Research In Motion F1Q10 (Qtr End 5/30/09) Earnings Call Transcript

| About: BlackBerry Ltd. (BB)
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Research In Motion Limited (RIMM) F1Q10 Earnings Call June 18, 2009 5:00 PM ET


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


Keith Bachman - BMO Capital Markets

Jeffery Kvaal - Barclays Capital

Mike Abramsky - RBC Capital Markets

Jim Suva - Citigroup

Simona Jankowski - Goldman Sachs

Ittai Kidron - Oppenheimer

Edel Ebbs

Welcome to RIM's fiscal 2010 first quarter results conference call. With me on the call today is Jim Balsillie, RIM's Co-CEO, and Brian Bidulka, RIM's Chief Accounting Officer.

After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then the review first quarter results and I will discuss our outlook for the second quarter of fiscal 2010. 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 website.

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

Some of the statements we will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, CapEx, depreciation and amortization, investment income, earnings, channel inventory, seasonality, ASPs, and foreign exchange related matters for Q2 and beyond; our expectations regarding RIM's near and long-term tax rates, as well as the effect of changes to Canadian tax laws; our estimates of the number of net subscriber account additions and other non-financial estimates; our efforts to manage operating expenses and reduce costs; our product development initiatives and timing; developments relating to our carrier partners; and other statements regarding our plans and objectives.

We will indicate forward-looking statements by using words such as expect, plan, 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 relating to the uncertainty of general economic conditions, risks relating to our intellectual property rights, our ability to enhance our current products and develop new products and services, our reliance on carrier partners and third-party manufacturers, third-party network developers and suppliers; the efficient and uninterrupted operation of RIM's network operations centers; risks associated with our international operations; foreign exchange risks; risks relating to competition 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 the strong results for the first quarter of fiscal 2010, with revenue of $3.4 billion, up 53% over the prior year and adjusted earnings per share of $0.98, slightly higher than we forecasted on the last conference call.

Throughout the quarter we saw strong, ongoing support for our approximately 475 carrier and distribution partners around the world; we announced a number of new products, including BES 5.0, and BlackBerry Tour; we hosted the eighth annual wireless enterprise symposium and made dramatic progress in the penetration of new market segments.

Approximately 3.8 million BlackBerry net subscriber accounts were added during the quarter, up 65% from the same quarter last year and in line with expectations. BIS subscriber base has grown steadily over the past couple of quarters and in Q1 approximately 80% of net new subscriber account additions came from the non-enterprise customers. These customers now represent over half of the total BlackBerry subscriber account base.

International markets, which tend to be more weighted to prosumer BIS plans, were strong in Q1 and we are encouraged by the growth we see in many regions, especially Latin America, Middle East, and parts of Asia. In addition, the first quarter can be seasonally lighter for New Edge net additions due to corporate customers starting new budget cycles in January and having made larger-than-normal purchases heading into the year-end. Similarly, the budget cycles for government purchasing peaked in the fall, which can have a positive impact on the enterprise business in the timeframe, given the large and growing presence of the BlackBerry solution in this market segment.

Inventory in carrier channels continues to be lean and in some cases, we are seeing ongoing reductions in channel inventory levels. The absolute level of inventory in the channel at the end of Q1 was similar to levels at the end of Q4 and we expect to maintain this low level into Q2. While we typically see a slowdown in the summer months due to normal seasonality, we expect to ship between 8.1 and 8.7 BlackBerry smartphones and add between 3.8 and 4.1 net new subscriber accounts in Q2, reflecting the strong demand that we see across multiple channels, new product launches that are scheduled in the quarter, and planned carrier promotions throughout the summer and into the fall.

IDC recently announced their U.S. smartphone market share figures for Q1, which showed that our market share gained 8.5 points in Q1 after gaining 6.4 points in Q4, having grown market share from roughly 40% to 55% in the past two quarters. BlackBerry now accounts for more than all the other smartphone sales in the United States combined and more than double our nearest competitor. We are also pleased to see analyst reports confirming the BlackBerry Curve as the number one selling smartphone in North America. BlackBerry global smartphone market share also increased year over year from 16% to 21%.

The success of the BlackBerry platform and its growing acceptance by carriers around the world is testament to the core values of efficiency, reliability, and security that have been pillars of the BlackBerry offering for the past 10 years. As end users demand more and more services and applications on their smartphone, network capacity and efficient and profitable delivery of these data services is an increasingly important factor in carrier decisions on which smartphones to offer, subsidize, and put marketing support behind. Many of our carrier partners are beginning to see the BlackBerry solutions as a way to reign in new and unexpected CapEx spending requirements for more network capacity, and to deliver high quality of service levels to their customers.

Increasing loads being put on carrier networks and the related quality of service issues have recently been garnering significant industry and media analyst attention. The addition of services such as streaming video, which consumes 100 times the capacity of a voice call and the demands of new devices, such as wirelessly enabled netbooks, will exacerbate these issues and make BlackBerry’s efficiency and network management capabilities an even greater benefit to our carrier partners in the future.

Earlier this week, we announced the BlackBerry Tour smartphone for high-speed CDMA networks in North America with 3G UMTS HSPA support for roaming worldwide. This newest BlackBerry smartphone combines outstanding mobile performance with state-of-the-art multimedia capabilities, GPS, a 3.2 megapixel camera, and a striking new design. Tour also offers the easy-to-access email, messaging, and social networking that BlackBerry smartphone users rave about. Additionally, its high resolution display, full QWERTY keyboard, Bluetooth, and hot swappable MicroSD slots with support for up to a 32-gigabyte card, make it perfect for work or personal multimedia enjoyment. We expect launches of the BlackBerry Tour across North American carrier channels beginning this summer.

During Q1, the Curve 8900 received broad acceptance in markets in North America and around the world, has now launched with over 150 carriers globally. T-Mobile U.S.A. supported the launch of the BlackBerry 8900 with advertising campaigns including extensive TV, online, and in-store placement. AT&T also recently launched the product across the United States in both business and retail channels at an attractive $149 price point.

In Europe, many major carriers have launched the device and are supporting it with aggressive promotions and data plans. The 8900 has also been popular in some of our emerging market regions.

North America continued to be a strong market for BlackBerry smartphone adoption during Q1, both through carrier and indirect channels. Verizon drove strong subscriber account additions through programs such as the buy one, get one free campaign, which has been running since January and was supported by nationwide advertising and TV promotions.

Recently, Verizon also announced the launch of the Pearl Flip 8230, which combines 3G connectivity with multimedia and messaging capabilities in a small clamshell form factor and will be in stores starting tomorrow. We expect Verizon to continue its aggressive promotion of BlackBerry smartphones through the summer months and into the fall.

Bell offered the BlackBerry Storm for $49 including a gift with purchase at Best Buy stores, while Telus launched a [inaudible] program for the BlackBerry Curve 8350i to drive replacement sales among their IDEN customer base.

[inaudible] has also been aggressively pursuing replacement demand in their subscriber base through a marketing and promotional campaign around the 8350i, which includes TV and online media advertising, as well as an additional $50 Visa credit with any purchase of a Curve.

AT&T continued their focus on the enterprise market this quarter by offering competitive pricing on a Bold at $199, and aggressive pricing of the Curve 8320 and Pearl, which they are offering for free with a data plan.

Launch activity around the Curve 8900 and Storm was ongoing in Europe through Q1, and these efforts were supported by numerous carrier advertising promotions and competitive pricing plans.

In the U.K., we saw excellent sell-through of the 8900, driven by innovative tiered pricing models.

Orange U.K., we hit a milestone with the 8900 being the number one selling contract device in the quarter after being launched with a 30-pound per month plan. Not only did the 8900 beat out all other smartphones at Orange, it also beat out all other types of devices to earn this number one ranking.

Orange France also launched the 8900 with UMA in both their enterprise and retail channels for EUR99 with two months free service and marketed both this device and the EUR9 8220 Flip through a large web and email campaign.

Mobi-Star in Belgium launched the 8220 and 8900 and outfitted 125 cyclists in the Tour Flanders bike race with BlackBerry smartphones loaded with a new track-and-trace application that allows spectators at the Mobi-Star booth to follow the exact positions of different riders.

Mobile Com Austria launched Storm in March at EUR49, in conjunction with their new consumer plan for EUR15 per month, and saw a strong take-up of the product offering.

Latin America built its Q4 strength with multiple launches of the Curve 8350i, 8900, and Storm, achieving remarkable sell-through in many key markets, including Brazil, Mexico, Argentina, and Venezuela.

In Brazil, TIM launched Storm with a major national advertising campaign, while Nextel International engaged in a significant prelaunch initiative for the Curve 8350i, followed by VIP launch parties in major cities that garnered extensive media coverage and presales activity. The launch of the BlackBerry 8900 at Digitel, Movelnet, and Telefonica in Venezuela, combined with the introduction of prepaid BlackBerry service at Digitel and a BlackBerry tech forum focusing on social networking and other third-party applications, also drove growth in the region during the quarter.

The efforts we have been making over the past several quarters in the Middle East are starting to pay dividends. In partnership with Alcatel Lucent, the Bold, Storm, and the new Curve 8900 have been launched in Qatar, Kuwait, Saudi Arabia, and a number of other countries in the region. In the UAE, we partnered with Eddie Sulat to sponsor the Red Bull Air Race in Dubai to support the launch of the BlackBerry Storm and in Turkey, Aveya heavily invested in the promotion of the Curve 8900.

Saudi Telecom also had a successful quarter with a TV, online, and print advertising campaign for the BlackBerry Bold and Curve 8900.

We are beginning to see an increase in BIS demand in India, driven by new BIS life plans for as low as 299 Rupees per month, which is around $6, the customer can get access to unlimited messaging on a BlackBerry smartphone. Reddington is also playing a vital role in the expansion of our prosumer presence in India, especially with the partnerships they are generating in indirect channels.

BlackBerry products are now being positioned in popular retail stores throughout India, including the mobile store, Reliance Digital, and Planet M. We continue to expand our presence in indirect channels. In Q1, Ingram Micro Canada launched the BlackBerry Solution and by the end of May, we had over 70 retailers up and running with software and service. ICCS, which is a reseller for the Sprint network, invested in TV, radio, and customer events during the quarter, which paid off with a substantial increase in sell-through.

At Walmart, BlackBerry smartphones now represent one-third of the retailers’ post-paid handset sales and recently became the centerpiece of their new, in-store mobility feature displays. We have seen similar showcases at other retailers, including Futureshop in Canada and Carphone Warehouse in Europe.

In May, we launched BES 5.0 after a year of intense testing and trial at over 1,000 beta sites. The new version of BES gives IT managers greater control and flexibility in the management of their installed base of BlackBerry devices, with features including role-based access controls, over-the-air application development, and increased capacity. New end user features include remote access to Windows network file sharing to provide full behind-the-firewall access to documents and emails, the ability to flag emails on device and view attachments with an appointment, easy management of distribution lists, and more. BES 5.0 also recently achieved common criteria level 4+, which is a key security certification recognized in 26 countries and by thousands of corporations around the world.

In addition to the new BES enhancement, we have also partnered with Cisco and optimized BlackBerry MVS to work with Cisco Unified Communications Manager 6.1. The deep integration between BlackBerry MVS Server, the BlackBerry Enterprise Server, and the Cisco Telephony system provides users with the complete mobile office that includes access to secure mail, corporate applications, and enterprise voice services on their BlackBerry smartphone.

The integrated solution also now enables IT professionals to manage mobile costs by extending corporate voice policy to their mobile devices while offering end users a rich set of familiar enterprise features through the same elegant user interface of the BlackBerry smartphone.

As we move further towards fixed mobile convergence, more and more carriers are showing signs of embracing MVS. At WES in May, Sprint and Verizon both announced plans to support the next version of BlackBerry MVS as a core component of their fixed mobile convergence and unified communication strategy. Several customers also gave presentations to attendees on their decision to deploy BlackBerry MVS and discussed cost-savings they anticipate both domestically and internationally.

With the launch of SAP CRM for BlackBerry smartphones this quarter, SAP and RIM are setting a new standard for mobile CRM with a highly refined and secure mobile user experience. The native integration of SAP with the BlackBerry solution extends valuable customer information to BlackBerry smartphones by leveraging the core strengths of the BlackBerry platform, including reliability, real-time push technology, deep application integration, and market-leading securities. With features including push-based notifications of updated customer data and access to CRM data anytime, anywhere in the world, we expect this offering to drive even greater adoption of the BlackBerry solution in the enterprise.

SAP recently recognized RIM at their annual Sapphire Conference with the Pinnacle Award for Innovation.

Hewlett-Packard and RIM are also working together to deliver solutions that allow customers to weave mobility into their daily operations. Through this collaboration, businesses will have access to an expanded set of applications and services for their BlackBerry smartphone deployments, including HP Cloud Print to enable quick and convenient printing directly from a BlackBerry smartphone and HP Operations Manager to enable central monitoring and management of the organization’s BlackBerry infrastructure, both of which were introduced at WES in May.

With the launch of BlackBerry App World in April, the BlackBerry smartphone customers have been exploring the wide variety of applications available for the BlackBerry platform. There is tremendous enthusiasm from our subscriber base and new and interesting applications are being added to App World every day. In order to grow the offering even further, this quarter we introduced some additional tools so that developers can leverage more of the platform strength when designing apps. With the availability of new push APIs, developers have the ability to control this core platform efficiency and give the end users more applications that incorporate real-time push content and alerts. Features like this raise the bar in terms of real-time content delivery and lengthen battery life while decreasing data usage. Some of the apps already taking full advantage of this technology are Time, The Hockey News, and Pocket Express.

To date, there have been close to $15 million downloads of social networking applications on BlackBerry smartphones, with Facebook and MySpace being the most popular. The recently launched Facebook Version 1.6 for BlackBerry smartphones offers a number of enhancements, including easier navigation of photo galleries, the ability to comment on status updates, integration with address book, calendar, and message lists, and a faster and more streamlined user interface.

MySpace application for BlackBerry smartphones was also refreshed during the quarter, with the added ability to view friend updates and enhance messaging capabilities.

Prepaid continues to be an area of opportunity for BlackBerry products. Outside of North America, the majority of mobile phone users rely on prepaid service plans. We are working with carriers in many of these regions to offer BlackBerry service plans tailored to the needs of this market.

For example, T-Mobile U.K. recently launched the pay one to BlackBerry service plan for 180 Pounds, which includes a BlackBerry smartphone and a full year of BlackBerry data service that can be paired with a number of prepaid voice plan options.

Bell-Tel in Mexico also offers a prepaid option with customers being offered the choice of a service plan length which can be as little as one day, week, or month and also allows the subscriber to select which data service they want to access. Subscribers can top up these services, either in the store or at roadside vending machines.

In the United States, metro PTS launched a prepaid BlackBerry service plan with the Curve 8330 available for $50 a month unlimited BIS or $60 a month for BES. Prepaid offers the benefit of attracting new customers to the BlackBerry solution who would never consider a post-paid service offering and allows us to expand the addressable market for BlackBerry products, particularly outside of the United States.

While prepaid users are currently a small percentage of the BlackBerry subscriber account base, we see tremendous potential to grow this segment as we experiment with new ways to package this service offering.

We are pleased with the momentum in our business as we head into the second quarter of fiscal 2010 and are especially excited about the plans we have in place for the second half of the fiscal year. We have a number of exciting new products planned, as well as a number of opportunities to continue to expand the addressable market and appeal of BlackBerry products in new segments.

We have been successful in reducing costs in our hardware platforms and look forward to combining these benefits with prudent cost management to drive earnings growth throughout the remainder of the year. While there are a number of launches planned in the second half of the year, we continue to believe that we will be able to keep gross margins in the low 40s, as we said in the last earnings conference call and at the RIM Capital Markets Day in May.

I will now turn the call over to Brian to review Q1 results.

Brian Bidulka

Thank you, Jim. Revenue for the first quarter ended May 30 was $3.42 billion, which was comparable to the $3.46 billion in the previous quarter and in line with the guidance we provided on the April conference call. Handheld devices represented $2.8 billion, or 81% of revenue during the quarter, down slightly from $2.9 billion or 83% in the previous quarter. Total devices shipped in the quarter were similar to that of Q4 at approximately 7.8 million units. Approximately 7.3 million new devices were activated in Q1, either for new customers or for replacements and upgrades, not including phone only sales. We estimate that four weeks of channel inventory and the absolute level of channel inventory at the end of Q1 similar to Q4. Jim mentioned carriers continue to keep lean levels of inventory in the channel and in some cases, continue to reduce the levels they are keeping on hand.

We expect channel inventory at the end of Q2 to remain similar to Q1 levels.

Device ASPs in the quarter were approximately $357, in line with guidance and lower than Q4 due to shifts in produce mix. Service revenue was $451 million, or 13% of revenue for the quarter, up $36 million from Q4. Monthly ARPU declined from the prior quarter as a percentage of non-enterprise subscriber accounts grew substantially and certain carriers achieved volume discounts.

Software revenue was $62 million, or 2% of revenue.

Other revenue, including non-warranty repairs and accessories, was $123 million, or 4% of revenue.

Gross margin for the first quarter was 43.6%, in line with guidance we provided in April and higher than the 40% in the fourth quarter, due to reductions in raw material costs, as well as shifts in product mix, as we discussed in the last earnings call.

Operating expenses in the first quarter were $801 million, up 23% over Q4 due to certain unusual items included in operating expenses. Included in sales, marketing, and administrative expenses were $54.3 million relating to the foreign exchange impact of the enactment of the new tax rules that came into effect in Q1; $42.1 million related to a provision for employee tax obligations for stock options.

Adjusted sales, marketing, and administrative expense for Q1, which excludes these items, was $418 million, or 12.2% of sales, an increase of 3% over Q4 levels and slightly less than we had forecast.

R&D spending was $220 million, or 6% of revenue for the quarter, in line with our forecast.

Excluding the unusual items affecting sales, marketing, and administrative expenses, operating expense increased by approximately $54 million to $705 million, and was 20.6% of revenue. Included in operating expenses is stock-based compensation of approximately $13 million.

Investment income in the first quarter was approximately $9 million, slightly less than expected due to lower yields on our investment portfolio.

As discussed on the last call, new Canadian tax legislation was enacted into law during Q1. This change resulted in a tax benefit to RIM of approximately $145 million that was recognized in Q1 and resulted in a significantly lower-than-normal tax rate for RIM's GAAP results.

Excluding the one-time items, RIM's normalized tax rate was approximately 29%, in lien with the guidance we gave on the last call. There was no additional impact on the tax rate in the quarter from foreign exchange fluctuation.

GAAP net income for the first quarter was $643 million, or $1.12 per share diluted. Adjusting for unusual items, adjusted EPS for the first quarter was $0.98 per share diluted, slightly above the guidance we gave on the last earnings call. This was primarily due to the slightly lower-than-expected sales and marketing expense in the quarter.

The press release we issued earlier today provides a detailed reconciliation of GAAP earnings to adjusted earnings.

Weighted average diluted shares used in the EPS calculation for the quarter were 573 million. Actual shares outstanding at May 30th were 567 million. Total options outstanding at May 30th were approximately 11 million.

Total of cash, cash equivalents, short-term and long-term investments increased by approximately $180 million to $2.42 billion at the end of Q1, as compared to $2.24 billion at the end of the previous quarter. During the quarter, RIM generated approximately $615 million in cash from operating activities which was offset by primarily by capital asset additions of $247 million, intangible asset additions of $63 million, and business acquisitions of $124 million, which included the acquisition of Certicom that closed in Q1 and which resulted in a cash outflow of approximately $111 million.

In Q1, accounts receivable were approximately $2.3 billion and DSOs increased to 59 days from 52 days in the prior quarter, primarily due to timing and geographic mix of sales in the quarter.

During the past quarter, RIM continued its efforts to better manage working capital through improvement in cycle times and vendor payment, providing opportunities for RIM to take advantage of benefits such as early payment discounts. We plan to continue to optimize our working capital balances going forward.

Also reflecting our efforts to better manage working capital balances, inventory on hand was down slightly in Q1 to approximately $634 million versus $682 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 disclosed in our public filings.

We are forecasting revenue for the second quarter of fiscal 2010 to be higher than Q1 in the range of $3.45 billion to $3.7 billion, with units shipped also higher than Q1 levels at approximately 8.1 million to 8.7 million units. This growth is being driven by the ongoing strong sell-through and net subscriber account additions, as well as the launch of new products during the quarter.

As Jim mentioned, channel inventories remain quite low and we are not building in an expectation for these levels to increase meaningfully in the second quarter. We expect the ASP for the second quarter of approximately $345. This is lower than in the first quarter primarily due to the mix of products expected to ship during the quarter.

Software revenue in Q2 is expected to be similar to Q1 levels.

We are targeting net subscriber account additions for Q2 in the range of 3.8 million to 4.1 million. While we do expect to see typical summer seasonality affect weekly run-rates, particularly in July and August, we also expect to see some of this impact mitigated by the strength of new product launches, such as the BlackBerry Tour and new carrier promotions that are scheduled throughout the summer months.

We are targeting gross margin for the second quarter to be similar to Q1 between 43% and 44%.

Total operating expenses are expected to increase in Q2 by approximately 7% to 9% from Q1 levels. We expect R&D to increase by approximately 8% to 9% and sales, marketing, and administration expense to increase by approximately 6% to 8%.

We expect depreciation and amortization to be approximately $75 million in Q2, higher than Q2 due to ongoing CapEx and acquisitions. We expect CapEx to be approximately $300 million in each of Q2 and Q3. The primary areas of spending are expansion of network infrastructure and R&D facilities.

Investment income is expected to be approximately $8 million in Q2 and we expect the tax rate to be approximately 29% to 30% both in Q2 and throughout fiscal 2010. Beyond fiscal 2010, we expect the tax rate to be lower as budget changes in Canadian corporate tax rates are implemented.

We expect Q2 EPS to be in the range of $0.94 to $1.03 diluted per share.

Before I turn the call back to Jim, I would like to provide an update on the impact of foreign exchange on our business. As mentioned in prior quarters, volatility in the foreign exchange markets can have a significant impact on both revenue and operating expenses. RIM reports in U.S. dollars but has a significant portion of its expense and revenues in other currencies, primarily Canadian dollar, British Pound, and Euro. While we have hedged a portion of forecasted revenues and expenses for Q2 to reduce the effect of foreign exchange movements, it’s impossible to be perfectly hedged at any point in time. We estimate that a 10% appreciation in the U.S. would reduce revenue by approximately $17 million and increase pretax net income by approximately $5 million, given the current hedge program and the currently forecasted mix for Q2.

I will now turn the call back to Jim.

James L. Balsillie

Thank you, Edel. Fiscal 2010 has gotten off to an excellent start and we are excited about our plans and prospects for the coming year. Strong market position of BlackBerry and the compelling value proposition offered by the BlackBerry platform to our carrier partners and end users will continue to drive our performance throughout the coming year.

This concludes our formal comments and we’d like to open the call up for questions. To allow as many people as possible to participate, 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 Instructions) Your first question comes from Keith Bachman. Please go ahead.

Keith Bachman - BMO Capital Markets

I wanted to see how you are thinking about the competitive dynamics, specifically against Apple’s recently announced phones and the low-end price point at $99. And then also how you are thinking about what impact on the share side that Pre may be having on the market. Thanks very much.

James L. Balsillie

Well, I think -- and I mean, we’ve had lots of offers for the BlackBerry that have been free and $49 and $99 and buy one, get one free, so I think we’ve had very aggressive promotion through a lot of carriers and we gave some sense of that.

I’m not one to really follow these other things. I mean, I think that was just a limited time offer for a year-old product, or I think that’s a year-old product, you know, to really keep things moving, not to overhang with the new announcement. So I don’t think it’s a big structural kind of thing or anything like that, and other products that are out there -- I mean, they might be new, so it’s kind of early to really tell anything. And we’re pretty focused on doing what we have to do, so I don’t really sort of fret those kinds of things. You know, we plan on [better] spaces opening up and the alignment with the value proposition, the strengthening, and the alignment with the carriers as key and we’re just seeing that our strength -- you know, we’ve really -- I think we’ve demonstrated a lot of surging strength in the last two quarters and I’m not seeing anyone here take their foot off the gas, so you can extrapolate as you wish.

Next question.


Your next question comes from Jeffery Kvaal from Barclays Capital.

Jeffery Kvaal - Barclays Capital

Thanks very much. I was wondering if you could talk about units. It seems as though many of us might have been expecting a few more units in either this quarter or the next quarter. Jim, could you talk a little bit about the replacement rate, given activation seems to be relatively high? And to what extent phones sold without a data plan factors into that? Thank you.

James L. Balsillie

Well, I mean, I don’t think that’s a big, big part of it. One, I think we have a bit of a range there because there’s a pretty exciting line-up of stuff we’ve really got lined up for the rest of the year, with some pretty spectacular roadmaps. So it comes a little bit on timing and normally, there can be some quietness in the summer time, so the fact that we are where as we are and we can see it going higher, you know, really heading into the holiday season is really very, very strong.

So I mean, you take what you’ve got but we are really bringing in a lot of new devices and it relies a little bit on timing at the end of the quarter, how much of it you catch and how strong its pushed but we feel -- I mean, the lineup really for the next 14, 15 months is spectacular and the engagement with the carriers is fantastic and with this consolidation in consumer electronics to the smartphone and the carrier being a services platform, which is our OEM strategy, we’ve got sector winds at our sail and so -- but you know, when obviously you are merging a lot of stuff and you are bringing new stuff, you sort of give your best you can. But I think we’ve -- the range is a little open just because, you know, if a lot of things sort of go right, it can go really well but it’s the summer time and -- but I mean, I think we are very pleased with where we are and what we are doing.

Jeffery Kvaal - Barclays Capital

Does that suggest we should see the typical unit volume up-tick in the second half of the fiscal year?

James L. Balsillie

Well, I think there’s a disproportionate amount of activity heading into the holiday season and you’ve seen what we’ve done each year as we surge more in the B-to-C but how the B-to-B, you’ve seen how that seasonally goes and you hear how our B-to-B is doing fine but our B-to-C is surging around the world, so -- I would hope that this evolution and position that we have sustains itself if we are able to execute. Obviously things got legs and I can say -- I’m telling you, the roadmap is exceptional, carrier alignment is exceptional. The power and capability of the services platform and the partnerships, which I talked a little more on the B-to-B today because we talked a little bit more in the B-to-C last time, has been remarkable and if this is this subsuming thing that’s going on where these things do sort of a dozen things that used to be different things in your life, and now it’s all consolidated, it’s all services enabling and it’s all going innovative. So it’s hard not to -- hard not to get excited.

Jeffery Kvaal - Barclays Capital

Can B-to-B do better? Is that particularly depressed right now?

James L. Balsillie

No, I think what’s going on with B-to-B is much more an architecture shift. I mean, that’s why MVS is so powerful in that the new MVS version is about making it a true synchronized PBX and the SAP stuff is very important because that’s the native services environment. You know, and all the WiFi for the FMC, and then the BES 5.0 is just getting out, so really it’s much more about seriously re-engineering work processes and so it’s much more about transformation of the working environment than hey, I had a cell phone before, let’s make it a smartphone now. So we’ve been doing some pretty heavy lifting there in the B-to-B for a couple of years and it’s a pretty focal area for it to shift, but -- you know, and our relationship with like the [Vias] and Ciscos, you know, we are working together, you kind of have to question, you know, synchronize this to your PBX, why would anyone need a desk phone anymore, you know? And FMC, WiFi, and wide area and then all of a sudden, it does very interesting things to the numbers.

But we’ve got to catalyze that transformation. We’ve got to get the new CCX extensions in Cisco and they are working on it. I’m -- it’s going to happen.


Your next question comes from Mike Abramsky from RBC.

Mike Abramsky - RBC Capital Markets

Thanks. Jim, consumers are clearly interested in touch screens in their richer mobile browser media apps and messaging, and it also seems that despite its higher bandwidth consumption, Apple is getting subsidies [and hero positions] from some of the carriers, maybe prioritizing those things. So I’m just wondering, how do you see your plans to address that market while preserving your legendary compression and battery life advantages?

James L. Balsillie

Well, if you are efficient, like I mean, what we do is people know how we compress and they know how our infrastructure, you don’t have to pull all the time because we trace your dynamic IP addressing and we truncate chatty protocols, CCPIP protocols and use wireless [inaudible] protocols and yes, we have all kinds of different compression architectures for different sized messages because generally, you are compressing small messages.

And so the bottom line of it is if you can take something that’s two packets and make it one, you double the battery life and you double the network capacity and you double the speed. And so it doesn’t matter what’s going on, efficiency pays huge rewards in a world of scarcity and I think you are seeing this scarcity issue is really rearing a pretty ugly head. And now, things that we have focused on, side-loading but still allowing over-the-air and really a very thoughtful rationing on a value basis of capacity at play, so I don’t see it changing. I think it’s like if I’ve got twice the efficient engine of the other guy, whether it’s a big car or a small car, I still get twice the efficiency. The big car may consume more gas than the small car but it’s still a fraction of the other big car, and so it’s on a relative basis and gas price matters and the packet consumption matters, and so in this stuff, we’re up on our multimedia side-loading over the air, the browsing’s enhancing and all of these things are going through rapid enhancement but we are still seeing tremendous focus on it and you’ve seen in the media, in the analyst community they are now realizing this has -- you know, paying attention to this has positive CapEx and quality of service elements to the carriers and the carrier CEOs I’m dealing with, they are seriously recognizing this. It’s becoming very strategic.

It’s just like -- it’s like fuel efficiency in cars when gas prices go up. Everybody, fuel efficiency matters a lot more when the price of gas is up and when network capacity is getting tight, efficiency matters.

Mike Abramsky - RBC Capital Markets

And you feel that you can involve the BlackBerry browsing experience to pay some of these competitive alternatives that are more bandwidth consumptive?

James L. Balsillie

Oh, our browser -- like, when you actually look at actual Internet traffic and the part of that as we parse it out that goes to actual air link traffic, it’s remarkably efficient. Oh yeah, that’s the -- that’s part -- it plays even more. Like, what it does in terms of reducing, oh sure. I mean, if you just do browser tests and you know, of whatever and don’t look at the -- and look at the Internet traffic and then say show me the air link traffic with -- just with a packet meter, you’d be -- it’s a fraction. Now, it varies with different kinds of -- but many tests have shown it to be a very small fraction and like a multiple, a significant multiple. We’re not talking percentages. We’re talking multiple of difference, and again when scarcity matters, yeah, and we’re seeing that happen. We’re quite -- it matters, and the more people want to do and the more multimedia and the more browsing and the more gaming and the more messaging and social networking and LBS and advertising and e-commerce and all that, the more it’s going to matter.

Mike Abramsky - RBC Capital Markets



Your next question comes from Jim Suva from Citigroup.

Jim Suva - Citigroup

Great, thanks very much. A quick question for Edel and then a quick one for Jim -- Edel, when you gave your guidance, is it fair to say that that includes the recently announced Tour? And if so, does it include anything else that isn’t announced, or would that be additional?

And then for Jim, when you mentioned, Jim, that gross margins to be in the low 40%, just to help us all understand the magnitude of what you mean there, if you are currently guiding the next quarter of 43% to 44%, is that in the realm of what you consider low 40%, or do you think we are going to see a step-down function to what many may consider say 40% to 42%? Thank you.

Edel Ebbs

Jim, I think you are going to get me for both of those questions. Yes, the forecast for Q2 does include the Tour, which we expect to launch in the quarter. There’s also some other smaller bits of other products, but Tour would be the bigger piece in terms of new products in there.

On the gross margin, I mean, we really haven’t changed what we’ve said. It’s really what we said at the analyst day as well. I mean, I think when we say low 40s, is really because we just don’t have that much certainty because there’s a lot of mix and all these other things, so I would say -- I would look at that as kind of the, you know, trying to give you a sense that that’s not going to be any worse than that, based on our current view of mix.

Jim Suva - Citigroup

Okay, but 43% to 44% for next quarter, you don’t see anything structurally that would be a big step function? Because if we think about the low 40s for the full year, with two quarters behind us, this quarter, next quarter, you’d almost need to see a big step function down for it to come in the range of 40 to 42.

Edel Ebbs

I think we’re talking more on a sequential basis, right? So like you know, I mean, if this is too -- it’s too hard right now to know what the mix is going to look like in the last couple of quarters of the fiscal year but I think we are basically saying in Q3, you know, we would expect low 40s to be the bottom and you know, as the possibilities and the same thing for Q4 as opposed to it being an average for the whole year.

Jim Suva - Citigroup

Great. Thank you very much.


Your next question comes from Simona Jankowski from Goldman Sachs.

Simona Jankowski - Goldman Sachs

Thank you very much. Jim, I just have a question on the quarter, and then a longer term question. On the quarter, if I heard you correctly that 80% of your sub adds were consumer, that basket seems to -- sub add number on the enterprise side that declined a little over 30% on a sequential basis in terms of the new sub adds. And coming off of a record quarter of enterprise net new sub adds last quarter, when really we were in the depths of the recession, this was just a little surprising. You know, you did mention seasonality but when we look back, I haven’t really seen such negative seasonality on the enterprise side in the last few years. So just wondering if you can expand on what might have caused it. You know, I don’t know if the BES 5.0 transition or anything else might have played a factor.

Edel Ebbs

Yeah, I mean, there’s a number of things I think going on. I mean, some of it is that, we talked about international as well, particularly emerging markets, contributing more to net adds this quarter, and they tend to be more BIS focused. So that was a factor. There is a seasonal aspect. I mean, sometimes it’s harder to break it out but I mean, I think that that is a factor.

Beyond that, I mean, I think there’s really -- there’s a lot, as Jim talked about, I think the last question or the question before, some of the structural things going on as well, in terms of MVS and BES 5.0 as well. I think it’s a factor but I don’t think that there’s anything going on in the enterprise market that’s sort of a sustainable trend downwards or anything like that. I think we are very focused on --

James L. Balsillie

I haven’t had anyone give me any of that sense directly. You know, Edel is talking in the aggregate but I have not had anyone give me that sense, that they are pulling back or they are dialing -- no, we -- there’s an architectural shift.

Simona Jankowski - Goldman Sachs

That’s kind of what I just want to get a sense of because it’s just kind of a very discontinuous data point, if you look at the last few quarters, and so if there’s just something that there’s some pent-up demand that we did not see in the May quarter because of BES or some other transition that we are going to catch up on in the August quarter? I mean, is that really your sense here or what -- I mean, I just struggle to see such a -- you know, what might explain such a big sequential drop that we really haven’t seen before.

James L. Balsillie

I mean, the sales are good everywhere. The corporates are engaged. It could have been a little bit of slowdown for BES 5.0 as they are done it, but I don’t think so. I mean, they seem to be -- the B-to-Bs haven’t really sort of given any signal that they are doing anything but going ahead. Nobody is -- I haven’t gotten any data point that gives me any indication that anything is not -- you know, it’s just about planning major re-engineerings, major extensions. Nobody said gosh, you know, we’re doing less or we’re going slow. I don’t have any of those anecdotally and I am in the market a lot.

Simona Jankowski - Goldman Sachs

Okay. Thanks a lot.

Edel Ebbs

-- to remember is that the last quarter, we saw a pretty good growth in the enterprise market. That was with sort of the -- you would have had the same question the other way, I think that the --

Simona Jankowski - Goldman Sachs


Edel Ebbs

-- you know, smooth sometimes, quarter on quarter as you would like to see but --

Simona Jankowski - Goldman Sachs

Yeah, no, that’s exactly right. I mean, the weakness we saw this quarter is what I thought we would have seen last quarter and we didn’t. And Jim, a strategy question, kind of longer term is you know, when you look at the operating systems in the smartphone space, you know, three of them are relatively new when you look at the android, the iPhone, and the Palm OS, and kind of true to consumer focus, very browser-based. And then the other three, including yours and Symbian and Windows Mobile are a little older and more file based. I guess the question for you is do you feel like your strategy is going to remain to have one unified operating system to address the enterprise and the consumer side of the business? Or -- and do you see that there’s any element of the enterprise side and the security, the policy management requirements of that, kind of holding up the pace of innovation or maybe the architecture that you need to implement on the consumer side to remain competitive with some of the newer operating systems out there?

James L. Balsillie

Well, you know, it’s a good question but when you do these competitive analytics, you have to make sure you frame it accurately because if you mis-frame it, you may come up with proper analysis for the question but you may actually conclude wrongly because it’s not the right question. And so when you look at this, and here’s an example, when you really talk about OSs, I mean, is it really an OS on a handheld? I mean, it’s an application task handler, the real-time OS is underneath that with the radio codes, most of the core apps are built-in by the manufacturers. If anything, you’re interested in just how easy the tools are and how rich the tools are. That’s kind of the key element and these are not heavy apps and they are pretty easy to port across.

So when you talk about OS, if you are going to talk about a parallel, it is the whole system and it’s what you connect to, it’s what you proxy to and what you interface to, so -- you know, people, they don’t say gosh, you know, I’m going to get that BlackBerry because it’s got J2ME on it. They really think in terms of apps, so you kind of have to discuss it at a system level to really get the OS because the OS is really about an OS that brings you to services and not just a point basis. And so it’s very different, because these are network appliances. This is not a distributed computing type of thing of the original PCs, so in essence, you have to think of the OS in a broader definition than at the point, because it’s just a small task handler. It’s a point piece. It’s quite frankly -- it has a job to do but it’s not defining. There are many other aspects that are more defining, so you have to be careful.

And then the other thing, you know, there was a PDA company out a few years ago that talked about having 40,000 applications and we really started with one, and so let’s be careful about in terms of breadth and depth versus core, focal efficiency. Now yes, there is more of a breadth element to this thing and people want to do many things but there is still a huge element of communications efficiency and interfacing at hand and in the sort of choice of “broader consumer stuff”, when do you hit diminishing returns and negative returns just on choice?

And so, you know, I appreciate your question but it’s -- it might -- it’s actually a bigger question than the one you asked, which is what is really an OS in wireless and what is really value to sort of catalyze the market, and there’s an element of tools, there’s an element of third-party application choice but there’s also an element of thinking of it as a system and really driving the core communications and interfacing very firmly and very richly, you know, as a bigger part of the equation and sometimes people may discount that just a little too much, so they forget the fundamentals of mobility. You know, kind of like in talking about the network elements and all that kind of stuff, because it’s -- you’ve got to remember, it exists in a very different set of system dynamics than the original PCs did, the original standalone, occasionally connected, you know, and the connection was there. And so wireless is a very different design.

So I think the OS definition was a very dangerous one. In essence, Palm is talking about it as a system. They don’t talk about it as a client, so you have to really talk about it as a system level.

But I mean -- so for us, I mean, we have -- I mean, our partnerships, we are overwhelmed with partnerships. All the key B-to-B and C-to-C vendors, players work with us, our market share and our adoption speaks for itself and people want the volume and we’re getting all the core and powerful and relevant applications people to really work with us and you know, we’re excited and we’ve got our -- App World is really a distribution channel, which is fine. It’s being used fully but it’s not the sole way people order, especially not in B-to-B and others, but they are all growing.

But you know, you’ve got to be careful not to mis-frame the competitive dynamic because it leads you to false conclusions and that is why I told that PDA story to email story. You know, one said 40,000 apps, we did one -- at the time. That was 10 years ago, and maybe it was a missed frameset of competitive dynamics.


Your next question comes from Ittai Kidron from Oppenheimer.

Ittai Kidron - Oppenheimer

Thank you. I just made it in. Edel, I wanted to dig a little bit more about your international business. Can you give us a little bit more color on the quarter, on the units, how much was international and maybe a little bit more granule on a regional basis? And when you give your guidance, should we expect international to start outpacing the U.S., just given how penetrated you are in the U.S. over the next two, three quarters? Is that going to be a much more stronger contributor on the sequential basis than it’s been up until now?

Edel Ebbs

Sure, Ittai. I mean, we don’t break out units or subs, international versus non-international. They were a bigger contributor but North America, I mean, I don’t mean to imply that North America wasn’t really successful this quarter. It’s just that there was a little bit more of a mix shift towards international and that is a bit more BIS oriented, so that was really why I brought it up.

I mean, longer term, absolutely I think that what we are doing in international markets and all the work that we’ve been doing there is really paying off and I expect it to grow as part of -- you know, as a percentage of the mix as we go forward. But I don’t think it’s going to be some big, dramatic shift that you are going to see next quarter. I think again, it does kind of move around, depending on what launches and programs are going on at a particular quarter, so I think you kind of have to move away just from the quarterly trend and kind of look at it over a bit of a longer period of time. But would we expect it to grow? Yes.

Ittai Kidron - Oppenheimer

Okay, very good. Thanks.

Edel Ebbs

Operator, I think that’s all we have time for. In closing, I just would like to give everybody the dial-in number for the replay, as well as for the webcast. There’s a post-use service available at 416-640-1917, passcode 21289979#, or you can go to our website, and listen to a replay of the webcast. Thank you.


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

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