Research In Motion F2Q09 (Qtr End 8/30/08) Earnings Call Transcript

| About: BlackBerry Ltd. (BB)
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Research In Motion Limited (RIMM) F2Q09 Earnings Call September 25, 2008 5:00 PM ET


Edel Ebbs - Vice President, Investor Relations.

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

Brian Bidulka - Chief Accounting Officer


Maynard Um - UBS Securities

Chris Umiastowski - TD Newcrest

Gus Papageorgiou - Scotia Capital

Jeffery Kvaal - Barclay’s Capital

Kulbinder Garcha - Credit Suisse

Tim Long - Banc of America


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

Edel Ebbs

Thank you, Operator. Welcome to RIM's fiscal 2009 second quarter results conference call. I’m Edel Ebbs, RIM's Vice President of Investor Relations. With me on the call today is Jim Balsillie, RIM's Co-CEO, and Brian Bidulka, RIM's Chief Accounting Officer.

After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update. Brian will then review second quarter results and I will discuss our outlook for the third quarter of fiscal 2009. We will then open the call up for questions.

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

We plan to wrap up the call today before 6:00 p.m. Eastern 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, earnings per share, channel inventory, seasonality, 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, prepaid plans and other non-financial estimates; our product development initiatives and timing; developments relating to our carrier partners; new and expanding markets for our products, and other statements regarding our plans and objectives.

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

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements, including risks related to the restatement of our previously filed financial statements as a result of our internal review of historical stock option granting practices and regulatory investigations or litigation 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; our reliance on carrier partners; the efficient and uninterrupted operation of RIM's network operations centers; the occurrence or perception of a breach of RIM's security measures; our reliance on suppliers and third-party manufacturers; risks relating to possible product defects and product liability; risks associated with our expanding foreign operations; restrictions on import and/or use of RIM's products in certain countries due to encryption of our product; our ability to effectively manage our growth; general economic conditions; risks related to competition; foreign exchange risks; and other factors set forth in the Risk Factors and MD&A sections in RIM's filings with the SEC and Canadian securities regulators.

We base our forward-looking statements on information currently available to us and we do not assume any obligation to update them, except as required by law.

I will now turn the call over to Jim.

James L. Balsillie

Thank you, Edel. We are pleased with our second quarter performance with revenues of $2.58 billion, up 88% from the prior year and earnings of $0.86 per share, up from $0.50 per share the same quarter last year. It’s been a busy summer at RIM with a few new product launches -- with a number of new product launches and announcements, as well a several new relationships with companies such as AOL, Microsoft, MySpace, Slacker, TicketMaster, and Tivo.

We added approximately 2.5 million net new subscriber accounts in the second quarter and the total BlackBerry subscriber account based was approximately 19 million at the end of Q2. Approximately 60% of the net additions in the quarter were by non-enterprise customers, and approximately 42% of our subscriber account base are now non-enterprise users. We continue to add carrier and distribution partners around the world and we now have approximately 400 carrier distribution partners offering BlackBerry in over 150 countries around the world.

The percentage of our subscriber base outside North America remains steady in Q2 in the low 30% range. The BlackBerry Bold was launched by 60 carriers in 29 countries this quarter and there is a strong take-up of the product by both enterprise and consumer customers. In fact, the mix of Bolds being activated in the market is split roughly in half between enterprise and non-enterprise segments. In the initial days of these Bold launches, we saw a disproportionate amount of Bolds being activated as upgrades or replacements. However, the mix between upgrades and new customers is beginning to shift now that the product has been marketed for a few weeks. This is consistent with our past experience with other query devices, such as the Curve and the 8800. In markets where it is launched, product reviews of the BlackBerry Bold have been overwhelmingly positive and we look forward to continued rollout of the BlackBerry Bold around the world and a U.S. launch in the near-future.

Earlier this month at CTIA, we announced the BlackBerry Pearl flip smartphone. The Pearl flip is the first smartphone designed to address the estimated 70% of the U.S. market that prefers to use a flip form factor. The BlackBerry Pearl flip, with its special drop-hinged design, sure-type keyboard system and dual color LCD displays for easy message previewing has cracked the code for a smart flip phone and is ideally suited to address this large market segment.

In addition to quad-band edge, the BlackBerry Pearl flip also allows a seamless hand-off between WiFi and cellular networks to address the growing number of people who choose to have one number and one line as opposed to a cellular/landline configuration. Reactions to this new model have been excellent and we are looking forward to its availability in markets around the world this fall.

In addition to the Pearl flip, we also recently announced the BlackBerry Curve 8350I for Sprint’s push-to-talk network. In addition to being the newest BlackBerry smartphone to use the IDEN network technology for Nextel Direct Connect, the BlackBerry 8350I will include integrated GPS and WiFi, an internal antenna, 2-megapixel camera, an advanced media player, as well as a large, removable battery for optimal battery life. The 8350I is targeted to the many market verticals where push-to-talk is a way of life while offering all the convenience and capabilities that the BlackBerry Curve product line is know for.

While we have a number of new products launching this fall, our existing product portfolio continues to be strong. During Q2, we observed a significant ramp of the BlackBerry Curve 8330 with many of our CDMA partners. Verizon and Telus drove record activations, led in part by the availability of new colors of the curve. At Sprint, the successful launch of the Curve in titanium followed by a successor in red led the device to become the most successful product we’ve ever launched at Sprint.

In order to take advantage of this high level of interest, we have partnered with Spring on a substantial joint marketing program, which will offer the curve at $99 for September and October.

Alltel also continues to show strong support for the BlackBerry platform by offering the red and amethyst Pearl at $79 and by becoming the first CDMA carrier to launch the white Pearl 8130 in the United States.

AT&T continues to be a significant partner for RIM. We’re across all channels, including indirect retail, B2B, SMB, and national retailers. Promotion of the Pearl 8110 with GPS continued through the summer and the BlackBerry solution was featured in AT&T’s Dads and Grads campaign that ran from June through September. BlackBerry professional software was also a key focus area in Q2 for AT&T’s dedicated SMB sales team.

Internationally, Latin America continues to be a strong market for BlackBerry products and services. Carriers throughout the region heavily promoted the BlackBerry solution throughout the summer and with the BlackBerry bold now launched with 20 carriers in Latin America and the continued strong interest in our existing product portfolio, we are expecting this momentum to continue into the fall.

In Europe, we continue to introduce new price plans for BlackBerry service as we work with carriers to promote the devices through more of their consumer channels.

T-Mobile Germany saw significant adoption through special pricing of less than EUR10 on Pearl and Curve, including six months for e-mail and GPS navigation. This promotion drove retail store sales to increase significantly in the quarter.

Vodafone Germany also had strong results with promotion of color Pearls, Pearl colors including the placement of the sunset red pearl in their TV, print, and online ads, as well as hero status in 1,000 Vodafone retail [stores].

In Spain, Orange launched BlackBerry smartphones for the first time into their more than 900 retail stores, with a EUR9 unlimited e-mail plan and a special 50% discount on service plans for the first three months.

In Turkey, Turkcell launched the Bold in August and supported it with TV, print, and online campaigns, as well as featured placement in their top retail stores with those efforts leading to significant increased sales for Turkcell.

The BlackBerry Bold is also making in-roads into Asian markets. In Hong Kong, the Bold launch was supported by significant carrier promotions and is receiving positive reviews and market acceptance.

In Australia, we launched Bold with Optus and also with Vodafone Australia and Telstra, and we are seeing new pricing plans to support the device.

In China, we continue to see greater interest among both multi-nationals and domestic enterprise accounts and are encouraged by our progress so far.

In India last week, we introduced the Bold with Bharti AirTel, Reliance Mobile, and Vodafone, and we announced BlackBerry product availability for the first time with Tata India. Recently, we have also entered into a relationship with Redington India Limited to distribute BlackBerry products to our carrier partners in India. This is a significant step for us as India is the second-largest cell phone market in the world and this agreement will allow us to gain broader access to the SMB and consumer segment.

During Q2, we continued to roll out more prepaid plans, including the announcement of an offering with Indosat in Indonesia. The BlackBerry on-demand program allows individuals and small businesses to prepay for unlimited data increments via SMS with options of either seven or 30-day data plans.

Programs like this are in place in other regions, including Telcel in Latin America and TIM in Italy, where prepaid represents a large percentage of their subscriber bases. Over time, we expect prepaid to become an increasing part of our business and we will likely break these subscribers out separately once they reach critical mass.

We continue to grow our presence in indirect channels. This past quarter, we have expanded our presence at Wal-Mart with the addition of Curve to the BlackBerry offerings and at Radio Shack where the BlackBerry Pearl was added to the mix.

There have also been a number of back-to-school promotions from these channels in the U.S. with Wal-Mart offering a free pearl with any two-year contract and Best Buy offering a Curve for $49. Throughout the summer months, Best Buy invested heavily to support BlackBerry with hero status and a special advertising campaign showcasing the benefits of taking a BlackBerry smartphone on vacation. This is a sharp departure from the way BlackBerry devices have historically been positioned in these channels and demonstrates the partnership that has developed with national retailers.

As we head into this year’s holiday selling season, both Pearl and Curve will be available at most of the major retail plans in North America. Other non-carrier owned retail environments like The Telephone Booth or Wireless Wave also continued to promote BlackBerry as a core product offering and play an important role in the marketplace.

Brightstar and Verizon have launched a dedicated program to increase the availability of BlackBerry devices throughout Verizon’s indirect channels. In addition to sales and marketing support, Brightstar assists with credit and inventory management for these channels. For indirect vendors like Go Wireless and others, this relationship facilitates the seamless offering of BlackBerry devices and accessories for the 65-network operators in 36 countries throughout the Americas where Brightstar distributes BlackBerry products.

In September, we announced the addition of AOL Instant Message, ICQ, and AOL Mail as native applications for BlackBerry smartphones. This is in addition to the already announced relationships with Windows Live Messenger, Google Talk, and Yahoo! Messenger. The benefit of native integration is a tight association between the apps and the device, which leads to a seamless experience and a high degree of usability, whether the user is attaching a photo to an instant message or viewing messages with multiple accounts and services in the same in-box. The BlackBerry solution is currently the only mobile platform that supports all five major IM services.

As a follow-up to our announcement last quarter regarding the integration of Microsoft’s Windows Live Messenger, we are pleased to have recently announced with Microsoft that we will be offering rich live search capabilities to the BlackBerry browser and BlackBerry maps application. This will enable users to choose live search as their native search engine and also allow for location sensitive queries within BlackBerry maps.

In addition to messaging payloads like IM and e-mail, increasing numbers of mobile customers are looking to participate wireless in social networks. Last year around this time, we announced our partnership with Facebook and have had over 2.5 million downloads of Facebook for BlackBerry applications since then. A few weeks ago, we announced a new partnership with MySpace, which has over 120 million monthly active users worldwide and is one of the most trafficked sites on the Internet. As with Facebook, the introduction of MySpace as a native app on BlackBerry smartphones will allow for a richer relationship between the user and the social network as it allows for push-based notifications, updating of status, browsing of messages, and more using a cellular or WiFi connection.

With mobile social networking rapidly increasing both in the enterprise and consumer space, this native integration with push-notification continued to attract consumer users to the BlackBerry platform.

Other announcements this quarter included TicketMaster, Tivo, Slacker, and others. As the official smartphone for TicketMaster, we are working closely with them to allow BlackBerry subscribers to browse, search, and purchase tickets to all types of events.

In addition, users have the option to listen to sample music cuts before buying concert tickets and the integration of the BlackBerry wallet application allows for quick and easy payments.

With the Tivo application, initially BlackBerry users will gain convenience of being able to download which shows are on and schedule television recordings while away from the living room and on the go. The Slacker application will provide users with over 100 expertly programmed Slacker radio stations and over 10,000 artist stations, as well as the option to create customized stations to personalize the experience even further. With this offering, BlackBerry subscribers will have the ability to leverage the outstanding multimedia experience on their devices by being able to take even more of their favorite music with them when away from their home or desk.

On the enterprise side, we’ve just announced support for Microsoft Office Communications Server 2007, which provides an enhanced real-time instant messaging and presence-based experience for corporate customers with an installed BES. This integrated offering combines the latest advances in enterprise instant messaging with a seamless user experience on a BlackBerry smartphone to help corporations and SMBs further increased their productivity and efficiencies in communications.

We also continue to work closely with SAP on seamless integration of their SAP business suite product. We are currently engaged with a number of CIOs in various industries who are excited to be among the first to try the combined solutions. We are pleased to be moving forward with the integration of a native SAP solution on BlackBerry smartphones.

During Q2, the BlackBerry mobile voice system continued to be adopted by enterprises in both North America and Europe. Many of these projects are progressing well, with some significant clients transitioning from pilot to full production deployment.

In addition, we are receiving a high level of interest from companies in Asia for this solution. We believe we are in a unique position to natively integrate the BlackBerry device with a corporate PBX and BES to allow the end user to dial through their enterprise network from their device as if they were sitting at their desk phone. We continue to broaden the distribution channels around this offering and announced a renewed partnership with Sprint this past week to market our MBS solution to their SMB and enterprise customers.

RIM continued its brand advertising campaign in North America and parts of Europe throughout Q2, with a goal of supporting [our partners’] marketing efforts and helping increase brand relevance and purchase intent in the broader consumer market. The campaign utilized Internet and print mediums, as well as TV advertising. We continue to track the results of these campaigns closely and in each market where it is running, we have seen positive results. Feedback on the campaign is that it successfully conveys the value of BlackBerry to a whole new audience in a way that making them more and more receptive to the brand in a way that is clearly influencing purchasing intent with these target audiences.

We are also pleased to note that Interbrand, a globally recognized brand consultancy, has placed BlackBerry in its top 100 best global brands list for the very first time, debuting with a number of 73 in this group of super powered brands.

There is a shift occurring in the market for mobile devices and RIM is in an excellent position to capitalize on this opportunity. Overall growth in the traditional phone market has stagnated for the past five years, while the combined annual growth rate of the smartphone market in the U.S. over the same period is 58%. Given this trend, we believe that one day all mobile phones will be smartphones. This is a segment that BlackBerry handsets target and we currently have the number one -- are the number one smartphone vendor in the U.S. with a 54% market share in Q2, according to IDEC. We believe the now -- that we believe that now is the time to aggressively pursue adoption.

As we go after this market with leading edge new products, many of which are just launching, there will be an impact on hardware gross margin. Our [core cash] for Q3, which Edel will detail later in the call, is for overall gross margin of approximately 47%, driven primarily by a decrease in the blended handset gross margins.

Our new hardware platforms, which include a multitude of new features and functionality and operate on next-generation network technologies, have higher associated costs. This is particularly the case with Bold and other unannounced 3G product platforms. Products on existing platforms, such as the BlackBerry Pearl flip, have a margin structure more in line with Curve and Pearl.

It is difficult to pass all of the increased cost of these new platforms and features on to customers and still achieve the end market pricing point we are targeting to stimulate mass adoption. In addition, because our new products are leading edge in terms of technology and functionality, we are sole-sourced on certain key components and, as we mentioned on the last earnings call, also -- are also experiencing the effects of the weak U.S. dollar in the prices we are paying for some components.

In the past, we have seen scale benefits over time with the launch of new platforms and we believe that there are opportunities for a degree of cost recovery on these products as we move up the experience curve and seek dual source components and design -- as we seek dual source opportunities and design and engineering efficiencies in our hardware platforms.

We also believe that as we scale our installed base, there are opportunities to grow other higher margin revenue streams. As we have said in the past, we believe we have a leverage business model and the significant growth opportunities we see heading into the remainder of the fiscal year. We believe the opportunities for operational efficiencies and scale to drive profitability are substantial.

With respect to preparing the organization for the growth we are anticipating, we have added a number of new EMS partners globally to increase our manufacturing capacity and flexibility. These new partners are now beginning to build BlackBerry products for us and will be an important part of meeting the strong demand we are seeing for our products heading into the second half of the year.

I will now turn the call over to Brian to review Q2 results.

Brian Bidulka

Thank you, Jim. Revenue for the second quarter ended August 30th was $2.58 billion, up 15% from $2.24 billion in the previous quarter. Handheld devices represented $2.12 billion, or 82% of RIM's revenue during the quarter, in line with the previous quarter. Total devices shipped in the quarter of approximately 6.1 million were up from 5.4 million in the prior quarter.

Approximately 4.8 million new devices were activated in Q2, either for new customers or for replacements and upgrades, not including phone only sales.

Channel inventory at the end of Q2 was up slightly from Q1.

Device ASPs in the quarter were approximately $344. We expect ASPs in Q3 to be approximately the same as in Q2.

Service revenue was $334 million, or 13% of revenue for the quarter, up $42 million from Q1.

Monthly ARPU declined just slightly from the prior quarter.

Software revenue was $64 million, or 3% of revenue.

Other revenue, including non-warranty repairs and accessories, was $63 million, or 2% of revenue.

Gross margin for the second quarter was 50.7%, in line with our expectations.

Operating expenses increased by 23%, slightly less than we had forecast last quarter. R&D spending was $181 million, or 7% of revenue for the quarter, and selling, marketing, and administrative expenses increased to $380 million, and were 15% of revenue. Included in operating expenses is stock option expense of approximately $10 million.

The tax rate for the quarter was approximately 31.1%, slightly higher than our forecast, primarily due to the unfavorable impact of the appreciation of the U.S. dollar relative to the Canadian dollar. The impact of the unfavorable tax rate was just over $0.01 per share and was primarily the result of U.S. dollar denominated assets and liabilities held by our Canadian operating companies that are subject to tax in Canadian dollars and the related timing of transactions.

Net income for Q2 was $496 million, or $0.86 per share diluted. Weighted average diluted shares used in the EPS calculation for the quarter were 575 million. Actual shares outstanding at August 30th were 565 million. Total options outstanding at August 30th were 13.7 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances. During the quarter, RIM generated approximately $163 million in cash from operations before working capital adjustments. Total cash, cash equivalents, short-term and long-term investments were $2.24 billion at the end of Q2, as compared to $2.08 billion at the end of the previous quarter.

Capital asset additions in Q2, including intangible assets, were approximately $425 million, which was offset in part by cash provided by financing activities of $8 million, primarily related to the issuance of share capital resulting from the exercise of stock options.

From a working capital perspective, trade receivables were up from the prior quarter, in line with top line growth, and DSOs were higher from the prior quarter at 56.5 days. This increase was due to sales that were weighted towards the latter part of the quarter, as well as longer payment terms for non-North American customers.

Inventory on-hand was approximately $513 million versus $462 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 Q3.

Edel Ebbs

Thanks, Brian. Just before I move on to guidance, I just want to clarify that the net subscriber account additions in the quarter were 2.6 million. Before I discuss our outlook for Q3, I would like to remind everyone that these forward-looking statements reflect management’s best current estimate and should be taken in the context of the risk factors listed at the beginning of the call and outlined in our public filings.

We are forecasting revenue for the third quarter of fiscal 2009 to be significantly higher than Q2 in the range of $2.95 billion to $3.1 billion. We expect hardware shipments to be over 7 million units at a similar ASP to the second quarter. The number of product launches that were scheduled for early Q3 are now scheduled to occur later in the quarter than we anticipated at the time of the last earnings call and the ramp in these products is now expected to straddle Q3 and Q4.

Our forecast for Q3 includes a number of new products, including Bold, the Pearl flip, as well as smaller quantities of an unannounced product on a new platform that is expected to ship later in the quarter. The slip in the timing of these launches beyond our expectations, in particular the BlackBerry Bold and the BlackBerry Pearl flip launches in the U.S., could impact the actual results we report for the third quarter and shift unit shipments from Q3 to Q4.

We anticipate that forward weeks of channel inventory at the end of the third quarter will be similar to Q2.

Software revenue in Q3 is expected to increase slightly.

We are targeting net subscriber account additions for Q3 of approximately 2.9 million. This increase is expected to be driven by back-to-school promotions that have been happening in September, holiday programs scheduled for late October and throughout November, and new product launches in both the U.S. and globally.

Last year we saw a very strong November as carriers ran two marketing and pricing promotions in anticipation of Black Friday and we expect to see a similar pattern this year with a high proportion of shipments and net subscriber account additions occurring in the last month of the quarter.

In terms of sell-through, we would expect to continue to see strong replacement sales for Bold and for phone-only sales to increase with the addition of the BlackBerry Pearl flip to the product mix later this quarter.

Again, as I mentioned previously, quarters with high dependence on new product launches carry greater risk and therefore the estimate of 2.9 million net subscriber account additions is dependent on new products launching within our expected timeframes and being delivered in time to meet carrier holiday promotional windows.

We are targeting gross margin for the third quarter of approximately 47%. As Jim mentioned previously, gross margin is expected to move down as we launch new premium product platforms that are feature rich and designed to operate on new network technologies. The higher costs are primarily related to these new platforms, while products designed on existing platforms, such as the BlackBerry Pearl flip, have higher gross margins.

In addition, the weak U.S. dollar and tightness in certain segments of our supply chain are also putting pressure on gross margins.

We expect an even larger percentage of our handset mix in the fourth quarter to be based on new platforms and therefore we expect a slightly lower gross margin again in Q4. Beyond this fiscal year, there are opportunities to work some of the costs out of our new hardware platforms but as these are expected to be large volume products, and we plan to develop future products on these platforms, it is unlikely that hardware gross margins will improve substantially in fiscal 2010.

For modeling purposes beyond Q3, we currently believe it is reasonable to use a gross margin estimate in the mid-40% range.

We have stated on many occasions in that past that we believe our operating model is a leveraged one. With the large ramp in OpEx we saw in Q1 and Q2 now behind us, we can begin to drive leverage in operating expenses as we grow the top line into Q4 and beyond. This leverage, together with a strong revenue ramp, will offset much of the effect of the lower gross margins on earnings as we move forward and we believe that strong profit growth is achievable beyond Q3 and into fiscal 2010.

We expect a total operating expense increase for Q3 of approximately 11% to 12% from Q2 levels, with R&D increasing approximately 11% to 12%, and sales and marketing and administration expense increasing by approximately 10% to 11%.

As we discussed previously, we are investing in R&D as well as marketing and branding programs to support our push into broader market segments. While we expect OpEx to continue to grow on an absolute dollar basis, we believe that the ramp in spend is normalizing and will likely decrease as a percentage of revenues beyond Q3 and into fiscal 2010.

We expect depreciation and amortization to be between $53 million and $54 million in Q3, higher than Q2 due to ongoing CapEx. We expect CapEx to be approximately $250 million in Q3 and we expect a continued high level of investment for the remainder of the fiscal year.

Investment income is expected to be approximately $30 million in Q3, which is higher than normal due to a gain on an investment of approximately $13 million that’s expected to be realized in the quarter.

We expect the tax rate to be approximately 29% to 30% in Q3 and Q4. Beyond fiscal 2009, we would expect to see the rate decrease slightly due to scheduled Canadian corporate tax reductions. Please note that the rate could move outside this range, depending on foreign exchange fluctuations, as we saw in Q2.

We expect Q3 fully diluted EPS to be in the range of $0.89 to $0.97 per share.

I will now turn the call back to Jim.

James L. Balsillie

Thank you, Edel and thank you, Brian. We believe we are entering a time of tremendous opportunity for our business and are targeting strong revenue and earnings growth for the remainder of the fiscal year.

The BlackBerry product portfolio we have in market, together with the growth in brand awareness and carrier support of the past several quarters, put RIM in an excellent position to continue to gain share in the global smartphone market. We look forward to updating you on our progress again in December.

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 Instructions) Your first question comes from Maynard Um from UBS.

Maynard Um - UBS Securities

It sounds like this past quarter and the current quarter is very promotion heavy around back-to-school and other carrier promotions, which I presume is the thing that is also helping the top line. And it sounds like beyond that, you expect greater revenue ramps in Q4, helping your leverage and the leverage in the model but I guess the question is beyond the third quarter, looking into the fourth quarter, why wouldn’t we expect to see some seasonality to start kick in and beyond that, as some of this promotional activity starts to tail off, which looks like is being the key driver over this past quarter and the November quarter?

James L. Balsillie

Well, it’s a fair question. What’s really happening -- I mean, there’s a number of currents at play in the market right now which are very, very exciting. You know, we -- if you’ll remember, when we have the conference call last year, we really had a surge during the Black Friday and we weren’t really sure what was going to happen and there was a pretty -- there was a very strong flow into the new year, calendar new year throughout Q4, so that was pleasant and one could reasonably expect that if all these hero programs take the traction we think we are going to have, and we have a dramatic and comprehensive set of hero programs really throughout North America and Western Europe but that should carry through. So when you talk of seasonality, is that something for the spring or something like that, it’s getting a little out of our visibility because it’s very important to remember that there’s a lot of sector-specific stuff at play right now where the smartphone is really displacing the common cell phone and so we’ve got a lot of sector-specific trends that really are key drivers with all these new enablers we talked about.

So our view of it is it’s really a time for adoption. The new products traditionally have a higher BOM and you work it down. We’ve just got such a rapid product cycle. You’ve seen part of the announcement this -- at CTIA a couple of weeks ago and you haven’t heard all of the announcements and all of these are coming in mid-quarter, so small shifts in a couple of weeks here or there really shift how much comes into the quarter. And definitely being a hero campaign for the holiday season is very unique for us and we participate in some of the pricing and the promotion in this but as I said before, there’s also ways to get the cost down and we see some very exciting new high margin revenue strategies that come out of all of this, so it’s exciting, it’s dynamic, it’s high growth, we’re the leading market share player, we’re investing hard in product innovation and platform innovation and hardware innovation and channel execution and new ecosystem development and beyond that, the nuancing of bits of tweaks in the model in seasonality is a bit hard to predict but it’s not really where our head is. Our head is just driving this hero campaign and driving the ecosystem adoption in this hot new space and that really tees up something that just sustains and sustains for a long period of time and it definitely comes with some investment on our part in all of that.

So it’s very hard to nuance. As I’ve said, the sector-specific stuff is more dramatic force in our business than sort of macroeconomic stuff, so a bit of seasonality, sure, but you are really subject to the sector-specific drivers.

Maynard Um - UBS Securities

Can you just clarify on the gross margin the impact of the COGS of the hardware versus any contra revenue marketing that you are doing?

James L. Balsillie

It’s probably a 50-50. It’s a fair comment. You know, there’s some high BOM on it but we really just pack it full of features and then you cost reduce later but we’ve never introduced so much new product so fast. And for sure, you do some contra stuff to get the hero campaign because this is cutting over to a mass play and like I said, we are a platform play and there are a lot of new revenue streams that are teeing up on this and we are the market share leader and this is the future and you gotta extend and drive the adoption with it all the way and the models aren’t static and changes on interim basis as we step through transitions and investments and adoptions, we view them as shrewd and very, very beneficial to the long-term interest of the company. But I’d put it down to a 50-50. I’d say some aggressive pricing for a hero campaign with major growth plays and the other is just an overstuffed BOM that takes a little bit of time to cost reduce but you know, [there’s such a high product cycle] and we’re not even near done this autumn. Like, you are going to see even more stuff, so it’s a remarkable time.

Maynard Um - UBS Securities

Thank you.


Your next question comes from Chris Umiastowski from TD Newcrest.

Chris Umiastowski - TD Newcrest

Thanks very much. I think the gross margin stuff is going to get asked to death so I want to ask something a little bit different -- can you guys talk about your expectation for having phones like the Pearl flip hit the prepaid market? But I’m talking about the prepaid voice market, not so much prepaid BlackBerry. It seems to me that in Europe in particular, and probably globally this is a trend towards more of a pay-as-you-go on a voice basis and I don’t really see a lot of carriers offering BlackBerry data on a prepaid voice SIM card and I’m wondering whether you think that’s going to start to change and how important that might be.

James L. Balsillie

Well that’s happened a fair bit and T-Mobile has done that, first of all, as a voice only. It won’t be hard to get into a pay-as-you-go. What’s also interesting is we are working on prepaid plans for data, so all the different channel programs and channel promotions -- you know, I think the key thing for the carriers really is that as the voice comes under pressure and commoditizes a bit, [and number] portability and VOIP things and all that kind of stuff, the most important thing for the carrier is to create a platform relationship with data services to their customers so getting sort of a pay-as-you-go voice plan isn't that strategic because BlackBerry represents a very profitable play for them, so it’s much more about -- but you know, what’s interesting to me is that I think pretty soon all phones will be smartphones. It’s a function of just a little bit of software and some memory and a little bit of audio and a bit of a platform structure in it and so will all these phones be sold as latent smartphones? Yes. And will there be data activated? It may be just they are latent to use as you wish and there will be creative revenue models and that kind of stuff, so that seems very, very intriguing to me, as well as them selling voice only plans. But we haven’t got a lot into sort of pay-as-you-go voice plans but the more interest has actually been into prepaid data because pay-as-you-go on data -- that’s what you mean, a prepaid thing and we have announced some of those and that’s a big play in a lot of the world. You know, parts of Lat-Am where even the high-end customers, the overwhelming percentage are prepaid and so getting data into a prepaid model is becoming a big, big part of what we are doing but a little less just going in the pay-as-you-go voice segment. That one hasn’t come my way. We have sort of bigger fish to fry on our adoption but that may come out as kind of a channel product planning strategy to carriers but it’s been more the other things I’ve talked about so far.

Chris Umiastowski - TD Newcrest

Okay, and I just also wanted to ask a clarification -- you said ASP would be flat for the quarter coming up but you are expecting to ship a lot of new devices with higher costs, so I was hoping you could reconcile why flat ASP if you are going to be shipping a lot more expensive devices in the quarter?

Edel Ebbs

Sure, Chris. Some of them, there’s also the BlackBerry flip in there, the BlackBerry Pearl flip, which is a fair bit lower ASP and there’s still a good portion because those launches are sort of straddling Q3-Q4, there’s you know, still a good bit of our Curve Pearl 8800 platform in there as well.

Chris Umiastowski - TD Newcrest

Okay. Thanks a lot, guys.


Your next question comes from Gus Papageorgiou from Scotia Capital.

Gus Papageorgiou - Scotia Capital

Just on the margins, so if I look at your operating model based on the guidance you are giving, we should see operating margins just kind of below 26% for the next quarter. That’s EBIT margins, which is a number you haven’t seen since kind of Q105. Since that time, you’ve been between kind of 26% to 31%, 32% operating margins. I’m just wondering, going forward for the modeling purposes, do you think you can maintain that 26% to 31%, 32% range operating margin or should we also take down our expectations of operating margins consistent with the gross margin?

Edel Ebbs

I think what we tried to get across on the call is that we think that the big ramp in the OpEx spend is really behind us and now you will just see more normal spend so while the absolute dollars will go up, you will see a normalization in terms of rate, so you will see it go down as a percentage of revenue. I mean, the counteract into that is the decreased gross margins but I think that as you go out into Q4 and next year, if we get the top line growth that we are hoping for, we will be able to drive some leverage. I can’t commit to a level. There’s too many wildcards in there but that’s where the dynamic that we are looking at and we think that we can drive leverage and sell some really good profit growth.

Gus Papageorgiou - Scotia Capital

So is it then reasonable to think that you can kind of maintain historic EBIT margins or is that an unrealistic assumption?

Edel Ebbs

I mean, I don’t think that -- I mean, I think that there’s certainly ways that we can get back there.

James L. Balsillie

I think, Gus, in the interim, there’s really -- I mean, this is a heavy adoption cycle. It’s a new product cycle. There’s some pricing and there’s some BOM stuff but you know -- I mean, I think we’ve sort of telegraphed we have some ways that we think we can bring the cost down if we see some new revenue streams. The model, we believe it’s long-term leverage. We believe this high-growth we got -- we got leadership in this and I just can’t telegraph a lot more of it right now but we feel very comfortable about the long-term margin and the long-term opportunities with this.

Gus Papageorgiou - Scotia Capital

Okay. Thank you.


Your next question comes from Jeffery Kvaal from Barclay’s Capital.

Jeffery Kvaal - Barclay’s Capital

Indeed. Jim, my question is -- I’m wondering if there’s a bit of a shift in the competitive or market landscape. It seems as though that in the past, you might have been able to pass along some of the cost of a new platform or in this particular case, there is a little bit more co-marketing that is required in launching a new product, so I’m wondering if the market is softening, is there greater competitive elements to the market now than there might have been a few years ago or how we should think about this?

James L. Balsillie

It’s a fair question, Jeff, and I would say the things that are different here is that’s pretty normal for us when we introduce new products if they got a slightly tighter margin. What’s unique here is we’ve never introduced so much product and brought so much product into the mix at the same time, so that’s kind of point number one.

Point number two, we’ve never been put in so many hero campaigns and there’s a little bit of a quid pro quo because they completely put their shoulders -- like, you are going to see hero programs like -- just wait until you see. Like, everyone has a hero campaign where we are the featured if not the only featured device for the buying season. And that transitions us to a totally different league and a totally different set of opportunities that really keeps that sort of smartphone into traditional cell phone displacement cycle and mass marketing thing going on.

So if we believe that adoption and positioning is the key, this is the core strategy at this point in time so I wouldn’t put it to a competitive thing. I would put it to a rapid introduction of new products in the cycle, coupled with being positioned as hero.

And again, this is a lot of new newness. Like, these are -- like, you know, you are starting to see early, early indications of these campaigns but wait 30 days and when you see these campaigns, it’s like nothing you’ve ever seen before. And part of it is if they are going to put their shoulder into it, we’ve got to put it in a little bit and yes, there’s some interim model shifting but the aggregate margins so great and we are also at an investment cycle in all these different geographies around the world and our capacity -- you know, I don’t know how to say it other than if you look at the nature of the application partnerships we talked about at CTIA and we talked about on this call, you are just seeing the front-end of these kinds of things and these smartphones are just becoming so powerful. They represent so much of what you want to do and that’s why everybody is getting excited about it and we are unambiguously in the overwhelming leadership position. I mean, 54% market share and we have an opportunity to keep that and extend it as these become the main interface for darn near everything in people’s digital lives. And us, you know, you play the adoption cycle and then you let your other revenue streams and your cost reduction come on later, so no, I think it’s fair that you are focusing on sector-specific factors, which is what drives us principally but it’s much less the competitive element than it is the very things of adoption we are trying to catalyze, and it is a fair thing to sort of look at those who have a good platform strategy and those that don’t and see what are the real factors at play.

We are just simply positioning for greater adoption because this is not smartphone versus smartphone. This is smartphone versus legacy and that’s why things like the flip and the push-to-talk and the Bold and maybe a couple of other surprises, some you know of, some you don’t this fall, coupled with the platform extension things and the carrier hero campaigns, you know, a land grab is not a bad metaphor for what’s going on right now, or sort of mass adoption or mass displacement. And so our thing is is you just can’t be approaching it quite the same way you did before without compromising your adoption potential.

So we could have a sweeter margin for a couple of quarters and we might not torque the growth quite as much and then we will rue that for the next 20 years, that we gave up the key land for a little bit of interim gratification. And no, I don’t see it in the competitive context, no, I don’t.

Jeffery Kvaal - Barclay’s Capital

If things are driven by large product ramps in the next few quarters and hero campaigns, then I might have thought that those pressures would alleviate at some point, maybe not in the next few quarters but over the next three or four quarters. It didn’t sound that way from the way, Edel, you were talking about the gross margins.

Edel Ebbs

Yeah, well I think that -- you know, we have a lot of products launching Q3, Q4, and even into early next year and a lot of them are all on the same product platform that have the higher costs that we refer to, so -- I mean, it’s not -- yes, Pearl flip is a little bit different but most of the rest of our products that are coming out over the next few quarters are going to be at that higher cost and we are expecting a lot of volume from those products so you’ll start to see over time --

James L. Balsillie

If you still have that land grab going on, you still have the rapid introduction, you are surging, we’re in a surge type situation right now, you know, it’s hard to have any reasonable visibility beyond a couple of quarters from now. I mean, it just gets more and more opaque very quickly after that but you are going to see a rapid set of product introductions and a rapid adoption of what we do as this thing accelerates. I mean, that to us is unambiguous and as we’ve said, we think we can cost reduce these once it stabilizes and we think we have new revenue streams and the market leverages, and investors have to decide -- do they want that leverage off a small platform base or a large platform base? And strategically running this company, I think it’s all about adoption right now because that’s going to be the basis for phenomenal leverage for a long, long period of time and as you assess this business and get close to it and you see the dynamic that’s at play, there’s a turbo-charging and there’s a massive disruption going on in a very positive way if this is played out well right now and it’s all about catalyzing adoption through this rapid stage of the next couple of quarters.

And exactly how the model will settle out, you know, we know there’s leverage, we know there’s new revenue streams, we know there’s cost reduction opportunities and most of all, we know there’s a super-charged top line and we’ve got to be there and if we are there, it’s great and -- but if we give up ground for short-term gratification, that’s just not in the best interest of our shareholders, not even close.

Jeffery Kvaal - Barclay’s Capital

Thank you.


Your next question comes from Kulbinder Garcha from Credit Suisse.

Kulbinder Garcha - Credit Suisse

Thanks. I hear the comments on gross margin and [inaudible] you are going after. I guess what I am surprised about is why isn't the [inaudible] seasonality even stronger for the next couple of quarters? That’s my first question.

The second one is on OpEx, did I hear you correctly saying OpEx still should start basically going down after the next quarter?

James L. Balsillie

Well that’s -- I mean, you know, first of all, I think we are guiding at least 20% growth, around 20% growth this quarter with a fair bit of range. And second of all, a lot of these products are coming in mid-quarter, mid-ish to late quarter so here we’re bringing some in now and so -- and you invest and brand build and co-op right in the start of those things, so I mean, I think you look at the leverage of the model and the cash flow of the company and this hyper growth that we’ve been through chronically and the tremendous pipeline of products and the tremendous platform extensions and I said on the call, we’re now at over 400 carrier partners around the world. I mean, I blink and it was 25 not so long ago and I just came back from India -- remarkable opportunities and investment there. You know, we’re in China with remarkable opportunities to invest. Russia, remarkable ones and surging in Western Europe in the holiday season and North America.

So why is it there? Is it -- you know, first of all, I think there is growth, tremendous growth, actually. I mean, 20% give or take whatever the bit is going to be and that’s what’s guided with a lot of new products coming in and a lot of opportunity and a lot of exciting stuff for Q4. A lot of this stuff coming in mid-quarter, heavy investments in all we do and still I think a strong model and strong performance and strong growth and strong cash management and we’re balancing so many things and I think we are balancing them exceptionally. I completely support -- you know, if there was one thing that I would do if I had more latitude, I think we should invest more. I think coming from India, that could be the biggest market in the world and you could make an easy case for that. And I’m not saying it is and I’m not saying it’s the short-term but it justifies tremendous attention and so you get your products then, you get them priced right, you get your promos done, you get your ecosystem supported, you get them launched, you build the base of the platform, you build the whole constituency and this is why everybody is playing so aggressive into this space. I mean, everybody is and we’ve got leadership and we’ve got leadership worldwide.

So I think we have growth and it’s coming from products, coming mid-ish and late in the quarter. I think you are going to get a tremendous bump from those this quarter. We’re going to get an even bigger bump from them next quarter and I think more and more these new revenue streams, which I have to be careful of, will become more and more apparent and I think investors will be delighted because the company -- as long as the company holds its leadership position in this smartphone platform as it goes to mass adoption, like I said, you’ve got a lot of indicators at CTIA. You know, these things are doing a lot more things a lot faster than even I anticipated and that is very, very exciting and that means whatever value our position had to the world, it’s worth more to build and extend and hold and build and extend that than it did before because it represents more. And I’m not going to knowingly let that slip by trying to be just a little too parsimonious on some key things for a short period of time.

Brand new platforms on brand new architectures and radio code and silicon and the whole U.I.s and the whole works and so it’s been -- you know, the engineers absolutely moved heaven and earth in performance throughout the summer time, so there’s elements of design risks on our point of view. There’s certification risks on the carrier’s point of view with their new network technologies and their certification processes. There’s cycles with the carriers and with fundamental to all of them being so strategic, they are as motivated as we are because we represent a very high profitability future but again, we are -- to evaluate the -- you know, this is a step function of enabling for a long-term set of deliverables and promises and economic opportunities that are tremendously complex and multi-faceted development exercises and certification exercises and it is not pure science and precision. And to be doing all that and actually delivering the promise within 30-day plus or minus windows of certification and acceptance is just -- quite frankly, anyone who is close to the business categorizes that as outstanding and would even consider that an understatement.

Well, if you were planning something to get 60 days in a quarter and it shifts two or three or four weeks, which is a nothing shift in these kinds of things, you may only have four weeks of that product in the quarter instead of eight weeks, or you may get six or you may get the full eight weeks.

So we play on the margins but we’ve been there before and that’s not a big element of our risk and exposure and our fate, though of course it leaves us prone to over-extrapolation because people sort of catch a tweak mid-quarter and over-extend it. So yeah, there are shifts but I don’t know if we’ve ever launched a product without these risks being at play with a movement a couple of weeks here or there.

Kulbinder Garcha - Credit Suisse

Okay. Thank you.


Your next question comes from Tim Long from Banc of America.

Tim Long - Banc of America

Thank you. If I could just drill a little bit more into the OpEx line -- so it did come in it looks like a little bit better for the August quarter and the guidance seems a little bit better than what probably most people had, so two parts on that -- number one, could you just talk a little bit about is this management because the gross margin line is coming down? So is this a trend here or is this just somewhat to try to make up for spending on the gross margin line?

And second, could you talk about if any spending shifts between the OpEx lines and the COGS line, whether it’s some of the promotional activity or anything like that where we are seeing some spending shift from what we would see in OpEx to what we are seeing now in gross margin? Thanks.

Edel Ebbs

On your OpEx question, when we first talked about the ramp in OpEx that we were expecting in terms of -- especially for the branding programs and for the R&D growth, at the time we talked about that not sort of being a growth rate in OpEx that we were going to see going on instantly. And I think what we are seeing now, I mean, I think the message has always been that we were expecting that to normalize and go back to our regular spending patterns in terms of OpEx, where you have higher marketing spend around launches and things like that. And I think that that’s what is happening here, is that we did do the big spend, we’ve got the branding programs going, we’ve got a lot of growth happen in R&D with some of the new facilities we have and now we are just in a position where we can leverage that. You know, we’ve got the new products hitting the market so we are able to leverage it. I think that’s really what you are seeing in terms of the guidance and maybe a little bit what you saw this quarter.

Tim Long - Banc of America

Okay. Would it be safe to assume that -- you mentioned a small amount of units for a new platform in the November quarter. Would it be safe to assume that the marketing dollars associated with that would be in the November quarter, given that it’s starting to shift now as opposed to when it ramps in February?

Edel Ebbs

It’s really going to depend on when it launches and when it goes into market. You know, the product that I’m referring to, it is a small amount in the quarter and it’s really when the marketing spend for that happens is going to be somewhat dependent on when that launch happens. It’s really hard to say on what side that is going to fall.

Tim Long - Banc of America

Okay, but that was similar to what the Bold was last quarter, correct?

Edel Ebbs

Well, I mean, Bold was [part a little bit this last quarter] but I mean, Q3 is really going to be a bigger quarter or Bold.

Tim Long - Banc of America

Okay. Thank you.


There are no more questions at this time. Please continue.

Edel Ebbs

Thank you. Thank you, Operator.


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

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