BlackBerry Ltd (BB) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Research in Motion third quarter fiscal 2009 results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for the queue up for question.

(Operator Instructions).

I would like to remind everyone that his conference call is being recorded on Thursday, December 18, 2009, at 5:00 p.m.

Eastern time.

I will now turn the conference over to Ms.

Adele Ebbs Vice President of Investor Relations.

Please go ahead.

Thank you.

Welcome to RIM's fiscal 2009 third quarter results conference call.

With me on the call today is Jim Balsillie, RIMs Co-CEO; and Brian Bidulka, RIMs Chief Accounting Officer.

After I read the required forward-looking statements disclaimer, Jim will provide a business and strategic update.

Brian will then review third quarter results and I will discuss our outlook for the fourth quarter of fiscal 2009.

We will then open the call up to questions.

I would like to note that this call is available to the general public via a call-in number and webcast.

A replay of the webcast will also be available on the RIM.com website.

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

Eastern this evening.

Some of the statements we 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, ASPs and foreign exchange related matters for Q4 and beyond.

Our expectations regarding RIMs near and long term tax rates as well as the timing and effect of proposed changes to Canadian tax laws, our estimates of the number of BlackBerry shipments, 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've 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 results 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 in a timely manner.

Our reliance on carrier partners.

The efficient and uninterrupted operation of RIMs network operation centers.

The occurrence or perception of a breach of RIMs 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 RIMs products in certain countries due to encryption of our products.

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 section of RIMs 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.

Thank you, Adele.

We're pleased to report third quarter revenues of $2.78 billion up 66% from the prior year and adjusted earnings per share of $0.86 up from $0.65 per share in the same quarter last year.

Q3 results were in line with preliminary Q3 results reported on December 2, but lower than originally estimated primarily due to delays in the launches of certain new products, mix of product shipped in the quarter and unfavorable foreign exchange rate.

We believe that the weakness in the US economy had an impact.

RIM shipped approximately 6.7 million units in Q3 with new products launched in the quarter accounting for a higher than expected percentage of the total.

The rate of adoption of our new products in Q3 was faster than we anticipated and we expect this to continue in the fourth quarter.

As a result of the strong demand for these feature-rich products, particularly Storm, the volume of shipments expected in Q4 is much higher than Q3 of between 7.5 and 8 million units.

The rapid shift in product mix from earlier products to these newer products over a short period of time is causing our gross margin to decline faster than we expected and the blended gross margin for Q4 is expected to be lower than Q3, between 40 and 41%.

This includes the foreign exchange impact of approximately 1% due to the continued unfavorable relative foreign exchange rates.

We're working closely with our suppliers, manufacturing partners and design team to reduce costs in our new product platforms and we'll begin to see the effect of these later in the quarter and more fully as we head into fiscal 2010.

Based on our current forecast for ASP and product mix we expect that gross margin percentage for fiscal 2010 will be in the low 40s and that net earnings will continue to grow.

Q3 was a pivotal quarter for RIM with an ambitious number of products launched.

We added approximately 2.6 million net new subscriber accounts in the third quarter and total BlackBerry subscriber account base grew approximately 14%.

The growth of net subscriber account additions was tempered by a number of factors that impacted us in Q3.

The impact of customers delaying purchases in anticipation of the new devices that were launched in the quarter was greater than we expected and the actual timing of launches later in the quarter meant that we experienced this overhang effect for longer than we had originally anticipated in September when we set the guidance.

We also saw a high proportion of Bold sales in the United States go to existing customers rather than to net new subscriber accounts which contributed to the higher than normal replacement rate in the quarter.

Outside of the US, Bold sales are split about half and half between new customers and upgrades.

We also believe that the weakness in the US economy began to impact net subscriber account run rates in October.

Approximately 60% of net additions in the quarter were non-enterprise and these customers now account for approximately 45% of our subscriber account base.

The non-enterprise segment grew well across all geographies and growth in international markets accelerated following the launch of our new products into these regions.

We continue to add carrier and distribution partners around the world and we now have approximately 425 carrier and distribution partners offering the BlackBerry solution in over 150 countries.

The percentage of our subscriber base outside North America increased slightly in Q3.

We saw unprecedented marketing support from our carrier partners in the third quarter and Black Friday was once again a record day for BlackBerry device sell through and net subscriber account additions.

This strength is continuing so far in December.

Year-over-year percentage increase in net adds on Black Friday was even higher than this -- than this time last year with many carriers achieving their highest level of BlackBerry net adds ever in a single day despite the economic conditions facing consumers this year.

The response to the BlackBerry Storm launch with Verizon and Vodafone has been exceptional and demand for the devices is even stronger than we anticipated.

Verizon stores sold out initial shipments on the first day and while we have been replenishing supply regularly, we have not been able to meet demand for the product in North America.

On November 21, the day Verizon launched the Storm there were lineups at many Verizon stores and we experienced the highest number of net new subscriber account additions in a single day in our history.

The launch was extremely successful in Europe as well with Vodafone estimating they sold a Storm device every 13 seconds in the UK during the first weekend of sales.

Based on subscriber data so far, Storm is overwhelmingly attracting new subscribers and expanding the addressable market for BlackBerry products.

With 75% of the sell through going to new customers in the United States, and an even higher percentage going to new customers in Europe.

Verizon witnessed unprecedented early demand for the Storm with over 0.5 million on line registrations prior to the commercial launch of the device and Storm continues to be Verizon's best selling device.

Both Verizon and Vodafone ran intense marketing campaigns which drove strong demand for the product.

This strong demand led to some challenges in ramping production fast enough to keep up in the early weeks of the launch.

Volumes are now scaling well and we anticipate that the supply constraint on Storm will be relieved in the coming weeks with this product making up a large part of the shipment mix in Q4.

In addition to Verizon and Vodafone, Storm has recently launched with TELUS and Bell in Canada with excellent early results.

The BlackBerry Bold was launched in the United States this quarter with AT&T.

Prior to launch AT&T ran a marketing campaign including a tour with promotions by Michael Phelps and Carrie Welch to raise anticipation for the Bold.

Once Bold was available in early November, AT&T supported the launch with a multimillion dollar marketing and advertising campaign and hosted a number of gala launch events.

This was followed by a 12-city enterprise and SMB road show where business customers interacted with multiple ISVs who had an opportunity to showcase applications they had developed for Bold to potential customers.

The Pearl Flip 8220 was launched mid-quarter with many of our global carrier partners.

The Pearl Flip has been particularly successful in Canada with Rogers aggressively promoting the product and pricing it at approximately $49 and offering BlackBerry service for $15 on top of a voice plan.

In the United States T-Mobile launched the Pro Flip at $149 and recently lowered the pricing to $99 heading into the holiday season.

We recently launched the Curve 8900 with T-Mobile Germany, Rogers and CarPhone Warehouse.

The Curve 8900 has a streamlined design as well as a high resolution display, a 3.2 megapixel camera with auto focus, flash and video recording as well as enhanced media player options.

Has both Wi-Fi and GPS, a fast 512 megahertz processor and a new user interface all in the thinnest full QWERTY BlackBerry form factor available.

T-Mobile Germany is offering 8900 for as low as EUR4.5 with free biz e-mail service for the first six months.

At Rogers the 8900 is being offered at $179 with a three-year plan and through O2 and Orange via Car Warehouse for free with an 18-month plan.

This week Sprint/Nextel started selling the 8350 ICurve with Push to Talk for IDEN.

In addition to being the newest BlackBerry smartphone to use IDEN technology for Nextel Direct Connect the BlackBerry 8350i includes integrated GPS and Wi-Fi, an internal antenna, a two megapixel camera and advanced media player as well as a large removable battery for optimal battery life.

The 8350i is targeted at the many vertical markets where Push to Talk is a way of life.

The initial response to this product has been exceptional.

With Sprint having a large number of preorders heading into this week's launch.

In EMEA we've seen strong growth in the BlackBerry platform and significant support from our carrier partners.

In addition to the highly successful Vodafone Storm launch, Vodafone had a strong quarter with Bold particularly in Germany and UK.

In France we also had a record quarter with the Bold.

Orange invested in a large outdoor campaign that focused on Bold's HDTV and multimedia capabilities.

While SFR ran an on-line contest to win a BlackBerry Storm.

Additionally T-Mobile Germany significantly increased customer sales of the BlackBerry solution by promoting the Bold and other products in an integrated marketing campaign.

The launch of the new products and increased carrier commitment during Q3 has stimulated market growth and we look forward to building on this momentum in the region.

Latin America continues to perform well and many carriers throughout the region are supporting BlackBerry products with marketing programs and promotions.

This market continues to be dominated by non-enterprise customers and many carriers are beginning to target the large prepaid market with the BlackBerry solution.

There are multiple ways for customers to take advantage of prepaid BlackBerry services.

Through time, or traffic based service intervals or through a new product initiative called BlackBerry in a Box.

This product allows a device to be provisioned for a certain minimum time period up to which users can customize the time intervals for renewal.

With 72% of the world total mobile phone market being prepaid we see this as a large future addressable market opportunity and we expect to continue to customize offerings for these users.

We now have over 10 carriers offering prepaid BlackBerry service primarily in Latin America and Asia and plan to expand this in the coming months.

In Asia, we're pleased to have recently launched a BlackBerry enterprise solution and the BlackBerry Bold with SK Telecom in South Korea.

The initial target market will be multinational corporations as well as large domestic enterprises.

In China we continue to engage in marketing programs with our partners to raise awareness and demand for the BlackBerry solution and BlackBerry enterprise service software is now available in the region.

In Australia, Vodafone is offering the Storm for free with two-year contract, while Optus has rolled out a multi-city marketing campaign featuring the Pearl Flip.

In India, Tata has joined our other carrier partners in launching BlackBerry service and has been offering the Curve 8330 on their CDMA network while Airtel, Vodafone and Reliant have all launched Bold.

We've seen significant strength of the new products, in particular Bold, throughout many regions of Asia and we're now seeing healthy growth in the region.

We continue to expand our presence in indirect distribution channels and are seeing continued success with existing and potential retail new partners around the world.

Best Buy took center stage this quarter by offering the option to preorder the BlackBerry Storm online and continuing to aggressively promote the product post-launch.

In Vodafone's indirect channels the BlackBerry Storm helped penetrate hundreds of locations in Ireland and the Netherlands that began offering BlackBerry products for the first time.

Q3 represented our strongest sell-through to date at CarPhone warehouse where the Bold, Curve and Pearl, have been given their own prominent display in stores and RIMs lifelong BlackBerry campaign has been heavily promoted.

This quarter we're also pleased to have added Target as an indirect channel partner.

Target will be trialing BlackBerry product placement in 30 of their stores in the coming months.

Q3 has been a busy time for our platform development teams and independent software developer partners.

In late October we held the first annual BlackBerry developers conference in Santa Clara, where over 900 commercial and corporate developers from 27 countries took part in workshops, round table discussions, and sessions that highlighted the latest developments for the BlackBerry platform.

In addition to workshops and key notes, the BlackBerry Partners Fund also played an important role at the conference by awarding two grand prize winners with $150,000 investment for further development of their applications.

This quarter we also introduced several enhancements to our broad array of BlackBerry developer tools.

The updated JD plug-in for Eclipse, gives developers deeper integration with the Eclipse and greater version support.

BlackBerry MDS Studio 2.0 now supports collective development, mobile application controls and GPS location modifications and the updated BlackBerry plug-in for Microsoft Visual Studio adds the ability to integrate customized mobile applications with core BlackBerry smartphone applications.

The ability to create better applications for the BlackBerry platform also extends to the web with the introduction of new tools and technologies that will give web application developers the assets they need to build even more customized and interactive web applications for our products.

As we continue to evolve the web browsing experience of our devices, these new tools will allow for better leverage of our push capabilities, security and network efficiency.

Additionally the BlackBerry web signals will allow web developers to push API that will enable content providers to push relevant and timely information to BlackBerry smartphones based on users preset preferences.

Additionally this technology is being used by news sources like Fox, Reuters and AccuWeather and other providers are actively testing the technology.

We also recently announced the planned acquisition of Chalk Media, the developer of Mobile Chalkboard, which is an award winning application suite that enables rapid creation and secure tract deployment of media rich pushcast to BlackBerry smartphones.

The integration of this functionality into the BlackBerry platform is compelling both for enterprises to deliver training and other educational programs to employers -- employees for content providers to easily deliver products and services to end user.

This BlackBerry developer conference also gave rise to two substantial distribution initiatives for BlackBerry applications.

The BlackBerry application store front and the new on-device application center that will facilitate wider reach for carriers and developers in reaching their target markets as well as making it seamless for customers to find and purchase new applications for the BlackBerry devices.

Developers will be able to set their own price for the application and retain 80% of the revenues generated.

We have already started to accept applications from developers and look forward to taking this initiative live.

We are also working closely with our carrier partners to provide them with an after-market on-device opportunity through the BlackBerry applications center.

This unique offering will provide carriers with a way of customizing their portion of the center and present a catalog of software downloads to their customers natively on the device.

Some carriers have this capability already and have used it to offer Facebook and other types of software and we plan to expand availability in the coming months.

Social networking continues to be an important offering on the BlackBerry platform.

We are uniquely positioned to provide a native push based experience to our customers.

MySpace for BlackBerry smartphones launched in mid-November with 400,000 downloads in the first week of availability and over a million by the end of the first month, which is all time high for both MySpace and RIM.

We have also surpassed the 5 million mark for downloads of the Facebook applications which has doubled the number we had last quarter.

During Q3 BlackBerry Mobile VoIP System added customers in diverse industries, including manufacturing, health care, biotech, energy, finance, transportation, entertainment and education.

The core MVS value proposition of increased employee productivity and reduced wireless expense resonates well with enterprise customers during these challenging economic times.

By allowing customers to mobilize their existing KVX equipment with rip and replace upgrades, truly enables information technology groups to do more with less.

RIM is uniquely positioned to continue to leverage our enterprise presence to enable fixed mobile conversions in a meaningful, inexpensive and compelling matter.

Q3 was a quarter of transition for RIM with a record number of new feature-rich products launched and a dramatic expansion of our addressable markets.

The momentum we're experiencing with these new products and strong holiday sales are laying the groundwork for a record number of shipments in the fourth quarter and we believe that we have never been in a better position to take advantage of the sectoral shift to smartphones as occurring in the market.

I will now turn the call over to Brian who will review Q3 results.

Brian.

Thank you, Jim.

Revenue for the third quarter ended November 29, was $2.78 billion, up 8% from $2.58 billion in the previous quarter.

Hand held devices represented $2.25 billion or 81% of RIMs revenue during the quarter, in line with the previous quarter.

Total devices shipped in the quarter of approximately 6.7 million were up from 6.1 million in the prior quarter.

Approximately 5.2 million new devices were activated in Q3 either for new customers or for replacements and upgrades not including phone-only sales.

Forward weeks of channel inventory at the end of Q3 were down slightly from Q2 and we expect channel inventory at the end of Q4 to be lower than at the end of Q3.

Device ASPs in the quarter were approximately $337.

This was lower than originally estimated due primarily to the impact of the strong US dollar of device ASPs outside the United States.

Service revenue was $361 million or 13% of revenue for the quarter, up $28 million from Q2.

Monthly ARPU declined slightly from the prior quarter.

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

Other revenue including non-warranty repairs and accessories was $107 million or 4% of revenue.

Gross margin for the third quarter was 45.6%, lower than originally estimated and in line with our preannouncement.

Primary factors leading to a lower than originally expected gross margin were unfavorable foreign exchange impact on device ASPs which we estimate reduced gross margin by approximately 1% and the mix of handsets shipped in the quarter with new generation handsets making up significantly more the total shipments than expected.

Operating expenses increased by 4% over Q2, slightly less in dollar terms than we forecast last quarter, but similar as a percentage of revenue.

This favorability was due primarily to a positive foreign exchange impact and lower marketing spend due to delays in product launches.

R&D spending was $193 million, 7% of revenue, for the quarter, and selling, marketing, administrative expenses increased slightly to $383 million or 14% of revenue.

Included in operating expenses is stock option expense of approximately $10 million.

Investment income in the third quarter was approximately $30 million.

This was higher than normal due to a gain on investment of approximately $13 million that was realized in the quarter.

The tax rate for the quarter was approximately 41%, substantially higher than our original primarily forecast due to the unfavorable impact of the appreciation of the US dollar relative to the Canadian dollar.

The impact of the unfavorable tax rate was approximately $0.14 per share, and it was primarily the result of the significant depreciation of the Canadian dollar in Q3 and its affect on RIMs US dollar denominated assets and liabilities held by RIMs Canadian Operating Company that are subject to tax in Canadian dollars.

There are proposed changes to the existing Canadian laws that will allow RIM to calculate its fiscal 2009 Canadian tax expense based on the US dollar which is RIMs functional currency.

While we elected to adopt these rules in Q3 we cannot recognize the related tax benefit for US GAAP financial reporting purposes until they are formally enacted.

Once the new rules are enacted the incremental tax expense in Q3 will be reversed.

Additional tax benefits for prior quarters in fiscal 2009 will be realized and future tax rate volatility will be reduced.

We expect the proposed rule to be enacted sometime in calendar 2009.

Excluding the impact of foreign exchange in our tax rate beyond the guided 29% to 30% discussed in the last earnings call, adjusted net income for Q3 was $477 million or $0.83 per share diluted.

GAAP net income was $396 million or $0.69 per share diluted.

Please note that the adjusted earnings per share does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies.

This non-GAAP financial measure should be considered in the context of RIMs GAAP results.

Weighted average diluted shares used in the EPS calculation for the quarter were 573.5 million.

Actual shares outstanding at November 29, were 565 million.

Total options outstanding at November 29, were 13 million.

RIM's balance sheet continues to be strong with substantial cash reserves and appropriate working capital balances.

During the quarter RIM generated approximately $566 million in cash from operating activities which is offset in part by capital asset additions of $196 million.

Intangible asset additions of $135 million resulting in increase in cash and investments of $249 million.

Total of cash, cash equivalents, short-term and long-term investments was $2.49 billion at the end of Q3 as compared to $2.24 billion at the end of the previous quarter.

From a working capital perspective trade receivables were up from the prior quarter in line with top-line growth, DSOs were higher from the prior quarter at 59 days.

This increase was due to sales that were weighted towards the latter part of the quarter as well as longer payment terms for North American customers.

Inventory on hand was approximately $599 million versus $513 million in the prior quarter.

Inventories continue to be primarily raw materials and semi-finished goods to support the demand for BlackBerry products.

I will now turn the call over to Adele to discuss our outlook for Q4.

Thanks, Brian.

Before I discuss our outlook for Q4 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're forecasting revenue for the fourth quarter of fiscal 2009 to be significantly higher than Q3 in the range of $3.3 billion to $3.5 billion.

We have a high percentage of orders already booked for the fourth quarter giving us confidence in our forecasting these less certain economic times.

However we have widened the guidance range due to the difficulty in forecasting, the impact of foreign exchange in the current volatile markets and ongoing uncertainty in predicting the impact of a weakening global economy beyond what we see today.

We expect hardware shipments to be between 7.5 million and 8 million units and ASP of approximately $370 up from $337 in the third quarter due to the higher proportion of premium products expected in the mix.

The growth in shipments will be driven by demand for new products, particularly Storm, as we continue our production ramp to meet the strong demand we are experiencing and to alleviate any remaining stock up situations.

We are also forecasting large shipments of Bold, Curve 8900 and the iDEN Curve 8350i for Q4.

Software revenue in Q4 is expected to increase slightly.

We are targeting net subscriber account additions for Q4 of approximately 2.9 million.

As Jim mentioned, December has been a very strong month for BlackBerry net subscriber account additions with many carriers hitting their highest levels of net activations ever and with channel and marketing support for BlackBerry products at an all-time high.

We are forecasting a seasonal step-down in the run rate of weekly net subscriber account additions in the latter part of December and into the new year reflecting the typical buying patterns of the consumer segment as well as uncertainty about consumer and enterprise post-holiday spending.

While there are a number of carrier programs running throughout the quarter, there is a higher concentration of them playing for February which we expect will allow run rates to increase somewhat in the last few weeks of the quarter.

We're targeting gross margin for the fourth quarter of between 40% and 41%.

As we mentioned on the last call, gross margin was expected to decrease as we launched new premium product platforms.

These premium products, especially the BlackBerry Storm have been more successful than we expected, sooner than he expected.

As a result, these products have transitioned to a high percentage of the product mix earlier in the product life cycle than is typical.

This has had the effect of a steeper decline in gross margins than we originally anticipated.

As volumes ramp and we take advantage of the opportunities for cost savings that Jim mentioned earlier, we expect margins on these handsets to improve as they grow as part of the mix.

Given our current view on expected product mix and ASP for fiscal 2010, we believe that gross margins will be similar to Q4 levels or slightly better in fiscal 2010.

We expect a total operating expense increase for Q4 of approximately 11% to 13% from Q3 levels with R&D increasing 2% to 4% and sales, marketing and administrative expense increasing by approximately 16% to 17%.

The increased volume of shipments forecast for Q4 allows us to leverage operating expenses.

As discussed in the last earnings call, while we expect OpEx to continue to grow on an absolute dollar basis we believe that OpEx will likely decrease as a percentage of revenue in Q4 and in fiscal 2010.

We remain committed to managing gross margin and operating expenses to drive profit growth in the coming quarters.

We expect depreciation and amortization to be approximately $60 million in Q4, higher than Q3, due to ongoing CapEx.

We expect CapEx to be approximately $275 million in Q4.

Investment income is expected to be approximately $14 million in Q4.

We expect the tax rate to be approximately 29% to 30% in Q4, and in fiscal 2010 we expect to see the rate decline slightly due to scheduled Canadian corporate income tax reductions.

Based on this tax rate guidance we expect Q4 fully diluted EPS to be in the range of $0.83 to $0.91 per share.

Should the Q4 tax rate be outside this forecasted range due to foreign exchange fluctuations, or passage of the draft tax legislation Brian mentioned earlier we will break this out separately.

The recent volatility in foreign exchange markets can have a significant impact on both revenues and operating expenses as you saw in Q3.

RIM reports in US dollars but has a significant portion of its expenses and revenue in currencies other than the US dollar.

We have a hedging program in place to hedge a portion of the net exposure between these revenue expenses, but this does not completely neutralize the exposure.

We have recently begun increasing the hedge portion of forecasted revenues and expenses to reduce the effect of foreign exchange movements, but it is impossible to be perfectly hedged at any point in time.

For Q4 we estimate that 10% appreciation or depreciation in the US dollar would have approximately a $40 million impact on revenue and a $10 million impact on net income given the currently forecasted mix for Q4.

I will now turn the call back to Jim.

Thank you very much, Adele.

We're pleased to be entering the fourth quarter building on the momentum of a strong Black Friday and holiday buying season.

Despite the current turmoil in the economy, we believe RIM is well positioned to take advantage of the industry shift to smartphones that's occurring and to grow its share in this market segment.

This concludes our formal comments.

We would like to open the call up for questions.

To allow as many people as possible to participate please limit yourself to one question per person.

We plan to end the call today by approximately 6:00 p.m.

Would the operator please come on to handle questions?

Ladies and gentlemen, we will now conduct a question-and-answer session.

(Operator Instructions).

Your first question comes from Maynard Um from UBS Securities.

Hi, I just want to clarify your guidance, are you assuming you're going to see a normal seasonal step-down through December into January or towards the end of December and then into January and then February you're seeing a pick back up because of the higher concentration?

What I'm trying to understand, I guess, is just how much conservatism you're building in -- into the month of February, where typically we would see a bounce-back.

And then, if I could, how long does the Hero agreement go on for with Verizon and Vodafone?

I'll answer your subscriber question first.

What we stoked into the guidance, obviously we had a very strong December up to this point.

We would normally see a slow-down, from the sort of Christmas onward into January, and we have that type of seasonality built in.

In terms of February, we're expecting it to still be a good bit slower than December.

But we, in the latter part when some of the carriers start the Valentine's promotions and there is a higher concentration of those running we would expect that run rate to be higher than what we're seeing in January.

Does that help?

That does.

But in as you go back into -- into January, you are expecting greater than seasonal declines that you've seen historically?

Or is that--?

I think I understand your question, Maynard, and I think the answer principally lies in what Adele said, that we have a high percentage of orders already booked in the fourth quarter.

So there's elements of seasonality, but we have particularly good visibility, because of extended orders for the hot new products.

So I would say we've tried to take an especially prudent approach to guidance on our revenue this quarter beyond seasonality, and what we're guiding, we have a particularly good proportion of the orders already in the book.

Okay.

And then just on the Hero agreement.

How long does it that go on for the Verizon Vodafone?

Well, there is elements of different versions and extension of that.

But that product we're just seeing volumes that are really quite surprising and backlogged orders, and it really extended high deliveries, certainly well throughout Q4, and there's ways to sort of carry on that Hero agreement.

I think this is a -- we're in very early part of the first inning in this relationship and it all looks very good.

So there's lots of legs on that Hero agreement to go.

Your next question comes from Gus Papageorgiou from Scotia Capital.

Go ahead.

I just want to talk about the gross margins a little bit.

I mean, can you just also, you discussed a little bit of the influences on gross margins.

I was wondering if you could touch on warranty costs and impact on the gross margin.

Are warranty costs for the newer products higher than what you normally saw ultimately -- is there any difference on the gross margin geographically, devices sold in different regions, do they carry different gross margins or are they uniform across all geographies?

And then, finally, just, can you talk a little bit about pricing.

You've seen very good success or better than expected success on these devices.

Were there terms in the agreements that if you surpass certain volumes the pricing would come down?

Sure, Gus, on the warranty question, there's really -- I mean, we have a standard policy in how we handle warranty for new products and there's been no change in that policy.

In terms of pricing on international versus North American product, really within a particular region the pricing on the product is typically the same but in some international markets the pricing may be a bit higher on a -- on an ASP basis than it would be in a North American market.

Sometimes that is tied to volume.

And what was the third question?

I think it was geographic differences in pricing, and, no, the focus now really is, no, the pricing is really attractive and it's very established with these products.

The key for us is to work the costing down and I think we feel very positive.

I think the adoption of the new products was stronger than we expected and the interest, and that continues to accelerate.

I think we normally get a slower ramp to work down the volume, but this is kind of, the switch-over to new products is faster than we expect.

Which is actually a very, very good trend, especially in this environment.

The issue is that it just shifts the margin structure, because normally you get a quarter or so to work that in and we have to work it in right out of the gate.

And so, we feel very good that we can work to improve the gross margins, and like I said on the last call, we have a substantial number of new indirect revenue sources from the BlackBerry platform which we are going to start to see coming into gear.

So the margin structure shifted because of the new products.

We believe we can improve the costing of these which is very traditional.

We don't believe -- there is no special pricing reductions on volume that we have right now, and it's fairly generic across regions, subject to volume.

The margin structures around the globe.

Sorry.

I just have a clarification.

Part of my question was, I would assume that you built in volume discounts if carriers exceed certain volumes on sales of new devices.

And I wonder since you saw such a strong success, would that success trigger price discounts sooner than you expected?

No.

No.

Thank you.

Your next question comes from Rob Sanderson from America Technology Research.

Yes, thanks.

It has been a while since we had an update on the expectations for your monthly service revenue.

In the past you talked about ranges for how they're different between beds and bids and the higher ends and lower ends of those ranges might be depending on volumes.

Do those historic ranges still apply when you're trending to the lower end over time?

Or are we looking at new low ends for those ranges on your monthly recurring?

Thank you.

Thanks, Rob.

I think those ranges, that we talked about before, some of those had thresholds built in, that when carriers passed a certain threshold, in the size of their subscriber base there would be discounts on what the monthly rate was.

I believe Brian said in his comments that monthly ARPU on a blended basis was just down slightly this quarter.

That has been pretty much what we've been seeing over the past several quarters.

And that is really driven as much by shifts in the product, the subscriber base towards non-enterprise as anything else.

We have introduced some lower-tiered plans in certain markets where we get a lower monthly fee, but that is still part of that blended number and when those users upgrade to a full biz plan then if it goes back up into our typical 3 to 5 range.

That is on the current period but I'm asking more about, what should we expect in the coming years as the volumes start to pick up again?

Lower ends of those historic ranges we've discussed, or do we see lower -- lower new lows on the low ends?

I think it depends on what time frame you're talking about here.

We're still not near the low end in most of those buckets today.

I mean, it depends on what your volume assumptions are going to be over the longer term, but I don't see this as something that's a near-term issue other than the normal declines that we've been seeing on a quarterly basis as a result of mix shifts.

Got it.

So, I think trending as we've seen and no significant step-downs because of new commitments with carriers.

Not currently.

There's things over time that we may decide to do, but, those are things we communicate once they're in place.

Okay.

Thank you very much.

Your next question comes from Chris Umiastowski from TD Newcrest, please go ahead.

I want to really just dig in a bit more on the gross margin line.

First question is, can you break out the margin that you're expecting on hardware?

I think the way you break it out in your Ks and Qs is hardware and other, along with software and services being buckets.

And I think the software and services has been about 84%.

The hardware and other, has been in the 40's, and it looks like it is the -- it is the major responsible factor for the big decline.

Is it safe to say your hardware margins is now low 30s?

We don't break them out, as you know, to that agree of granularity.

I think it is safe to say the majority of the move down in blended gross margin is due to a decrease in hardware gross margin, if that helps you.

I'm not going to give you anymore.

Rob just asked about ARPU, so I think that does clarify it.

And that's good.

Maybe you could talk a little bit about how the Storm launch affected you in the quarter and how the continued success of Storm into Q4 is affecting your margins?

Because it sounds to me like you're saying it's getting introduced faster than expected, the margins are lower up front and they usually get higher.

I know in the past you've talked about how that happened with the Pearl.

It just -- it seems interesting to me like you're saying you can get the margins up in time, but you're also guiding into fiscal 2010 to be basically flat or slightly higher.

I think a lot of people would have expected that if your comments were -- were accurate about working the margin back up, that you'd see quite a big change in margin in 2010 towards the up-side and I'm wondering why we're not seeing that in your commentary?

Your comments are very fair, Chris, and really we're in a time of great upheaval, really, in the global economy.

So what can we bring to the table with very high levels of certainty?

And what do we have really good visibility on, and what do we give reasonable estimates on?

At the core, we have very good visibility into our top-line of Q4.

And there are, on the certainty pieces, forget about potential things where they're often very positive things that happen with us because we're not introducing new products particularly this quarter as much as others, so we're not facing that kind of change.

So we're trying to communicate very high comfort on our -- on our opportunities -- on the top-line this quarter, which is really a remarkable amount of growth given all the dynamics in the markets that you have seen and from chips vendors into the wireless and all of the different players.

As well, the, there is a -- as I said on the last call, this is very much a bit of a land-grab phase going on in the wireless market.

And we're very, very pleased with the adoption of our products and leadership position we have, and in many respects the leadership position we're extending.

These are things we know.

The other thing we know is that traditionally we've worked down costs over time and we seem to have some early positive indicators on that.

The other thing we've indicated is that there are some new revenue streams coming in, in the BlackBerry platform, which we're working diligently on, which are very complementary, not the least of which is the app store, but many other things that help our business.

So I think one could -- we obviously aim to enhance the margin.

I believe there is opportunity there.

Will I guide it now?

Do we feel we're in a very, very stable place where we are?

Yes.

Do we have a very torqued top-line?

Yes.

Do we have opportunity to enhance the model over time?

Yes.

But I think we're very strong and stable and extending our position, there is a land-grab going on which is going well.

Our products are loved.

And the value of platform leadership I think is great and far greater than people imagined, and the absolute specifics of the model will clarify over time.

So we're giving you indicators but they're so much in flux right now.

And I'm not going to give you a false sense of clarity.

But I will say our products are adopted.

Our order book and our low case on margin is very stable and there are lots of chances for enhancement.

And we're in a good spot with a great team and a great set of opportunities before us.

Very unprecedented in this Company.

And I'm just not going to give you false clarity and I'm not trying to guide beyond where we are today.

But in spite of the challenging times, I personally and we all as a team feel remarkably good about where we are and what we're performing.

Yes, we just got to get new revenues going more and we got to get the cost down.

But those are things that are real opportunities but the core aspects of the business are very strong and stable.

Thanks, I appreciate that clarification on that and I just want to finally make sure in the margins that we understand, co-op marketing, could you explain how that affects in your accounting?

Co-op marketing, it is sales and marketing expense.

Okay.

Rebate activity would be in cost of goods sold.

Okay.

Perfect.

Thanks very much.

I'll pass

And ASP.

Your next question comes from James Faucette from Pacific Crest, please go ahead.

Thanks very much.

I just wanted to ask a follow-up question on the products, one in reference to the question I think from Maynard in terms of the Storm.

When is the window -- when does the window open that we could start to expect that product to end up at other carriers outside of Verizon, Vodafone, or perhaps a product like that, firstly?

Secondly, when you talked about the faster than expected transition to new products, and also seeing a bit of economic hit on the legacy products, can you just give your guess as to, as far as the shortfall for the November quarter, what portion was attributable to the economic environment and if you had to guess what portion was attributable to the delays Thank you.

Very fair comment, and this is my sense on it.

I think the shortfall in subscribers was half and half, but I think principally the revenue was, I would give much stronger proportion to the delay of the products.

Otherwise, why are we just rocking it out so strong in December, and with orders so stuffed in January and February?

The economic climate, if anything, has tightened.

So we didn't know at that time, but once we -- so we guided based on what we knew in -- but the results of the new products and the strength in December has been -- I mean, I'm -- we can't be more delighted, really.

So you have to say that it was principally delay in new products.

You look at the products we introduced, it was a flurry of new products.

What happens is you get an overhang, you schedule launches, and the channel holds off existing products for purposes of all that they push.

And when you lose two to four weeks, that chunks right out of, if you do the -- the time under the curve of adoption of an adoption curve, the calculus of it is you lose a fair bit of volume just on those last couple weeks of the quarter just based on how you are going to ramp.

And we're just running that.

So I would give a disproportionate weight to the delay in products.

Though that didn't explain the reduction in subs in October, which subsequently responded very nicely in November and very nicely in December.

So I think the sub thing was more an economic thing, in my view of it.

But the -- but the overall top-line was much more of a product delay.

But what had happened, and you asked about markets and next versions and all that kind of stuff.

The quality of our product portfolio has really created a global buzz.

And the success of the -- don't forget the Sprint push-to-talk, which is we're delighted by how Sprint is performing.

You see that the Bold performance with tremendous results and then the Storm.

BlackBerry is a platform and we have a very, very capable set of handset design teams.

So if you knew the road map of products and the unique designs and the evolution and enhanced componentry and enhanced performance and how special it is for different partnerships, you would see a rich road map for '09 and '10.

It would blow you away.

So I'll just put it this way, we have exciting road maps in these carrier partnerships.

The commitment is to accelerating the whole BlackBerry platform with very exciting end designs and a stronger BlackBerry platform.

And even though there's economic environments, I think there are sector-specific catalysts that are within our hands to control and drive, and my expectation is they want, they will pay a little bit more for the devices but they want a lot more features so we have got to work down the cost to maintain the margin percentage.

So the absolute margin is still very good.

And I think the model is going to improve with enhanced services over time.

And so there is a lot of moving parts, but the fundamentals, I feel very, very good about.

Great.

And I guess just if I could, just to clarify then on the Storm, you do expect that product or similar products to be at other carriers.

Any sense as -- can you give us a more direct, specific, in terms of dates for that?

Thanks.

I can't comment on specific stuff, but it is a very deep and special partnership worldwide with Verizon and Vodafone, and we also create special partnerships with other carriers respecting our commitments to others.

So I just can't talk particular.

Some aspects are very special to some, and others, but each carrier is coming out with very special road maps and you're going to see, I think there is a real heart beat, though.

There is interesting things in the first half of the year.

I think we're going to really ride these products for a while and you're going to see a remarkable cycle into the autumn of next year, sling-shotting off of what all these new products are going to give us in the first half.

Thanks for the comments, Jim.

Your next question comes from Jeff Kvaal from Barclays Capital.

Thanks, very much.

Jim, Adele, Brian, could an you help us understand if there are any one-time factors that are involved in the unit forecasts for the fourth quarter, like are there push-outs from November, or is there a destocking of the inventory of the distribution channel?

Anything along those lines?

Nothing that I know.

No, this is flow.

This is flow.

It is all flow.

Fantastic.

And then secondly, CapEx, $250 million in the quarter plus or minus, is that going mostly to the [Knox], the new buildings, do you expect that to continue?

How should we think about that?

Jeff, it is primarily facilities.

I mean, there's parts of it going to IT-type stuff and to the networked operations.

But the biggest piece of that is still facilities.

Okay.

Then should we expect that to slow in fiscal '10?

It is tough to guide out that far.

It can be very lumpy and things can slip from one quarter to the next but I wouldn't be forecasting dramatic decreases.

Okay.

Great.

And then on the gross margin elements, should we be expecting the 3G mix to be increasing in fiscal '10?

I would imagine yes.

And if so, and to -- where are the levers that you can pull and the new products to improve the margin?

Yes, that is a very fair question.

The 3G mix is clearly intensifying.

Though a lot of the rest of the world is still interested in Edge and Edge Evolution.

So we're sort of using Edge as 3G evolution off of a GPRS chipset, so they're lower cost.

But I think you'll see a trending towards 3G.

I think it's clearly lower componentry costs, really.

These high performance 3G products are dramatically more expensive to build currently.

And it's been our tradition that when we enter these things they're expensive and you have to work them down.

And I think we have to work it down.

And I think that's inevitable.

It will work down to what degree, and what percentage is a good question.

Other handset vendors haven't talked about lower gross margins on 3G, though, Jim.

Is there something specific that's going on with you, or they may be able to hide it with greater volume?

I don't know.

If you look at the rest of the cellular phone industry we've seen some margin guidance that you can really reflect on a little bit.

I don't think we're in any -- I think whether they say it is competition or whether it is cost-base on it, I think you have to realize that we're in that high-end segment and we got true leadership in that area.

And, I don't know.

I mean, you can talk about the other ones.

I mean, all I can say is I know the costs to make these hot new products with the displays and the componentry and all the processors and all you get out of them, and they are selling great and they love them.

They currently cost more than the established Curves and Pearls and -- but those products we worked down over time and they're -- on their costs, too.

But what I would say is that we've never seen such a shift in mix to new products so quick.

That's the part that sort of caught me.

I didn't expect the adoption to be so strong so fast.

So it is an evolution that has been very, very quick.

So it tells me the industry is in rapid transition right now.

Rapid transition to platform imperative and the performance imperative of these smartphones.

And the more broad deployment of smartphones.

But that has lots of consequences.

But there is rapid transition and we're being really taken through a leadership position in that stuff, and it's putting some flux on our normal trends, but overwhelmingly the trends are positive but one of them is that the devices cost a little bit more to make and the shift from old to new is faster than we expect and that has got some shifts in the model, but in this period of time, but we see a lot of ways to enhance that and I've tried to give you too, but it will play out.

Thanks, Jim.

At this point we have time for one last question.

And your next question comes from Scott Coleman from Morgan Stanley.

Please go ahead.

Thanks and, for taking my question.

Jim, I'm wondering if you can help us understand what percentage of units this quarter were from new products?

And also help us understand what's going on with some of the older products, as well.

How are -- how are carriers and consumers using the new products differently than the old products?

Is it helping drive ARPUs higher or is the demand more from better screens, better cameras, but not necessarily driving data ARPUs higher for the carriers?

Thanks.

Sure.

Well, the -- I don't have the specific percentage of new products, but I would say it's over half what we're running now.

I mean, in terms of this quarter, a lot of those products were coming in later in the quarter.

However, it is important to know that Curve is still the number one selling cell phone in the United States.

So it's still selling very, very well, and Pearl is doing well, too.

But what we're going to see -- what we're seeing at the end of the quarter and in December, are really strong, just new streams of Bold and Storm, which take up over half the units.

But that is why our top-line is growing so well, even in a very prudent case that we're offering now.

So it's a very quick, out of the gate basically transitioning to well over half the sales, new products.

Right.

I understand that, but I'm trying to understand if, from your perspective if -- if users are using the new devices differently in a way that is helping the carriers garner higher ARPUs themselves?

I sort of figured that was the second part of the question.

Okay.

Thank you.

And so if I got the first part of it and so if I got the first part, which I hope I think I did.

On the second part, there is a rapid shift in how people use these devices.

In essence, they came out that some people sort of saw these as a music sync devices and BlackBerry had a lot of messaging lineage.

Now what is happening is multi-media and messaging and Rich Waves are there, and Web 2.0 is there.

We gave some indications of the rapid adoption of wireless social networking, like that is becoming the new wave in many respects.

All of these new search and GPS apps, so are carriers getting -- I mean, are carriers making more money per user?

My dealings with carriers is though they like making more money per user, their greater player is deeper penetration of voice data relationships in their base.

So would they like to make more money on the people currently on data?

Sure.

And of course they have strategies to do that.

But principally this is about cutting over the smartphone with the data relationship to mainstream.

BlackBerry as you see by the ads and the promotion and the nature of net new subscribers on Storm, I think we're a principal catalyst of that cap over.

In theory very early stages where we can't keep product on the shelf.

What does this mean?

It means that people say, I carry an Internet appliance on my belt, I carry my social networking, messaging environment on my belt.

I carry my Internet surfing, I carry a multi-media machine where I can V-Cast music and navigate on GPS.

And the carriers are allowing open platforms with app stores, but also putting their own channel, proprietary apps, like the VZ Navigator and V-Cast music and stuff like that.

So are we in a rapid evolution?

Absolutely.

Is what these platforms promising?

Irrefutably.

And the goal of the carriers is if they can create an environment where this becomes a very common, if not principal interface to people's data relationships and multi media relationships and messaging relationships, quite frankly, it radically enhances their economics, especially with a model like BlackBerry where we OEM through carriers so they're observing this platform and they have market protection on particular designs that they can market around and rally around.

So the answer to your question is, absolutely yes, absolutely yes.

And, there is no question, and you're seeing it in the completing platforms.

The question is, will the carriers be a services platform or will they be just disintermediated?

And our strategy and our commitment and our vision is the carriers will serve as a platform and they say OEM BlackBerry and people literally will have dozens if not hundreds of apps and consume principally, this is the principle basis to consume their multimedia.

And this is happening on early trends.

I forget, there was some data out when they did the upgrades of the Storm patch and the dramatic percentage that activated V-Cast services on the Storm, it was staggering.

Like it was a very high percentage.

So, we're heading into new ground here.

We're heading into new rounds, new models, new applications.

And so what can we say?

We got leadership.

We got very good bookings for this quarter which gives us strong growth.

We have a rich product road map with a very, very strong carrier allied relationships.

And we have complementary new revenue streams coming on board and those are the certain pieces that I can give you in a very, very turbulent high-growth and highly dynamic and highly contended sector.

I like what we've achieved in the year.

Calendar year.

We have a lot more to be done and I'm not trying to give you false clarity here.

But we do have some foundation points which are movable, and I think those, we can build from and we can extend from.

So absolutely there's tons of new apps.

Absolutely there's tons of new use.

Absolutely there's new indirect models that everybody is coming at.

And I can assure you just as I said this time last year, the industry is going to look very different by December '08 than '07.

And I think that is fairly accurate.

I think you are going to see an equally different and equally enhanced set of opportunities by this time next year.

Ms.

Adele Ebbs, there are no further questions at this time.

Please continue.

Thank you.

Just before I finish I just want to clarify a point on my response to Chris Umiastowski's question on co-op marketing.

So the rebates actually go through -- show at the ASP and flow through revenue not through cost of goods sold.

In closing I'd like to remind everyone that there's a post-view service available at 416-640-1917 passcode 21252987 pound where you can listen to the call which has been recorded and archived on our website at www.rim.com/investors.

Thank you very much.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for your participation.

Please disconnect your lines.