BlackBerry Ltd (BB) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Research In Motion fiscal 2009 fourth quarter and year-end results conference call.

(Operator Instructions).

Later, we will conduct a question and answer session.

I would like to remind everyone that this call is being recorded today, Thursday April 2, 2009 at 5:00 p.m.

Eastern Time.

And I would now like to turn the call over to Edel Ebbs, Vice President Investor Relations.

Please go ahead.

Thank you, operator.

With me on the call today is Jim Balsillie, 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 the fourth quarter results.

And I will discuss our outlook for the first quarter fiscal 2010.

We will then open the call up for questions.

I would like to note that this call is available to general public via 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 margins, operating expenses, CapEx, depreciation and amortization, investment income, earnings, channel inventory, seasonality, ASP's and foreign exchange related matters for Q1 and beyond, our expectations regarding RIM's near and long-term tax rates, as well as the affect of changes to Canadian tax laws.

Our estimates of the number of net subscriber account additions and other nonfinancial estimates.

Our efforts to manage operating expenses and reduce costs, our product development initiatives and timing, developments relating to our carrier partners.

And other statements relating to our plans and objectives.

We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intend, believe, continue and similar expressions.

All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements, including risks relating to the uncertainty of general economic conditions.

Risks relating to 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 RIM's network operation centers.

The occurrence or perception of a breach of RIM's security measures.

Our reliance on suppliers and third party manufacturers.

Risks associated with our expanding foreign operations.

Foreign exchange risks.

Our ability to effectively manage our growth.

Risks relating to competition.

And other factors set forth in the risk factors and MD&A sections in RIM's filings with the SEC and Canadian Securities Regulators.

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

I will now turn the call over to Jim.

Thank you, Edel.

We were pleased to end the fourth quarter and fiscal year with revenue subscriber account additions and shipments, all up more than 80% from last year.

RIM launched a record number of new products during the year.

And the acceptance of these products outpaced our expectations and led to continued market share growth and record financial results.

The number of devices shipped in the year, almost doubled to 26 million.

And there are now over 25 million BlackBerry subscriber accounts.

Demand for BlackBerry products and services reached an unprecedented level in Q4, with net subscriber account additions far exceeding our forecast.

Approximately 3.9 million BlackBerry net subscriber accounts were added in the quarter, up over 50% from Q3 and approximately 35% higher than we anticipated back in December.

As we mentioned on the last call, the strength of the BlackBerry net subscriber account additions in December was unprecedented, 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.

Greater than expected momentum following the holiday buying season, a continued positive reception of new products that were launched in Q3 and Q4 and aggressive carrier promotions, such as the Verizon buy-one-get-one program that began the latter part of the quarter; drove this outperformance.

Both North America and international results outpaced our forecasts and about 1/2 of BlackBerry subscriber account base continues to be outside of North America.

We saw double digit subscriber growth in the enterprise market this quarter.

And the non-enterprise market drove exceptional results, given the typical holiday seasonality and the nature of carrier promotions in the quarter.

Approximately 70% of net new subscriber accounts came from non-enterprise.

And these customers now represent approximately 50% of the total BlackBerry subscriber account base.

As we mentioned on the last call, we saw a number of opportunities to reduce costs in our smartphone portfolio in order to improve gross margin.

We are pleased that RIM's R&D, supply chain and manufacturing teams have been effective in reducing costs and improving yields.

And we expect these efficiencies to begin to be reflected in Q1.

These cost reductions, together with a favorable shift in product mix, have the affect of increasing both hardware and blended corporate gross margins.

Based on these improvements, we expect overall gross margin in the first quarter to increase to 43% or 44%.

Some of the factors that will affect gross margin throughout fiscal 2010 are the success of ongoing efforts to reduce building materials costs, product mix shift, potential impacts from new product launches, particularly in the second half of the fiscal year, ASP changes and foreign exchange.

Based on our current view and a potential for variation due to these factors, we continue to expect gross margin percentage for the year 2010 to be in the low 40's.

We anticipate ASP for the first quarter to be lower than Q4 at approximately $350.

But this was primarily related to the shift in the mix of devices that we expect to ship in the quarter, rather than actual ASP declines on individual products.

Given the uncertain economic environment and the desire to drive increased profitability in our business model in fiscal 2010, we are increasing our focus on managing operating expenses and driving efficiency across all parts of the organization.

RIM is faring well in the current environment and we continue to believe we can grow market share.

However, we believe it is prudent to turn our attention to making sure that the operations are as streamlined as possible in case of further deterioration in the broader economy.

Carrier inventory in the channel is at the lowest levels we have seen for sometime and sell-through for both new customers and replacement sales is strong.

Carriers are not replenishing inventory to the same levels they've previously held and in some cases, are continuing to reduce levels.

Therefore, the volume of shipments required for channel maintenance is lower than it would normally be and is similar to volumes we shipped in Q4, despite the strong sell-through we saw in Q4 and expect to continue in Q1.

We believe the the majority of inventory adjustment has occurred in Q4 and is beginning to moderate in Q1.

And that these lower inventory levels are a response to the weaker macro environment and do not reflect anything specific to BlackBerry.

Storm continues to do well at Verizon and Vodafone and the ongoing promotion of the product resulted in record levels of net subscriber account additions at these carriers.

The product continues to be a strong driver of new customers for BlackBerry and it's clearly opened up a new market segment.

In Canada, both Bell and Telus successfully launched Storm in the quarter, with numerous promotions and advertising campaigns, which led to these carriers significantly growing their BlackBerry subscriber base.

Storm is now launching in a number of emerging markets, including TIM Brasil, Vodafone India, and multiple carriers in Hong Kong.

We are also pleased this quarter that the BlackBerry Storm was awarded the GSM Association's Best Mobile Technology Breakthrough award at the Mobile World Congress in February.

During the quarter, we launched the Curve 8900 at a number of carriers, including T-Mobile in the US; Rogers in Canada; Vodafone, Orange and BT in Europe; Vodafone in India; Intel PCS and TIM Brasil in Latin America.

Prior to the launch of the Curve 8900, T-Mobile had a large number of pre-registrations for the device and it has been well received by customers.

Reviews of the Curve 8900 have been excellent, with reviewers ranking it one of the best smartphones on the market and describing it as a gorgeous and powerful device.

This product is just beginning to ramp and we look forward to growing the number of carriers offering it in the coming months.

The Pearl Flip continues to gain traction.

And during the quarter, T-Mobile reduced the price of the product to $49 and launched an aggressive marketing campaign to support the new pricing.

Rogers in Canada continued to promote the product at CAD49, with an attractive CAD25 unlimited text, e-mail and instant messaging plan.

Pearl Flip for CDMA was also launched in Q4, with Bell Mobility offering the product for CAD29 in Canada.

The BlackBerry Curve 8350i for iDEN, is now available in several markets, including the United States, Canada and a number of countries throughout Latin America.

The unique attributes of the iDEN network, including push to talk, make this an attractive device for many industry verticals, as well as the SME market.

And we're seeing this product drive strong replacement sales, as well as attract new subscribers to this network.

International markets performed well in the fourth quarter.

In Europe, Vodafone, supporting both the Storm and the Curve 8900 with extensive advertising promotional programs across multiple properties.

And Orange launched the 8900, coupled with free BIS on a GBP35 plan, which resulted in the highest sales among their entire post-paid consumer device portfolio.

This past quarter, Orange UK also introduced a GBP5 per month prepaid plan, which includes unlimited e-mail, instant messaging and social networking on the BlackBerry Pearl 8120.

British Telecom was also quite aggressive with its launch of the Bold, offering BlackBerry service, bundled minutes and a free device for just over GBP20 per month, on a 24-month contract, which was also extended to the Curve 8900 later in the quarter.

Latin America continues to be the fastest growing international market for BlackBerry subscribers.

In the fourth quarter, a number of BlackBerry subscriber account milestones were reached in countries throughout the region.

With particular strength in Venezuela, Chile and Brazil, driven by holiday promotional activities, new product launches and aggressive pricing plans by our partners in these regions.

In Asia, we launched BlackBerry Enterprise service and the BlackBerry Bold, featuring Korean localization with SK Telecom in Korea.

Addressing pent-up demand from several multinational corporations in the region and domestic Korean businesses.

In addition, we now have nine carrier partners in India and are investing in new initiatives to increase BlackBerry's visibility with 30 multibrand outlets and leading national retail chains in the country.

RIM is continuing to penetrate indirect channels around the world.

In North America, Wal-Mart, Best Buy and Sam's Club are all offering BlackBerry products to their customers and the BlackBerry offering has been -- was recently awarded Vendor of the Year award in the Electronics Category by Sam's Club.

At Best Buy, heavy marketing of the Storm and an aggressive price point on the Curve 8330 drove strong adoption of our devices and impressive quarterly incremental growth.

In Europe, Carphone Warehouse introduced the Curve 8900 and has supported the offering with significant in-store and window displays.

In Asia, we are also extending our relationship with Redington, India, to establish national retail distribution channels for BlackBerry devices.

Initially, the BlackBerry Pearl, Curve and Bold will be available in retail and modern trade outlets across nine cities in India, with plans for further penetration into broader Indian market over time.

We're very excited to have launched BlackBerry App World yesterday at CTIA.

BlackBerry App World is a one-stop, on-device store for users to discover and purchase applications made for BlackBerry.

App World launched with a solid mix of applications, ranging from entertainment, to travel, to productivity software.

And we expect the number of available apps to continue growing, as our existing developer community, as well as newcomers take advantage of this new sales channel to reach millions of customers.

We see a tremendous amount of opportunity for our partners, as more and more customers discover the services and applications available for BlackBerry smartphones.

Some of the featured applications such as Facebook, ViGO and Slacker are already familiar to many BlackBerry users but are now easier to find.

Other applications launched yesterday concurrent with App World, included Shazam, which allows the user to identify, buy and share music.

And Pandora, which allows the user to customize streaming radio to their specifications.

One of the applications we are excited about, that we will launch shortly, is Primetime 2 Go from Quickplay, which will allow users to take their favorite television shows with them via an app that seamlessly syncs shows to an SD card over WiFi and automatically updates new content.

All the best news, games, social networking, entertainment and other applications in one easy to access on-device location, we believe App World will open the eyes of BlackBerry users to a world of new ways to enjoy the BlackBerry experience.

RIM has a thriving developer community for many years, with over 100,000 downloads of our software delivered per kit.

And the availability of App World will make existing and new software applications more easily discoverable.

BlackBerry offers a number of unique features to customers and developers, including the ability to have multiple apps running simultaneously in the background, as well as the ability to auto start when the device powers up.

The ability to integrate with core e-mail, PIM, phone and other software features on BlackBerry smartphones.

For example, making an online purchase and then having it shipped to someone listed in your address book.

And open API's allowed developers to leverage the native GPS and mapping capability of BlackBerry smartphones in their applications.

Earlier this year, we launched Media Sync for BlackBerry, which enables simple one-click access to synchronize iTunes or Windows Media Player files directly to a BlackBerry smartphone.

Since launch, more than 1 million users have downloaded this application.

To support the growing popularity of mobile music on BlackBerry, this summer we are teaming up with YouTube as a sponsor of their Global U2 360-degree Tour, which will be the first time the band has toured in stadium venues, with a 360-degree design to provide an unobstructed view to the audience from anywhere in the venue.

Additionally, we have added new partnerships with application companies, including Slacker, Pandora and iHeart to bring BlackBerry users and music content together.

Our relationship with Ticketmaster further extends this reach through the combination of the BlackBerry platform's unique push technology and Ticketmaster's leading position in ticket sales, so that BlackBerry users will get easy access to the best seats for upcoming events and concerts.

We're also working with partners such as Will.i.am and Dipdive to extend the boundaries of social networking, so that artists and fans can engage realtime.

With the combination of BlackBerry's unique platform and these exciting partnerships, it's never been easier to truly live life on BlackBerry.

On the enterprise side of business, GE Security launched eKEY for BlackBerry, to enable real estate agents to open lock boxes from BlackBerry smart phones.

And other partners introduced another of new CRM solutions for BlackBerry, including Maximizer CRM version 10.5 and BMC Remedy Service Desk for BlackBerry.

BlackBerry mobile voice system had one of its best quarters ever in Q4, with enterprise customers becoming increasingly open to exploring new types of cost savings initiatives.

With MVS, companies can leverage the back end systems they already have, to not only free their employees from the desk phone but also from the office.

We've been working to combine our efficiencies in this base with the expertise and enterprise great knowledge of Cisco's collaboration software group and are pleased with the early results from this collaboration.

We are looking forward to the launch of the BlackBerry Enterprise Server version 5.0 in the very near future.

After many months of planning and testing at over 1,000 beta sites, BES 5.0 is ready to be rolled out.

This latest release delivers on several key corporate IT imperatives, including increased manageability, lower total cost of ownership, scalability and support for very large scale deployments and easy mobilization of hundreds of applications.

S5.0 will also introduce a number of highly desired end-use capabilities, including file sharing, the ability for users to securely download files from their corporate network.

And enhanced e-mail management, including features to allow the creation, deletion and renaming of folders and the assignment of flags for follow-up to messages.

This is the most powerful version of the BlackBerry Enterprise Server ever and we believe it will further cement RIM's leadership position in the enterprise market.

In May, we will host the Eighth Annual Wireless Enterprise Symposium in Orlando, Florida.

WES is always a big hit with customers and partners.

And we look forward to another intensive line-up of keynotes, break out sessions, case studies, training and technical labs.

Along with an impressive technology exhibition, where RIM and its partners will showcase a variety of applications and solutions for the BlackBerry platform.

We are pleased with the momentum of our business as we head into fiscal 2010 and are committed to managing our operations to profitably grow market share and drive leverage of our financial model.

We see a number of opportunities for efficiencies and operating expenses throughout the year and we'll continue to work to reducing bill of materials costs on hardware to maximize gross margin potential.

I will now turn the call over to Brian to review our Q4 results.

Thank you, Jim.

Revenue for the fourth quarter ended February 28 was $3.46 billion, up 24% from $2.78 billion in the previous quarter.

This was at the high end of our December guidance range and slightly higher than our February 11 update, due to higher shipments in the latter part of the quarter.

Revenue for the fiscal year was approximately $11 billion, an increase of 84% over the $6 billion in the previous year.

Handheld devices represented $2.88 billion or 83% of RIM's revenue during the quarter, up from $2.25 billion, or 81% in the previous quarter.

Total devices shipped in the quarter of approximately 7.8 million were up from 6.7 million in the prior quarter.

Approximately 7.3 million new device were activated in Q4, either for new customers or for replacements and upgrades, not including phone only sales.

Four weeks of channel inventory at the end of Q4 were down substantially from Q3.

And we expect weeks of channel inventory at the end of Q1 to be slightly lower than Q4 levels.

Device ASP's in the quarter were approximately $370, in line with guidance and higher than Q3 due to shifts in product mix.

Service revenue was $415 million, at 12% of revenue for the quarter, up $54 million from Q3.

Monthly ARPU declined slightly from the prior quarter as the percentage of non-enterprise subscriber accounts grew.

Software revenue was $59 million or 2% of revenue.

Other revenue, including non-warranty, repairs and accessories, was $106 million, at 3% of revenue.

Gross margin for the fourth quarter was 40%, in line with the update we provided on February 11.

This was at the lower end of the range we guided in December due to lower margin products making up a greater percentage of shipments in the quarter.

Operating expenses increased by 3% over Q3, slightly less than we had forecast.

R&D spending was $183 million or 5% of revenue for the quarter.

And selling, marketing and administration expenses were $406 million or 12% of revenue.

Included in operating expenses is stock-based compensation expense of approximately $9 million.

Investment income in the fourth quarter was approximately $11 million, slightly less than expected due to lower yields on our investment portfolio.

Tax rate for the quarter was approximately 30%, in line with our expectations.

There was no material impact on the tax rate in the quarter from foreign exchange fluctuations.

The draft Canadian tax legislation that was discussed in the last earnings call was enacted into law on March 12.

As a result, there's a net benefit totaling approximately $70 million to $100 million that will be recognized in Q1.

This amount is excluded from the earnings guidance we gave for Q1 in the earnings release.

The new tax legislation, which allows RIM to calculate its taxes in US dollars, will lead to reduced tax rate volatility going forward.

GAAP net income for the fourth quarter was $518 million and $0.90 per share.

This is higher than the February 11 update due to the higher than expected revenue and the slightly lower operating expenses.

Weighted average diluted shares, using the EPS calculation for the quarter, were 573 million.

Actual shares outstanding at February 28 were 566 million.

Total options outstanding at February 28 were 13 million.

During the quarter, RIM generated approximately $291 million in cash from operating activities, lower than expected primarily due to changes in working capital balances.

While DSO's were down from 59 days in the prior quarter, to 52 days in Q4, during the past quarter, RIM increased efforts to better manage working capital through improvement in cycle times for vendor payment.

Providing opportunities for RIM to take advantage of benefits such as yearly payment discounts.

We plan to continue to optimize our working capital balances going forward.

In Q4, RIM also made capital asset additions of $252 million.

Intangible asset additions of $222 million.

Business acquisitions of $48 million.

Resulting in a decrease in cash of approximately $250 million.

Both the total of cash, cash equivalents, short-term and long-term investments was $2.24 billion at the end of Q4, as compared to $2.49 billion at the end of the previous quarter.

I would also like to note that we will be required to fund our estimated 2009 corporate tax liability in the first quarter, which which will result in a cash outflow of approximately $350 million.

In addition, RIM's acquisition of Certicom closed in Q1, which will result in a cash outflow of approximately $100 million.

Inventory on hand was approximately $683 million versus $599 million in the prior quarter.

Inventories continue to be primarily raw materials and semifinished goods to support demand for BlackBerry products.

I'll now turn the call over to Edel to discuss our outlook for Q1.

Thanks, Brian.

Before I discuss our outlook for Q1, I'd 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 disclosed in our public filings.

We are forecasting revenue for the first quarter of fiscal 2010 to be similar to Q4 in the range of $3.3 to $3.5 billion.

With units shipped similar to Q4 levels between 7.5 and 8 million.

As Jim mentioned, BlackBerry is enjoying the highest levels of sell-through and net subscriber account additions in our history.

The current uncertainty in the macro economic environment is leading many of our carrier partners to be more conservative than normal, leading to lower levels of inventory being held in the channel.

This, when coupled with the fact that there are fewer new launches happening this quarter with their associated channel fill, the rate of unit shipments has remained constant in Q1 versus Q4.

We once again have a high level of orders already booked for the first quarter, giving us confidence in our forecast of unit shipments.

We expect ASP for the first quarter of approximately $350.

This is lower than in the fourth quarter, primarily due to product mix with lower ASP products becoming a larger percentage of shipments.

Software revenue in Q1 is expected to be similar to Q4 levels.

We are targeting net subscriber account additions for Q1 in the range of 3.7 to 3.9 million.

We are providing a range, rather than an approximate number, due to increased complexity in forecasting as the number of BlackBerry distribution channels expand and the proportion of non-enterprise subscribers grow.

Given that an increasing percentage of net new subscriber account additions are coming from non-enterprise customers, we believe our business will tend to see more of a seasonal lift in Q4 relative to both the previous and following quarters.

In addition, we are anticipating that weekly run rates throughout the quarter moderate from February levels due to expected changes in carrier promotions and fewer new product launches.

We have seen strong momentum so far in Q1 and taking these factors into account, we are pleased at the subscriber outlook for the first quarter.

We are targeting gross margin for the first quarter of between 43% and 44%.

As Jim mentioned, this margin improvement is due to cost savings we have been able to achieve on certain products and a favorable mix shift.

We expect a total operating expense increase for Q1 of approximately 12% to 13% from Q4 levels.

With R&D increasing by approximately 21% to 22%, reflecting increases in head count, including those from the Certicom and Chalk Media acquisitions.

Sales, marketing and administration expenses is expected to increase by approximately 8% to 9%.

We expect depreciation and amortization to be approximately $70 million in Q1, higher than Q4 due to ongoing CapEx and acquisitions.

We expect CapEx to be approximately $300 million in each of Q1 and Q2.

The primary areas of spending are expansion of network infrastructure and R&D facilities.

Investment income is expected to be approximately $10 million in Q1.

We expect the tax rate to be approximately 29% to 30% in Q1 and throughout fiscal '10.

Beyond fiscal '10, we expect the tax rate to be lower than this range as budgeted changes in the Canadian corporate tax rate are implemented.

We expect Q1 adjusted EPS, which excludes the expected gain related to the new tax legislation, to be in the range of $0.88 to $0.89 per share.

GAAP EPS will be higher than this.

Before I turn the call back to Jim, I'd like to provide an update on the impact of foreign exchange in our business.

As we mentioned last quarter, volatility in the foreign exchange markets can have a significant impact on both revenue and operating expenses.

RIM reports in US dollars but has a significant portion of its expenses and revenue in other currencies, primarily Canadian dollar, British pound and euro.

We increased the hedged portion of forecasted revenues and expenses for the first quarter to reduce the effect of foreign exchange movements but it is impossible to be perfectly hedged at any point in time.

We estimate that a 10% appreciation in the US dollar would reduce revenue by approximately $9 million and increase pretax net income by approximately $6 million, given the current hedge program and currently forecasted mix for Q1.

I will now turn the call back to Jim.

Thank you, Edel.

We are pleased with the growth we have shown in fiscal 2009 and the strong momentum we will see heading into the new fiscal year.

With net subscriber account base over 25 million and continued strong momentum in the number of new customers coming to BlackBerry, we are looking forward to the execution of our plans throughout the year and continuing profitability -- to profitably grow our market share.

This concludes our formal comments and we'd like to open the call up for questions.

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

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

Would the operator please come on to handle some questions?

Thank you.

(Operator Instructions).

Your first question comes from Simona Jankowski of Goldman Sachs.

Please go ahead.

Hi, thank you very much.

Just a couple of follow-ups on your gross margin guidance.

Number one, is can you give us a rough quantitative split-up of the contribution of the various income components you talked about to that guidance?

In other words, the mix and the cost improvements and I don't know if there's any rebates or FX elements of that as well?

And then secondly, what do you view as your normalized gross margins?

Is it this level or do you see any further upside or downside as we go into the second half of the year?

Thanks, Simona.

It's Edel.

In terms of what drove the improvements, the biggest piece of that would be cost savings on the bill of materials for hardware.

Mix, would then be the secondary factor there.

Foreign exchange is not a big piece of it.

In terms of a normalized run rate, it's a really difficult question for us to answer right now.

It's just really hard to have a lot of visibility out more than a couple of quarters.

So, it's just not really something that -- we've given our best kind of guess that we have today in what we said in our prepared remarks.

Thanks, Edel.

Just maybe as a quick follow-up to that.

You did mention that you were going to have a number of launches in the second half of the year.

If were just to isolate the impact of those, would they have, all else being equal, an upward or a downward impact on margins?

It's, again, a tough one to answer.

It really depend on; Do they launch on the schedule that we're planning to launch them on today?

Or what kind of cutover from old products to new products happens?

So again, when I talk about lack of visibility, it's just difficult to know how some of those things are going play out in the second half of the year.

Okay.

Thanks very much.

Your next question comes from Mike Abramsky.

Please go ahead.

Yes, thanks very much.

Originally, you had talked about a land grab and I'm just wondering what inning you sort of think we're in now, Jim, with regard to that?

Do you see this quarter's results as an example and your guidance of playing that through?

And on your forward margin guidance, are you still kind of planning to introduce, or do you feel you need to introduce lower price devices or accept maybe lower subsidies from carriers in order to sustain the land grab strategy?

Those are good questions.

I think the -- when you talk of gross margin, the most difficult aspect of gross margin really right now is turbulence in currency swings around the world.

You just don't plan on European currencies dropping 20% to 30% within a quarter and just at the same time you're accelerating your business.

So I think that's really sort of an external macro economic factor that we didn't foresee when we were on the call just before Christmas that's really there.

I think the land grab is still there.

What we've found is our role is definitely, as a standard trusted element in the B2B is really there and that's definitely solidified.

But what we're trying to do is create more and more value propositions to widely deploy them throughout organizations, especially with unified communications and the mobile office and these kinds of strategies.

And that's why you've seen a lot of activity with us in unified communications partnerships recently.

So the B2B is still, I would put that in sort of a deeper penetration but not really a land grab.

But it's a very strategic and critical important growth business.

Definitely, there's an enormous transition happening in the B2C.

So, I think we're still in early innings.

If I had to give it an inning, I'd say one down and -- two down in the second inning.

So, we're not quite done the second inning but we're pretty close.

But this is -- the smartphone and connected appliance is one of the few strong sectors in the B2C in sort of the economy out there.

We think it's the new kind of consumption, the new kind of stimulus, the new kind of innovation, where new kind of jobs are going to come from.

So, it's a lot of responsibility on the sector.

It's not sort of -- it's about tomorrow's kinds of things and this is where a lot of innovation and consumption is.

So for us and we talked a little bit about some value-added services before, I think you've seen the App Store.

I think you've seen some of the VAR deals, like Ticketmaster and more to come, some of the search deals.

So I think -- and there's a lot more to come in that area.

That's more active than people realize.

So I think the mix is going to shift.

Gross margin, it's a function of a lot of factors at play, costs and working down the BOM but deeper penetration and currency swings.

So, it's still a land grab and there's still lots of variabilities in turbulence but I think we're navigating it well and we're well positioned.

And it's very valuable land and it benefits users, benefits developers and really benefits carriers.

And so, that's kind of where we are.

Thanks, Jim.

We'll assume you've got a strong batter warming up for the third inning.

Your next question comes from Deepak Chopra of Genuity Capital Markets.

Please go ahead.

Good evening.

A couple questions.

In terms of the pricing environment, Jim, what do you see on that front?

And do you think you'll get any more aggressive than what we saw in the second half of last year?

And then, in terms of replacement cycles, I was wondering if you can just provide a bit of commentary on that front?

And in terms of -- it seems like things -- people continue to upgrade more quickly than anticipated.

And what your thoughts are during the overall economy's weakness and so on?

It's a good question.

I think pricing is a function of what's at play and I think we're segmenting a lot more.

And so, there's a lot of segmenting in devices and there's a lot of segmenting in services that we've done.

And you saw a little bit of that in the BIS and the BIS Lite.

I think you're going to see some more powerful segmenting and some more powerful options for folks in terms of segmenting.

But that's not just a pure price play, that's really a cost position play for us.

But it's also important to remember that these a lifestyle devices that people use for a lot of -- arguably, a couple hundred times a day and soon to be more.

And so, is really saving $50 on BOM, for something you're going to use for a couple of years, all day every day, really where people are going to be price cautious?

But maybe at a first time entry a point, it's hard to know.

In terms of replacement, it's tough because so many people are coming new to BlackBerry, that we've had this surge, not only with replacement cycle but we've also had new users.

And so, the character and nature of those users, we don't really know, but we know that they're coming at a higher rate on B2C, even though B2B is still growing.

But among the things you're going to see is this whole connected music experience, this social networking, this e-commerce.

And you're going to see a lot happening in sort of mobile video and mobile TV and being able to stream and cache and all that.

So, will that drive sort of people wanting higher end devices?

And we've got some -- you have to really support the strong and multimedia.

So, there's just so many pieces at play right now.

And we told you in the last call, we're going to be able to work down the BOM.

We had a quick shift in mix but there's a lot more capability that people want in these things.

But the adoption seems to be faster and we have long-term sort of activities for value adding.

And I think three months later, I think we have a fair bit of credibility in saying those things happened.

And we see those continuing to evolve.

But we're into new ground all the time and to give an excessive sense of certainty is not fair to you and I don't think it's fair to us but we will maintain leadership.

We will continue to grab that land.

We will respect the model.

But sometimes it's better to give one back, one step to gain two steps forward.

And it's a function of all that's at play in different parts of the world.

For instance, currency stuff.

That puts some real questions onto EMEA, as an example, strategically.

But we're working down the BOM nicely.

And we report in US dollars, which is a very strong global currency in this last quarter.

I think far stronger anyone in the world ever would have guessed.

So it does some things in LatAm, it does some things in EMEA, as an example.

On inventory, how long can the carriers stay at these levels?

It seems like at a certain point, if demand stays this strong, they're going to just have to move it higher at some point in the summer.

They're full.

Yes, this is an active part.

I know they want to cash manage but they are very well aware of how profitable BlackBerry is for the business.

And they are very well aware of how strategically aligned we are with them, both current and long-term.

And they're very well aware of how much they're growing with us.

And that's evident.

So this goes into the category of penny-wise, pound foolish to really squeeze the channels because your inventory disperses a little bit more when you go much more indirect and you go much more B2C and much more retail.

And people have shown that if the item is in the store, they will buy it a lot more than if it's not.

And this cutover to the B2C and B2 strategic platform and all that kind of stuff, super strategic, super critical to carriers.

So, this is an active part of management.

But a big part of our job is to work carefully with carriers to synthesize strategy because if they just think in isolation, "I need the lowest CPGA possible.

I need to cut inventory possible." That may be at the expense of super high growth, super profitable, high long-term value customers.

So, it really becomes about integrating strategic things with them.

And a big part of our life is not only that but new channel strategies, new channel training but also new care strategies with these new complex services and so on.

So these kind of operational and strategic elements of relatedness are a big, big part of what we do because this is a partnership.

Thank you, Jim.

Your next question comes from Peter Misek of Canaccord Adams.

Please go ahead.

Thank you.

Just first, the housekeeping.

I just want to make sure I heard this correctly.

Your guidance does not include any channel refill, it includes a continued drawdown in inventory.

And then, I'd just like to ask a question.

Yes, Peter.

So, what we said is that we expect four weeks of channel inventory to be down again a little bit at the end of Q1.

So, yes, I would expect that the level will come down slightly.

And, just a follow-up if I could on that clarification is, we heard from Best Buy that they just started restocking.

Has there been any indication of restocking yet at all from any carrier?

Any movement on that front?

I don't know the answer to that, Peter.

I don't know if Jim has any insight into what's going on in the channel in terms of; Are carriers getting closer to restocking?

It's a big part.

Yes, what happens is, is they get tight and then you get stung.

And then, the guys who are in charge of sales start squawking because the cash managers are squeezing the revenue generators and it's penny-wise, pound foolish and it really shows up.

Because what happens is the channel gets really loud when they, they run out of a hot product.

They get -- they're not shy about it.

So, it's different with every situation but it can't go -- it seems to by righting itself.

And again, we have to do buffer stocks and we have to be reactive and we have to manage supply and forecasting.

And so, a lot of that stuff gets off loaded to us and that's the reality but there's a point where it just can't be off loaded anymore.

And so, I think they're really at that point where it's penny-wise, pound foolish and they're going to swing back.

Is that going to swing back tomorrow?

In some respects, it is.

Are some of them going to have to take a couple more bumps on situations in misperforming the channel?

Maybe.

It's case by case, almost.

Okay.

Just a question on you guys as a platform and the carriers.

So there was some debate, primarily by some of your competitors suggesting that, one veteran in particular, saying RIM likes to tell Wall Street and use it as marketing that they are the most profitable service or that they consume less bandwidth than everyone else.

I'm wondering, it seems like the technical value that the carriers get -- that your efficiencies, your partnerships, et cetera, can you walk us through how some of these other carriers are thinking about you as a platform?

Has there been any kind of mindset change in the marketing departments?

Have we started to see the carriers?

Because your performance in the consumer this quarter was very good.

Have we started to see any change there on dollar allocation, the view of you as a true partner and platform?

Has there been a change there?

Well, our activities have been consistent for decades.

So, since we've been working with the carrier channel, that's eight years.

So that's been -- we've been consistent and perception can change and sentiment can change but we are nothing if not consistent.

We are a very consistent bunch and very predictable.

But perception's definitely change.

I would say the overwhelming majority of carriers see us very strategically and absolutely, work with us.

And I think that's why, when they really see the profitability.

So if a competitor says we're really profitable for the carrier, I should thank them for the marketing help.

If they say we're really efficient on a network with scarce capacity.

Again, I should buy dinner for the marketing help because those are absolute truths.

To market that you are most of the network consumption of the carrier, I don't think is a very good marketing plan.

Because what you're seeing is, in this CapEx environment, when there's scarcity, when you have call performance issues, most of the time it's a capacity issue.

And that's what happens, you just get stung on capacity.

So, you're running a 5 kbps voice app and then somebody is trying to stream a TV show for 100 kbps or 80 kbps you're taking away 10 to 20 voice calls of capacity.

So with the contention comes congest and all this kind of stuff.

So, if you can compress and you can script and you can buffer and you can side load and all this kind of stuff, you're rationing capacity.

And plus, if you're rationing packets, it's pretty much a linear relationship between battery life -- battery consumption and packets delivered.

There's also some display consumption, of course, with the color display.

So all I can say is carriers do get the element that we're profitable.

It's the wise carrier, that not only correlates that on a CPGA, ARPU, churn kind of basis but also interrelates that to the true step function of CapEx in a scarce capacity function.

And think in this world, there is and there's going to be a lot of reckoning on CapEx.

Especially, as these smartphones become more and more powerful and these high speed PC cards are out there and these high speed networks.

Just because you can go faster, doesn't change Shannon's law that it's fixed relationship of a bit per hertz.

Just because you can go 10 times faster and consume 10 times more packets, doesn't mean you have 10 times more capacity or 100 times even.

But I think the role of side loading is going to be very, very important.

And the role of efficiency management is going to be important for user experience and for network capacity.

And this is not like pulling an optical network and just repurposing the whole spectrum on fiber for every strand of fiber.

Wireless is different and I think conceptually, nobody had to pay attention to it.

But as you see the bandwidth consumption -- and a lot of these carries don't own their back haul either.

So, there's actually a variable cost to back haul packets.

So, how you can off-net that but still maintain them as platform customers is a very -- I think it's actually going to be the defining aspect, in many respects, for the success of carriers.

So, we're going to stick to our mantra because we know it's key to success.

It's really great when they receive the message thoughtfully and immediately but that doesn't always happen.

Thank you, Jim.

Your next question comes from Vivek Arya of Bank of America.

Please go ahead.

Thanks.

Jim, two questions.

First, could you please discuss how the product pipeline is looking for the remainder of the year?

What new capabilities can we look forward to to compete with say the new Palm3 and all these new Android smartphones?

And then I have a follow-up?

Well, I think we've talked a little bit about where we're going.

The BES 5.0 is a platform play and then, all the evolution of BIS.

And then this sort of unite breakout pieces with the Media Sync and others to come.

And then, new value add services, like App Store and so on and so forth.

I think the whole BlackBerry environment and its richness and its reliability of our infrastructure have truly -- and the nature of our services model in the channel carrier.

Helping them train the care, save Q's, help Q's, automated help on BlackBerry, channel capacity and store training, seating, promotion.

These are all very, very important parts of what we do.

And developer stuff and this kind of stuff and branding and the YouTube concert, et cetera, et cetera.

These are all parts of the whole system.

And then you come into, okay, let's talk about the access device.

And obviously, we had a stellar set of introductions in late, in the fiscal -- in the calendar year.

And that's been -- that's played a critical role in where we are today.

Suffice it to say, we have an exciting road map for the back half of this year.

We just try not to talk a lot about them six, seven months in advance.

But generally, with with your carrier partners, you're planning sort of 12 months, pretty firm, right out there, specific launches in the springtime, into the back to school, into the holiday season.

And then, what's sort of same changing in new ways, early in the next calendar year.

So, that's a very active part of our life, ongoing but particularly, right now because everything is sort of getting reloaded into the summertime.

So, I just can't get specific right now.

But lots of packaging, lots of multimedia, lots of new airlink, some surprising things for sure.

And again, I think you're going to see this sort of smart appliance in the role of the wireless carrier platform emerging sustainably and dramatically.

And the smart carriers are going to profit tremendously.

And that goes back to the early question, from Mike, about; Sort of what inning are we in?

We're still in a rapidly emerging stage of "land grab" and so we have to keep driving these device innovations.

But we have to drive everything.

It's not just the devices but it's our system.

But it's also our care and our processes and our relatedness because this puts a lot more complexity on the care side of the carrier and on the channel side of the carrier.

And that's not the lineage and they have to bulk up their game there and we have to be with them on that way.

And as we flow more packets in more places, we have to scale up our infrastructure.

And if we have more SKU's, we have to scale up our supply chain.

So, I know I'm digressing a bit, Vivek, on your question because yes we have a great line-up for the back of the year and for sure, for the rest of this 12 months of this fiscal year -- the next 11 months, it looks great.

But there's a lot of responsibilities throughout the whole thing because just a good device doesn't give a profitable system experience for the user and for the -- or a compelling system experience for the user and a profitable satisfied customer for the carrier.

And just one perhaps related thing, Jim.

What's been the response to the Application Store launch?

And where I'm going with that is, that some of your carrier customers also plan to open their own application stores.

Do you see any risk of the customer being confused or do you see a place for multiple application stores?

And what would really be the impact of that application store on RIM's earnings model later in the year?

Thanks.

Well, I think it has the -- it's modestly positive.

It's not a big profit driver but it's a real catalyst for developers and for users.

And it's kind of a precondition.

And I tell you, the first day has been -- we've been shocked by the adoption.

So, the flow of apps and new users has been pleasantly surprising.

Honestly, I think if carriers have a store, that's an awful lot for a carrier to do.

Some of them have that but they have to -- you have to do everything.

They have to do the developers, they have maintain the environment, they have to do all the agreements, they have to do the merchandising.

And the truth of it is carriers have -- the reality of wireless is that the environments are fragmented.

So they have to do this in multiple kinds of environments.

I just think it's an untenably difficult job for an carrier to do and it's inefficient.

It would be as inefficient as them creating their own BlackBerry Enterprise Service.

But I think the magic lies in letting the carrier drive what they want to drive, which is their -- cut their own deals with developers when appropriate for key apps and drive their own apps.

Let them have their own store within the store.

Let them have their branding.

Let them have a rev share.

Let them integrate it with their billing.

Integrate it with their care.

And then, the carrier is a strategic platform but we get to do our effort of levering our community across our almost 500 carrier and distribution partners in over 160 countries.

And that's that nuancing that I think will really grow the carriers strategic platform.

But how we interrelate with them is critical.

And again, we cracked that model eight years ago and we've stayed consistent.

And we invested in it and it works!

And so, I think the App Store, is if you just say, "No, carrier, you're out of this, good-bye." I think that's got a disintermediation risk, which is strategically risky to them.

But if you also say to them, "Okay, here you go.

You carry it and you run it." Is that something they can really invest in and support properly?

And does that make it compelling to the users?

Does it make it compelling to the developers?

And so I think there's a better place in the partnership model and we spent a lot of time on it.

But we've got a lot of work because there's different billing systems and there's different languages and all of that in that.

So it puts a lot on our back.

But this is a model we know and trust and have built over years.

And again, have been very, very consistent and predictable on.

This concludes the question-and-answer session.

Ms.

Ebbs, please continue.

Thank you, operator.

In closing, I would like to remind everyone that there's a post view service available at 416-640-1917, pass code 21252988 pound.

Or you can also listen to the call, which has been recorded and is available on the investor relations section of our Website at rim.com/investors.

Thank you.

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

Thank you for your participation.

You may now disconnect your lines.