Research In Motion Limited F4Q06 (Qtr Ending Mar 4, 2006) Earnings Conference Call Transcript (RIMM)

| About: BlackBerry Ltd. (BBRY)

Research In Motion Limited (RIMM)

Q4 FY2006 Earnings Conference Call

April 6th 2006, 5:00 PM EST


Dennis Kavelman - CFO

Jim Balsillie - Chairman, Co-CEO


Rob Sanderson - American Technology Research

Paul Coster - JP Morgan

Jeffrey Kvaal - Lehman Brothers

Maynard Um - UBS Warburg

Andrew Lee - TD Newcrest


Welcome to the RIM fourth quarter fiscal 2006 year end results conference call. (Operator Instructions) I will now turn the conference over to Dennis Kavelman, CFO. Mr. Kavelman, please go ahead.

Dennis Kavelman

Thank you. Welcome to RIM's fiscal 2006 fourth quarter and year end results conference call. With me is Jim Balsillie, RIM Chairman and Co-CEO. After reading the required forward-looking statements disclaimer, I will begin by providing an overview of fourth quarter results as well as our guidance for Q1. I will then turn the call over to Jim who will provide a business and strategic update. We will then open up the call for questions.

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

Some of the statements Jim and I will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws. These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, stock option expense, investment income, earnings, EPS, and ASPs for Q1 and beyond; our expectations regarding RIM's near and long-term tax rates; our estimates in the number of BlackBerry subscriber accounts, subscriber account additions, and other nonfinancial 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.

I will indicate forward-looking statements by using words such as expect, anticipate, estimate, may, will, plan, should, forecast, intend, believe, and similar expressions. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements including: risks relating to our intellectual property; our ability to enhance our current products and develop and bring to market new products; our reliance on others including carrier partner and third party network operators; our reliance on carrier partners and their systems to accurately report subscriber account activations and deactivations to RIM on a timely basis; our reliance on suppliers; our ability to effectively manage our growth; risks relating to possible product defects and product liability; risks relating to competition, general economic conditions, foreign exchange risks; risks associated with our expanding foreign operations; and other factors set forth in the risk factors and MD&A section in RIM's filings with the SEC and Canadian Securities regulators.

We base forward-looking statements on information currently available to us. We do not assume any obligation to update them.

Turning to Q4 results, revenue for the fourth quarter ending March 4 was $561 million which is flat with the prior quarter, and a 39% increase from the same quarter last year. Revenue for the year was $2.07 billion, a 53% increase over the prior year.

Handheld devices represented $391 million or 70% of RIM's revenue during the quarter, flat with the previous quarter. Total devices shipped in the quarter of approximately 1.12 million were also flat with the prior quarter. Average device ASPs remained steady at approximately $350.

Service revenue was $117 million or 21% of revenue for the quarter, an increase over the $104 million in the prior quarter. In addition to the normal expected increase from our higher subscriber base, service revenue was higher due to the extra week in this 14-week quarter.

RIM added approximately 625,000 BlackBerry subscriber accounts during the quarter which was within the revised range we announced on March 3. As we discussed in our March press release, the lower than expected additions for the fourth quarter were primarily the result of the uncertainty created by the patent litigation. The total base of BlackBerry subscriber accounts at the end of the quarter was approximately 4.9 million.

Sell-through revenue was lower than the prior quarter at $29 million or 5% of revenue, again related mainly to litigation overhang. Other revenue such as accessories and billable repairs was $24 million, or 4% of revenue.

Gross margin for the fourth quarter decreased slightly to 55% from 55.8% in the prior quarter. This was at the low end of our forecasted range in December and was due to the lower than expected software revenue in the quarter which affected the overall mix.

R&D spending was $43.9 million or 8% of revenue for the quarter. Selling, marketing, and administrative expenses increased by 10% to $92 million versus $84 million in Q3 or 17% of revenue.

RIM has finalized the accounting for the litigation settlement. At the end of Q3, RIM had an accrued liability of $450 million relating to litigation which represented, at that time, management's best current estimate as to the litigation expense. With the full and final settlement amount of $612.5 million paid on March 3, an additional charge to earnings in the amount of $162.5 million was recorded in operating results in Q4. No value has been ascribed to the license arising from the settlement, so the entire remaining amount was expensed in the quarter.

Excluding the impact of the litigation settlement, the tax rate for the quarter was approximately 29%. GAAP net income for Q4 was $18.4 million or $0.10 per share diluted. Adjusting out the litigation settlement, the EPS was $0.65 which was within the revised range of $0.64 to $0.66. The GAAP reconciliation of our adjusted EPS was included in the earnings press release we issued this afternoon.

Weighted average diluted shares using the GAAP EPS calculation for the quarter were 192 million. Actual shares outstanding at March 4 were 186 million and total options outstanding at March 4 were 9 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. At the end of the fourth quarter, RIM had $1.25 billion in cash, cash equivalents, and investments. This was down $356 million from the prior quarter and the decrease reflected the settlement funding of $414 million and capital asset investment of $48 million which was offset in part by cash from operating activities of $106 million.

Trade receivables and inventories were up from the prior quarter but are within acceptable ranges. We're not experiencing any collections issues, and inventory was higher due mainly to an increase in raw materials.

We currently expect CapEx to be approximately $70 million to $80 million in Q1 due to spending on increased capacity, BlackBerry infrastructure, and facilities. This does not count the Ascendant acquisition.

At this time I would like to discuss our outlook for Q1. Again, a reminder 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.

Following the litigation settlement announced on March 3, we've had strong indications of support from the carrier channels and our corporate customers. Everyone is obviously relieved that the risk of injunction has been removed and companies are moving forward with the role of planning and implementation.

We believe that the corporate market for BlackBerry is still in its early stages and that there is significant growth ahead in North America and internationally. The consumer and prosumer markets for BlackBerry are also early stage. We've been investing heavily to put together the pieces to drive growth in these markets.

In Q3, we averaged just below 50,000 subscriber account additions per week and were held become in November due to delays in the launch of the 8700 handset. In Q4 the average was lower at approximately 44,000 per week due to the litigation overhang; and in fact during February, prior to the settlement, we had been tracking even lower at approximately 40,000 additions per week.

In the week's following the announcement of the settlement on March 4, subscriber additions increased immediately to almost 50,000 a 20% increase. 50,000 per week was a significant improvement and was back to our high Q3 levels and this extrapolates to about 650,000 for a thirteen-week quarter.

Last week we saw a ramp to well over 60,000 -- more than 50% above February levels, which was very encouraging. The last week in March is typically high as it is quarter end for our carrier partners, but the first part of this week has remained on track at the 50,000 level, and we have confidence in continued growth through the rest of this quarter, in particular because of a number of incremental marketing programs that are planned for April and May.

Europe has been particularly performing well, having its highest weeks ever with the availability of the 8700. In North America we have a few major carriers that have bounced back substantially and are executing well. We also have a few carriers who have under-performed prior to launching the 8700 or the 7130. I would say we're extremely encouraged by the overall momentum.

In trying to forecast the remainder of the first quarter, there are several factors that we need to consider. First, as I said already, we're hearing positive indications from customers and channel partners that they have strong BlackBerry roll out plans going forward and are not being distracted by competitors.

Second, the 8700 is now available across Europe and is getting a tremendous response. Europe and Asia are performing very well relative to our Q1 sales plan. We don't focus on total BES installation numbers any more, but I think it is worth reporting that the number of BES installed in Europe and Asia is already 50% of the total in North America. I believe this is an indication of strong international subscriber growth potential.

Third, there are a number of significant marketing channel initiatives in the U.S., Europe, and Asia that are expected to continue to accelerate subscriber additions and sell-through.

By looking at our current run rates and the plans for April and May, I believe that a reasonable and attainable target for Q1 activations is approximately 675,000. If weekly add rates continue to strengthen then we can exceed this number; but there is no point in getting ahead of ourselves until we see the evidence of this sustained growth. This is a significant increase from the 625,000 in Q4, as Q4 was a fourteen-week quarter and Q1 is a normal 13-week quarter.

With respect to revenue there are a number of factors to consider when looking at Q1. The lower subscriber additions for Q4 and forecasts for Q1 have an impact on the number of handsets required by carriers. This is being partially offset by upgrades, as expected, as new 8700's and 7130's launch both in the U.S. and internationally. As well, we have several new products ready to launch which are expected to contribute modest revenue in May.

The sum of these factors is that we currently expect Q1 revenue to be between $580 million and $610 million, slightly lower than the previously guided range of $610 million to $650 million.

Based on these subscriber and revenue forecasts, we're anticipating channel inventories to be at very reasonable levels at the end of May. In looking forward to Q2, this means that we will have our major carriers selling our most current products with the low channel inventories, therefore requiring ongoing shipments of handsets to keep up with subscriber additions and upgrades.

Without providing specific Q2 revenue guidance, I will say that we're anticipating reasonable growth over Q1. Handset ASP's are expected to remain steady in Q1 at approximately $350.

Service revenue continues to grow and we're not seeing material ARPU decreases. Q4 service revenue was higher than normal due to the fourteen-week quarter. Since Q1 has thirteen weeks we expect the total service revenue will grow modestly relative to Q4.

Software revenue as expected to increase in Q1 to approximately $40 million with the launch of BES 4.1 in the post-litigation rebound. However, it will still be a smaller percentage of the revenue mix than expected as we continue to use software as a tool in enterprise marketing programs.

Hardware is expected to be a slightly higher percentage of our revenue mix in Q1, partially due to the high number of replacement and upgrade handset sales; and given that software is not expected to grow significantly, we're expecting gross margin to remain flat with Q4 in the 54% to 55% range.

Beyond Q1, gross margin will be dependent on the revenue mix between hardware, service, and software, and is currently forecasted in a similar range as Q1.

We continue to increase spending on R&D and sales and marketing. R&D growth is mainly in head count for continued new product initiatives, as well as the recent Ascendant acquisition. Sales and marketing continues to grow as the number of carrier partners grows and as efforts into the prosumer market and retail channels continue to build. Increases are planned in both discretionary program spending and in head count.

Over fiscal 2007 on a quarter-to-quarter basis, OpEx in these areas may increase as a percentage of revenue, but the long-term plan is for continuing operating leverage to improve driven by revenue growth. We go through these periods of investment in order to drive the next step function in growth. Many programs we are investing in now are setting up growth for this fall and winter with new products and new markets.

Many of the international carrier relationships and channel initiatives are expected to bear significant fruit as these channels and new markets become productive. As a result, we expect an operating expense increase for Q1 of approximately 12% from Q4 levels to support the launch of new products, retail programs, and new branding and marketing initiatives. We expect R&D to increase by approximately 9% to 10% in Q1 and sales, marketing and admin to increase by approximately 13%.

Beginning, in Q1 RIM will begin recording employee stock option expense in accordance with FAS 123R. We expect this to be approximately $4 million to $5 million in Q1. The gross margin and OpEx guidance provided on the call does not include stock option expense. We will provide earnings guidance including and excluding stock option expense and our GAAP financial statements will have stock option expense allocated to appropriate cost of sales and operating expense accounts.

We expect depreciation and amortization to be approximately $17 million to $18 million in Q1. This increase is due to an amount relating to the Ascendant acquisition as well as an amount relating to the accelerated write down of some tooling equipment.

Following the payment of $612.5 million to settle the litigation, our cash balance is now $1.25 billion. This decrease in cash balance will result in investment income being lower in the range of $12 million to $13 million in Q1.

As we discussed previously, we expect RIM's overall tax rate to decrease over time as RIM's international business activities continue to expand. We're expecting the rate to be approximately 26% to 27% in Q1 and decreasing going forward. A reasonable long-term rate for modeling is approximately 25%.

I have included Ascendant in the operating expenses in my Q1 guidance but we have not finalized the purchase accounting. I will provide an update on the purchase accounting when we report Q1 results. There is not expected to be any material P&L impact, but if there is, I will break it out at that time.

Given the lower revenue outlook and the previously forecasted increase in operating expenses, as well as the decrease in investment income, we expect Q1 GAAP EPS to be lower than the December guidance in the range of $0.60 to $0.65 per share and $0.62 to $0.67 per share excluding stock option expense of $4 million to $5 million. I will now turn the call over to Jim.

Jim Balsillie

Thank you, Dennis. Before I provide a business update I would like to thank our shareholders for their support over the past several months as we worked our way through the resolution of the patent litigation. With this behind us, we are invigorated and excited to be able to focus 100% on growing our business and leveraging the many opportunities ahead of us.

As Dennis discussed earlier, we're beginning to see some momentum return to our BlackBerry business with subscriber account additions and business opportunities increasing noticeably since early March. In the past few weeks, we have surpassed the 5 million subscriber mark and are poised to extend our market leadership as we move into the new fiscal year.

While there is no doubt that our business lost some momentum during the past few months, everyone at RIM is encouraged and excited about the strength we are now beginning to see. The majority of RIM's carrier partners are showing significant growth and have many new BlackBerry programs planned for this year.

We are also seeing our investment in international markets begin to pay off and expect these to contribute increasingly to our growth over the coming year. We believe the market for wireless solutions is still in its early stages and there is no doubt that it is growing at a rapid pace. BlackBerry is in a very good position to take advantage of this.

Mike and I are extremely focused and confident that RIM has the product platform and the business plan to capitalize on this opportunity. We have an exciting slate of new products scheduled for the remainder of fiscal 2007 that will expand our presence in existing markets and open the doors to new ones.

In addition, we continue to seek opportunities for technology-focused acquisitions, similar to the recent Ascendant acquisition that will complement the BlackBerry platform.

Fiscal 2006 was an exciting year for RIM with the launch of a number of new hardware and software products, entrance into dozens of new markets and new relationships with industry-leading partners. Even with the disruption caused by the litigation our overall performance was excellent. Revenues grew 53% to over $2 billion and we shipped over 4 million BlackBerry handhelds. Our subscriber base nearly doubled year-over-year.

This coming May, RIM will be hosting the fifth annual Wireless Enterprise Symposium which will be held May 15-19 in Orlando. We will also be holding our annual analyst day in conjunction with the event. For those of you who have not attended before, WES is the only industry show that is focused on wireless showings for the enterprise and provides an excellent opportunity to see what's new in wireless data and to meet and network with over 2,000 IT managers, ISD partners, carrier executives, and other handset and solution partners. It is a great event for anyone interested in wireless solutions for the enterprise and I strongly urge you to attend.

Since the Q3 earnings call we have added 30 new carrier partners for a total of 110 carriers added this fiscal year. Partners recently launched include Cbeyond USA, Cable and Wireless Sanguia, Montserrat, and Turks and Caicos Islands; TIM, Argentina; COSMOTE, Greece; Polkomtel Poland; CSL Hong Kong; TBayTel in Canada; TMM Portugal; T-Mobile Slovakia; BTC Bahamas; and SETAR, Aruba. We also signed an agreement with Alcatel to be RIM's distributor for BlackBerry for our major carrier in Africa and expect to roll out the BlackBerry solution through Alcatel to a number of other countries in Africa in the near future.

Launches of the 8700 handheld continue with carriers around the world and the product has received an excellent response both in terms of customer take-off and media reviews. 20 carriers have launched the 8700 to date. Recent launches have been with Telefonica in Spain, TIM in Italy, Orange in France, Airtel in India, Maxus in Malaysia, O2 in the U.K. AIS in Thailand, and Vodafone in a number of properties.

We are also especially pleased to see T-Mobile showcasing the 8700 this week in CTIA with plans to move forward with a full launch in the United States later this month.

The EVDO-based 7130e also continued to gain acceptance with Verizon's customer base and it was also recently launched with Alltel in the United States and Telus in Canada. We are also working closely with our CDMA carrier partners on product road map plans for the coming year.

Both the 8700 and the 7130e handsets are beginning to see traction with their modem mode capability which is available through Cingular and Verizon. Modem mode allows customers to use their BlackBerry handset as a data modem with a laptop to access applications and transport files over the carriers wireless network. Carriers are pricing this service at a flat rate for unlimited usage on top of the standard BlackBerry pricing.

We are on the verge of launching BlackBerry service with China Mobile and expect to launch by the end of May. We are operationally ready to move forward with BlackBerry service in China and expect the initial service launch to be nationwide across all 30 provincial operators that comprise the China Mobile network.

With the launch, which will initially target multinational corporations with operations in China, China Mobile will be selling their SIM to offer BlackBerry service for users already with access to BlackBerry handhelds and software. Customers will be able to select service using BIS, BES, or both.

We're also actively working on plans for a full product launch with China Mobile offering BlackBerry handhelds and BES software. China Mobile is currently testing 8700G handhelds, and we expect these to be available in China later in fiscal 2007.

For an enterprise update, RIM 's enterprise customer base demonstrated tremendous loyalty and support of the BlackBerry leading position in the market over the past several months. A primary strength in the BlackBerry platform is that it addresses all aspects of the enterprise architecture.

There are four main stores and three main environments that an enterprise wireless data platform needs to address. These stores are the desktop, real time computing, application services architecture and the PBX.

The three main desktop environments are Notes and GroupWise which are approximately half the market; and Exchange with approximately the other half. The desktop which is essentially email and PIM, was the first enterprise data store that BlackBerry was designed to address and this led to RIM's early leadership position in the market.

RIM continues to enhance its offering to wirelessly enable the desktop and also continues to provide for increased manageability and security features for IT administrators responsible for managing these applications. RIM is extending BlackBerry's leadership through the enablement of other key enterprise data stores.

Real-time computing is becoming increasingly important for many enterprises. The BES 4.1 which is now available, addresses this requirement with support for IBM Sametime which was highlighted at this year's Lotusphere and support for Microsoft Live Communication Server 2006.

BES 4.1 supports the full range of IM features including presence, group chat, buddy list synchronization, message auditing, and enterprise access controls with Microsoft and IBM messaging servers.

We are also working closely with Novell on support for Novell GroupWise Messenger and at BrainShare 2006, Novell held a main stage demo showcasing GroupWise Instant Messenger with BlackBerry.

The uptake of wireless enterprise instant messaging on BlackBerry has been strong to date, and we expect this trend to continue as more and more corporations realize the benefits of real-time computing and presence-based applications.

Application service architecture requirements are addressed with Mobile Data Service 4.1 and through RIM's ISV community. MDS 4.1 is the component of the BlackBerry enterprise solution that applies leading edge technology and standard space integration methods to mobilize enterprise applications and back end systems.

MDS Studio, which is a key component of MDS 4.1, allows for the rapid creation of rich client applications utilizing the power of web services. In this development environment, applications are visually assembled using standard components and drag and drop techniques.

RIM's ISV community, with over 500 partners, is a large and growing ecosystem that provides an extensive range of both horizontal and vertical enterprise applications to enable customers to derive even more value from their BlackBerry deployments.

Enabling the PBX is the newest frontier for BlackBerry and one which we are addressing through our recent acquisition of Ascendant. The Ascendant Voice Mobility Suite allows RIM to further extend and enhance the use of wireless communications in the enterprise by integrating voice mobility as a seamless part of the enterprises wireless communications.

The Voice Mobility Suite gives users the ability to have their PBX phone on their BlackBerry handset and access all the features and functionality of the PBX such as single number reads, call forwarding and call waiting, call parking, extension dialing, and enterprise dial tone while they are not at their desk.

Ascendant is also unique in its ability to handle hybrid PBX environments which are a combination of legacy and IP PBX's which is the reality for most corporations.

Ascendant already has a customer list of 30 large corporations and a strong relationship with Sprint Nextel, who markets the product as Mobile Extension. We expect there is a tremendous opportunity to leverage BlackBerry over 150 existing carrier relationships and extensive enterprise presence to grow Ascendant's penetration in the wireless PBX market.

The BlackBerry solution is in a unique position to address all key enterprise data stores for all the key environments. For the carriers, this means that there is a single solution to sell and support that addresses the entire market. In addition, the BlackBerry architecture in infrastructure provides value in many ways, some of which are non-negotiable requirements for doing wireless in an acceptably secure manner.

The BlackBerry architecture acts as a bridge between the wired and wireless environments. It manages millions of two-way traffic sessions between devices and the knock on one side; and tens of thousands of one-way connections between the enterprise servers and the knock on the other side.

Without the BlackBerry architecture, the millions of device connections would need in-bound tunnels through the firewall which is generally shunned by IT managers. The BlackBerry allows the BES to connect to one known IP address on an outbound basis only. Other security features of the BlackBerry architecture include the ability to protect against viruses, trojan horses, bad packets, and denial of service attacks.

The BlackBerry also promotes a great wireless experience by making sure the data arrives reliably. That data is compressed effectively for optimal wireless transmission and for keeping the device connections up and active efficiently without causing undue drain on the networks or battery life.

Customers do not have to worry about connecting to multiple carriers as BlackBerry does this for them. The BlackBerry architecture also promotes a better wireless experience by buffering the massive capacity of the wired environment from the finite capacity of the wireless environment.

Last month we launched BlackBerry Enterprise Server 4.1 which incorporates feedback from our thousands of enterprise customers across the globe. BES 4.1 includes new functionality that makes it even easier for corporations to expand their population of BlackBerry users and manage large scale deployments.

In addition to providing tight integration with leading platforms for enterprise instant messaging including Microsoft Windows Messenger, Live Communication Server 2005 and IBM Lotus Sametime; and offering support for the new Mobile Data System 4.1 development and development environment, MDS adds powerful new functionality for administrators, users and developers including a single common interface for managing multiple BlackBerry Enterprise Servers and PIN-to-PIN estimates, and message audit logs which is a requirement for much of the financial services industry.

The BlackBerry architecture is proven and trusted. It is in use by millions of enterprise users around the world, supported by over 150 carriers in over 60 countries around the world and growing. It offers an extensive customer support organization and offers the highest degree of reliability and manageability of any available enterprise wireless data solutions. With an additional 160 carriers in backlog, RIM is on track to increase the total number of global carrier partners to over 300.

For a retail update, BES continues to be the leading platform for the prosumer market. Retail customers are choosing the end-to-end BES solution over other offerings for its ease of use, reliability, and great experience. The ease of provisioning and integrating e-mail experience with the newest version of BES is serving to further extend BlackBerry's lead in the retail market.

We often hear from customers that BlackBerry handhelds are an important component of their purchasing decision, and they select BlackBerry because the handsets offer the best balance between voice and data utility as well as exceptional battery life and good value.

Recent launches such as the 8700 and the 7130e are helping us grow our presence in the prosumer market. For example, following the launch of the 7130e in the Verizon retail channel, Verizon's BlackBerry subscriber activations from retail stores increased from an average of about 25% of their total before the launch to over 50% of their total activations post-launch.

Our recently announced relationships with leading consumer, prosumer, portal, and application companies such as Google and Yahoo! widen the addressable market and give retail customers access to the data payload that best suits their business and lifestyle needs.

Since the launch of Google Talk and Google Local for BlackBerry, there has been tremendous interest in take up from BlackBerry users on both the BlackBerry and Google websites.

With respect to Yahoo! we have recently expanded our relationship to bring Yahoo! services to BlackBerry users around the world including Yahoo! Go for Mobile, Yahoo! Search, Yahoo! Mail, and Yahoo! Messenger. Yahoo! Go for Mobile will integrate the full range of Yahoo's leading products into a single comprehensive experience for BlackBerry users. With a single click on the Yahoo! Go for Mobile icon, BlackBerry users will have direct access to a full suite of Yahoo services, including real-time access to Yahoo!'s community information and content services.

In order to broaden our retail channel reach, we have been successfully expanding our efforts in the indirect channel both in and beyond North America. BlackBerry appeals to these indirect channels due to the simplicity of provisioning, the low return rates relative to other products, and the integrated handset software service solution that BlackBerry provides.

For an update on BlackBerry Connect, we're pleased that Cingular has become the first carrier to launch the Nokia 9300 handset with BlackBerry Connect in the United States. We expect this to be the first of several launches of BlackBerry enabled handsets in the U.S. and are looking forward to seeing the U.S. market build on the success we've seen in Europe and Asia.

Our BlackBerry Connect team has also been working closely with HTC on a number of their Windows Mobile devices and we're beginning to see carriers launch the products. This past quarter, Germany launched the HTC Blue Angel and Magician Windows Mobile devices with BlackBerry. These products are the VPA 3 and VPA Compact respectively. In addition, T-Mobile in Germany has launched the HTC Universal under the brand MDA Pro and the HTC Withered, another brand MDA Vario; both with BlackBerry Connect, and they have done that this month.

As 3GSM in February a number of BlackBerry Connect handsets including those from Sony Ericsson, Nokia, and Palm were showcased both at the RIM booth and those of our partners. Also at 3GSM the BlackBerry enabled Sony Ericsson P990 and the M600 were announced. Both these devices use the latest Symbian operating system version 9.1.

The P990 is a follow on to the successful P900 and P910 product line and the M600 handset is designed to integrate voice and data in a slim device which features a touch screen display and handwriting recognition software.

The coming fiscal year promises to be an exciting one for our BlackBerry licensing programs. In addition to the over 20 handsets already launched with more than 60 carriers worldwide, we expect to launch at least another 20 handsets during fiscal 2007.

In summary, we have recently passed the 5 million BlackBerry subscriber milestone and with the litigation behind us we're looking forward to building on the momentum we're seeing early in fiscal 2007 and to further extend our market leadership.

With over 150 carrier partners around the world and a strong product portfolio, including a number of new launches planned for the remainder of fiscal 2007, we're well-positioned to grow the business and we look forward to reporting on our progress to you throughout the year.

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

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Andrew Lee of TD Newcrest.

Andrew Lee - TD Newcrest

Jim, on the last update you just made a comment with regards to the lack of competitive losses for your product through the litigation, that most of the decisions were being delayed. Now that we have another month behind us, can you still give us a refresh on that? It looks like the sub numbers some would view to be not reflective of what should be some stronger pent up demand. Thank you.

Jim Balsillie

Well, I think Dennis addressed that in his guidance and really we just want to be careful on this, and we don't want to overstate the case. The trending is very, very positive, and we have a number of launches. There is a certain latency in relaunching demand.

As I said before, we didn't see the competitive shift. For all the hype and hyperbole and polemics that were spun out there, it just didn't materialize, and the carriers reflected this.

Really we're seeing strong growth, and there are a couple of carriers that have key launches in the next 30 days that are really key to get them back up to the position where they want to be. Really, it is not like we've seen some slower growth all over the place. Most of the key places are very, very strong, and there are just a couple laggards, so the average is a bit deceptive. It's really a couple case specific points.

Hopefully with the key initiatives they'll pop back. That is the plan and expectation. We just don't want to get ahead of ourselves. But at the end of the day it has not been a competition thing. A lot of competitors have tried, and it possibly created some flood for reflection, but it hasn't caused anyone to switch that's notified me or that I have become aware that said, look I am not happy any more. I haven't had one case come my way.

Andrew Lee - TD Newcrest

Thank you.


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

Rob Sanderson - American Technology Research

Thank you. Good afternoon. I just wanted to follow on Andrew's question. Obviously a very big delta from where your thinking was last September. I agree, we can't really see any real size of competitive loss. Probably people will be a little concerned on health of the end market.

Can you comment on if you've seen any changes in end market demand or you think it is 100% related to overhang on NTP? Jim, could you comment maybe on IT budget cycles or carrier marketing budget cycles? Is that something that really takes more than 90 days to turn around? Is that part of the lower than expected guidance?

Jim Balsillie

Well, it is a fair question. Again, we have seen most of the key markets pop back really nicely; and really we just have one or two laggards. What happens is -- that's really what it is quite frankly. Most of them are at or beyond planned. Just one or two of them have pushed out a product cycle by 45 days, and that really catches you when you're popping back and they're overhung compared to themselves and compared to a competitor network.

I just don't see it as a budgeting thing. I think the end market's plenty healthy. There is such a pay back on this. There is a lot of execution stuff on our part. Our world is so much about a productive channel and keeping it strong. Strong with hardware, strong with applications, strong with support, strong with marketing programs and that's part of our special sauce, and it has all got to be lined up well, and we do it well.

There are a couple key ones that are just shifting on that, and plus even in their own markets when they have new products coming, it is a little tougher for their own sales guys to push something hard when there is something maybe stronger coming real soon.

So I think it is very carrier specific what's going on. I don't think it has anything to do with IT budgets and health of the end market whatsoever. There is such a demand productivity quotient in our game that we're pretty isolated from those macro economic stats.

I have never really seen that weigh on our world. You get a little bit of competitive thud. But that creates a selling opportunity, and as I said before, a lot of what we're driving on are new countries and indirect and VARs and retail and BES.

So it is just a lot of execution. Again, we have seen them pop back to where they used to be. Some of it was 50% over what it was a month before, and the other one was 25%. I just don't think we need to get too far ahead of ourselves. That's actually pretty good stuff. It just doesn't happen in a day and not necessarily every single cylinder fires at 100% day one, and I think people may have over extrapolated immediacy a month ago, and now it is too easy to overreact.

It is very, very healthy. There are just a couple carriers quite frankly, who we have to just get key launches and key programs done where there may have been push out or there may have been some certification or there may have been some launch windows and that puts them into a slower thing, and it is really just one or two cases.

The rest of the business, all the different carriers and the different regions are performing above plan and having record weeks and a record month, but unfortunately I am not going to give you all the specifics. You just see the total and the average. It really distorts a little bit how healthy 90% of the carriers really are out there, and then the plans to bring the last 10% onto full pop.

That's what we're good at is getting all of those cylinders popping and sometimes you can get it going real quick with programs. Sometimes you have got to catch the next window. So that's really what's going on here. There is nothing to do with a competitor thing or an end market demand thing. It is just anything but. It is anything but.

Dennis Kavelman

Rob, it is Dennis. I am just going to add a quick thing. As Jim said, we've been through a couple quarters with a lot of uncertainty around the sub numbers. So the last thing I want to do is put out a number that is a stretch. I want to make sure that we have very realistic goals and like Jim said, we're not trying to be heroes on the sub number.

Let's put out a realistic target. I can tell you that the carrier business unit leads are all very, very excited about the opportunities and their plans this quarter, the carriers in North America, they're selling the most current products have been doing well.

There is a couple carriers that have to launch the new product still. Europe has been having record weeks, Asia has been doing very, very well. We have seen this momentum really go.

I think we just have to give it some time and it has only been four and a bit weeks since we got the settlement done and people have digested it. As we look ahead through Q2 and I think a lot of this pent-up demand is going to keep us rolling through that period.

We always have some seasonality, et cetera there, but I am very positive and when I look at the channel inventory numbers out there, it is all very reasonable as well. I think that bodes very well for handset sales and the ongoing upgrade path. I'll tell you the mood internally is very bullish, and I just want to make sure that the bar out there is very, very realistic and reasonable.

Rob Sanderson - American Technology Research

All right. Thank you, guys.


Next question comes from Paul Coster of J.P. Morgan. Please go ahead.

Paul Coster - JP Morgan

Good afternoon, Jim, and Dennis. Just one question actually, which is that many of us expect this market to be potentially very large, $150 million; but we're seeing the revenue growth rate declining for eight successive quarters. How do we reconcile these? It seems like you're growing towards a market of say $10 million ultimately rather than $100 million.

Dennis Kavelman

That's a fair comment, and first of all, no one is making any reasonable ground from the competitive point of view, so all of that posturing and hyperbole is completely, quite frankly, misrepresented. I think that the nature of this market is when you have an emerging market, it goes by fits and spurts. It is just not a linear up to the right. There is no question we're reloading. We're executing fine here. That's all fine.

We're also doing a massive reload set of activities for September, October. So on the one hand we've got all the carriers going, we have some key launches, and we mentioned T-Mobile is showing the 8700. There are a couple other key products that are coming out in May that we would have liked in early April. They're pushed to late May. It slows down a key carrier now and then, and you get caught in time windows.

I think you see the things -- Google, we've launched their tremendous services in Talk and we have plans for Local with them. Our stuff with Yahoo! just got announced in 160 carriers. That was in just a handful. It is a much richer service.

There is a tremendous number of things, and so I think what's really happened is the kind of low-hanging, very easy fruit was grabbed, --just hey, I am a working person or I'm a high-end person who wants some ISP or desktop email, and a phone would be nice, but not mandatory.

I think that's why we spent a fair bit of time talking about the platform, both in the BIS and the BES. If people do both, there is a tremendous hardware revolution going on right now with the networks, and then we also talked about the channel. The platform with the hardware in the channel is just readying up and there is a lot of powder drying out to search to a new plateau, is my experience in this market. You define something and you search and you search like crazy for some period of time, and then it settles in, and then you ready it all up, and you surge again.

Our business is going to keep growing. We're absolutely emerging from this. We're excited by how all aspects of the business are either where they need to be or about to be where they need to be.

There is also an extensive redefinition, if you will, to move to a next level. BIS 2.0 with new hardware and new channel programs all coming together, and for those that have followed us for awhile, it was three years ago that we launched the 7230 -- it was color, it was triband, it was GSM. The networks got reliable; the device was; BES 3.6 and 2.2 and decent pricing by the carriers and all the pieces came together and it just went pop.

That ran for awhile and then it plateau'd and then a whole set of new hardware and carriers and applications and it pops up again. Quite frankly, I think we're on the cusp of another one of those when it all just sort of surges out in September.

That doesn't mean we're not growing, we're not pushing through the next four or five months. That is fine. A complete transformation experience is something that we've keyed up for this autumn. It is a substantial market. It is a dramatically interesting market. I am not going to put numbers on it. But it is more than $10 million, that's for sure.

Paul Coster - JP Morgan

Thank you.


Your next question is from Jeffrey Kvaal of Lehman Brothers.

Jeffrey Kvaal - Lehman Brothers

Dennis, my question is targeted for you I think. It seems as though there is a lot of things that you're suggesting will help the sub number as we progress through the May quarter, even more late in the May quarter. The August outlook I think is sometimes affected by seasonality, last year was flat to slightly up in terms of net adds. How should we think about the trajectory of those two conflicting themes as we head into August?

Dennis Kavelman

Q2 is a tricky one. There is a reason we guide one quarter out, and quite frankly as I tried to describe by my longer section today was exactly how we think about it, and how we watch the week to week. Clearly we had a bit of a game changing event four-and-a-half weeks ago, so the trick is to try to watch and see what's happening. Last week was an exceptional week. We've talked with about what we're seeing with which carriers and how it is going.

I wanted you to get inside my head a bit and see the data we use when we're planning going forward, and combined with the data from the last four-and-a-half weeks, we have the plans and quotas of the different carrier teams and the marketing groups expectations and programs for the next two months.

Based on all of that, I really do see steady up and to the right growth. I think that continues very solidly through June and July. In the past, the seasonality in Q2 typically hits you most in August and there, it is most significant in Europe.

Retail and BES is becoming a bigger and bigger piece of our overall sales to the extent, I think that's one offsetting factor, because you do get back to school stuff and you get all kinds of different programs that can be run in that August timeframe. There is no question, I think that summer seasonality is going to be with us for a long, long time, so you're right. That is a factor to think of in Q2.

I think that this pent up demand we talked about -- and I wanted to show how far February had fallen off because of the litigation overhang to let you know where we were basing this idea of pent up demand on -- and maybe everybody didn't walk into the office on Monday after the settlement and place a 2,000 unit order. All of these folks have now freed it up in their planning and in their budget and they're going to be rolling that out, whether that is April, May, June, July, go forward.

I think over this year that pent up demand, the huge visibility and brand awareness from BlackBerry that was I guess a by-product of this whole experience, all the programs are doing and let's face it -- the 8700 is a tremendous product. The 7130 is a tremendous product. All the carriers will be selling them both very shortly. The BES 4.1 is out there. We're about to get the industry going at WES in six weeks or so.

I am optimistic. At the same time, we've been around this long enough that I think this is not a time to try to be hero on the numbers and I am going to be conservative. I'd rather let it all unfold and see how it plays out and see these growth trends play out. I think as I said with Q1, there is a lot of things that make me very confident. With Q2, I see that continuing and yes we do have the seasonality factor and we'll have to see how that plays out.

Jeffrey Kvaal - Lehman Brothers

Thank you.


Next question is from Maynard Um of UBS Warburg. Please go ahead.

Maynard Um - UBS Warburg

You talked a little about new products this quarter. Can you just offer some more detail, as you talked being a little bit more aggressive in the consumer space and potentially how you would address the small to medium-sized businesses? Should we expect camera BlackBerry's UMTS? If you can provide a little more detail. Thank you.

Jim Balsillie

Well, Maynard, that's a fair question. I think the media aspects of the BlackBerry is something you can expect some plans on it and I won't go in any more detail than that. That really does some interesting things. I think you can also see things BlackBerries that support all of the transports that are out there, and that's both EDGE and EVDO which we're seeing a lot of success on.

Certainly one can expect some UMTS type solutions in that respect, and so that's exciting new hardware media capabilities. As well as exciting new transports, and that's the second dimension, hardware and transport.

The third one is that with the BIS 2.0 it has got tremendously enhanced capabilities in terms of active ease of activation, ease of provisioning, ease of manageability which is really the tough parasitic drag that you encounter when you leave the enterprise, and so that's a big, big step forward.

The fourth dimension going on is a lot of application enhancement. A small example, the Yahoo! Mail announcement we made is an iMap mail interface instead of POP and it is free. Most people pay for POP access from Yahoo!. Now iMap is free. POP has latency, iMap doesn't and you get that rich integration of deletes and read and sent, kind of like you do on a BES in the Yahoo! store and you get instant messaging available -- and you get it all over the world -- so that's an application enhancement as I would say.

The uptake of Google Local with the mapping and Google Talk has been fantastic. The downloads and utilization has been fantastic and certainly there's plans to put ads in that by them, and so on and so forth, as well as the search that Google does.

Really a fifth aspect or dimension of this is the element of channel work. We've done a lot of work that it's really been invigorated in the last six months or really been developed and we're continuing to developed in the indirect channel, the retail channel, the VAR channel because that's where these people buy. As well, we are doing small business bundles and special small business promos. Whether they buy a Yahoo! thing or whether they have an exchange server, they don't have a carrier B2B call on them, so they go through VARs or retail but they have to be sophisticated in carrying it. They want some more complementary stuff.

As well, we have a lot of real exciting applications going on in those areas not only for consumer but stay tuned for a bunch of stuff we're doing with key partners like next week.

In that respect, Dennis has to do his job and be appropriately guiding you and all of that stuff, and he gets full support for that, but boy, when you really are familiar under the covers with all that's going on, it is wonderful.

I mean we had some turbulence, and we got through it, and didn't lose competitive positioning, put some parasitic drag on the sales. When you see all these programs and they all are lining up together, and the carriers are so supportive -- because quite frankly you put a data attach rate of a BlackBerry attach rate to an existing customer, the profitability multiplies. They're not just receptive to these plans, they're pushing them. They're like, we want them faster, we want more, we want to get going.

It is putting a lot of heat on our engineering to be ready for very aggressive launches in September and BIS 2.0 is launching earlier, and I am not even going in a lot of detail about all of the BES stuff and small business.

So everybody's full on around here, the market is full on, and I have no doubt it is growing, no doubt whatsoever, but the nature of this thing is it is not a linear experience, because you get these capturing of multiple enhancers and when they all sort of hit in the right way at the right time, it drives the market to a new level.

I am very excited on the enterprise, very excited on the prosumer and all aspects of the enterprise SMB ;and quite frankly, the consumer and high-end consumer thing, just wait. It is remarkable. I think what it does to the addressable market is more than you can imagine.

Dennis Kavelman

I am just going to jump in because I notice it is 6:00. That seems like a pretty appropriate place to with wrap up, so with that I think we'll end the call. Again, I would like to remind everyone about our analyst day at the Wireless Enterprise Symposium. You can go to our website to check it out. There is a post view service available on our website for the call. Thanks very much.


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

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