Research In Motion F2Q08 (Qtr End 9/1/07) Earnings Call Transcript

Research In Motion Limited (RIMM)

F2Q08 Earnings Call

October 4, 2007 5:00 pm ET

Executives

Edel Ebbs - Vice President of Investor Relations

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

Brian Bidulka - Chief Accounting Officer

Analysts

Gus Papageorgiou - Scotia Capital Markets

Mike Abramsky - RBC Capital Markets

Jim Suva - Citigroup

Paras Bhargava - BMO Capital Markets

Paul Coster - JP Morgan

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Research In Motion second quarter fiscal 2008 results conference call. (Operator Instructions) I will now turn the conference over to Edel Ebbs, Vice President of Investor Relations. Please go ahead.

Edel Ebbs

Thank you. Welcome to RIM's fiscal 2008 second quarter results conference call. I am Edel Ebbs, RIM's Vice President of Investor Relations. With me on the call today is Jim Balsillie, RIM's Co-CEO, and Brian Bidulka, RIM's Chief Accounting Officer. After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then review second quarter results and I will discuss our outlook for the third quarter of fiscal 2008. We will then open the call up for questions.

I would like to note that this call is available to the general public by a call-in number and webcast. A replay of the webcast will also be available on the rim.com website.

We plan to wrap up the call today a little before 6:00 p.m. Eastern.

Some of the statements we’ll be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. These include statements about our expectations and estimates with respect to revenue, gross margin, operating expenses, CapEx, depreciation and amortization, investment income, earnings, earnings per share, and ASPS for Q3 and beyond; our expectations regarding RIM's near and long-term tax rates; our estimates of the number of BlackBerry subscriber accounts, subscriber account additions, replacement device sales, and other non-financial estimates; our product development initiatives and timing; developments relating to our carrier partners; new and expanding markets for our products, and other statements regarding our plans and objectives.

We will indicate forward-looking statements by using words such expect, anticipate, estimate, may, will, 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 our forward-looking statements, including risks relating to our internal review of our stock option granting practices, the restatement of our previously filed financial statements as a result of the review, and regulatory investigations or litigation regarding those matters; risks relating to intellectual property; our ability to enhance our current products and develop and bring to market new products and services; the efficient and uninterrupted operation of RIM's network operations center; the occurrence or perception of a breach of RIM's security measures; general economic conditions; our reliance on carrier partners to grow our BlackBerry subscriber account base and to accurately report subscriber account activations and deactivations to RIM on a timely basis; risks relating to competition; risks relating to possible product defects and product liability; our reliance on suppliers and third-party manufacturers; our ability to effectively manager our growth; risks associated with our expanding foreign operations; foreign exchange risks; and other factors set forth in the forward-looking statements section of today’s news release and the risk factors and MD&A sections in RIM's filings with the SEC and Canadian securities regulators.

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

I will now turn the call over to Jim.

James L. Balsillie

Thank you, Edel. We are pleased with the record results for the second quarter with revenue earnings and subscriber account additions all above the high end of the ranges we guided in June. This out-performance was driven by the strong product cycle we are in the midst of, as well as the diversification of our user base across multiple geographies and multiple market segments.

International markets continue to grow, now representing approximately 32% of our subscriber account base and the percentage of subscribers coming from non-enterprise is also increasing, with over 30% of our base now in this category.

We are also continuing to see an increase in the number of devices being sold as upgrades or replacements to existing users. We are excited about the strong product introduction cycle that is continuing in Q3, with the 8130 Pearl for CDMA and the 8120 WiFi Pearl with Telefonica, as well as the BlackBerry Unite, which I will discuss in greater detail later in the call.

Demand for BlackBerry products and services in Q2 was robust, with approximately 1.45 million BlackBerry net subscriber adds accounts added during the quarter, which was higher than our June forecast of 1.325 to 1.375 million, and was 21% higher than the approximately 1.2 million subscriber accounts added in Q1.

We believe that the traditional summer slowdown did not affect the Q2 results due to strong demand for new products, such as the BlackBerry 8830 World phone and the BlackBerry Curve 8310 launch this summer, as well as the ongoing strength and demand for the Pearl 8100 and the Curve 8300.

In addition, with the BlackBerry solution now available from approximately 325 carriers around the world, other markets balance out the seasonally slower ones and the high percentage of our net adds coming from non-enterprise also serves to moderate the seasonal impact.

We shipped a record number of devices in the quarter, including our 20 millionth BlackBerry device and the total BlackBerry subscriber account base worldwide was approximately 10.5 million at the end of Q2, and is now over 11 million.

Summer has been a busy time at RIM, with multiple product announcements, including the BlackBerry 8820 with WiFi, which was announced in July. This product has just been launched with AT&T in the U.S. and Orange in the U.K., among others. We also recently announced the 8320 WiFi with T-Mobile and the WiFi enabled Pearl with Telefonica.

All WiFi enabled BlackBerry devices feature seamless roaming between wide area and WiFi networks, as well as seamless voice handoffs using UMA. Several of our carrier partners are excited about this solution. For example, T-Mobile sees a tremendous opportunity in the prosumer/consumer segment by combining the 8320 with its hotspot at home offering and UMA support.

There is also an excellent opportunity to expand in the enterprise market with WiFi enabled handsets, particularly when combined with the BlackBerry mobile voice system and the BlackBerry enterprise server. These devices are enabled with multiple security protocols to also meet the security needs of our corporate clients who required protected access to the corporate network via VPN.

We have entered the fall with a strong stable of new product announcements: the 8130 Pearl for CDMA/EVDO networks; the 8120 Pearl for Edge and WiFi networks; and our exciting new convergence software platform for the Soho and SMB market and home market, the BlackBerry Unite.

We expect the BlackBerry Pearl 8310, which will be available from all carriers in North America later this fall, to open up a new market of CDMA users who want the small, light form factor of the Pearl on a high-speed EVDO network. Our experience with the Pearl on the edge platform is that it heavily contributes to net new subscriber account additions rather than driving an equal proportion of upgrades as we see with some of our other smartphone products.

The 8130 offers a number of new advanced features, including a 2-megapixel camera with a 5X digital zoom and enhanced flash video capture, an enhanced BlackBerry browser, and a new page view option that displays a full webpage on the screen, along with a magnifying glass that allows the user to quickly and accurately point and zoom on a particular -- on a specific area of a webpage. The 8310 also supports 3G RTSP streaming protocol, which allows users to view streaming video from sites such as that you like, such as YouTube.com, and it includes GPS to provide out-of-the-box support for location-based applications and services, including BlackBerry Maps, with a local search capability, which was developed with the support of Google.

This feature allows users to find local businesses, such as banks, hotels, and restaurants, within a short driving distance. Our CDMA partners are very excited about the 8130 and their plans to support the product with aggressive marketing and advertising campaigns as we head into the holiday season.

We are also pleased to announce this week the new BlackBerry Pearl 8120 initially with Telefonica. This device is the next generation Pearl product for Edge networks and incorporates 801.11BG WiFi with seamless data hand-offs between WiFi and GPS Edge, as well as seamless voice hand-offs with UMA. The 8120 also offers an enhanced 2.0 megapixel camera, video capture, and playback capability, as well as an externally accessible SD memory card and an enhanced visual user interface. The 8120 will also offer the enhanced BlackBerry browser with full page view and zooming capability. Telefonica plans to support the new offering with a EUR9.99 BIS plan.

BlackBerry Unite is our new software offering designed to allow small groups, such as a family or Soho, to stay connected with each other and easily coordinate their personal and business activities.

We are pleased to be working with Telefonica in Spain to preview the product and believe it will be a key component of their convergent strategy and is an excellent complement to their strong broadband and mobile offerings.

BlackBerry Unite software will be offered as a free download that provides groups of up to five users with mobile access to shared calendars, pictures, music, documents, and desktop content through BlackBerry smartphones. This will allow these groups a simple, low-cost way to coordinate and collaborate with each other.

Some of the features of BlackBerry Unite include the ability to share key information, including e-mail, contacts, pictures, documents and bookmarks directly from the BlackBerry smartphone with other group members; remotely download content, including pictures, music, documents and other content on their desktop computers directly from their BlackBerry smartphone; coordinate schedules using shared wireless calendar, with the ability to check each other’s availability setup or modify appointments and send reminders; remotely secure devices, including the ability to use commands that wirelessly erase lost or stolen devices and to enforce password protection; simple wireless controls to help define acceptable smartphone usage for each individual, such as the ability to place long distance calls or access certain online content, and the ability to automatically back up files on the BlackBerry smart phone to the desktop computer, so that if the device is lost or stolen, all the data can be simply restored in minutes on a replacement unit.

BlackBerry Unite will be available for free as a free download and with the help of an easy-to-follow setup wizard, can be installed in minutes on a regular PC. BlackBerry Unite is currently in development and a prototype of the software is expected to be available for customers for a free download later this autumn. We are excited about the upcoming availability of this product, given its ability to further proliferate the BlackBerry solution as a convergence platform by wirelessly enabling key data stores for family and Soho customer segments.

This summer, we announced the BlackBerry Curve 8310, with built-in GPS, which is available from a number of carriers, including Vodafone in Germany and the U.K., Proximus in Belgium, Rogers in Canada, and TIM in Brazil.

The availability of GPS on BlackBerry smartphones continues to be an exciting development and allows our partners to enable location-based services, such as allowing users to plan trips, taking into account traffic patterns, automatically rerouting them to their destination and providing access to local restaurant listings and delivering customized weather reports.

The 8100 Pearl continues to be a strong product platform with sustained support from our carrier partners. It is now available in over 80 countries around the world and our partners are continuing to focus on and promote the product.

In early September, T-Mobile launched three new colors of the Pearl; sunset red, blue, and pale gold, in addition to the already available black and white, and supporting this launch with a new, $9.99 BIS pricing program. For the first time in North America, we are seeing a carrier offer an unlimited BIS e-mail plan for under $10 a month. Our experience in Europe has indicated that BIS plans in this price range significantly drive adoption in the prosumer/consumer segment.

T-Mobile is also aggressively promoting the new WiFi Curve 8320, which will be the first converged device offered in T-Mobile’s UMA product lineup and the first Curve in North America with WiFi and UMA.

The 8830 World Phone continues to perform very well for our CDMA partners. At Verizon, we saw record device shipments and net subscriber account activations almost doubled over Q1, far exceeding our expectations. They continue to offer the 8830 at an attractive $199 price point and have committed to actively support it with TV and print media through the holidays.

During the quarter, RIM partnered with Verizon and American Express to target 400,000 American Express cardholders with a direct mail campaign that included a unique BlackBerry 8830 offer. Sprint also launched the 8830 in July at $199 and are supporting the product with a free 14-day trial of Sprint Navigation, Sprint on-demand premium services, and 20% off the purchase of any software from the Sprint software store.

As a result, they are seeing strong sell-through and net subscriber account activations. We are looking forward to extending the success we’ve seen on the World Phone into new market segments this fall with the 8130 Pearl for CDMA networks.

RIM's marketing efforts continue to focus on building awareness of BlackBerry smartphones with lifestyle products. RIM's sponsorship of the John Mayer summer tour was a success, with extensive BlackBerry branding throughout concert venues, on tour buses and in advertisements.

In addition, programs such as the Very Canadian campaign with Rogers, lower price BIS offerings by carriers and a continued focus on channel expansion are fueling our success in segments beyond the enterprise.

Our expansion in retail and indirect channels is ongoing and we are pleased to have recently launched the BlackBerry Pearl, Curve, and 8800 with Carphone Warehouse and their stores throughout the U.K., and we look forward to further building on this relationship.

In North America, our retail presence also continues to grow and non-enterprise subscriber account additions exceed 50% of net additions for the first time. Increasing numbers of carriers are recognizing the potential of the BlackBerry solution outside the enterprise market through introductory BIS pricing and pay-as-you-go plans.

In addition to the new $9.99 BIS plan being offered by T-Mobile U.S.A. and the EUR9.99 offering from Telefonica that I mentioned earlier, a number of other carriers launched lower priced BIS plans in the quarter, including Vodafone Italy, CSL Hong Kong, and Vodafone Hong Kong. We expect this trend to continue both in North America and in markets around the world.

The presence of BlackBerry smartphones in the back-to-school market got a significant boost this year with our participation in AT&T’s back-to-school promotion from mid-July through mid-September. They featured both Pearl and Curve as hero products in their print, online and radio campaign targeted at this segment, and Curve was also featured on AT&T’s back-to-school TV spots.

This quarter marked the launch of the builtforblackberry.com website. This new user-focused site offers downloadable applications for multiple areas of interest, including sports, navigation, news and gaming.

In addition, the BlackBerry owner’s lounge has been updated to provide an even better experience to the online community of BlackBerry end users who have joined in order to get exclusive access to BlackBerry applications, incentives, and other important content.

We are seeing an excellent response to these two new sites, with large numbers of users signing up daily. We have also added 50 additional BlackBerry Alliance program members this quarter. These are companies that build, sell, and deploy applications and services that work with the BlackBerry platform. Some of our new partners are Sage Software with their CRM products and The Gap Survey, with their new mobile software subscription.

We also continue to partner with content providers to make content easily accessible to BlackBerry smartphone users and this quarter, we partnered with both Major League Baseball and ESPN to provide the ability to download an icon to their BlackBerry handset that will give them one-click access to the content from these providers.

RIM's lead in the enterprise continues to expand with the common criteria EAL 2-plus certification for BlackBerry enterprise server 4.1.3 and the BlackBerry wireless handheld server, 4.1.0, which were recently issued. This is the first common criteria certification to be awarded to a mobile solution and further solidifies our leadership position in the area of security.

This particular certification is accepted by 25 countries under the common criteria recognition arrangement, which includes France, Germany, the U.S. and Canada, among others.

In addition, during Q2 we rolled out our BlackBerry smart card reader software update 1.5.1, which includes supports for Windows Vista, as well as the ability to lock down Bluetooth on the desktop. This new feature allows the smart card reader to be used in a more protected environment to enhance information security for our most security-conscious customers. The U.S. Army had previously approved this product and this quarter, it was also approved by the U.S. Navy.

During Q2, Verizon Business announced distribution of the Ascendant voice mobility suite as part of their fixed mobile convergence portfolio. We view this announcement from a major U.S. carrier as an endorsement of our strategy to deliver a mobile desk phone experience. During the past quarter, there’s been tremendous interest in the BlackBerry mobile voice system from end customers and carriers. Based on the technology available from Ascendant systems, BlackBerry mobile voice system delivers fixed mobile convergence between the desktop and BlackBerry smartphone. We believe this is the only solution that can truly unify the fixed and mobile environment in a compelling, easy-to-use and secure manner. This advance positions RIM to benefit from the trends of unified communications and fixed mobile convergence, while remaining open to the various PBX and voice systems in use by the enterprise. We are beginning to see a trend in the number of telecom executives who are considering BlackBerry handsets in the mobile voice area for many of the same reasons that BlackBerry smartphones have been successful in the data area, and we are receiving early indications that enterprises are considering replacing cellular phones with voice-enabled BlackBerry smartphones in order to secure and converge this key enterprise store.

This past quarter, we also entered into an agreement with Ingram Micro Europe to offer BES and technical support services in the U.K., Germany, and the Netherlands beginning in Q3.

Latin America continues to be an excellent growth market for the BlackBerry solution. Building on the success of the Pearl in this region, we have now launched the 8800 and Curve in many Latin American markets and continue to see launches of our products and services for the first time in new markets such as Guatemala, Honduras, and Paraguay. We continue to work closely with our partner, Brightstar, for distribution in the region and now have approximately 70 Latin American carriers offering the BlackBerry service.

This week, we also announced the availability of the BlackBerry 8310 in Brazil, which is a key market in the region. BlackBerry smartphone sales continue to grow across Asia-Pacific, driven by new product launches as well as attractive carrier service plans and multimedia bundle offers, channel expansion in the small-medium business segment, further penetration in the enterprise accounts, and proliferation of data solutions with corporate customer applications.

The BlackBerry Curve 8300 was launched successfully in Asian markets, generating strong demand in both corporate and prosumer segments, supported by carrier promotions, road shows, customer seminars, direct mailings, and trials. The BlackBerry 8820 with WiFi capability was launched in Hong Kong in August and in Singapore in September. The BlackBerry 8800 with built-in GPS capability and associated navigation and tracking applications has generated tremendous interest.

As well, the BlackBerry Curve 8310 with built-in GPS capability was launched in Hong Kong by Smart Tone Vodafone in August, and in India by Vodafone SR in September. More carriers will be launching in the coming months.

Since we started working to bring the BlackBerry solution into China just three years ago, we have made significant progress in the past three years. BlackBerry service has been available with China Mobile since last year for customers who purchased BlackBerry handsets abroad, and we continue to move forward in our efforts to import BlackBerry handsets into the region.

We are working closely with a strategic channel partner to import and distribute devices into China and hope to be able to update you shortly on the BlackBerry devices, the availability of BlackBerry devices in the Chinese market.

In Japan, RIM and NTT DoCoMo launched Japanese text support on the BlackBerry 8707H for enterprise customers in Japan. The product was previously available in English only and we believe this is an important step in increasing the BlackBerry platform appeal in this market.

In India, Reliance launched the BlackBerry solution across its pan-Indian CDMA network, highlighted by the introduction of the BlackBerry 8830 World Edition smartphone, with a strong focus on BlackBerry applications and solutions.

In Sri Lanka, Millicom Tigo recently launched the BlackBerry solution with both BES and BIS service offerings. BlackBerry Connect continued to expand its market presence this quarter with new carrier and device launches.

In total, 97 carriers have now launched BlackBerry Connect services. New devices launched this quarter include HTC Touch, HTC Cavalier, Sony Ericsson P1I, and the Nokia E90 communicator. Demand for BlackBerry application suite on Windows Mobile 6 also remained strong and we are on track to launch this product later this year.

Before I hand the call over to Brian and Edel to take you through our results and guidance, I would like to finish by saying that we are confident that our hardware and software product portfolio, together with the expansion of our distribution channels and growing carrier support around the world, will enable us to continue to grow the number of BlackBerry smartphone users across multiple segments. We expect to enter the holiday season with strong momentum to deliver continued growth and earnings leverage throughout the remainder of the year.

Brian Bidulka

Thank you, Jim. Revenue for the second quarter ended September 1st was $1.37 billion, up 27% from $1.08 billion in the previous quarter. Handheld devices represented $1.08 billion, or 78% of RIM's revenue during the quarter, up from 76% of total revenue in the previous quarter.

Total devices shipped in the quarter of approximately 3.1 million were up from 2.4 million in the prior quarter. Approximately 2.7 million new devices were activated in Q2, either for new customers or for replacements and upgrades. Actual sell-through was somewhat higher as there are some devices sold without a BlackBerry service plan that are not captured in this number.

The ratio of devices activated to net subscriber account additions has increased slightly from Q1 as replacement and upgrade sales continued to increase.

Channel inventory on a four-weeks basis remained approximately flat in Q2.

Average device ASPs were slightly higher than expected at approximately $353. This is due to mix of handsets shipped in the quarter. We expect ASPs in Q3 to be approximately $340.

Service revenue was $201 million, 15% of revenue for the quarter, up $27 million from Q1. With respect to monthly ARPU, as expected it declined slightly on a normalized basis in the quarter.

Software revenue was $57 million, or 4% of revenue. Other revenues, such as repairs and accessories, was $36 million, or 3% of revenue.

Gross margin for the first quarter was just over 51%, which is in line with our June guidance. Operating expenses increased slightly more than we had forecast last quarter. R&D spending was $88 million, or 6% of revenue for the quarter, and selling, marketing and administrative expenses increased by 12% to $198 million, and were 14% of revenue.

Included in Q2 op-ex is slightly higher compensation expense than in the previous quarter due to the appointment of two of RIM's directors to Director Emeritus status as discussed on the last call and in RIM's management information circular.

The Canadian dollar has continued to strengthen relative to the U.S. dollar and I would like to take this opportunity to comment on the impact of foreign exchange fluctuations on RIM's operating expenses.

Our largest operating expense exposure to the Canadian dollar continues to be our payroll. However, we do have some offsetting Canadian dollar revenue, as well as a program in place to hedge a portion of the exposure. This does not insulate us 100% and we continue to hedge our exposure, which may result in us entering into forward contracts at more or less favorable rates over time. In the short-term, we continue to expect minimal impact on operating expenses as a result of the Canadian dollar fluctuations.

The tax rate for the quarter was approximately 30%, in line with our forecast. Net income for Q2 was $288 million, or $0.50 per share diluted. Please note that this reflects the effective three-for-one stock split that occurred during the quarter.

Weighted average diluted shares used in the EPS calculation for the quarter were 572 million. Actual shares outstanding at September 1st were $560 million. Total options outstanding at September 1st were $18 million. Again, these share counts reflect the affect of the three-for-one stock split that occurred in the quarter.

RIM's balance sheet continues to be strong, with substantial cash reserves and appropriate working capital balances. At the end of the second quarter, RIM had approximately $1.7 billion in cash, cash equivalents, and investments. This was up $166 million from the prior quarter.

During the quarter, RIM generated approximately $227 million in cash from operations. The primary use of cash in the quarter was capital expenditures of approximately $79 million. These capital expenditures were slightly lower than forecast due to the deferral of certain investments from Q2 into Q3.

From a working capital perspective, trade receivables were up from the prior quarter, in line with top line growth and DSOs decreased to 52 days from 55 days in the prior quarter.

Inventory on hand was approximately $301 million versus $259 million in the prior quarter. Inventories continued to be primarily raw materials and semi-finished goods to support demand for current and upcoming product launches.

I will now turn the call over to Edel to discuss out outlook for Q3.

Edel Ebbs

Thanks, Brian. Before I discuss our outlook for Q3, I would like to remind everyone that these forward-looking statements reflect management’s best current estimates and should be taken in the context of the risk factors listed at the beginning of the call and outlined in our public filings.

We are forecasting revenue for the third quarter of fiscal 2008 to be significantly higher than Q2, in the range of $1.6 billion to $1.67 billion. We expect hardware shipments to be over 3.7 million units at an average ASP of approximately $340. The expected increase in volume of shipments is due to carriers ramping newly launched products, such as the Curve 8320 and 8310, the BlackBerry 8820, and the new color variants of Pearl, as well as shipments to support the launch of the 8130 CDMA Pearl and the 8120 Pearl scheduled later in the quarter.

We are also expecting a high level of upgrade sales to continue as the subscriber account base grows.

With the expansion in our downstream channels that has been achieved over the past several quarters, the higher levels of inventory required by carriers as they head into the holiday season, and large shipments of new products to support carrier launches scheduled in the latter part of the quarter, we are expecting the forward weeks of inventory to increase somewhat in Q3. We continue to be comfortable with the level of inventory at most carriers.

Software revenue in Q3 is expected to increase modestly.

We are targeting net subscriber account additions for Q3 of approximately 1.65 million.

So far in the quarter, we have seen an average weekly run-rate of approximately 125,000 which, on a straight line basis, equates to quarterly net subscriber account additions of just over 1.625 million.

With a number of product launches and significant carrier marketing programs kicking in later in the quarter, it is too early to predict the potential impact of some of these programs on the weekly run-rate. Some of our other new products for the fall, such as Curve 8310 and Curve 8320, as well as carrier programs like the T-Mobile $9.99 BIS plan that Jim referenced, are also just beginning to ramp in October, already one month into the quarter.

In previous years, we have not seen a meaningful lift in net subscriber account additions during the U.S. Thanksgiving holiday promotion period. We now have multiple products targeted at the consumer/prosumer segment. Carriers are actively targeting this period with promotions and we’ve expanded our reach in retail distribution channels, so there is certainly the possibility that we will see stronger-than-normal adoption during this period.

Keep in mind when looking at Q3 versus Q2 that we had an exceptional second quarter with new products, such as the World Phone at Verizon, which was in the market for the full quarter and exceeded expectations in Q2. In contrast, many of the programs scheduled for the fall are just beginning to ramp this month.

We expect gross margin for Q3 to be flat with Q2 at approximately 51%. We expect a total operating expense increase for Q3 of approximately 11% to 12% from Q2 levels. We expect R&D to increase by approximately 8% in Q3 and continue to be approximately 6% of revenue.

We expect sales, marketing and administration expense to increase in Q3 by approximately 13% to 14% and decline as a percentage of revenue to approximately 14%. We continue to believe that we will be able to drive further operating leverage throughout fiscal 2008.

We expect depreciation and amortization to be approximately $27.5 million to $28.5 million in Q3, higher than Q2 due to ongoing CapEx.

We expect CapEx to be approximately $140 million in both Q3 and Q4. This increase is due to shifts in the timing of certain investments between quarters.

Investment income is expected to be in the range of $21 million to $21.5 million in Q3.

We expect the tax rate to remain around 30% to 31% for the remainder of the year; however, I would like you to please note that the rate can move outside this range, depending on foreign exchange fluctuations. Beyond fiscal 2008, we continue to expect the tax rate to decline slightly.

We expect Q3 EPS to be in the range of $0.59 to $0.63 per share diluted.

I will now turn the call back to Jim.

James L. Balsillie

Thanks so much, Edel. We are pleased to have passed a number of key milestones in this quarter, including shipping our 20 millionth device and surpassing 10 million total subscriber accounts. We are on track to end the third quarter with over 12 million subscriber accounts and are excited by the range of opportunities we see ahead of us in multiple market segments around the world. We look forward to leveraging these opportunities to drive continued growth and earnings leverage of our business.

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

Would the Operator please come on to handle questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gus Papageorgiou of Scotia Capital. Please go ahead.

Gus Papageorgiou - Scotia Capital Markets

Thanks. Jim, I just wanted to talk a little bit more about this BlackBerry Unite, specifically on remote access control content. I guess you will be able to use your device to buy content and then that content is delivered directly to your PC, so I’m assuming you can buy music, pictures, whatever using your device and then it is stored directly onto your PC. Is that how it is going to work?

James L. Balsillie

Well, yes, the way I think of it is that BlackBerry is a synchronization engine and there are three places where people, we see them synchronizing. We see them synchronizing behind a firewall, which is obviously we use for the BES server. They synchronize into the cloud, which is the BIS, BlackBerry Internet Service, and BlackBerry Unite is really a synchronization server for the PC, and the PC is very common at the home and at the Soho. So it just -- it’s what you synchronize and who you synchronize with tends to be different because in the home, it’s very much blurred between work and family and what you synchronize too tends to be much more for pleasure and media.

But to us, they are just files with interfaces that you synchronize and that you cache and that you render, so however you get your content is your decision but by all means, there will be purchasing options as a commerce transaction on the device.

But we think the very powerful aspect is that it is as you say, a remote control to remotely change how you want them synchronized, your playlists, and a lot of preferences, whatever it may be. Really, it extends to work information, it extends to pictures, music, and there is a lot of activity when it comes to video and video synchronization, so the remote control, coupled with the synchronization and the caching of something in the home where it is very personal and you also have a WiFi airlink option for larger files, is a very, very nice complement to the behind the firewall and in the cloud types of synchronization, and they can all be mixed and matched and it is free.

So it is very powerful and there was a very important message that we put in there and I hope it came through, is that we -- our products are offered through our carrier partners and we believe that the carriers should be a strategic platform. Every smart carrier that I deal with around the world has very powerful convergence strategies, and so this product is about making the carrier a convergence platform as opposed to disintermediation strategies that make them a pipe.

Yes, as you say, it is very powerful to the user and it s very aligned strategically to the carrier, so this is good.

Gus Papageorgiou - Scotia Capital Markets

Are you working with content providers to get them involved in this service as well?

James L. Balsillie

Yes, for sure the -- yes. And more so -- we’ve done a lot with the portal folks on an app basis and on a messaging basis so far. In the past, most of the cooperation is on the video side -- normal consumer and entertainment video stuff, both Internet and non-Internet.

The other thing, which is very interesting, is that the combination of music coupled with the fact that BlackBerry is a data platform and you can populate an icon. We’ve had a very bit of inter-relationship with music companies who are looking at creating a more direct relationship with their subscribers for merchandising purposes of music and other things, and it requires an open communications platform, as well as a media player, so this whole relationship with the content on the video side and on the music side is emerging very nicely and it is a very nice complement and enhance to what we are doing for sure.

Gus Papageorgiou - Scotia Capital Markets

Thank you very much.

Operator

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

Mike Abramsky - RBC Capital Markets

Thanks very much. Yes, Jim, first just a brief housekeeping question; it seems there is a gap between -- or maybe I’m wrong -- there’s a gap between the last quarter ending sub adds, which was I think around 9.3 and this quarter, over 11 and your 1.45 million sub adds. I’m just wondering if there is another adjustment here to the sub based on reconciliation. I think we saw something like this in Q107.

Edel Ebbs

I’m going to take that question. Every quarter there is always small adjustments to the base. There was nothing abnormal this quarter. I think where some analysts get into trouble is just that cumulative rounding over a period of time. There are small adjustments every quarter from prior periods and I think the cumulative effect of that together with rounding sometimes means you are off by 100,000 or so in your calculation versus where we actually report we are.

Mike Abramsky - RBC Capital Markets

Okay, so nothing material in that last quarter?

Edel Ebbs

No, no.

Mike Abramsky - RBC Capital Markets

Okay, my question is on new devices. There’s been some rumors of more multimedia-centric devices coming that have different form factors. I know you don’t comment on these devices but could you perhaps talk a little bit, Jim, about how maybe some of your strategies and thinking are going against some of the new consumer form factors we’ve seen out there. Some of the apps, of course, LBS, multimedia video, but there is also -- you’ve got the iPhone and Touch, Verizon Voyager, LG Prada, which are emphasizing larger screens and interactive UIs. How are these things affecting your thinking in your product line?

James L. Balsillie

Well, it’s a very good question and we try to think of these things as a system. At the core, we think of the devices as the presentation terminal. It’s got IO packaging and it requires a -- you know, and the principal focus is balancing richness and efficiency and scarcity. And then you need a synchronization engine because people view these as network appliances that synchronize generally to a distributed set of server stores in their life.

And then the third thing is you need a channel relationship or you need a direct relationship where the carrier is prepared to be simply a data pipe. And so our view of it is strategically, we endeavor to evolve carriers’ relationships with voice customers to platform relationships on an OEM relationships with BlackBerry, which is the synchronization engine, as I mentioned, in the three different areas that we synchronize to.

Of course, we have a rich channel relationship with them and a comprehensive synchronization capability, and that is to work in harmony with the devices. The devices are not in isolation. So as the transports get richer, as the back-end stores people want to connect to proliferate, and as the kind of applications people want evolve, of course it creates tremendous opportunities to innovate on the device side.

Things like YouTube video weren’t even concepts not a long period of time ago. Even the synchronization of an MP3 from a PC store is a relatively new concept in the hardware world, and then the fact that it’s just a software op on a cell phone is much, much newer. And then you look at the fixed mobile convergence, you look at new user input things where people want a lot of screen real estate with the ability to evolve it to varying forms of input -- you know, there’s a tremendous amount of innovation on there.

But the key is is the efficiency platform of the device and the performance of the synchronization engine and the alignment of the carrier channel in our world are preconditions. And then absolutely a rapidly emerging dimension of innovation is the IO packaging, and that is something we absolutely do well in and we are innovating and we are driving and we have lots of exciting demands and lots of exciting partnerships, but it’s always looked at in a system service, efficiency and channel relationship context.

Chasing pretty packaging is not really what drives us, but that being said, exciting forms of multimedia IO and form factors the complement all the different services that people want and offer in wireless, it’s absolutely a big, big part of our business and it’s hard not to get excited by larger and addressable markets and compelling services and the kind of things that people are prepared to pay more money for to the carriers and churn less.

Operator

Your next question comes from Jim Suva of Citigroup. Please go ahead.

Jim Suva - Citigroup

Thank you very much. I believe you made a comment that you said consumer represented about or just over 30% versus enterprise, which would be the remainder. Could you talk a little bit about exactly what that number was? And as you look forward say next quarter and then maybe even a year further down the with all these new product launches, how do you see the enterprise versus consumer breakdown shaking out?

James L. Balsillie

This is the first quarter where our subs in a quarter for the non-enterprise were bigger than the enterprise in North America. So BIS was bigger than BES and the enterprise business is growing very fast. The non-enterprise business is growing very, very fast.

When you look at the TAM for the BIS and the Unite market, it is a bigger TAM and it’s an emerging TAM, but when you look at things like the mobile voice server service and the PBX synchronization, that people -- and the WiFi 6 mobile convergence piece, as well as all the web services, it’s a very, very exciting prospect indeed.

If I had to guess, I think they both are going to grow strong but I would have to think that over time, the non-BES market just has a bigger addressable market, just by sheer numbers to address around the world than the BES market, and it’s a more elusive market but we seem to be honing in on it really nice.

So I think the long-term trend is the BIS and the Unite are going to have just incrementally stronger growth rates and the law of compounding is just going to shift the composition slowly over time.

Jim Suva - Citigroup

Great. Thank you and congratulations.

Operator

Your next question comes from Paras Bhargava of BMO Capital Markets. Please go ahead.

Paras Bhargava - BMO Capital Markets

Good afternoon. Jim, could you tell us a little bit about the replacement cycle? What is the average age of your devices in the field today and how long do you expect the replacement cycle to continue?

James L. Balsillie

What is interesting is that whenever we come up with -- you know, companies try to get longer replacement cycles to amortize their devices but whenever we come up with a hot new device, there just seems to be a rash of unfortunate breakages at the large corporations. I don’t know if that’s just a mathematical anomaly or intentional.

These things are quasi-disposable, really and I don’t have specific stats but -- Edel, I don’t know if you have more but generally, you should think of these as quasi-disposable devices, something around a year-and-a-half to a two-year useful life that get broken or people just upgrade through the productivity. Edel.

Edel Ebbs

The way we kind of think about it from the financial side is we look at what the ratio is of total devices activated and to net activations. And I think last quarter it was around 1.85 or somewhere around there, close to two. I think the overall cell phone industry is actually a fair bit higher than that, so I think that there is still room for us to grow and I think as Jim mentioned, new products come out and that tends to accelerate that a little bit as people get itchy to want the new device.

Paras Bhargava - BMO Capital Markets

So it’s fair to say the average age of a BlackBerry is still greater than 1.5, Edel?

Edel Ebbs

One-point-five -- I just don’t have that kind of data here. Sorry, Paras.

Paras Bhargava - BMO Capital Markets

All right. Thanks.

Operator

Your last question comes from Paul Coster of JP Morgan. Please go ahead.

Paul Coster - JP Morgan

If I may, a two-part question, the two parts being completed unrelated; the first one is of our total revenue, what percentage came from out of the U.S.? And the second part of the question is Jim, you’ve got a bit cash balance. Do acquisitions figure in your growth strategy and if so, what are the criteria?

Edel Ebbs

We don’t break out revenue on a quarterly basis. I can pull the number for you while Jim answers the second part of your question on what it was for the fiscal year that we ended in March, but we just don’t break out revenue international versus North America quarterly.

James L. Balsillie

On the cash balance, I mean, for every person that says we are sitting on more cash than we need -- I shouldn’t say every person, but many people say we sit on more cash than we need and many bankers pitch that you need a cash horde, maybe a bigger one or a bigger whatever you want to call it for potential strategic purposes. It’s a very important and fair question; what are we going to do with our cash?

We are at a point right now where we carefully invest it and we preserve it and it’s a nice amount for us for what we want to do. There’s no question we look at a lot of M&A and we do a number of tuck-unders and certainly those have complemented our strategies and we’ve disclosed those over the years, and we will continue to do that.

But you can really look at every M&A thing we’ve done, it’s integrated into the technology platform or RIM to better avail this service that I tried to explain earlier. Would there be some kind of dramatic M&A? Obviously if that kind of thing was to start and materialize, we’d disclose it right way when it’s real, but your points are really fair comments.

It’s a high quality problem. What do you do with cash balances? We have a really strong and high performance audit committee and finance is a big part of that. And what’s the long-term cash strategies of the company is going to be a really important thing that we owe our investors an answer to sometime in the not-too-distant future. It’s not a pressing issue right now. It’s kind of at a reasonable level right now but with positive cash flows, we’re doing a lot of CapEx in facilities and infrastructure and in growth, but the cash flows are stronger than even our CapEx in a rapid growing space. There will come a time in the not-too-distant future where we have to come, you know, if there’s not a big M&A and there’s not big CapEx, then we have to come up with a cash strategy, whether it’s buy-backs or dividends or whatever is appropriate.

But that is not something that is fully thought through but it is something that’s been put on my agenda to address with the board and with the audit committee. Once we get greater clarity than that, we’ll do it.

In the past, we’ve done some buy-backs and those look like those were very smart things to do with the cash to the maximum 5% you can do at the price we did them at that time, and that is certainly one of the things that stays on consideration once this becomes brought forward.

I just don’t have a good answer for you right now.

Edel Ebbs

I actually do have some information for you. We actually did start breaking it out on a quarterly basis in the notes to our statements, which you wouldn’t have yet but the percentage of revenue outside North America was 34.5% this quarter.

Paul Coster - JP Morgan

Thank you.

Edel Ebbs

And I think that was our last question, so in closing I would just like to remind everyone that there is a post service available at 416-640-1917, passcode 21221688 pound, or you can listen to the call which has been recorded and is available in the investor events section of our website at www.rim.com/investors.

Thank you and we’ll talk to you next quarter.

Operator

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