BlackBerry Ltd (BB) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Research In Motion's third quarter fiscal 2012 conference call.

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

Later, 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, December 15, 2011 at 5 PM Eastern.

And I would now like to turn the conference over to Mr.

Paul Carpino, Vice President, Investor Relations.

Please go ahead, sir.

Great.

Thank you.

Welcome to RIM's fiscal 2012 third quarter results conference call.

With me on the call today are Jim Balsillie and Mike Lazaridis, Co-CEOs, Brian Bidulka, CFO, and Edel Ebbs, Senior Vice President, Investor Relations.

After I read our cautionary note regarding forward-looking statements, Jim and Mike will provide a business and strategic update.

Brian will then review the third quarter results, and Edel will discuss our outlook for the fourth quarter of fiscal 2012.

We will then open the call up for questions.

This call is available to the general public via call-in numbers and via webcast, in the Investor Relations section at rim.com.

The webcast includes the supporting slides that can be viewed through your personal computer or your BlackBerry PlayBook tablet.

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

We plan to wrap up the call before 6 PM Eastern this evening.

In order to let as many people as possible ask questions, please limit yourself to one question and one brief follow-up.

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 product shipments, revenue, gross margin, operating expenses, CapEx, depreciation and amortization, earnings and sell-through for the fourth quarter and beyond, our expectation regarding RIM's tax rate for the fourth quarter, our product development and marketing initiatives and timing including our expectations relating to the BlackBerry PlayBook operating system 2.0 software, and our BlackBerry 10 smartphone, our plans and expectations relating to our organizational and technology transition, our plans and initiatives to improve the performance of the business including our marketing initiatives, developments relating to our carrier partners, and other statements regarding our plans, objectives and expectations.

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 in 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 delays in new product introductions, risks related to intense competitions including our ability to compete in the tablet market, our ability to manage inventory and asset risk including PlayBook sell-through program, risks related to RIM's ability to realize the anticipated benefits of it's cost optimization program, risks relating to network disruptions and other business interruptions, our reliance on carrier partners, third-party manufacturers, third-party network developers and suppliers, security risks and risks related to encryption technology, our ability to maintain and enhance the BlackBerry brand through our marketing initiatives, our ability to manage our production processes, risks associated with our international operations, potential charges in future quarters relating to the impairment of goodwill given the decline in our share price, difficulties in forecasting financial results given the rapid technological changes, evolving industry standards, intense competition and short product life cycles that characterize our industry, and other factors set forth in the risk factors in the MD&A section, and 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 obligations to update them except as required by law.

I will now turn the call over to Jim.

Thank you, Paul.

The last few quarters have been some of the most trying in the recent history of this Company.

As you know, we are in the process of completing the largest platform and organizational transition in the Company's history, and while we have remained a solidly profitable -- remain solidly profitable and delivered significant unit volume during this transition, we recognize that our shareholders may feel we have fallen short, in terms of product execution, market share, and financial performance.

That being said, we continue to believe that our transition will better position us to deliver enhanced value to shareholders, and enhance our leading position in the mobile communication space.

It is important for you to know that Mike and I, as two of RIM's largest shareholders, understand investor sentiment, and we are more committed than ever, to addressing the issues at hand.

To further demonstrate our passion, alignment and commitment to RIM's long-term success, both Mike and I have asked the compensation committee to make a change to our cash compensation, such that our salaries will be reduced to $1.00 per year, effective immediately.

As part of our commitment to evaluating ways to improve the performance of the Company, we will be re-evaluating our product portfolio, operations, manufacturing and R&D strategy.

We plan to introduce new devices into the smartphone and tablet market, as well as products and services that better leverage our global cloud infrastructure, and unique capabilities within the smartphone market.

Today, Mike and I would like to share with you, some of the steps we are taking and plan to take, to address some of the key areas.

We are evaluating a broad range of initiatives and strategies, with respect to how we introduced product, the efficiency of our operation, and what is the best organizational structure for the Company.

We're focused on doing the right things to improve the business, and drive shareholder value.

We are undertaking a comprehensive review of all aspects of the business to uncover the best ways to improve the Company -- to improve the Company and position ourselves for the future.

We are leaving no stone unturned, and are evaluating a number of areas including product management and the number of SKUs offered, supply chain and bill of material cost efficiency, marketing and advertising, partnership and licensing opportunities, organizational and management structure, opportunities to leverage the BlackBerry infrastructure.

While the proposed transformation may take some time, we believe that the steps we are taking will improve our performance, and better enable us to deliver on what we expect of ourselves, what our stakeholders want us to achieve, and what the 75 million loyal and passionate BlackBerry subscribers expect from us.

We have a large market opportunity, unique services capabilities, and a powerful platform that we believe will enable the Company to benefit the continued growth in the mobile communications market.

It's important to keep in mind, that some of the decisions we make to achieve the objective of better and more consistent long-term results, may impact our performance over the short-term.

As we progress through our review, we are open to evaluating what is best for the Company and for our shareholders.

We look forward to updating you on our progress.

I will now discuss our third quarter results and the business outlook.

RIM shipped approximately 14.1 million BlackBerry smartphones in line with our guidance, and 150,000 PlayBook tablets in Q3.

The BlackBerry subscriber base is now almost 75 million, which is up 35% from 1 year ago.

We continue to add millions of net new subscribers each quarter.

The BlackBerry 7 products are being well-received, particularly the Bold 9900.

However, product launch delays, increased competition in the smartphone and tablet market, and the October service interruption impacted our sell-through in the quarter.

In Q3, we sold through approximately 13 million units, which was below our expectation.

RIM's US business is particularly weak, and the positive trends we are seeing in several markets around the world including the UK, France, South Africa, Mexico and Argentina are being offset by high churn, and decreasing subscriber base in the United States.

We are not satisfied with the performance of the business in the United States.

In order to drive increasing demand for BlackBerry products and services in this key market, we are planning to undertake a comprehensive advertising and promotional program in 2012.

This is expected to have an impact on earnings, as we invest to maintain and grow the BlackBerry brand and awareness in the high-performance BlackBerry 7 product family.

This will lay the groundwork for the launch of the BlackBerry 10 QNX-based smartphone in the latter part of calendar 2012.

We understand our marketing efforts over the past year have not achieved the desired result, impacting the Company's performance.

In addition to the US advertising and promotional program, we are also planning to increase advertising and promotional activity in a number of key global markets.

Outside of North America, our performance was very strong with hardware revenue growing 56%, driven by product launches and ongoing promotion and marketing activities.

In East Asia, the BlackBerry Bold 9900 launch was supported by the most comprehensive marketing campaign in East Asia to date, and the first BlackBerry Lifestyle stores were opened in Thailand, and Indonesia over the quarter.

In the UK, the BlackBerry 7 portfolio made it's debut with the launch of the Bold 9900 and the Curve 9360.

Key channels such as Carphone Warehouse and Vodafone promoted the BlackBerry 7 devices into retail hero status during the quarter.

In South Africa, the BlackBerry solution continues to break sales records for net new subscribers and sell-through.

The success is driven by the successful launch of the Bold 9900, and an aggressive TV, outdoor, radio and online campaign.

RIM is the number one smart phone vendor in the Latin American and Caribbean region.

Based on IDC rankings, BlackBerry leads the smartphone category in several key markets, including Mexico, Ecuador, Venezuela and Colombia.

Services revenue remained strong, and was approximately $1 billion in the quarter.

The BlackBerry infrastructure provides the security, push messaging and efficiency that BlackBerry is known for, and is a key competitive differentiator for RIM.

We continue to evaluate ways to leverage it, to benefit our customers and carrier partners.

With nearly 75 million BlackBerry subscribers, in more than 175 countries, RIM continues to be a leading smartphone and services Company.

In November alone, we passed more than 25 petabytes of traffic across the RIM global cloud infrastructure.

We take pride in our relationships, with over 630 carrier and distribution partners we work closely with around the world, to deliver a high-quality customer experience.

BlackBerry tiered service plans continue to drive growth in our subscriber base.

In the United States, Verizon became the first carrier to launch the $10.00 a month BlackBerry social messaging plan, paired with the BlackBerry Curve 9330.

The service plan offers customers access to BBM, Facebook, Twitter, instant messaging and other social messaging applications for a low monthly rate, and we look forward to leveraging this to attract new customers in the US market.

RIM is the leading provider of enterprise mobility solution, and over 90% of the Fortune 500 companies use BlackBerry smartphones to date.

We continue to maintain the lead in this market, as a result of our focus on security and manageability, and we are committed to addressing the needs of CIOs and IT departments, in both business and government.

We recently announced Mobile Fusion, which provides RIM with an opportunity to expand our relationship with enterprises, as they embrace many different mobile devices.

Mobile Fusion brings together RIM's industry-leading BlackBerry enterprise server technology for BlackBerry smartphones, with mobile device management capabilities for IOS and Android devices.

This make it easier for IT departments to manage, control wireless access to both company-owned and employee-owned mobile devices within their organizations, without the need to deploy and manage third-party software.

We believe the combination of Mobile Fusion and BlackBerry Balance will reinforce and extend BlackBerry's leading position in the enterprise.

We continue to make strategic acquisitions to our products and service offerings.

Recently, RIM acquired NewBay software, a provider of White Label Cloud Services platform to carriers.

NewBay enables carriers to offer their customers the ability to store, manage and access content including photos, videos and documents.

It also allows them to share them easily across multiple social networks.

We look forward to providing you with further updates on how NewBay software will be integrated into the BlackBerry platform.

I will now turn the call over to Mike.

Thanks, Jim.

First of all, let me reiterate what Jim said regarding our commitment to completing this challenging transition, and commitment to leading no stone unturned when it comes to evaluating the business, and determining the best way to improve our performance going forward.

Despite being delayed, BlackBerry 7 smartphones are doing well in markets around the world, and hardware revenue is up 56% outside of North America.

Since launch, 8 new BlackBerry 7 products based on our Bold, Torch and Curve families were introduced throughout our global network of carrier partners.

To date, we have achieved 1,450 technical acceptances across 400 carriers globally.

The Bold 9900 is considered by many to be the best communications device on the market today.

With it's industry-leading keyboard, responsive high resolution touch screen and high-speed browser capabilities, it has been successfully launched in 57 markets around the world.

The highly successful Curve family is also been expanded, with the addition of 4 new BlackBerry 7 Curve products around the world.

It is early days for BlackBerry 7, and we expect that the significant marketing and promotional programs we are planning around the product, will help drive consumer awareness of these products, and drive demand and sell-through in calendar 2012.

With respect to PlayBook, we took an inventory-related charge in the third quarter of approximately $485 million.

As a result of the promotional programs we recently launched, we have worked through most of the inventory in the channel, and are replenishing channels to support holiday demand.

We've seen a significant increase in sell-through since the launch of these programs, and we expect this trend to continue with the launch of PlayBook 2.0 software in February.

We are committed to the BlackBerry PlayBook, and it's an important aspect of our longer term smartphone and mobile computing strategy.

While we would have preferred the initial launch to have been smoother, I firmly believe that the BlackBerry PlayBook tablet remains the most secure and most advanced tablet platform on the market today, with true, real-time multi-tasking, flash-enabled browsing, uncompromised video streaming for both HTML 5 and flash video, which constitutes the majority of premium video content on the internet today, as well as a flexible platform based on open standards.

These attributes will be further enhanced by the PlayBook 2.0 software when it becomes available.

The competitive dynamics of the tablet market are shifting rapidly, with a number of new entrants and pricing moves in the industry.

As we await the launch of PlayBook 2.0, we expect to continue to run promotions to stimulate the market for PlayBook, both in the enterprise and consumer segments.

While all PlayBook users will benefit from the new PlayBook 2.0 features such as native e-mail, contacts and calendar integration and the android player, enterprise customers will benefit even further.

New enterprise-focused features include enhanced device manageability, enterprise application deployment, and BlackBerry Balance.

BlackBerry Balance allows IT departments to be able to manage corporate information with trusted BlackBerry security, while ensuring end user's personal information experience remains uncompromised.

In addition, PlayBook 2.0 will provide a dedicated enterprise App World, so corporations can make enterprise applications easily available to their end users.

PlayBook is now available in 44 markets, and early results from recent PlayBook promotions indicate a significant increase in demand across most channels.

And we look forward to growing the install base of PlayBook users, to attract partners and developers to deliver industry-leading applications, content and services that leverage the power of the QNX-based platform.

The native SDK for BlackBerry 10 launched at DevCon Americas in October.

This release makes the development and porting of games to the BlackBerry PlayBook an extremely attractive proposition for developers.

Throughout the quarter, we have seen strong advances in gaming development for PlayBook, with approximately 100 native games submitted to App World from major players such as EA, GameLoft and others, who brought many of their top titles to the platform.

In addition to these submissions, gaming engines from AirPlay Marmalade, Unity and ShiVa 3-D all went live.

Applications developed today, using native SDK will also benefit future BlackBerry 10 smartphones.

At DevCon Asia this month, the momentum continued, with attendance up 50% over last year.

BlackBerry App World continues to grow, and there are now more than 50,000 applications available in App World, with 5 million app downloads on a daily basis.

BBM continues to be a tremendous and growing success for RIM in markets around the world.

To date, there are 380 BBM-connected apps available in App World, and these now represent almost 20% of the daily downloads from App World.

BBM Music was launched in 7 countries in Q3, and we will continue to rollout availability in other markets in Q4 and beyond.

We've seen strong take-up of BBM Music in Canada, and the UK and other markets.

As we mentioned earlier, we are focused on driving efficiency in the organization, and are actively looking at ways to operate more effectively, while still ensuring we have the resources to grow the business.

We currently have a major cost optimization and resource efficiency program underway.

We call it Core, for short, that is being led by a cross-functional executive team, that will identify opportunities to drive efficiency in the organization.

This program includes evaluating our current and future product portfolio to determine the appropriate number of SKUs and segments to address, as well as focusing on cost and supply chain efficiency.

This project is not focused on headcount.

It's about looking at how we do things every day, and finding ways to do them more efficiently.

As part of this initiative, RIM launched it's new global operations control center for supply chain management this quarter.

This state-of-the-art monitoring and analysis center is a centralized data-centric operation that allows our supply chain team to monitor and optimize every aspect of our global supply chain, and product manufacturing, and improved product delivery performance to our carriers.

We believe the global operations control center will allow us to execute on our production schedules better, help improve forecasting, and unlock hundreds of millions of dollars in cost savings in working capital efficiency, much of which will be deployed back into the business, in the form of more aggressive marketing, advertising and promotion.

Before I turn the call over to Brian to discuss the financials, I would like to provide an update on the timing of BlackBerry 10 smartphones.

As I said on the last earnings call, we are focused on delivering a high quality, fully-featured user experience when these products are launched.

This means having a well-developed ecosystem of applications and services, as well as having the hardware specifications, industrial design and application features that will meet the expectations of consumers in the competitive US market.

To achieve this goal, we need a highly integrated dual core LTE platform.

The processor we selected offers industry-leading power and efficiency, and also allows us to deliver the industrial design, that we believe is critical to the success in this market segment.

This chipset will not be available until mid 2012.

And as a result of this and certain other factors, we now expect our first BlackBerry 10 smartphones to reach markets in the latter part of calendar 2012.

In the meantime, we believe that our strong BlackBerry 7 portfolio will continue to drive adoption of BlackBerry around the world.

We also believe there is an opportunity to accelerate adoption in the United States, through the aggressive marketing and promotional programs we discussed earlier, as well as programs designed to drive adoption of services such as BBM and Mobile Fusion.

We ask for your patience and confidence, and look forward to reporting further progress in the coming quarters.

Jim and I would like to take this opportunity to thank our employees, who are navigating the biggest transition in the Company's history.

It takes a strong and dedicated team to grow Company to almost $20 billion in annual sales.

We know that it has been challenging for our employees, to both support the existing business, and to help prepare the Company for the future.

Our employees continue to go above and beyond, and we are very proud of this team.

I'll now turn the call over to Brian to discuss the financials.

Thank you, Mike.

Revenue for the third quarter of fiscal 2012 was $5.2 billion, a 24% increase from the second quarter.

This (inaudible) revenue also reflected a negative impact of approximately $50 million, as a result of the October service interrupt.

Sales outside the United States, United Kingdom and Canada represented approximately 61% of total revenue, compared to 56% in the second quarter.

Some of the larger markets comprising the other segment in the quarter were Indonesia, Saudi Arabia and South Africa.

US sales declined in Q3, and represented 20% of total consolidated revenue, compared to 27% in Q2.

Revenue in the United States is weaker than expected due to slower than expected sell-through, and delays in launch dates of certain BlackBerry 7 smartphones, resulting in a mix that was more weighted to BlackBerry 6 handsets than we had anticipated.

Sales in the UK represented approximately 11%, compared to 10% in the second quarter, and Canada represented the remainder.

RIM shipped approximately 14.1 million smartphones in the third quarter.

In the first nine months of fiscal 2012, approximately 38 million BlackBerry smartphones were shipped, compared to 37.5 million in fiscal 2011.

In Q3, we also shipped approximately 150,000 PlayBooks during the quarter, and sell-through to end customers, based on RIM's internal data was higher than this.

Since the launch of the new promotions across consumer and enterprise channels in the United States and Canada late in the third quarter, the Company has seen a significant increase in demand for the PlayBook.

For the first nine months of fiscal 2012, approximately 800,000 PlayBook tablets have been shipped.

Hardware revenue was approximately $4 billion or 79% of sales, compared to $3 billion or 73% of sales in the second quarter.

The 35% sequential increase in hardware revenue was primarily driven by new devices from our BB7 launch, and reflects the impact of PlayBook promotional activity in the quarter.

Service revenue was approximately $970 million, up 16% from last year, and slightly higher than last quarter, on an adjusted basis.

There was a reduction in service revenue of approximately $50 million related to the October service interruption.

Software revenue was approximately $80 million, similar to Q2 levels.

ARPU in the third quarter was slightly lower than Q2, primarily due to an increasing percentage of tiered [biz] plans, and pre-paid customers from international markets in the subscriber base, and a decline in the subscriber base in the United States.

Estimated sell-through in the quarter was approximately 13 million, including phone-only sales.

This was weaker than expected, due to the number of factors including competitive launches, the October service interruption, as well as delays in certain BlackBerry 7 product launches.

Gross margin was approximately 37% in the quarter, excluding the inventory provision, and in line with guidance.

This is lower than Q2, due to the higher percentage of hardware revenue in the mix, as well as the impact of PlayBook promotional activities.

Operating expenses declined approximately 10% in the second quarter.

Sales and marketing was lower than expected, as a result of the push-out of marketing programs associated with the later than expected launch of certain products, including PlayBook 2.0.

The tax rate in Q3 was approximately 20%, slightly below our forecast of 21%.

We expect the tax rate for Q4 to be slightly lower than Q3.

GAAP net income for the third quarter of fiscal 2012 decreased to $265 million or $0.51 per share, versus $0.63 per share in Q2, reflecting the PlayBook inventory provision of $485 million.

Excluding the PlayBook provision, service interruption impact and cost optimization charges, adjusted net income was $667 million or $1.27 per fully diluted share.

The earnings press release from this afternoon contains a reconciliation of our GAAP net income and diluted EPS to adjusted net income and adjusted diluted EPS.

RIM generated approximately $895 million in cash flow from operations in the quarter, and CapEx in the quarter was approximately $205 million.

Cash, cash equivalents, short and long-term investments increased by approximately $80 million to $1.5 billion at the end of the quarter.

We expect the cash balance to increase again in the fourth quarter.

I'll now turn the call over to Edel to provide more detail on our outlook for Q4.

Thanks, Brian.

Before I discuss the outlook for Q4, I would like to remind everyone that these forward-looking statements reflect management's best current estimates, and should be taken in the context of the risk factors listed at the beginning of the call, and disclosed in our public filings.

The fourth quarter unit outlook continues reflect the rapid changes in the competitive environment, the impact of the platform transition we are going through, and the service outage we expected -- that we experienced in October.

While we plan to invest heavily in new marketing programs in Q4, the impact of these activities are not expected to benefit Q4 sell-through.

Based on these factors, we expect sell-through in Q4 to be similar to Q3 levels, resulting in a higher level of inventory in the channel than we anticipated.

As a result, we expect to ship between 11 million and 12 million smartphones in Q4.

We expect revenue in the fourth quarter to be in the range of $4.6 billion to $4.9 billion, and we expect service revenues to be stable, to slightly higher in Q4.

We expect gross margin in the fourth quarter to be up slightly, to approximately 38%.

This is higher than Q3, because the PlayBook inventory provision impacted Q3 gross margin, and we expect more (inaudible) BlackBerry 7 products in the mix in the fourth quarter.

Total operating expenses are expected to increase by approximately 14% in Q4, and we expect Q4 diluted EPS to be in the range of $0.80 to $0.95 per share.

The decrease in EPS reflects lower device revenue driven by promotional activities, and the increased investment in marketing, that Jim and Mike referenced earlier.

We expect to invest approximately $100 million in marketing, advertising, and loyalty and retention programs in the US market in the fourth quarter.

We expect this high level of investment to continue throughout fiscal '13.

While we expect the cost savings from the Core program Mike referenced earlier to offset much of the increased marketing spend over time, we do expect the ongoing transition to create earnings pressure over the next fiscal year.

That concludes our formal remarks.

And I would now like to ask the operator to open up the call for questions.

Thank you.

(Operator Instructions).

And your first question today comes from the line of Rod Hall of JPMorgan.

Please go ahead.

Yes, thanks for taking my question.

Hi, I wonder if you could give us a little bit more color on the BB 10 smartphone delay.

You said it was mainly chipset related.

Was that a fairly recent update that you got from the chip manufacturer that, that chip was going to be delayed?

Or can you just give us some idea, because it sure seemed like at DevCon you thought that you would be able to deliver devices sooner?

And I got one follow-up to that.

We decided to use a highly integrated chipset, that's not available till mid year, in production.

So, we've designed -- we've been using that chip set, so we can have a much more aggressive industrial design to the product and better power and efficiency.

And because of that, and just making sure that we can then import that to the new platform, we've experienced a delay.

And, Mike, is that related to -- I mean it kind of sounds like maybe you were finding, you weren't getting the kind of power efficiency out of the software that you wanted to, and you needed to go to a more power efficient chip?

Or just, can you just give us some idea why the -- it seems like the delay was related to a chip decision, that maybe you made, rather than it did, a delay on the part of the chip manufacture?

So just can you give us some idea what happened there?

Yes.

We decided that we wanted to target a higher efficiency, lower power consuming, more integrated chip set for our LTE products in the US.

The BlackBerry 7 products are doing really well around the world.

And we wanted to make sure that the product we launched in the US had the performance and battery life expectations, our consumers are going to be expecting with BlackBerry products on LTE.

Okay.

And then, what are you doing about developers?

I mean, the developer is kind of expecting I think, to see the BB 10 stuff earlier.

Are you -- is there some sort of strategy for keeping people onboard for this additional period of time, while they wait for the new devices?

Well, as we've mentioned in the past, the developers are developing for the PlayBook environment.

But that work that they are doing is directly transferable to the BB 10 platform, the B 10 smartphones.

We're also working on developer phones for the developers, so they can start testing their applications in real life, and start experiencing the platform, experiencing how it works, seamlessness, it's performance.

Can we have the next question?

Thank you.

Great, thank you.

Your next question comes from the line of [Ahab Chavo] of Morgan Stanley.

Please go ahead.

Just a clarification, and then my question, Now that you, Edel, now you've written off the PlayBook inventory, as you sell PlayBooks, I'm just curious, how that runs through the P&L?

Do we get revenue, but we don't get cost against it?

Just understanding how that works, and if that impacts margin going forward, but that is just kind of a technical question.

On our bigger question, can you give us a sense as to -- of the almost 75 million subs that you have?

How many of them are still in the US, and possibly how many of them are in Europe?

And the 14.1 million BB7, I'm sorry, the 14.1 million BlackBerries you sold last quarter, and the guidance of 11 and 12, can you give us a sense, as to how many of those were BB7 this past fourth quarter, and how many you expect to be in the next quarter?

Hi, it's Brian.

I'll take the first question.

So with regards to the PlayBook provision, we're -- it was really a valuation adjustment to move the inventory cost, to what we considered we would be able to recover on it.

So while we will get the revenue on the shipments in the sell-through that we are driving, there will be an associated cost with that.

So the gross margin dollars will generally be very nominal, and the expectation on our gross margin percentage is about 1% in the -- in our estimate for Q4.

And Ahab, we don't break out geographic subs.

And we did you be a little bit of color on the call there, just saying that we did see a decline in the US.

And so the growth that we are talking about, is outside the US.

Sure.

I was hoping to try to get a sense as to how many subs were left in the US.

Can you give a sense as to how many (inaudible) based phones actually shipped to this past quarter?

And then if you are expecting the same 13 million sell-through next quarter, why is guidance 11 to 12?

I would of thought maybe higher, at least in line with that number?

Right.

So again, Ahab, I am not going to be able to break out the BlackBerry 7 percentages for you.

We do expect BlackBerry 7 shipments to be higher in Q4.

In terms of the guidance number, and I don't know if Brian maybe wants to take this one as well, but I think if you -- we talked about there being more channel inventory, because the sell-through is lower than expected.

So, that's the primary reason for why the shipments are lower.

We're just working through some of the channel inventory.

And we're basing that the current sell-through based on our current expectations, so and that's the reason why we are using the 11 million to 12 million unit number.

And your next question comes from the line of Tal Liani of Bank of America Merrill Lynch.

Please go ahead.

Hi.

First, just clarification of when you said that, you expect, stable to slightly higher quarter-over-quarter in the services, do you refer to the 970 plus 50?

Or, do you refer to the 970?

Is it before, or after the adjustment?

It is on an adjusted basis.

It was on the adjusted basis.

Adjusted basis?

Okay.

So that means the 970?

Right?

The question I have is on the PlayBook, at what point do you kind of give up?

What needs to happen for you to give up, and say maybe, I could use my resources better in a different way?

Or a different place?

And if you give up, does it mean that you save a lot of money?

Or, are most of the R&D costs shared, are shared between this and QNX anyway, QNX devices?

So then savings is not that great?

Obviously, the -- it's the same platform, which is great.

Because the same platform, whether it is a tablet or smart phone or even in a car installation -- and you know that we have -- we are in over 235 car make and models around the world, with QNX.

So that provides us a really strong base to build on, it gives us an opportunity spread that R&Dacross all mobile platforms, so all 3 mobile platforms.

I still think that market is in it's infancy, and it's rapidly evolving.

I think we are seeing -- we're really, really pleased with the increased demand with the PlayBook promotions.

We are growing that PlayBook install base, because it's the same platform, which gives us more -- our developers more incentive to support the platform, get ready for the BB 10 smartphone.

So, no, we are completely committed to the PlayBook.

And just to clarify on the 970, that was the GAAP numbers, so the adjusted would be up, the higher number?

Your next question today comes from the line of Richard Kramer of Arete.

Thanks.

I have a couple of questions.

One is, given the shift of the business to Latin America and Asia, and with some of the new Curve products not being very low end, how do you think about your future growth in emerging markets?

Are you going to have a portfolio of very low cost handsets?

And what does this mean when you look at the organization for how you have to ship your resources, maybe out of developed markets and into developing ones?

And then I have one follow-up.

Thanks

Well, that's a fair question, Richard.

And yes, there is a very powerful opportunity at the entry level as you say.

But that also exists in just about every market in the world, because some of the most sophisticated markets in the world are still over half on feature phones.

So we see that has -- that is a really important opportunity for us going forward, is to capture that entry level in the BB7 products going forward.

And then a question on this Core programming, and how you're running the business.

There is still a fairly high level compared to peers of inventory, receivables, et cetera, general working capital through the business.

Do you think you can make a meaningful reduction in that, and squeeze substantial cash out of the business in the next 12 months?

Or, should we assume that all of that -- anything that you squeeze that will be reinvested in the marketing programs that you mentioned?

Yes.

There's many aspects to the overall Core program, including material sourcing, [preparement], lifecycle management, in-direct sourcing, discretionary spending, so we're looking at a lot of aspects of our cost and efficiency.

And as Mike had mentioned, we've got cross functional teams working to drive these various initiatives.

And part of the program is to look how we can reinvest those savings into driving additional marketing and advertising.

Your next question comes from the line of Mark McKechnie of ThinkEquity.

Please go ahead.

Great, thanks.

So, just a couple of questions.

On QNX or BlackBerry 10 -- this is either for Mike or Jim, how much are you going to be changing on the infrastructure side?

On your [Bez] and your -- NOC?

And then, along with that, if you could talk about plans to either support other devices directly connecting to that, or about the ability of QNX to run applications from other areas?

And then I have a follow-up.

Yes, the QNX environment, the PlayBook 2.0 software, with it's native e-mail and contacts and calendar, will it be able to interface to BlackBerry enterprise servers, but it also will be able to enterprise -- interface to a lot of other services that we currently support.

So, I think one of things -- I don't think we've really talked about how we are doing that, that's part of our secret sauce.

But it does -- it does play right into the security that we have, the efficiencies that we have.

And it's something that I think -- and I know our enterprise customers are quite excited about, because they are able to re-use their investments in the BlackBerry enterprise server and systems.

And, to answer that, I mean, fair question, on what our infrastructure can do.

And it's part of the comprehensive assessment.

We're looking at ways to leverage our strengths in the infrastructure, in a broad set of services to the marketplace.

And so, this is part of the comprehensive view, we see our cloud infrastructure as a competitive differentiator.

You've seen the Mobile Fusion launch, you've seen the NewBay acquisition.

And this is something that is a core part of our assessment to leverage our strengths.

And your next question comes from the line of Jim Suva with Citi.

Please go ahead.

Thank you very much.

There was some commentary on the prepared remarks about some additional EPS pressure.

I'm just trying to understand, was that just simply referring to year-over-year EPS pressure or would the OpEx ramp next quarter?

Should we actually expect earnings per share beyond February, to kind of sequentially even trend lower or is February kind of the bottom?

Yes, Jim, we are not giving a whole lot of guidance right now.

I mean that -- we're giving as much color as we have visibility into at this point, to give you some idea of a trend.

But we are not prepared at this point, to give any more detailed guidance.

Okay, then.

If I could ask a follow-up.

On the OpEx, I believe you said up 100 quarter-over-quarter, and that's mostly related to advertising, if I heard that correctly?

And there was a comment about some royalty retention.

Can you just help us understand what that royalty retention is?

I'm not familiar with that language.

That was loyalty retention, actually, Tim.

That's the loyalty retention program, yes, so to keep our loyal customer base in the US.

Got you.

And that $100 million isn't necessarily all OpEx, so there are other aspects to that.

But, the comment was that we are investing in our results, our Q4 estimates do have a $100 million factor in there for that.

And finally, when are you finished with your restructuring efforts?

I believe we've already talked about our restructuring efforts.

The Core program is not about personnel or employees, it's about processes and efficiencies in the system, and how we do things.

And, it really is just a continuous comprehensive review of our business, as we mentioned early on the call.

And this is absolutely, not business as usual at RIM.

We are going to do what it takes to get the value for shareholders and the Company, and we are totally redoubling our efforts on execution here.

So the Core is really a comprehensive aspect, assessment of all aspects of the organization.

And your next question comes from the line of Stuart Jeffrey of Nomura.

Please go ahead.

Hi.

Thank you very much.

I had a question with regards to BB7.

It sounds like that you are not particularly happy with how that trended, or been accepted in the US, even allowing for some of the product launch delays.

And then talking about picking up promotional campaigns, and advertising and things like that.

I know that your gross margin guidance is 38% for the coming quarter, and the PlayBook seemingly has had lots of success through price cutting.

So could you please explain your thinking around price cutting around the BlackBerry portfolio, and why you're not be more aggressive over the next couple of quarters?

Thank you.

Jim, or sorry, Stuart, that's fair, to talk about it.

And we are certainly not satisfied with the situation in the US market.

And so, we are absolutely planning a comprehensive set of marketing, advertising, and promotional plans.

And you are going to see that happen imminently.

And yes, we talked that outside the United States our hardware revenue grew 56%, and we believe the BB7 products are excellent products for the market.

And we are excited with a broad number of certifications, several dozen, very late even in November around the world.

And we plan to be very, very aggressively promoting the BB7 value proposition to customers in the United States.

So does promotion mean advertising, or does it mean price cuts?

It means that there will be a special offers, there will be advertising, there will be special marketing campaigns, a very comprehensive set of activities.

Your next question comes from the line of Amitabh Passi of UBS.

Please go ahead.

Hi, thank you.

I was just wondering, with respect to your Core, program how do you intend to keep us updated?

Would it just be on your quarterly calls?

Can we expect to get intra-quarter updates, on any sort of updates?

Would love hear, as just, in terms of how you plan to keep us abreast of developments?

Yes, we hadn't necessarily thought that through, but that's something we can certainly get back on the next call, with an update on how that's progressing.

But that's certainly a focus for the organization.

And so we can certainly provide an update next quarter.

And then just as a follow-up, you did 14 million units this quarter, phones you're guiding 11 to 12.

Why is that ahead of BB 10, that unit shipments don't get worse?

I'm just try to figure over to potentially drive units even higher over the next 2 to 3 quarter?

The BB7 devices are really rejuvenating the BlackBerry experience around the world.

I hear stories every day where people are commenting about how the BlackBerry Bold is the best communication smartphone in the world today.

And, that something we're just building on.

And we're are going to support that, through marketing, advertising, promotion.

I think that BlackBerry 7 is such an advance over our previous BlackBerry platforms, that it really has changed the way people are perceiving the product.

The browser is really fast.

The touch screen is ultra responsive.

And it's just -- the fit and finish, material choice is amazing.

So the BlackBerry Bold is really driving the story forward for us in the world.

Yes and just, I mean, we recognize we've not met expectations, in aspects of our market share and performance.

But our BlackBerry 7 sub base has grown 35% to $75 million over the year.

So there is a core value proposition to the product.

It's very exciting in the US and around the world.

We plan a comprehensive set of marketing and advertising programs, and we have to make sure we're executing with laser-focus.

Your next question comes from the line of Jeff Kvaal of Barclays Capital.

Please go ahead.

Yes.

Thank you very much.

First of all, could I ask what you've learned about the longer term margin expectations, that we can expect in the tablet market?

Obviously, there's been a bit of a re-set there, and then some restructuring charges.

So, once all the dust has settled, what kind of margin structure might we assume?

Well, again, as we said before, we still view the tablet market, as being in its infancy and it's rapidly evolving.

We're very confident that the -- with the PlayBooks -- the PlayBooks acceptance in the market through these promotions.

So we know there is a demand for the product, and people are really enjoying the premium experience they are having today.

With the launch of the PlayBook 2.0 software upgrade, that's a substantial upgrade that our customers have to look forward too.

And then once that becomes part of the basic experience, that's going to be a -- that's going to be a major driver as well.

So, we see the PlayBook OS 2 enhancements being on track in February as a major milestone.

Okay.

That doesn't really help us with the margin implications, but we'll see maybe when the new PlayBooks come out --

Well, Jeff, to answer it, the industry is still in its infancy.

And as some have said, it's very difficult to be in the smartphone business, and not be in the tablet business.

And with different packaging sizes, when does it crossover?

So it is a business we are committed to.

The BB 10, we are committed to.

We are excited about the future.

We understand that we are in a transition, that we have to perform better in execution, in all aspects that we're doing.

But we're not going to represent things, that we don't have really high clarification on in the industry, because the industry is, the tablet market is very, very early still.

Your next question comes from the line of Kulbinder Garcha of Credit Suisse.

Please go ahead.

Thanks.

I just want to clarify on a previous question, just with respect to the visibility of (inaudible) of this marketing push you're going to make around BB 7, will actually prove successful.

And the reason, and here is my thinking and tell me where I am wrong.

Some of these BB7 products have been out for a few months now.

They haven't sold necessarily as well, the sell-through this quarter, you were saying wasn't that great.

Next quarter, volumes go down, because of some system channel inventory.

So with this marketing push, maybe there's a recovery in the quarter afterwards, but some of the products will be quite old.

The market is very competitive.

And it is very rare in the mobile phone industry, that if you don't get off to a good start in the first few months of the product, they actually sells very well.

So I'm trying to understand why your volume actually stabilized.

So could you please provide some clarification then?

And one question for Brian, on the inventory charge, or on the charges on the PlayBook.

So just to be clear, that you're just writing down your inventory on their books, to a level whereby you can sell out these PlayBooks.

I'm just wondering, what happens when that's done?

And then do we have another charge, or is the level of profitability for PlayBook (inaudible)?

Maybe I'm just missing this, but can you give a little bit more clarification around that?

Many thanks.

Yes, it's Brian, on the PlayBook inventory charge.

So that is an adjustment -- as I mentioned on the valuation, based on our estimated, on our current estimate on what we can sell that through as.

So, that's -- given the current inventory levels that we have, and our expected price points and promotion activity, that's where we record that provision.

And that's where the teams are driving, to ensure that we sell that inventory through.

On your question on the BB 7 sales, it is important to know that our hardware sales did grow 56% internationally in the past year.

That we have dozens, literally dozens of certifications very late in November.

So it's still early in the program -- very early in the launch of this product, and the Bold is doing very, very well, as an example.

And there was an earlier comment on marketing and how to reduce pricing and margins and promotions.

So we believe there is an opportunity there.

We are very, very excited about it.

But, of course, we are very, very focused on making sure we operate with excellence in these programs.

We think it's very early, and we think these are excellent products for the market.

And your next question comes from the line of Matt Thornton of Avian Securities.

Please go ahead.

Yes, good afternoon.

Thanks for taking my question.

Two, I guess, points of clarification.

First and I think I missed the -- this prior comment, but in talking about PlayBook, gross profit, I heard the 1% number.

I am not sure if it was that gross profit contribution number.

But I guess, my question is as we look to the February quarter, what does guidance imply for PlayBook?

Are we expecting volume growth, given all the promotions?

So should we see sell-in growth?

Given that the charge is now out of the way, should we actually see positive gross profit contribution?

I guess any color around that would be very helpful.

And then secondly, I think last quarter, we had talked about smartphone gross margin likely rebounding a bit in the November and February quarter, as these products age, as some of the new higher ones have launched, should we still expect smartphone gross margin to improve here directionally?

And, I guess any color around directional ASP on smartphones would be helpful as well.

Thank you.

It's Brian, I'll take the first one.

So what I had mentioned was the effect on our current estimate of sell-through and sell-in for PlayBook in Q4 is a 1%, on gross margin percentage.

So, to the effect that we've got revenue and costs related to -- and I had mentioned that, generally that, those two would more or less offset.

And that the impact would be about 1% on our estimated gross margin percentage.

And Matt, we had talked about the reason why gross margin was going to be higher in Q4.

Some of that is because the BlackBerry 7 products are going to be a bigger part of the mix.

So that would imply obviously that there is a higher margin there.

Ladies and gentlemen, we have time for one more question today.

And that will come from the line of Tavis McCourt of Morgan Keegan.

Please go ahead.

Hi, thanks for taking my question.

A clarification, Brian.

It looks like there was a $374 million purchase of intangibles in the quarter.

Am I right in that?

And if so, what was it?

And then my question is -- just for Jim, the last two quarters, the service revenues were up, the subscriber base is up, and yet handsets are down.

The only logical conclusion I can draw, is that the base of subscribers is not churning as fast, as perhaps many of us feared?

Is that a fair assessment?

And if so, is it in specific verticals, enterprise or specific geographies, where you are seeing that?

Sure.

It's Brian.

On the intangibles, that relates to payments for certain license agreements.

To answer your question, I'm not going to try and paint anything that is overly rosy, or anything that is overly pessimistic.

Yes, we have a very strong base of 75 million BlackBerry subscribers.

Yes, we do a $1 billion a quarter in our cloud services revenue.

And so, we are seeing lots of growth in subscribers.

We are seeing lots of growth in traffic.

BBM is growing, and that is a core area for us to leverage our strengths going forward, in new types of programs, in new types of plans, for both our consumer and enterprise space, which we are seeing growth in that, but also in different regions around the world.

So, yes, there is a very, very powerful system that we have here.

And it's up to us to make sure that we use that infrastructure in a way, and execute well to make sure that we create value for our shareholders.

Thank you, operator.

That is all the time that we have today.

I would like to thanks everyone for joining.

And let everybody know there is replay available on our website.

Thank you.

Thank you.

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

We thank you for your participation.

And you may now disconnect your lines.