of RIM's stringent requirements for bringing the product to market in partnership with our carrier partners.

Indirect channels continue to be strong drivers of sell-through. This quarter, the BlackBerry solution was introduced to hundreds of Phones for You stores in Europe for the first time, while continuing to perform well with existing channels, including 20-20, Carphone Warehouse, and Ingram Micro. Mother’s Day promotions in May were also plentiful in North America with Radio Shack and Best Buy highlighting BlackBerry smartphones in TV, in store, and online campaigns.

In Canada, TELUS introduced Pink Pearl into Canadian Wal-Mart stores for the first time and promoted it with in-store signage and device giveaways. This quarter, we also entered into a global agreement with Bright Point to distribute BlackBerry products and service. Bright Point’s 25,000 B2B channels will help us extend our market reach into multiple new territories and many carriers are already taking advantage of the expanded capabilities that Bright Point can offer in the enterprise and consumer space.

Tiered pricing plans with our carrier partners continue to drive end market success. This past quarter we saw the introduction of several prepaid plans in Europe, Asia, and Australia. We anticipate continued growth in the number of these types of plans going forward, and in Indonesia, Telkomsel announced the availability of a prepaid biz plan where subscribers can easily refill their service by SMS, which has led to a four-fold increase in weekly activations, albeit off a smaller base.

TIM continues to be a leader of innovative price plans, where they introduced a one-Euro per day prepaid plan, and Orange U.K. recently introduced an unlimited biz plan for 7.5 pounds.

In Asia-Pacific, we successfully launched additional carriers in both Australia and New Zealand. Existing carriers in the region have also seen good traction from different pricing promotions and new product introductions.

In India, Bharti Airtel continued its momentum from last quarter with innovative enterprise pricing plans and attractive device offerings. We are particularly excited to be launching Bold in Asia-Pacific very shortly and believe the availability of this new smartphone will stimulate further growth in the region.

BlackBerry solution continues to gain recognition among enterprise customers for its ability to integrate with most of the key enterprise applications that are important to IT managers and enterprise users. Our industry-leading integration with CRM platforms further evolved this past quarter with the announcement of the SAP CRM module for BlackBerry enterprise server, which allows SAP to run as a native application on SAP -- on BlackBerry devices. This announcement received an overwhelming response from the media and customers, including more than 450 articles published following the announcement and we expect this to be the first phase in our long-term, multi-faceted relationship with SAP.

At WEZ in May, we also announced a significant partnership with IBM which will enable IBM to offer a broad range of services for BlackBerry, including hosting, consulting, systems integration, and deployment of enterprise applications on the BlackBerry platform.

In addition, BAS customers will have access to a full line of IBM’s web 2.0 powered Lotus collaboration solutions, which enable personalization of portals and dashboards, corporate social networking, unified communication, and access to IBM’s Lotus Same-time and Lotus Connections.

We continue to expand our relationship with Microsoft and this quarter, RIM and Microsoft announced that BlackBerry users will be able to natively integrate the services of Windows Live Message and Windows Live Hotmail, leveraging the real-time push technology and seamless application integration of the BlackBerry solution. Customers will now have the option to amalgamate their Hotmail account with any of their other e-mail accounts into one inbox on their BlackBerry smartphone, so that regardless of the address, all e-mails can reside in one location.

These and other Microsoft services for BlackBerry smartphones are expected to be launched this summer. This integration with BlackBerry, with Microsoft augments our existing partnerships with Yahoo! and Google Services on BlackBerry smartphones and provides users with seamless access to messaging and other services from industry-leading messaging and Internet content delivery platforms for business and consumer.

In addition to large software companies such as SAP, IBM, and Microsoft, RIM is committed to supporting our ecosystem of smaller application development partners. This past quarter we announced the BlackBerry Partners Fund, which is a $150 million venture capital fund created to invest in innovative mobile applications. Together with Thomson Reuters, JLA Ventures, and RBC Venture Partners, the fund will assist entrepreneurs in developing and launching new applications and services that will advance mobile connectivity. These will include solutions for mobile commerce, navigation and mapping, social networking, and many others. The fund is open to companies regardless of their stage of development or mobile platform.

We also recently announced a new BlackBerry developer conference that will be held on October 20th in Santa Clara, California. The conference is open to both corporate and commercial developers who are interested in developing enterprise or consumer applications for the BlackBerry platform.

We are continuing to see strong adoption of Facebook for BlackBerry mobile, which now has over 1.5 million downloads and was recently launched in multiple languages.

Additionally, native versions of both the Washington Post and the USA Today mobile applications were launched in the quarter and a new e-trade mobile product for BlackBerry smartphones was also announced.

Unified for Life, a BlackBerry alliance partner, recently previewed their new home automation solution, which allows a BlackBerry device to act as a universal remote control to adjust your home thermostat, open your garage, turn off lights, and change TV channels, among other features.

In May, Bell launched BlackBerry Unite in Canada and the initial feedback has been very positive. Unite is a free software download that allows small business and families, or other small groups, to collaborate and share content from a central PC. It allows for a shared calendar, mobile access to e-mail, shared contacts, pictures, and documents, as well as advanced device and administrative control via central console. We plan to further expand this offering in the near future and add more features and capabilities later in the year.

Carriers and end users are continuing to embrace WiFi enabled BlackBerry devices. T-Mobile launched both the 8820 and the Pearl 8120 this quarter. This is in addition to already offering the 8320 WiFi enabled Curve. They have coupled these devices with attractive price points and as a result have seen further penetration of WiFi handsets in both the enterprise and consumer sector via their hot-spot at home offering. In Q1, almost half the BlackBerry devices sold through at T-Mobile were WiFi enabled.

Rogers also recently launched the 8120 with WiFi and paired it with their UMA based Rogers home calling zone. This is the first UMA based service to be offered in Canada and will allow subscribers to manage their phones costs by combining home and cellular services in one device for $20 a month for calls within Canada, and as low as $15 per month for local calls.

AT&T also launched the 8120 with WiFi in their B2B channels, targeted at corporate users who have wireless access within a campus environment, as well as offering support for global WiFi hot-spots.

Over the past two years, we have made significant investments in the enterprise voice space through the Ascendant acquisition, internal development, and significant partnership efforts with enterprise voice leaders such as Cisco and Avaya. The enterprise telephony space represents a substantial and largely untapped opportunity for the BlackBerry solution, which is in a unique position to capitalize on it with a secure mobile device, a BES for secure data communications and BlackBerry MVS for secured PBX voice integration.

During Q1, BlackBerry MVS continued to progress in wedding the desk phone with BlackBerry smartphones by launching a service pack to enable new features, such as the ability to move an ongoing desktop call to a BlackBerry smartphone with two clicks of the trackball.

BlackBerry MVS also received significant attention at WEZ where a panel was held, featuring companies such as Dell Computers sharing their experiences with MVS. On the panel, Dell discussed their plans to ultimately displace their desk phones with mobile phones as they move toward their goal of seamless unified communications.

Today, Vodafone Australia, Cisco and RIM jointly announced Vodafone Business One, a Vodafone branded turnkey fixed mobile convergence solution for businesses of up to 100 users. The solution utilizes BlackBerry MVS technology with WiFi enabled BlackBerry smartphones, WiFi routers, and a Cisco unified communications solution to provide customers with the necessary hardware, software, and smartphones for fixed mobile convergence solution.

By using WiFi enabled BlackBerry smartphones and secure Cisco WiFi and IP PBX in the office, Vodafone Business One customers and use their BlackBerry smartphones to make calls within the office zone at fixed line rates, while making calls outside the office via the Vodafone mobile network. This offering will be brought to market by Vodafone Australia later this year and we anticipate further expansion across other geographies.

We believe that the strong product portfolio we have, together with continued commitment by our carrier partners to promote BlackBerry throughout the summer months, will allow us to post healthy growth in Q2. Summer is a busy time at RIM and this summer will be especially so as we gear up for what could be our strongest second half ever, with several exciting new product launches planned and strategies in place to leverage the tremendous success we’ve had to date in penetrating new market segments and geographies.

To support the anticipated growth in the second half, we’ve been investing -- we have been investing in expanding in a number of areas to ensure that we can scale to meet the opportunity ahead of us. This is a multi-pronged approach that spans several areas of the business. We have recently launched a television advertising campaign in North America and Europe to build on the strong recognition that the BlackBerry brand enjoyed, and to expand the reach that our brand communications and support of overall sales and marketing mix from RIM and its partners.

On the R&D side, we have increased our investment in engineering talent and have recently opened two new engineering R&D centers, one on Bochum, Germany, with the initial hiring of 140 engineers, and one in South Florida, with an initial hiring of 130 engineers. These facilities combined could house up to a thousand engineers over time.

In addition, we’ve been scaling our infrastructure to support the expected growth in new subscriber accounts we expect over the coming quarters. We recently opened a new network node outside of North America and have recently performed a number of key upgrades to enhance the resiliency of the architecture. Also, to meet the expected demand for new and existing BlackBerry smartphones, we’re in the process of expanding our outsourcing relationships with a number of new EMS partners to give us the flexibility and capacity to meet customer demand. These investments are designed to grow the global market share of the BlackBerry solution, which will ultimately drive strong revenue and profit growth.

With that, I will turn it over to Brian Bidulka to discuss Q1 results.

Brian Bidulka

Thank you, Jim. Revenue for the first quarter ended May 31st was $2.24 billion, up 19% from $1.88 billion in the previous quarter. Handheld devices represented $1.84 billion, or 82% of RIM's revenue during the quarter, up from 81% of total revenue in the previous quarter. Total devices shipped in the quarter of approximately 5.4 million were up from 4.4 million in the prior quarter.

Approximately 4.2 million new devices were activated in Q1, either for new customers or for replacements and upgrades, not including phone only sales.

Channel inventory at the end of Q1 was up just slightly from Q4.

Device ASPs in the quarter were approximately $341. We expect ASPs in Q2 to be slightly higher than in Q1 at approximately $350.

Service revenue was $292 million, or 13% of revenue for the quarter, up $38 million from Q4.

Monthly ARPU declined just slightly from the prior quarter.

Software revenue was $67 million, or 3% of revenue.

Other revenue, including non-warranty repairs and accessories, was $45 million, or 2% of revenue.

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

Operating expenses increased by 22%, slightly more than we had forecast last quarter. R&D spending was $128 million, or 6% of revenue for the quarter, and selling, marketing, and administrative expenses increased to $327 million, and were 15% of revenue. Included in operating expenses is stock option expense of approximately $10 million.

The tax rate for the quarter was approximately 27.5%, slightly lower than our forecast, primarily due to the impact of foreign exchange relating to certain balance sheet items. The impact of this favorability in the tax rate was approximately $0.02 per share.

Net income for Q1 was $483 million, or $0.84 per share diluted. Weighted average diluted shares used in the EPS calculation for the quarter were 575 million. Actual shares outstanding at May 31st were 564 million. Total options outstanding at May 31st were 14.7 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. During the quarter, RIM generated approximately $504 million in cash from operations before working capital adjustments.

As mentioned on the Q4 earnings call, the company funded its remaining balance of fiscal 2008 income taxes payable, approximately $460 million, in the first quarter. When combined with other working capital charges, this resulted in net cash provided from operations of $6 million.

Capital asset additions in Q1, including intangible assets, were approximately $293 million, which was offset in part by cash provided by financing activities of $26 million, primarily related to the issuance of share capital resulting from the exercise of stock options.

From a working capital perspective, trade receivables were up in the prior quarter, in line with top line growth, and DSOs were down slightly from the prior quarter at 53 days.

Inventory on-hand was approximately $462 million versus $396 million in the prior quarter. Inventories continue to be primarily raw materials and semi-finished goods to support demand for BlackBerry products.

I will now turn the call over to Edel to discuss our outlook for Q2.

Edel Ebbs

Thanks, Brian. Before I discuss our outlook for Q2, I would like to remind everyone that these forward-looking statements reflect management’s best current estimate 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 second quarter of fiscal 2009 to be higher than Q1 in the range of $2.55 billion to $2.65 billion. We expect hardware shipments to be over 6 million units and an ASP of around $349. The expected increase in volume of shipments is primarily due to continued strong sell-through of existing BlackBerry products, such as the CDMA Curve and WiFi enabled devices with our North American carriers, as well as some stocking for back-to-school promotions scheduled for August.

While there will be some new products included in the mix, we expect shipments of BlackBerry Bold and other new products to really start ramping in Q3. We anticipate that weeks of channel inventory at the end of the second quarter will only be up slightly on a forward-weeks basis but are well within the range we are comfortable with.

Software revenue in Q2 is expected to increase slightly.

We are targeting net subscriber account additions for Q2 of approximately 2.6 million. As expected in Q1, we saw a very back-end loaded quarter in terms of net subscriber account additions. The launch of the 8330 CDMA Curve together with Mother’s Day promotions drove us to new highs in terms of weekly run-rates in the latter part of May. This momentum has continued into June.

Typically the challenge in forecasting the second quarter is the seasonal slowdown that is characteristic of the summer months. Given the performance so far in June, and taking into account that while there will be some slowdown due to summer holidays in Europe, it will be mitigated to some extent by back-to-school promotions in August and ongoing strength with our North American partners. We are forecasting healthy growth in net subscriber account additions for the second quarter.

We expect gross margin for Q2 to be slightly lower than Q1 at approximately 50.5%. The weak U.S. dollar is expected to put some near-term pressure on our gross margins. Many of our component suppliers and outsourcing partners have costs in currencies that are strong relative to the U.S. dollar, such as the Euro or Yen, and some of these increased costs are beginning to be passed along in the form of higher pricing to customers like RIM.

As Jim mentioned, we are actively diversifying our base of outsourcing partners which should help mitigate some of this. However, the ability to diversify away from certain components is somewhat limited.

We expect a total operating expense increase for Q2 of approximately 26% to 28% from Q1 levels, with R&D increasing by approximately 23% to 24%, and sales and marketing and administration expense increasing by approximately 28% to 30%.

As we discussed on the last call, we increased our investment in R&D significantly in Q1, and as expected this is continuing into the second quarter. Additionally, as Jim mentioned, we are at a stage in our business where it makes sense to support the next leg of growth, in part through increased marketing.

We believe the increased brand and marketing activities will increase BlackBerry purchase consideration by both business professionals and consumers and help support the heavy product launch schedule and aggressive carrier programs planned for the fall.

Spending in these areas is anticipated to help increase our global market share and ultimately drive revenue and profit growth in the second half of the fiscal year.

We expect depreciation and amortization to be between $44 million and $45 million in Q2, higher than Q1 due to ongoing CapEx. We expect CapEx to be approximately $250 million in each of Q2 and Q3.

In addition to the CapEx forecasted for the second quarter, a patent acquisition of approximately $200 million was completed subsequent to Q1 quarter end and is incremental to the $250 million CapEx forecast for Q2.

Investment income is expected to be approximately $16 million for the second quarter. We expect the tax rate to be approximately 29% to 30% in Q2 and to remain at this level throughout fiscal 2009. Beyond fiscal 2009, we expect to see the rate decrease further due to scheduled Canadian corporate income tax deductions. Please note that the rate could move outside this range, depending on foreign exchange fluctuations.

We expect Q2 EPS to be in the range of $0.84 to $0.89 per share diluted.

I will now turn the call back to Jim.

James L. Balsillie

Thank you, Edel. We see tremendous growth potential ahead of us and we are taking the appropriate steps through targeted investment, new product launches, brand building and channel expansion to ensure we are in a position to capitalize on this exceptional opportunity throughout the remainder of RIM's fiscal 2009. We look forward to updating you on our progress again in September.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Suva from Citigroup. Please go ahead.

Jim Suva - Citigroup

Great. Thanks very much. Can you give just a little bit more color on the SG&A and the investments you are making in the future? I believe you guided this quarter for SG&A to grow like 17% to 18% and it came in around 22%, or $10 million more. So an incremental increase beyond a very healthy increase -- it just seems like, is this more marketing? Is this more new product or how should we feel comfortable with these increases that we are seeing and what are they for?

Edel Ebbs

It’s really -- you know, we have a lot of stuff happening in Q3. We have product launches. We have a lot of carriers lining up some great programs and we really thought this is the right time to start investing. We really started last quarter, I mean Q1, started a branding campaign and I think you probably saw -- we talked a little bit about this at our analyst day -- you may have seen some of the ads on TV as well. There’s really two parts to it. There’s a brand building -- there’s brand building activities that we are doing and then there is more demand generation type activities that we are doing, and it’s really all designed to take advantage of all the stuff that we have happening in Q3.

Jim Suva - Citigroup

And the big increase then for next quarter also and then does it level out after that or do we continue to see it upward?

Edel Ebbs

I think you are going to continue to see it grow, as long as the programs are providing the return on them that we expect to get. But I mean really what it comes down to is what we are going to do on the top line.

James L. Balsillie

Yeah, it’s a surge of -- it’s a surge of capacity building and branding and demand and other programs ahead of really what’s a flurry in the back half of this year. And we’re delighted with the top line growth, obviously, in Q2 which is normally not the busiest time. And what’s lined up for the back half of this fiscal year, especially the whole holiday season, is by far unprecedented for RIM. A lot of execution pressures, and really this is -- but we have a lot of brand and marketing and channel and program investments due ahead of that, so it’s really investing to drive the top line, shifting a little more out of the traditional R&D side of it and there’s a bunch of other execution things. But we are pretty excited by the growth prospects and it’s really an investment to drive that.

Jim Suva - Citigroup

Thank you very much.

Operator

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

Maynard Um - UBS Securities

Thanks. Your top line guidance implies really strong fundamentals and I presume the visibility and lead times for hardware builds there give you good confidence in that range. The real question here, and too I guess your last comments and last question is really on the operating leverage side, and clearly it looks like you are building for something much larger in the back half of the year. I think you cited the strongest growth opportunities ever. In terms of the leverage in the model, I mean, do you anticipate that you need to continue to spend at this high clip going into the back half? Or should we anticipate with the top line growth a large part of that leverage should start to flow through in the back half and really taking advantage of the building that you started last quarter and into this quarter? Thanks.

James L. Balsillie

It’s a fair question. There is leverage in the model. There’s no -- that’s something we believe clearly. There are many changes at hand because you are always kind of investing into such a strong growth amount, so in a sense the investment becomes a constant. Even though we are performing very well currently financially, you still are investing for -- you know, it is important to remember we had 107% growth year over year, and we are still growing very, very strong and we expect strong growth. So there’s a constant in investing into growth where the amount seems a lot today but it turns something so positive tomorrow that it is small by comparison.

As well, there are a number of very, very positive things we see can be done with the model and it’s a question of timing and degree versus just purely driving top line.

So right now, it really is an adoption acceleration game, as I see it, and a channel with a flurry of products and a strong channel adoption and new carrier launches and ecosystem enabling of new apps, and just a model that’s so powerfully positive for carriers. And so that aspect really focuses us right now and just -- you know, the top line is very important because as long as we keep that growth going, many, many good things fall out and if you stop investing for growth, yeah, you bet the model just torques right back. But we’ve always had to invest -- you know, you have to invest certain periods of time to manifest that growth, whether it’s a quarter later or two quarters later or a year later, so just be -- so yeah, the model is positive, very positive, but you are also investing into hyper-growth and sometimes they are currently expensed items that are just -- that just distort the model a little bit.

Operator

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

Mike Abramsky - RBC Capital Markets

Thanks very much. What do you see, Jim, the company looking like after this period of investment for the next level? Is it just more of everything you are doing today, more products through the same channels, bigger brand, more capacity? Or is there something additional that you are trying to build that’s associated, for example, with your consumer push associated with some of the new things in front of you that you are wanting to capture in the market? Could you just give us a sense of where you are going strategically with these investments?

James L. Balsillie

That’s a really fair question and I reserve the right to be cryptic in my answer, for the best interests of our shareholders.

You know, this is a newsy space -- I mean, a day doesn’t go by when something strategic and interesting isn’t happening and this week has been no exception. And by the way, we’re barely -- you know, we’re only three days through this week and we see very, very positive structural things happening in our market, and ones that are worthy of considerable reflection. And so yeah, we see many aspects of the business shifting.

You’ve seen some interesting capabilities on the B2C and the cooperation that is coming out of there. Some of the big enterprise guys like SAP, you know, the carrier and the channel, much more powerful applications going on, deeper, deeper sort of sectoral expansion. And we sort of slid in a bit of a sleeper today, which was the Australia Cisco Vodafone one, which is really a pilot for global rollout with Cisco and other carriers, where the carrier becomes a turnkey SMB IT play, which has been sort of a market that’s always been hard to bring about and it’s using the Cisco box, which has different names or different countries, and an MVS and quite frankly, there’s exciting opportunities to roll in Unite and you just have this turnkey box there.

So there are many, many exciting levers at play and enablers that get the players who have strong positions in this space very excited. And it really becomes a question of timing and degree for us, but it all becomes moot if we don’t keep torquing adoption. And so as long as you feed adoption, as long as you have a strong carrier profit model, many other things are there and are going to happen. And we like where we sit, you know, and you see lots of dynamics in the market to sort of, you know, ignoring us or countering us or leapfrogging or seeking to or something like that. But we’re in a special position and if you really sort of reflect on the totality of what is going on, you really come to the conclusion that all roads lead to adoption right now and then definitely sort of streaming and enhancing and evolving later in ways that properly serve customers and carriers in the ecosystem. But it’s a bit of a land grab game right now.

Mike Abramsky - RBC Capital Markets

And just to complete the question, just a brief follow-up -- you said that earlier you are going to see benefits, investors will see benefits in terms of revenue and earnings. How long are you willing to -- [or not be] defer margins in order to achieve the kind of land grab and growth and momentum that you want to achieve right now?

James L. Balsillie

Well, I think by September you should have -- we should be able to give guidance as to how well we feel positioned for what’s coming up in that season. And if you see that the investments that we are making today bring satisfaction 90 days later, you know, I think there’s a return on that. If there’s -- and there’s also long-term strategic things because it drives the cascading of all these channels and so on.

So you know, there’s a long-term strategic element but I think we’ve been pretty clear that we feel we’re in a very -- and I tried to be pretty clear on the call -- we’re in a very special time for this industry and with the carriers and the emergence really in the holiday season in the second half of this fiscal year. And to actually be growing this strong over the summer, you know, is really quite excellent and yet we feel that’s a modest harbinger of what’s to come if we can execute what we have before us and things emerge as we expect.

So I think there are some near-term things but I think there’s some medium term things, but this has been a constant focus on our long-term goal in this company. You know, our strategies fundamentally haven’t changed in the past decade and we don’t expect them to fundamentally change but when you’ve got such rapid emergence, investing a bit, whether it’s currently expensed or capitalized, that’s an accounting thing we’ve considered wise and we think that’s why we’ve continued to grow so well and shareholders benefit.

Mike Abramsky - RBC Capital Markets

Thanks, Jim.

Operator

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

Rob Sanderson - American Technology Research

Good afternoon. Thanks. It’s going to be a call filled with margin questions, so I’m going to jump on as well; just a lot of talk about operating expenses but can we talk about the gross margin implications and what to expect as the new products ramp up? Will it be much like we’ve seen in past product cycles or do you think there is something different in terms of the unit economics on the new phones as we move into more of a 3G era?

Edel Ebbs

The only new product we’ve announced yet is Bold but I mean, I think generally most of our new products follow a pattern where certainly when they are first introduced, gross margins are lower, sometimes a fair bit lower than our average and as the products scale, you get gross margin improvements. So I mean, I think that sort of answers one part of your question.

The other part obviously that goes into that is ASP and what do you do on pricing, depending on what segment of the market you are targeting. When we launched the Pearl back 18 months or more ago, you know, that product was launched at the lowest price point we’d ever put a product out at, around $300 and the gross margin was a fair bit lower, probably 700 basis points, maybe more, lower than what our average gross margin was at that time. And as that product scaled, it really improved to the point at which now it’s a very good gross margin product for us.

So I think that’s the type of pattern you’d expect to see, depending on what ASPs you decide to use in the market.

The other thing I did mention on the call was just some of the cost things we are seeing from some of our components providers related to foreign exchange. And I mean, I think that’s something that -- you know, we’ve been able to sort of absorb that for a little while but some of it is being passed through. We are doing some things to try to mitigate some of it. We are expanding our base of outsourcing partners. It will give us a little more flexibility there, so we are doing what we can but I think generally gross margins around where we are for Q2. I wouldn’t be modeling them going up significantly or anything.

Rob Sanderson - American Technology Research

Right. Just as a follow-up, Edel, you mentioned in your prepared comments about the mix of new products in the August quarter guidance. Is it fair to assume that’s kind of between 5% and 10% of the $6 million, or is that the right ballpark or --

Edel Ebbs

I’m not going to give you a number, and some of it depends on -- I mean, new products are the hardest thing to predict, right? So I’m not going to give you a number but it would be a small percentage, yes.

Rob Sanderson - American Technology Research

Okay. Thanks very much. Oh, one quick question; what was the option expense this quarter?

Edel Ebbs

I think we said $10 million.

Brian Bidulka

$10 million.

Rob Sanderson - American Technology Research

Thank you very much.

Operator

Your next question comes from Scott Coleman from Morgan Stanley. Please go ahead.

Scott Coleman - Morgan Stanley

Thanks, guys. I wonder if we could just shift the focus to cash flow and some of the uses of cash you expect over the next couple of quarters. I guess one of the things that stuck out with me was last quarter you talked about CapEx being about $180 million. It was up higher this quarter, 195, and if I heard the numbers correctly, I think you said $250 million for the next two quarters. Clearly this goes hand-in-glove, or at least I assume that it would with some of the higher SG&A expenses, but can you fill us in on what this capital is being allocated to?

And then I guess a follow-up to that would be you spent some money on some patents last quarter. You are spending again this quarter, as well as some things that closed after Q1. Can you give us a little more color on what you expect to get from these expenses, or from this use of cash? Because I think clearly understanding where you are going with these intangible assets would help us out here.

Edel Ebbs

Sure, Scott. I’ll take your first question and maybe Jim can take your second on the patent.

Yeah, I mean, the CapEx -- it does -- one of the things with CapEx is that they tend to be big, lumpy expenditures. So while we guided for $180 million, it came in at 195, sometimes it’s just timing issues. You know, there’s been many quarters, probably the past couple where it’s gone the other way, where some of the CapEx was delayed. So those kinds of dynamics are at play.

Where do we spend the CapEx? There’s a couple of areas, some of them Jim alluded to. We’re growing our R&D base very substantially, hiring a lot of engineers, not just in the Bochum and Florida operations that Jim mentioned but also here in Waterloo and other places in Canada, and in the U.S. So you know, you have to have buildings to put those people in, you have to buy them equipment, so there’s a lot of it going to that type of activity. Then there’s the investment in our infrastructure, building out additional network nodes, expanding our capabilities in our [NOK], building in redundancies, those types of things.

So those would be the primary areas where they go. IT is also another area -- just, you know, everybody in here needs a PC, at least one, so there’s a lot of that as well.

Your question on the patent as to what value we are getting from them --

James L. Balsillie

Yeah, and --

Scott Coleman - Morgan Stanley

Actually, if I could just interrupt, just to follow-up on that, Edel, what changed over the course of a quarter for your CapEx to be 40% higher in Q2 than you thought it was going to be three months ago?

Edel Ebbs

I don’t have the exact details on what it was. It could be something as simple as just the real estate deal closing early or something that was pushed out from the prior quarter.

Scott Coleman - Morgan Stanley

Okay, thanks. And I apologize for interrupting, Jim.

James L. Balsillie

No problem. On the IPR stuff, I mean, we’ve just come across some fantastically fortunate circumstances to buy some essential GSM IPR that was not licensed to other players in the industry and that just gives RIM, as we emerge more and more, and it’s for a broad number of families that it’s absolutely essential IPR. And those of you that are familiar with the essential IPR game and the whole sort of roving issues on this in the cellular handset world, I can assure you that that is enormously valuable to a company, if only used on a defensive basis, because it allows you to have irrefutable aspects of IPR in the GSM world when companies come claiming rates that may or may not be reasonable and fair, some of which are public, some of which are not. When you have absolutely irrefutable IPR that sits upon their infrastructure and/or handset sales from the past decade and going forward for many, many years to come, it’s a very helpful trading card and licensing discussion, and we’ve just been very, very fortunate in certain circumstances where these weren’t of value to certain companies and they valued the fact that RIM was -- saw them as a good basis to help keep our products cost-effective to the market and we as a company are very, very fortunate to get those. They don’t come up very often and they are from special sources, and the fact that they are not encumbered by other cross-licenses with other players makes them especially helpful to RIM.

Scott Coleman - Morgan Stanley

That’s very helpful and maybe just to follow on that, when you say GSM I’m assuming you mean the GSM family, so extending into WCDMA? If you could just confirm, and is there a way that we can think about this from a margin perspective, that this will help you two or three points of gross margin on your --

James L. Balsillie

Scott?

Scott Coleman - Morgan Stanley

Yeah.

James L. Balsillie

Sorry, that’s a lot of questions. We asked for one, and we gave you two more, so we’ve got to move one. We can -- Edel can chat offline.

Scott Coleman - Morgan Stanley

Fair enough.

Operator

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

Jeffery Kvaal - Lehman Brothers

Thanks very much. I have a question about the gross margin line also; to what extent are there other variables about pricing that we should be considering? That question sort of morphs into a bit of a iPhone question as well, obviously some lower pricing there. Are you able to change the tenor of your conversations with carriers about subsidy levels? Are you worried about overlap with the Apple customer base as well?

James L. Balsillie

I think the second half of your question doesn’t have particular relevance to our thinking but the first half does, and that is when you cross over to more consumer markets and you are getting hero product treatment into the prime buying season of the holiday, how should you price entry and acceleration and how should you do co-op and those kinds of things? And sometimes when they are dramatically bigger strategies than before, you know, the absolute contribution to the company is so much greater, do you do some special one-time entry things and that kind of stuff? And again, if it absolutely creates sort of a platform acceleration thing in kind of an emerging sector reality, is that a good business decision? And I think any way I look at it, it’s an enormously good decision because once you decide to become a BlackBerry user, you kind of stay there for life. And let’s not be too penny-wise, pound foolish when we do get very good absolute margin. Let’s not get trapped into a percentage game when there’s also a BlackBerry platform and tweaking the services thing in the future and helping the carriers and all aspects of this. And the fact that, you know, we have a model that’s so profitable for carriers that they want to have strategies to really in many respects multiply -- in fact, they are not looking at sort of double-digit percentage growth of the BlackBerry business. We’re talking triple-digit type growth strategies with carriers.

So you can’t help but get into that discussion, and it’s a great discussion. And you have -- you reserve the right to say no and slow down your growth trajectory, and so is that sort of deleveraging a model in and out of the gate? I don’t think so. It’s an entry play and it’s a mighty cost effective one, so you know -- and this comes with -- you know, you have to -- I know you know this, but the sector is shifting dramatically. The middle part is hollowing out and there’s cheap, cheap, cheap phones and then it’s smartphones to a connected platform, and we kind of model what the carrier that we partnered with years ago and have invested in over and over and is proving to have been quite prescient to do that.

So do understand, I do understand the concerns on profitability and model on that. We absolutely respect that and care about it and invest in it. But you also have a dynamic of adoption and land grab and acceleration in carriers partnering with you, and I think it’s by far in RIM's best interest to have a fair model, not over-levered at this time, but make sure that we sustain this hyper growth, because the possibilities just opened beyond imagine every stage of acceleration, and that’s -- and it’s self-fulfilling and so -- but yeah, to answer your question, it absolutely comes into what do you put on the table in special entry plans, special advertising, co-op, can we change this market, can we change this game and all that, and those are highly integrated discussions that amongst many things, these kinds of discussion occupy a lot of our time.

And I think I go back to the consistency, which is at the end of the day, make sure acceleration -- at all elements, make sure acceleration is maintained, because every aspect of the model leverage is stop investing acceleration, but if you forego acceleration, then all the beautiful leverage model is just on a much smaller base in the not-too-distant future.

We’re in a hyper-growth model mode, with a very good model and good profitability. Make sure -- and you saw how we extended market share last quarter big time. So I’m pretty sure we’re doing the right things but sometimes there are tradeoffs. We can’t always have our cake and eat it too. Sometimes we do but not always.

Jeffery Kvaal - Lehman Brothers

Okay, so thanks. That sounds like you aren’t seeing too much of an overlap then, Jim, with the iPhone customer base in particular.

James L. Balsillie

No.

Jeffery Kvaal - Lehman Brothers

Okay. All right. Perfect. Thank you.

Operator

We have our last question from Simona Jankowski from Goldman Sachs. Please go ahead.

Simona Jankowski - Goldman Sachs

Thank you so much. I just wanted to ask you one question on the model, which is kind of comparing your activations number versus the device shipments. The gap there seems to be, if I heard the numbers right, about $1.2 million, which was again widening versus the last quarter, when I think it was more like $0.5 million and the quarter before was a little bit bigger, but not quite as big as this quarter. So I just wanted to get a better sense of how much of that gap you think is going into the phone only kind of shipments, and also how much of that is going incrementally into channel inventory? And then similarly, how you see that progressing into the August quarter.

Edel Ebbs

Sure, Simona. I mean, the phone only -- I mean again, it’s an estimate, right? We do get some data points on it that are real but you know, we really do have to rely on our relationship with the carrier to get some of that data.

I would say a few hundred thousand is probably phone only, give or take. And then beyond that, certainly some of it is going into channel inventory or going to replenish channels. You know, we had Verizon and Sprint both launch fairly late in the quarter with the 8330, so they are still taking product to support their channels and their channel fill. We are still expanding our downstream channels, so there’s a lot of indirects that need product, things like the 20-20 that we mentioned that we are expanding into in Europe.

So I think as a level of, or our number of channels expand, the number of products you need to ship to even keep a few devices in each store gets bigger. So I really -- I mean, we’re quite comfortable with where channel inventory levels are. They are certainly well within the range that we are comfortable with. So while they are increasing on an absolute basis, I think with the run-rates that carriers are expecting in terms of sell-through, most of them are pretty comfortable and we are comfortable as well.

Simona Jankowski - Goldman Sachs

Thanks, Edel. Just to clarify, do you expect within your guidance that the absolute level of shipments into the channel in the August quarter is going to be larger or smaller than the absolute level of shipments into the channel in the May quarter?

Edel Ebbs

I think we are expecting it to go up slightly on a weeks basis, so I think it might be just slightly higher.

Simona Jankowski - Goldman Sachs

Okay. Thank you so much.

Edel Ebbs

Thanks. Thank you, Operator. In closing, I would like to remind everyone that there is a post-view service available at 416-640-1917, pass code 21252982 pound, or you can listen to the call, which has been recorded and is available in the investor events section of our website. Thanks everybody for joining us today and we’ll talk to you again in September.

Operator

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

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