BlackBerry Ltd (BB) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Research In Motion second-quarter fiscal 2011 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 with instructions provided.

(Operator Instructions).

I would like to remind everyone that this conference is being recorded today, Thursday, September 16, 2010, at 5 p.m.

Eastern time.

And I will now turn the conference over to Edel Ebbs, Vice President, Investor Relations.

Please go ahead.

Thank you.

Welcome to RIM's fiscal 2011 second-quarter results conference call.

With me on the call today are Jim Balsillie, co-CEO, and Brian Bidulka, CFO.

After I read the required cautionary note regarding forward-looking statements Jim will provide a business and strategic update, Brian will then review the second-quarter results and I'll discuss our outlook for the third quarter of fiscal 2011.

We'll then open the call up for questions.

I'd like to note that this call is available to the general public via call-in number or webcast.

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

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

Eastern this evening.

Some of the statements we'll be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws.

These include statements about our expectations and estimates with respect to product shipments; revenue; gross margin; operating expenses; CapEx; depreciation and amortization; earnings; channel inventory; seasonality and ASPs for Q3 fiscal 2011 and beyond; our expectations regarding RIM's near and long-term tax rates; our expectations regarding the impact of foreign exchange of our revenue and net income in Q3; our estimates of the number of net subscriber account additions and other non-financial metrics; our product development and marketing initiatives and timing; developments relating to our carrier partners; and other statements regarding our plans and objectives.

We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intends, 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.

Any factors could cause our actual results, performance or achievements to be materially different than those expressed or implied by our forward-looking statements, including risks relating to our intellectual property rights; our ability to enhance our current products and develop new products and services; risks related to competition; our reliance on carrier partners, third-party manufactures, third-party network developers and suppliers; risks relating to network disruptions and other bus interruptions; our ability to manage our production facilities; security risks and risks relating to encryption technology; risks associated with our international operations; our ability to manage growth; 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'll now turn the call over to Jim.

Thank you, Edel.

We're pleased to report strong financial results for the second quarter of fiscal 2011, with shipments, revenues and earnings all above the high end of the ranges we guided on the last conference call.

Revenue grew 31% over the same quarter last year and GAAP earnings grew 76%.

The BlackBerry subscriber account base grew 56% year over year to over 50 million and RIM has shipped approximately 115 million handhelds to date.

This strong performance was due to the well-executed launch of two new products during the quarter, excellent performance in international markets, particularly Latin America and Asia.

BlackBerry smartphones are available through over 565 carrier and distribution partners in approximately 175 countries, and international markets continue to be a strong driver of growth.

Approximately 52% of revenue in the quarter was generated outside the United States and over 45% of BlackBerry subscriber account base is outside of North America.

In Q2, net subscriber account additions were 4.5 million, which was lower than we anticipated at the time of the last earnings call.

Net subscriber account additions are increasingly difficult to forecast as the smartphone market becomes mainstream with more channel complexity, growth in the number of competitive products and increased market segmentation.

In the early part of the second quarter we saw lower-than-expected net additions in the United States due to a large number of competitive offerings hitting the market in the absence of new BlackBerry product offerings.

In the latter part of the quarter we saw some impact from the weakness in the Middle East markets due to the well-publicized issue surrounding BlackBerry service in the region.

With the launch of the Torch in late August, we saw a meaningful increase in run rates in the United States, which has continued into the early part of Q3.

We have also seen an improvement in the Middle East as we work with authorities in these regions to address the regulatory concerns.

Despite the lower net subscriber account additions, sell-through of BlackBerry devices in the quarter was strong at approximately 11 million, not including devices sold as phone only.

This reflects a high level of replacement and upgrade sales, with millions of BlackBerry customers remaining loyal to BlackBerry products and services while millions of new BlackBerry subscribers are added to our service.

This was an exciting quarter for RIM with the launch of BlackBerry 6 along with the BlackBerry Torch and the BlackBerry Curve 3G.

The Torch launched with AT&T and through affiliated channels, including Best Buy, Wal-Mart, RadioShack, and others in mid August, and we are pleased with the positive impact this product has had on the performance of the BlackBerry product portfolio in the United States.

AT&T supported the launch of the Torch with one of the largest national marketing efforts ever for RIM with TV print and online media, dedicated freestanding BlackBerry Torch merchandising displays in retail stores and digital store displays, including multi-media content.

The level of marketing and advertising of Torch and other BlackBerry products is expected to increase further, as we head into Black Friday and various TV spots and other promotions leading to the highest exposure that BlackBerry products will have had in the US market to date.

Since the Torch launched, sell-through run rates have more than tripled in AT&T retail stores and Torch contributed to the best month ever for BlackBerry smartphones with Best Buy in August.

In fact, based on sell-through in the first three weeks after launch in AT&T, Torch is the most successful GSM BlackBerry smartphone launch in RIM's history.

So far adoption of Torch in the United States has been largely dominated by consumer and prosumer sales as enterprise customers typically put a new OS through a certification cycle before deploying.

We are excited that several of our large enterprise customers have put BlackBerry 6 on an accelerated validation cycle and we expect the enterprise to become a more significant driver of Torch adoption into Q3 and Q4.

The launch in the US with AT&T was just the tip of the iceberg in terms of rollout plans for BlackBerry Torch and we are excited to be launching with over 75 additional carriers around the world in the third quarter alone, including substantial launches and promotions plans for Mexico, Canada and Europe.

These launches give us excellent visibility into unit shipments over the coming months and we are excited at the prospect of increased penetration of this product into new markets as we head into the holiday buying season.

We expect the strong momentum of the second quarter to continue into Q3 and be further buoyed by the seasonal benefits of the holiday buying season and a heavy slate of promotional activity and advertising in support of BlackBerry smartphones in the coming months.

In the United States, we expect to rollout BlackBerry 6 for additional carriers, as well as to participate in a number of promotional campaigns heading into Black Friday.

And internationally the large number of expected launches, the BlackBerry 6 rollout for existing devices and a busy promotional calendar are all contributing to our strong outlook for the third quarter.

During Q2 we introduced BlackBerry 6, which delivers a redesigned user experience, including visually fluid interface, rich web browsing, and an engaging multi-media application portfolio.

BlackBerry 6 offers five customizable views that allow the user to smoothly and easily navigate between applications; a new web kit browser that quickly renders rich web content and simplifies application development; a new social feeds application that allows for a streamline consolidation of multiple streams; and a multi-media experience that includes a free podcasting application, advanced media capture and playback capabilities and the ability to sync it all over with a home Wi-Fi network.

The new camera software allows for easy scene mode selection, seamless geotagging and easily accessible and customizable screen and organization controls.

BlackBerry 6 desktop software features an updated and more user-friendly interface with built in media sync to organize multi-media content, easily manage software updates and add and remove applications.

Additionally, BB6 desktop software can monitor and manage music remotely using Wi-Fi to wirelessly sync changes once in coverage of a home Wi-Fi network.

Initially this software is only available for Windows but we expect to offer MAC support in the next few months.

The BlackBerry Torch is the first BlackBerry smartphone to feature BlackBerry 6 and we expect the software to be available through additional carriers and for devices, including the Bold 9700, Curve 3G, and Pearl 3G, in the near future.

BlackBerry podcasts was launched in mid August and is now shipping on all new products as well as being available for download in App World.

Podcasts include content from leading providers, including Bloomberg, National Public Radio, CBC, and others, as well as the BlackBerry channel with how-to videos and other content related to BlackBerry products and services.

BlackBerry podcasts can be set up to download content over Wi-Fi or cellular connection with content stored to the SD card for access on demand when out of network coverage, such as on an airplane.

This solution also leverages the unique push capability of the BlackBerry solution to notify the user when new channel content comes available, allowing for realtime communication between the subscriber and the content provider.

During Q2, we also launched the BlackBerry Curve 3G with Rogers in Canada and T-Mobile in the US, with rollouts already under way with other carriers in Q3.

This new addition to the Curve family features a full QWERTY keyboard, integrated multi-media keys, GPS, Wi-Fi, support for up to 32 gigabits of memory, and fast 3G connection, along with many other best-in-class smartphone features.

Rogers launched the Curve 3G during the first week of August at an aggressive $49 retail price point, which has led to solid and steadily increasing sell-through during the first month, outpacing even the success of the popular Curve 8520.

We have also announced this week that the new BlackBerry 6 Ready Curve 9330 3G for CDMA networks.

This product, which features a new design and number of consumer-friendly features, including improved multi-media and social networking capabilities, will be available from both Verizon and Sprint in time for the holiday season at attractive price points.

We look forward to building on the strength that the Curve family of products has traditionally had with these partners.

Latin America continues to perform exceptionally well and last quarter we saw particularly strong growth in Columbia, Mexico, and Argentina.

The Bold 9700 and Pearl 3G continue to be launched in primary and secondary markets throughout the region and marketing initiatives around BBM and World Cup provided a back drop for strong sell through.

Since the beginning of Q1, we have increased our regional point-of-sale presence by 225%, which is especially important in markets heavily dominated by prepaid where convenience is essential.

We continue to build on our strong positioning in the UK with the Curve 8520 and Bold 9700, including in the top five selling mobile phones across the region during calendar Q2.

O2 had its best quarter ever with BlackBerry products, launching the exclusive purple Pearl 3G and coupling the Curve 8520 with special marketing and give -aways during the World Cup.

Towards the end of quarter -- of the quarter, O2 launched a BlackBerry prepaid hero campaign around its pay-and-go products, which became one of the most successful recent marketing initiatives.

Vodafone UK launched a hero program around the exclusive pink Pearl 3G, with heavy promotions across its entire UK retail channel and the public sector marketing program launched last quarter featured a free Curve 8520 with a 24-month BES contract, which continues to be successful and is facilitating growth in law enforcement, healthcare, and government verticals.

Vodafone Spain launched the second wave of its BlackBerry Messenger promotional campaign, with attractive data and service plan combinations and a strong prepaid launch.

In the Netherlands, Q2 was the third consecutive quarter of record-breaking net subscriber additions for all three carriers in the country, driven by aggressive pricing, media promotion, and the launch of prepaid plans.

In France, SFR and [Bleek] have embraced BBM, building on the marketing RIM has been doing in the region with their own back-to-school promotions for BlackBerry smartphones.

BlackBerry products continue to maintain a leading position at Phones For You in Europe and recently won awards for service of the year for BBM and contract phone of the year for the Curve 8520.

The launch of the Pearl 3G was executed with a high visibility hero campaign, as well as an entire floor of the store, which was transformed into a BlackBerry smartphone zone and led to a sharp increase in sales.

We intend to duplicate this kind of promotion throughout more of its locations across the UK and in the upcoming quarters.

Carphone Warehouse is offering BBM bundled with Pearl 3G, Curve 8520 and Bold 9700 and has seen a strong uptake in this offering, particularly in the younger demographic.

In South Africa, MTN and Vodacom saw robust sales of the BlackBerry smartphone, leveraging the Bold 9700 in many of the World Cup promotional activities that took place throughout the country and BlackBerry service was launched with Cell C and supported by a large multi-channel marketing campaign.

Prepaid BlackBerry service is beginning to become a meaningful driver of adoption, particularly in the EMEA region.

During Q2, Vodafone Spain launched a prepaid plan that includes a Curve 8520 for EUR169 when combined with a EUR3.5 per week or EUR9 per month data plan and a voice plan.

Prepaid is also gaining traction in North America, driven by bundled service plans and clear and focused marketing campaigns.

Sprint, Boost and Virgin Mobile prepaid brands launched the Curve 8530 this quarter and have seen excellent adoption.

Also in the US Metro PCS with the launch of Cricket Mobile is driving strong prepaid adoption with no contract pricing of $249 and unlimited voice, text and data package of $60 per month.

While still a small percentage of the overall subscriber base, prepaid is a rapidly-growing part of the business and represents a substantial opportunity given that this segment of the market makes up the majority of wireless consumers around the world.

In Southeast Asia our channel expansion continues with Brightstar now distributing BlackBerry products into Singapore and Malaysia and Cool adding distribution in Thailand.

Social networking continues to be a primary driver in many of these markets and we've been building on this with new applications and features in targeted marketing efforts.

On the lawful -- on the topic of lawful access, RIM is continuing discussions with governments and carriers in India and the UAE and I believe we have made good progress in those discussions.

The details of such discussions are, of course, confidential, but I'm optimistic that a positive and constructive outcome can be achieved that addresses the regulatory requirements of government and the security and privacy needs of corporations and consumers.

I know that there are lots of contradictory rumors and theories on this topic and it is unfortunately inevitable given the circumstances.

It's the type of subject that draws a lot of interest and commentary from a lot of people, many of whom are simply speculating and some of whom are, frankly, driven by their own agendas and so it should be no surprise that there is a lot of misleading and -- inaccurate information out there.

With that in mind, I will reiterate that RIM continues to engage in constructive discussions in the matter and RIM has consistently and publicly communicated its principles in dealing with the matter.

We've made it clear that we are respectful of government needs and fully cooperating to comply with lawful requirements on an industry-standard basis, but we cannot compromise the security architecture of the BlackBerry enterprise solution.

It utilizes end-to-end encryption and RIM simply has no ability to read the encrypted information.

RIM has no master key or back door key to allow access and the location of RIM's infrastructure has no impact on the security architecture.

The end-to-end encryption is a fundamental part of the system design and we know it is a fundamentally important security feature for our enterprise customers around the world since they legitimately need to protect their confidential corporate information.

And this is a core underpinning of why we have over 250,000 BlackBerry enterprise servers installed and operational around the world today.

BlackBerry AppWorld was updated in August with the launch of several new features to enable better application discovery, easier payment and more opportunities for developer profitability.

New services added include bar code scanning that allows for direct access to applications by using the camera to scan QR bar codes in advertisements, and BlackBerry ID, which enables subscribers to have a device independent library of apps for quick and easy transfer between BlackBerry smartphones.

New payment options, including credit card and carrier billing, are now enabled in app -- BlackBerry AppWorld and are available with carriers, including AT&T, with rollout plans to others in the near future.

We further increased adoption of BlackBerry AppWorld.

The minimum price for an app has been lowered to $0.99 and navigation has been improved with new features, including tabbed option and the top 25 list.

To date over 35 million BlackBerry smartphones have downloaded AppWorld and an average of over 1.5 million apps are being downloaded every day, which is up 40% sequentially.

We continue to work closely with the developer community to encourage development of compelling applications for the BlackBerry platform.

BlackBerry 6 simplifies that development through support for web kit HTML 5 and Widget, the integration of universal search and preloading of AppWorld, and the new carrier billing, modified pricing and advertising that will add further elements of developer monetizing.

Since the launch of Torch with BlackBerry 6 last month, there are now over 2,000 applications available for the Torch in AppWorld and that number is rapid -- growing rapidly every week.

We are actively supporting our top developers, not only to optimize for the new BlackBerry 6 UI, but also working with them to help them take advantage of the new features in their app, such as universal search, bar code and QR code scanning, network-based location, and more.

We're also starting to bring new developers into the BlackBerry platform that are building full-featured apps on top of our web kit browser using the BlackBerry Widget platform.

We will be unveiling some very exciting news on the latest enhancements and future direction for this platform at the RIM BlackBerry DevCon at the end of September in San Francisco, as we continue to embrace and extend the HTML 5 web standards for both online content services and full-featured offline apps.

BBM continues to be an important driver of adoption in many markets around the world and in Q2 we began an integrated marketing campaign to increase awareness and usage.

Results from this campaign indicate increased penetration of BBM usage in many regions, with particular success in the youth demographic.

Marketing and advertising efforts in Q3 will be expanded to have a greater focus on highlighting the features and benefits of BlackBerry 6 and our new smartphone, including the BlackBerry Torch, in key markets around the world.

RIM's leadership position in the enterprise market continues to be strong, with over 90% of the Fortune 500 companies having deployed BlackBerry smartphones.

The combination of security, reliability, manageability and compliance, together with the ease of enabling corporate applications, continues to drive strong adoption and support for the BlackBerry enterprise solution by CIO's and IT departments around the world.

In addition to deploying the BlackBerry platform as a corporate data access solution, large enterprises increasingly are adding BlackBerry mobile voice system to their IT architecture.

MVS5, with its voice over Wi-Fi capability, became generally available at the end of Q2 and several large customers have moved ahead with adoption of the solution, including a number of Fortune 500 companies.

These and many other enterprise customers are reaping the economic and end-user benefits of making and taking phone calls from their office slides on their BlackBerry device, over a cellular network or Wi-Fi, when available.

In support of the release of the BlackBerry MVS5, some of our North American carrier partners have evolved their BlackBerry MVS offerings to include strategic programs that bundle BlackBerry MVS5 with net new purchase of BlackBerry smartphones, which is driving adoption and end-user value.

RIM is also making this solution available to value-added resellers in North America, such as Endpoint Technologies, Instant Technology Solutions and BBH Solutions through a new agreement that was signed this last quarter with Ingram Micro.

BlackBerry MBS 5 runs only on BlackBerry smartphones and builds on the value of the BlackBerry enterprise solution that is the gold standard for corporations around the world to mobilize their workforces.

There are two segments in the corporate data access market; corporate liable, where the Company purchases and deploys a smartphone to designated employees, and personal liable, where an individual has a personal smartphone enabled to access corporate data.

On the corporate liable side, RIM has been benefiting from the move by key enterprise customers to expand the number of organizational layers that qualify for corporate-designated BlackBerry Smartphones, which will drive deeper penetration within these organizations well beyond the executive and sales ranks.

The growth of personal liable devices in the enterprise represents an opportunity for RIM to build on its leading position as the corporate liable smartphone of choice in the enterprise.

We are building on this by ensuring that the BlackBerry dual persona solution for sandboxing allows organizations to maintain security of their corporate data assets and maintain compliance with regulatory requirements without compromising their employees enjoyment of their personal device applications.

Unique aspects of the BlackBerry solution include the ability to block cutting and pasting of work data into personal applications, the ability to restrict personal applications from accessing corporate information, and the ability to remotely wipe only the corporate side of the device and just allowing forwarding of corporate communications through personal communications applications; the ability to manage corporate access by personal devices on a corporate BES or with BES express is a key differentiator for the BlackBerry solution in this market and for large organizations with compliance, auditing and security requirements, the BlackBerry solution remains the simplest and least expensive way to meet regulatory requirements while increasing the productivity of their employee base through enabling corporate data access on personal smartphones.

For end users BlackBerry smartphones are for the benefit of providing an integrated experience between personal and work.

For example, the ability to manage their personal and work appointments in the same calendar view.

We expect this solution to be available to many of our corporate customers by the end of the year.

We know that many analysts are continuing to evolve their understanding and modeling of the enterprise market and we think that there are three important distinctions that must be made in evaluating the total addressable market and trend.

The first distinction is that smartphones purchased through a corporate discount program for friends and family may be reported as business devices, but those devices are, in fact, being utilized by consumers and were simply procured through a business channel in order to receive a discount.

This is a common practice in large enterprises.

The second distinction is that employees themselves who use a corporate discount program to purchase the smartphone or who may be receiving a cell phone reimbursement from their employer but who are not actually allowed to connect the smartphone to corporate data systems are not really enterprise users and therefore should also be considered consumers who are simply purchasing through a business channel in order to receive a discount.

Finally, the third key distinction that should be made is the size and growth rate of personal liable and corporate liable segments.

Many firms looking at supporting personal liable smartphones have not proceeded past the trial stage due to factors previously mentioned.

When sizing up competitive claims about these segments we think it is also important to question and challenge assumptions about the penetration since we have not typically seen competitive claims backed out by actual user numbers, excluding pilots and free device seeding.

We are very excited about the early adoption trends of the Torch 9800 and Curve 3G, as well as the heavy promotional calendar lined up to support BlackBerry products over the next few months.

Our partners and customers are excited about the future and current -- the current and future BlackBerry product portfolio and we are looking forward to continued strong adoption of the BlackBerry platform around the world.

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

Thank you, Jim.

Revenue for the second quarter ended August 28, was $4.62 billion, which was up from $4.24 billion in the previous quarter, slightly above the guidance we provided on the June conference call.

Handheld devices represented $3.64 billion, or 79% of revenue during the quarter, as compared to $3.35 billion, or 79% in the previous quarter.

Total devices shipped in the quarter were higher than Q1 at 12.1 million units.

Approximately 11 million new devices were activated in Q2 by those new customers or for replacement and upgrades not including phone-only sales.

We estimate that four weeks of channel inventory at the end of Q2 is similar to Q1, and based on our sell-through forecast we expect forward weeks of inventory to be relatively flat again in Q3.

Device ASPs in the quarter were approximately $304, which was slightly higher than Q1 due to product mix.

Service revenue was $771 million, or 17% of revenue, up $78 million from Q1.

Software revenue and other revenue accounted for the remaining 4% of sales in the quarter.

Gross margin for the second quarter was 44.5%, slightly higher than the guidance we provided in June due to revenue mix.

Operating expenses in the second quarter were $974 million, higher than the comparable Q1 level, as expected.

R&D spending was $323 million, or 7% of revenue for the quarter, in line with our forecast.

Sales, marketing and administration expense was approximately $546 million, slightly above our forecast.

Operating expenses included stock-based compensation expense of approximately $17 million.

Tax rate for the quarter was approximately 27%, in line with our forecast.

Net income for the second quarter was $797 million, or $1.46 per share diluted.

The impact of shares we purchased in the quarter was approximately $0.02 per share.

Weighted average diluted shares used in the EPS calculation for the quarter were 546.4 million.

Actual shares outstanding at August 28, were 524 million -- 524.5 million.

Total options outstanding at August 28, were approximately 7.5 million.

During the quarter, RIM repurchased and cancelled 28.4 million common shares at a cost of $1.53 billion in accordance with the Board-approved 2011 repurchase program authorized in June.

Total of cash, cash equivalents, short-term and long-term investments decreased by approximately $1.24 billion to $2.03 billion at the end of Q2 as compared to $3.27 billion at the end of the previous quarter.

During the quarter, RIM generated approximately $940 million in cash from operating activities, which was offset by capital asset additions of approximately $200 million, business acquisitions of $320 million and the repurchase of common shares of approximately $1.5 billion.

In Q2 accounts receivable were approximately $3.22 billion and DSOs increased 63 days from 57 days in the prior quarter, primarily due to the timing of sales in the quarter with the introduction of Torch and Curve 3G in the last few weeks of the quarter.

Inventory on hand in Q2 was approximately $645 million versus $556 million in the prior quarter.

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

Given the currently forecasted geographic mix for Q3, we do not expect a significant impact on revenue or net income from foreign exchange, with a 10% plus or minus move in the US dollar having a negligible impact on revenue or expenses.

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

Thanks, Brian.

Before I discuss our outlook for Q3, I'd like to remind everyone that these forward-looking statements reflect managements 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 expect to ship between 13.8 million and 14.4 million units in the third quarter of fiscal 2011 and for revenue to be in the range of $5.3 billion to $5.55 billion.

This increase in unit shipments is being driven by ongoing strong sell-through of existing new products, rollouts of new products, such as Torch in markets around the world, and channels preparing for the increased demand expected during the holiday buying season.

As we said on the last earnings call, we expect ASP in the second half of the year to be higher than the first half.

ASP in Q3 is expected to be between $310 and $315 higher than Q2 due to the mix of product expected to ship in the quarter.

As we've discussed for the past few quarters, the increase in the number of products we offer and the number of geographies we sell into makes forecasting product mix and therefore ASP increasingly difficult.

As a result, this will be the last quarter we will offer guidance on ASP and we will report ASP for the last time with our Q3 results in December.

We are targeting gross margin for the third quarter to be approximately 42%, which is consistent with our commentary from the last call where we said that we expect quarterly gross margin percentage to remain in the low 40%s throughout the second half of the fiscal year.

Q3 margin is expected to be lower than Q2, primarily due to strong growth in unit shipments driving hardware higher as a percentage of the revenue mix for Q3.

We continue to expect gross margin to remain in the low 40%s for Q4.

We are targeting net subscriber account additions for Q3 in the range of 5 million to 5.4 million.

This reflects the strong run rate we have seen so far in September with the Torch launch and the resolution of some of the regulatory issues in the Middle East, as well as the launch of the Torch and Curve 3G in dozens of incremental markets around the world, as well as the ongoing momentum we anticipate from the high level of advertising and promotional activity scheduled as we head into the holiday buying season and Black Friday.

Net subscriber account additions is a metric that is unique to RIM and is not comparable to metrics reported by any of our competitors.

Additionally, as Jim mentioned, forecasting net subscriber account additions is increasingly difficult given the growing complexity of our business with diverse market segments, multiple geographies and over 565 carriers and distribution partners.

As a result, after today we will no longer guide net subscriber account additions and we will report net subscriber account additions for the last time in December.

Total operating expenses are expected to increase in Q3 by approximately 7% to 12% from Q2 levels.

We expect R&D to increase by approximately 8% to 11% and sales, marketing and administration expense to increase by approximately 7% to 14%.

In the third quarter we expect depreciation and amortization to be approximately $110 million and we expect CapEx to be approximately $300 million.

In the fourth quarter we expect CapEx to be similar to Q3 levels.

The primary areas of spending continue to be expansion of network infrastructure and facilities for R&D and IT operations.

We expect the tax rate to be between 27% and 28% in Q3 and throughout the remainder of fiscal 2011.

We expect Q3 EPS to be in the range of $1.62 to $1.70 per share diluted.

I will now turn the call back to Jim.

Thank you, Edel.

Customers in markets around the world are continuing to embrace the BlackBerry solution and we are excited to leverage the momentum in our business into the holiday buying season in RIM's third quarter.

This concludes our formal comments.

We would like to open the call up for questions.

Please limit yourself to one question per person.

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

Would the operator please come on to handle questions?

Thank you.

(Operator Instructions).

One moment, please.

Your first question today comes from Mike Abramsky of RBC Capital Markets.

Please go ahead.

Yes, thanks very much -- pardon me, I'm sorry.

Jim, can you talk a little bit about your design philosophy going forward with regard to perhaps pushing specs versus following specs and trading that off versus traditional approaches with BlackBerry to things like battery life and cost?

I think the Torch is a fine product but also been criticized for perhaps not pushing the edge on things like processor and display, not carrying through on open GL for 3D gaming and so forth and I was just -- obviously you won't talk about roadmap but could you give us a little sense of how you might think about these things going forward in the context of competitive product?

Sure.

There's such an interesting dynamic going on in the market because first of all, I think when you talk about platform and design and future aspects, and I think you're going to be pleasantly surprised at Dev Con a week Monday.

So I can't really give you too much here but I think you're going to be really interested there.

So I think that more aspects of design philosophy are going to come out there.

I think in terms of what BlackBerry does, it still has a tremendous number of attributes that really serve the market in the way that we align it for the service and for the carrier and for the segment that it's supposed to address, and I think it's dangerous to frame all of this in a high-end arms race.

And I think you're going to see our capacity to go beyond what could have been expected by anyone and yet still address the issues of cost effectiveness, security, efficiency, and desired form factors.

So our specialty has been in resolving a paradox and if you don't resolve that -- if you don't innovate to resolve that paradox, robbing Peter to pay Paul isn't really a solution because you're just shifting strategies.

And so the feature phone's upgrading to a smartphone, I think our guidance just shows what's happening and if you saw the roadmap and you saw the engagement strategies you would see that we're being very prudent in our approaches but this is really a promising space and we can address lots of segments and we can still respect carrier alignment and efficiency and different price points,

But I think you're going to see the ability to -- I don't know how to say it better than other than resolve the paradox because if you make these things so high end that they're not adoptable to the market or they are so consumptive of the networks they can't scale, that's not what we originally designed our business for and what we've done is innovate to really avail the capability but still not sell out our lineage and that's the paradox that we're resolving.

But be careful that just because you don't jump to Peter and abandon Paul -- to sort of carry on with that sort of approach -- that we don't have an answer, but we're not -- we're trying to innovate forward our business, not be strategically erratic.

So the core BlackBerry aspects are well defended and well looked after and protected, but it's in a space where people have mushrooming expectations of what these things can do, and that's the essence of the paradox.

And all I can say is it won't take long before you see how we've done that and I think Torch and BlackBerry 6 is really an excellent step forward and that's why you've seen -- the promo campaigns are just starting but that's why you've seen the jump in guidance and the (inaudible) is that.

So I hope I answered your question.

It's a bit of a -- it's hard for me to answer too directly without violating confidential roadmap stuff.

Your next question comes from Kulbinder Garcha of Credit Suisse.

Please go ahead.

Thanks and my question is just on the visibility that you have for this quarter just given that -- just to be clear, it's basically driven mainly by North America and driven by the promotions there that you're seeing with the US carriers, or is it global?

And just one other question.

In terms of the distance between devices, activates and shipments [I think it's about moving the difference between] the higher end of where we've seen historically.

Is there an additional channel fill going on the next quarter you put in your guidance, as well, or is it more driven by sell-through strength?

Well, if you answer the second one it's not channel fill, trust me.

These carriers have got channel management down to a very, very strong business so it's not a channel strategy.

You could look at the inventory management plan with the carriers and know that one, so it's just a different world right now and it's a quick response logistics.

No, it's sell-through and there's upgrade and there's -- plus there's a lot net new net with us and a lot of them are phone only so there's phone only.

It's all of the above and, yes, our visibility is very strong.

Our visibility is very, very good.

We've tried to always be cautious coming into the holiday season and look at the trends from the past so like I said, these upgrades, all these products are upgraded to 6.0, all these promo campaigns, all these global campaigns, and I think you're going to see some very interesting strategic extension at Dev Con and signaling where we're going.

So I think we said on the last call this will all become very, very apparent by end of September and we said that for the last six, nine months and the end of September's not that far away.

I just --

Sorry.

Just on the visibility aspect, as well, it really -- it's a number of factors.

There's a lot going on in North America, obviously, with Torch and the Curve 3G and some of the promotions that are really just starting to ramp up now and the plans into Black Friday and the holidays.

But also, we really have Torch launching in Q3 in 75 carriers around the world and some of them have pretty heavy consumer positioning and marketing promotional campaigns behind them so it also gives us a lot of visibility.

And then just some follow, Edel, on -- just on clarifying what you're going to guide.

You're not going to guide on average selling prices and not report them going forward, or just not guide them and then report them afterwards (inaudible)?

The same for both of them.

So this will be the last time we'll guide them.

Next quarter is the last time we'll report them.

Your next question comes from Jeff Kvaal of Barclays Capital.

Please go ahead.

Yes, thanks very much.

It seems as though you both didn't have a particularly strong quarter in North America in net adds, if my ballpark math is it's probably the slowest quarter in some years.

Can you help us understand a little bit of what's going on there and should we expect that to be sustainably improved, or is this going to be a bumpy ride from here?

What's happening in North America?

Thank you.

Well, I think -- thanks for the question, Jeff.

I think we started to address it by saying we've got a dramatic guidance enhancement in this quarter for net and it's substantially driven by enhancement of North America since we launched the Torch and we have a number of these launches and campaigns starting now.

So if there was some softening, which we said there was some softening early in the quarter, that's dramatically reversed and the nice thing about what we do is we get subs per day, by op, by carrier, by country, and it rolls up.

And what we've seen in the first almost three weeks of this quarter looks -- that's the basis of our guidance and you look at the promo campaigns and the committed elements and you compare it to historical and it's very, very strong, very strong.

So there's elements of promotion and there's elements of product cycles and I also think that there's been strategic engagement and plans for key carriers in the US and I think you're going to see some very, very strong and not only enhanced current strategies but new strategies that strategically extend the carriers platform strategies using BlackBerry.

So it's built on -- it's basically based on the numbers that we've been getting in the last four or five weeks since Torch got going and the committed plans and new strategies and they -- we feel very, very strong about it.

But -- so there was -- it doesn't take a lot of weeks of something to be out of sync to gum up a quarter and I'd be a lot more troubled if that didn't turn around in the last three, four weeks of the quarter and then you sit there and go it's something structural rather than something intermittent that has to be cleaned up and enhanced.

But really, if you saw the roadmap and you saw the plans and you saw the programs and you saw the alignment, you'd be quite bullish.

And your next question comes from Maynard Um of UBS.

Please go ahead.

Hi, thanks.

Just a clarification and then a question.

I guess I understand not guiding the net adds but can you run through the rationale of not reporting the net adds afterwards because there is a big sensitivity, particularly to the out years, related to your service revenue?

And then the question is just following up on the US and it sounds like on North America net adds will actually reaccelerate given the Torch and the reinvigoration from that product, but that then implies that your international net adds will actually weaken so I'm just trying to understand the dynamics.

Is something happening on the international side, or is there -- I guess if you could just run through the dynamics there?

Thank you.

Well, I think we're guiding kind of 20-ish percent growth in it so -- quarter over quarter, so there's room in both there and you kind of take a number and roll them up to a discount and -- but it's also -- you get bits of variability because sometimes they go out as phones, sometimes there's upgrades and they don't go with net.

Sometimes you get these different events and so how much information is helpful and how much do you just put yourself in a position where it's got variability, as Edel said, and how much do you competitively disadvantage yourself by over disclosing stuff.

But we'll give you periodic indications of the overall subscriber base.

We'll let people know when we hit a 100 million or maybe 75 million, and you can do the math.

It's how long it's going to take and the only question is it one quarter earlier or later really.

You do play -- you do the stuff out how we do it and that's how we have to plan our infrastructure.

It's basically number of subs and the utilization profile of those guys.

So we have a pretty good sense of it but you can also pretty much deduce it.

It's just how much granularity do you give.

We -- it's competitive and then you have a responsibility to [unturbulent] the business to keep people all updated on it and -- is that --

Maybe if you can just help us understand on the ARPU side.

You said prepaid is actually growing and presumably becoming more significant.

Will the ARPU start to drop more significantly?

Are the ARPUs now for consumer around the $1 to $5 range, or do they still stay in the $3 to $5 range?

There's really been no change, Maynard.

If you actually -- I don't know if you've had a chance to back into some of the numbers, probably not yet, but the ARPU this quarter was pretty much flat.

And like we talked about at the analyst day, the more successful we are in some of these -- there's been no real change in a lot of the different tiers so much as we're just having a lot of success with some of the things, like prepaid, so the more successful we are, sure you're going to see that impact ARPU but that also means you're selling a whole lot of handsets.

Yes, you get -- yes, that's right, and then there tends to be an upgrade of handsets and it's still a good business even wherever it is, the tiering.

And also there's a real powerful set of indirect monetizations we've got going and there's campaign haloing that goes with dealing with the segments.

So there's a lot of strategic complimentariness on this.

So we sort of heard this diminished ARPU thesis for seven, eight, nine years now, and at the end of the day I think it's run its course.

Yes, and we're not like modeling anything really different than we talked about last quarter.

It's not like there's some huge decline in ARPU or something.

I think we've been consistent that this is a services platform and we need current return for what we do, but we also need a strategic presence of adopted customers because A) that's what you want in terms of true market share, and then you want -- because there's new ways of monetization.

And be careful on the market share definitions because when we look at market share, giving up some open source software that just gets fragmented in implementation, I'm not sure just where that market share for who and for how much.

So I mean -- and so when you go at the ARPU and all this kind of stuff, clearly there's a value to having this happy customer that you look after that's got a life cycle with you and you have an integrated commercial relationship with them so that there's commerce exchanged and that's distinct from just here's some software and let's see what happens.

But with us I think what's distinct for us is we're trying to do that in a rapidly-expanding market where we've got constructive alignment with the carriers and you're going to see some very powerful extensions of our constructive alignment with more of the ecosystem rolled out at Dev Con and throughout the rest of the autumn.

So there's margin on devices, there's margins on service, there's margin on (inaudible), there's margin on value-added stuff and it's a sphere that's rapidly expanding into what channels through a smartphone.

And so I agree it's a bit tricky to model and that's why ASPs can be a little leading, giving net subs can be a little misleading, so you just got to roll it up and say this is what we shipped, this is our revenue, this is our net and then you give general description around it.

And if you look at our guidance and performance, I think it's impressive.

Your next question comes from Gus Papageorgiou of Scotia Capital.

Please go ahead.

Jim, you said that Asia Pacific was one of the stronger regions this quarter.

I'm just wondering, can you highlight what's going on in China and how many carriers are dedicated to promote BlackBerry and when do you think China gets turned on like for real?

Well, that's a very fair question and we had a big internal planning exercise on China this week and then a bunch of trips planned and all that stuff.

China has global unique circumstances because there is state ownership and control of all three carriers and there are special state requirements in terms of how you fit with air link protocols and different aspects like that.

And so I believe -- and so you're going to see some very strategic extensions by us in China, and some implementation of things we've signaled in terms of new air links, very powerful local infrastructure, the fund there, localized products, and tight alignment with -- we've currently announced two of the three carriers so far.

Let's not talk beyond that right now, but I think we're uniquely positioned to be a very good citizen in China, in terms of pleasing the customers, complying with the carrier requirements there, and still leveraging the bene -- BlackBerry benefit worldwide, both in terms of its enterprise capability and its consumer capability.

So we have a plan there.

I think the numbers are improving.

I think the product pipeline is also improving.

I think the cornerstone pieces for a sustained solution that addresses all of the market and carriers is being put in place.

And I think we've been very systemic and patient in China and I think customers will benefit and I think you're going to see more and more from them this fiscal year.

Last quarter was a multiple of the previous quarter and the previous quarter and there's lots of great market in there.

But I think we're committed to being very good citizens in China.

We take a patient approach, we take an overall societal benefit approach and I personally spend a lot of attention to it and I think it's going to pay sustained and very good dividends for RIM shareholders this approach.

It's not a quick grab-and-dash thing, it's not a capitulation or sovereignty thing, it's a aligned patient approach and you're seeing product flow now.

You're going to see a lot of product starting to flow later this year.

But it's a long-term approach and so I think that's the way you've got to do it because if you go for just a bit of quick volume it can disappear as quickly as it shows up and we're about a service that really delivers a set of promises and -- so it's a much more comprehensive role we're taking on and its a carefully regulated society so we just have so slowly and systemically and patiently do what we do, but I think we're rather unique in that way and I think it will serve RIM shareholders for a very, very long time.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer session.

Please continue.

Thank you, operator.

In closing I'd like to remind everyone that there's a post [view] service available at 416-640-1917, passcode 4310309#, or you can listen to the call, which has been recorded and will be available in the investor event section of our website at RIM.com/investors.

Thank you.

Ladies and gentlemen, this does conclude the conference call for today.

Thank you for your participation and you may now disconnect your lines.