BlackBerry Ltd (BB) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Research In Motion's first-quarter fiscal 2013 results 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 this conference is being recorded today, Thursday, June 28, 2012, at 5 PM Eastern time.

I would now like to turn the conference over to Mr. Paul Carpino, Vice President Investor Relations.

Please go ahead, sir.

Thank you, Luke.

Welcome to RIM's fiscal 2013 first-quarter results conference call.

With me on the call today are Thorsten Heins, our Chief Executive Officer, and Brian Bidulka, our Chief Financial Officer.

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

Brian will then review the first-quarter results and our outlook.

We will then open up the call 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 supporting slides that can be viewed through your personal computer or your BlackBerry PlayBook tablet.

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

We plan to wrap up the call around 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 plans; strategies and objectives; and the anticipated challenges and opportunities in the coming quarters; our expectations with respect to product shipments; revenue; gross margin; operating expenses; our anticipated operating loss in Q2; Net subscribers; ARPU; and our cash position; our product development and marketing initiatives and timing, including our expectations relating to the launch of our BlackBerry 10 smartphones; plans and expectations relating to our core program; 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 view with respect to future events and are subject to risks and uncertainties and assumptions we have made.

Many risk factors could cause our actual results, performance or achievements to be materially different from those expressed or implied in our forward-looking statements including -- our ability to enhance our current products and develop new products and services; risks related to further delays in new product introductions; risks related to intense competition both in North America and internationally; our ability to maintain and grow our service revenue; our reliance on carrier partners and distributors; security risks and risks related to the collection, storage, transmission, use and disclosure of personal information; risks relating to network disruptions and other business interruptions; our ability to maintain or increase our cash balance in light of the challenges we face; our ability to implement and realize the benefits of our core programs; our ability to retain and attract key personnel; our ability to maintain and enhance the BlackBerry brand; risks associated with our international operations; intellectual property risks; 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 and MD&A sections of RIM's filings with the SEC and Canadian securities regulators.

We base our forward-looking statements on information currently available to us.

And we do not assume any obligation to update them except as required by law.

I will now turn the call over to Thorsten.

Thank you, Paul.

And thank you all for joining the call today.

I will let Brian talk about the specifics from the quarter, so I can address some of the challenges and actions that we're taking.

As discussed over the past few months, our first-quarter results reflect the platform and product transition we are going through, ongoing market challenges, and the competitive dynamics we are seeing across many of our markets.

This was a challenging quarter for the Company on many fronts.

And I am not satisfied with the financial performance we are reporting today.

I want to assure you that we are not standing still and that we are continuing to accelerate our focus on our key initiatives.

I would like to address four key areas on this call, including Q1 sales, the updated timetable for our first BlackBerry 10 device, our outlook for the next couple of quarters, an update on our operational and strategic review.

So let me get started with Q1 sales.

In the US, revenue has stabilized, showing only modest declines, but churn has remained high.

We are aggressively working with our carrier partners in this region to upgrade customers to BlackBerry 7. And we have had particular success with the BlackBerry Bold product.

We're also working closely with our enterprise customers to maintain our enterprise subscriber base and upgrade these customers to BlackBerry 7.

In the international markets, revenue has declined in the first quarter, reflecting pricing pressure due to competitive market dynamics and the age of our in-market product portfolio.

However, we have begun to refresh the portfolio with new BlackBerry Curve products in the UK, Middle East and Asia-Pac in the first quarter.

And will continue to drive these new devices into our global carrier and distribution channels in Q2.

Initial results from these launches are positive.

And we believe these products and other programs can help to reinvigorate sales in these regions.

Despite challenges in the quarter, we grew our global subscriber base sequentially in Latin, Asia-Pacific and the Europe, Middle East, Africa market.

The overall BlackBerry subscriber base grew in the quarter and now stands at approximately 78 million users.

We have shipped approximately 260,000 PlayBooks and have sold out of the 16-gig model.

We continue to sell the 32- and 64-gigabyte models.

And new LTE PlayBooks are in the final stages of testing with certain carrier partners.

And we expect to launch these in the near future.

The second item I'd like to discuss is the updated timetable for BlackBerry 10 that we announced today.

The successful launch of the BlackBerry 10 platform and the delivery of high-quality, full-featured BlackBerry 10 smartphones remains the Company's number one priority.

Over the past several weeks, RIM's software development teams have been very successful in the development of substantial features for the BlackBerry 10 platform.

However, with the long and strong in-flow of the integration of those features into the integration process into the platform, this has proven to be more challenging and time-consuming than anticipated.

I want to make clear that these issues are not related to the quality of functionality of the features in the software.

But rather to the time required to manage the integration of such a large volume of incoming code and to prepare it for commercial use globally.

Based on the current status of the software integration, it has become clear that the schedule we were working towards, which would have the first BlackBerry 10 smartphones in market this calendar year, is no longer realistic.

We now expect the first BlackBerry 10 commercial launches to occur in the first quarter of calendar 2013 on a global scale.

RIM's development teams are relentlessly focused on ensuring the quality and reliability of this platform.

I will not deliver a product to the market that is not ready to meet the needs of our customers.

Or provide anything less than an outstanding user experience with the quality I expect a BlackBerry product to have.

There will be no compromise on this issue.

In discussions with some of our global carrier partners on the launch plans of BlackBerry 10, many actually prefer a Q1 launch as many of the new global LTE networks will be getting in place by this time.

We expect customers will be delighted by the quality, variety and quantity of applications on the BlackBerry 10 platform when it is launched.

We plan to have a broad spectrum of applications available from every category, including games, multimedia, productivity, enterprise and social media applications.

Developers have already submitted over 25,000 PlayBook applications to BlackBerry App World.

Many of which will run on BlackBerry 10.

And we're expecting tens of thousands more, including applications specifically for BlackBerry 10 by launch.

We're extremely encouraged and excited by the traction that the BlackBerry 10 platform is gaining with application developers and content partners following the successful BlackBerry Jam session for developers we held at BlackBerry World.

And the ongoing 12-week, 23-city BlackBerry Jam World Tour that has sold out London, Barcelona, Berlin, Toronto, Montreal, New York, Santa Clara and Singapore.

BlackBerry World was a major success for the Company, with more than 5,000 attendees.

We provided a sneak preview of BlackBerry 10 and seeded developers with the first BlackBerry 10 dev offer device.

Developers are excited by the depth of our form factor, high resolution display, and the horsepower which allows for fast and powerful apps that can stream content quickly and easily.

And developers have already embraced the BlackBerry 10 platform, showcasing apps at BlackBerry World in May that took camera integration, our first-in-class HTML5 browser and social abilities for apps beyond anything we've seen on a BlackBerry before.

More than 20 partners demoed working BlackBerry 10 apps at the show after having the tools for less than two weeks.

BlackBerry 10 is a platform that truly lets people share and create content and communications in all forms, whether video, photo, music, graphics, voice or messaging.

In terms of our outlook, we are expecting the next several quarters to be very challenging.

We are in the midst of a platform and Company transition.

And we face an increasingly competitive environment.

We plan to continue to aggressively drive sales of BlackBerry 7 handheld devices through implementation of programs to both drive upgrades from older BlackBerry products to BlackBerry 7 handheld devices.

And attract first-time smartphone buyers to BlackBerry.

While these dynamics are expected to result in an operating loss in the second quarter, we have a plan to dramatically adjust our cost structure going forward to make RIM more efficient and to better align resources with our future opportunities.

In addition, we have a strong balance sheet which we are committed to maintaining.

I know I have delivered a lot of tough news today.

But I want to highlight what we're doing now to concurrently address all these issues and commit to you that we're focused on driving long-term value for our stakeholders.

Let me update you on our operational and strategic review.

First of all, I would like to discuss the 5,000-person workforce reduction we announced today and the core cost reduction program which Brian will discuss in more detail later.

I understand this is an incredibly difficult message to deliver.

But it is necessary.

In order to align our cost structure to help us move effectively through our transition and deliver on long-term stakeholder value, it is necessary to change the scale and refocus the Company on the areas of highest opportunities.

When we come out of this transition period, we want to move forward with a lean and nimble organization that can act quickly and is aligned with our growth opportunities.

We are also committed to ensuring that the reductions we make do not impact key programs such as BlackBerry 10, customer support, or BlackBerry service levels.

I fully understand the impact a workforce reduction of this size has on our employees and the communities in which we operate.

I assure you that we wouldn't move forward with a change of this size if we didn't think it was critical for our future.

It is our intent to move forward with these reductions as swiftly as possible to minimize interruption and uncertainty within our teams.

These reductions will occur over the remaining three quarters in this fiscal year.

However, we intend to notify those affected as quickly as possible.

And we're also bringing in additional key management to help RIM improve its position and to drive success of BlackBerry 10 once it's launched.

New additions to the executive team include a new Chief Operating Officer, Kristian Tear, and a new Chief Marketing Officer, Frank Boulben.

Kristian and Frank are industry veterans and bring extensive knowledge of the rapidly-changing wireless global market.

I am also very pleased to announce that we have further strengthened the executive team with the hiring of Steve Zipperstein as RIM's new General Counsel and Chief Legal Officer who is joining RIM from Verizon.

And [Ed Boen] as Executive Vice President of Organization Development, who comes to us from his own HR consulting firm.

And prior to that from Phillips where he served for 11 years in various human resource leadership positions.

In addition, we have promoted Rick Costanzo to Executive Vice President Global Sales.

Rick previously served as Senior Vice President and Regional Managing Director Americas for RIM.

And managed the strategy for all operations in Canada, Latin America, and the United States.

Prior to this, Rick was responsible for sales in Latin America and helped BlackBerry become the number one selling smartphone position in the region.

I am excited with the new leadership team that has been assembled and their readiness to take on the challenges ahead of us.

We also recently announced a comprehensive review of RIM's strategic opportunities, including partnerships and joint ventures, licensing and other ways to leverage RIM's assets in an attempt to increase value for our stakeholders.

To ensure we have all the necessary expertise and resources to complete a thorough assessment of these options, we have hired JPMorgan, and RBC Capital to help with the process.

And are actively working with them on this evaluation.

We are convinced that BlackBerry can deliver value as an integrated hardware, software and services offering.

And we are excited at the potential for BlackBerry 10 to take this value proposition into the future of mobile computing.

We believe the BlackBerry 10 platform has the potential to offer growth opportunities for the Company across multiple segments, including smartphones, tablets, software, services and solutions, enterprise, automotive, and embedded and machine-to-machine type applications.

There are four specific areas we are focusing our business on going forward.

First, RIM's product and service development focus will remain on specific consumer segments only, enterprise and BYOD.

As we know, the consumer enterprise market is becoming more integrated through BYOD.

And BYODs through our BlackBerry 10 platform will be an important part of the RIM strategy to strengthen its positioning in the consumer market and support the leading position in the enterprise market.

Mobile device management tools are an important element of the IT infrastructure for our enterprise customers.

And we intend to support these customers with a solid MDM offering.

On top of this, we plan to build services that are value added for our customers and generate incremental revenue for the Company.

There are also specific vertical markets where we have a relative competitive advantage that we plan to pursue with our enterprise offering.

We are actively engaging with our enterprise customers to ensure they're aware of our new offerings, including BlackBerry Balance and our mobile device management solutions.

And to work with them to deliver the type of enterprise services they want and expect from BlackBerry.

We will also continue to invest in our strong automotive business, as it has great potential for BlackBerry 10 platform in the future.

Second, we also plan to streamline the BlackBerry smartphone product portfolio to offer fewer number of devices in market at any given time.

The focus of the initial BlackBerry 10 launch is primarily on the premium smartphone segment in both touch and full QWERTY.

To be clear, we fully intend to lead in the full QWERTY segment with BlackBerry 10.

And expect the BlackBerry 10 QWERTY version to launch in close proximity to the initial full touch BlackBerry 10 smartphone.

The BlackBerry 7 product portfolio will continue to address the entry level and mid-segment of the market until we launch the full BlackBerry 10 portfolio.

We expect the streamlined smartphone portfolio to reduce total R&D costs, increase economies of scale per device, reduce marketing and sales complexity, and provide a distinct offering for each targeted market segment.

Third, we plan to evaluate opportunities to license the BlackBerry 10 platform.

We are evaluating partnerships and business models to license the BlackBerry 10 platform to expand the subscriber base of the ecosystem, not just in smartphones but potentially in other segments as well.

Finally, we intend to aggressively build on our 78 million customer base around the world as we transition to BlackBerry 10.

And focus on growing, developing, and executing on a consumer services model to augment the decline in ARPU we expect over the coming quarters.

We plan to build this consumer services business based on the unique strength of the BBM platform, which has 56 million customers and through partnerships with industry-leading consumer services companies.

We also plan to pursue partnerships to develop and deliver the services.

And intensive discussions are underway with a number of potential partners.

I have provided you with a lot of information here that I will be happy to discuss in our Q&A.

But let me now turn the call over to Brian who will take you through more detail on the quarter.

Brian, over to you.

Thank you, Thorsten.

Revenue for the first quarter of fiscal 2013 was $2.8 billion, a 33% decrease from the fourth quarter of fiscal 2012.

Primarily as the result of decreased BlackBerry smartphone shipments, greater proportion of entry-level products with lower average selling prices, and pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices.

Sales outside the United States, United Kingdom and Canada represented approximately 62% of total revenue, compared to 68% in Q4.

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

The decrease in other markets was primarily as a result of a less favorable product mix with lower ASPs.

US sales represented 25% of total consolidated revenue, compared to 17% in the fourth quarter.

On an absolute basis US revenue was down slightly as we aggressively implemented pricing initiatives that reduced churn in the United States.

Sales in the UK in the first quarter represented approximately 9%, compared to 10% last quarter and Canada represented the remainder.

RIM shipped 7.8 million smartphones in the first quarter.

Estimated sell-through in the quarter was approximately 10.5 million units, including phone-only sales.

Channel inventory is down on an absolute basis.

However, the trends in certain markets is such that our partners are not carrying as much inventory, they are not replenishing their inventory at the same pace as they have historically.

In the first quarter we shipped approximately 260,000 PlayBook tablets.

Sell-through to end customers based on our internal data was higher than this.

Hardware revenue was approximately $1.7 billion or 59% of sales compared to $2.9 billion or 68% of sales in the fourth quarter.

The decrease in hardware sales was primarily attributable to the lower unit volumes, a less favorable product mix with lower average selling prices, and the adoption of new pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices.

Service revenue was approximately $1 billion or 36% of sales.

Down approximately 12%, reflecting the 14th week in the previous quarter, as well as the change in mix of our subscriber base from higher-tier unlimited plans to prepaid and lower-tiered plans, which reduced ARPU.

Software revenue was approximately $69 million.

Gross margin was approximately 28% in the quarter, which was substantially lower than the adjusted gross margin of approximately 39.8%, which included the inventory provision in Q4.

This decrease was primarily as a result of certain fixed costs being allocated to lower volumes and a greater proportion of entry-level products with lower average selling prices.

And the adoption of new pricing initiatives to drive sell-through and sell-in of BlackBerry 7 handheld devices.

This was partially offset by an increase in service revenue as a percent of total revenue.

Operating expenses decreased from the fourth quarter primarily as a result of a reallocation of expenses affecting gross margin.

And reduced levels of discretionary marketing spend and reduced foreign exchange losses.

The reallocation of expenses had a $50 million impact on OpEx and a slight impact on gross margin, as well.

The tax rate in Q1 was approximately 19% on a GAAP basis, reflecting the non-deductible write-down on goodwill.

Excluding the impact of the goodwill charge, the income tax recovery was approximately 37%.

GAAP net loss for the first quarter of fiscal 2013 was $518 million or $0.99 per share diluted.

Versus net loss of $125 million or $0.24 per share in Q4.

Excluding the impairment of goodwill, the adjusted net loss was $192 million or $0.37 per share diluted.

The earnings press release issued this afternoon contains a reconciliation of our GAAP net loss and diluted loss per share to adjusted net loss and adjusted diluted loss per share.

RIM generated approximately $710 million in cash flow from operations in the quarter.

Uses of cash included CapEx of approximately $155 million, intangible asset additions of approximately $285 million as a result of prepaid license agreements and patent acquisitions, as well as a business acquisition of approximately $100 million.

Cash, cash equivalents, short- and long-term investments increased by approximately $100 million to $2.2 billion at the end of the quarter.

Given the current business conditions and the decline of the Company's market capitalization, the Company concluded that goodwill impairment indicators existed as of the end of Q1.

Consequently, the Company recorded a pretax non-cash goodwill impairment charge of $335 million, which eliminates the remaining book value of goodwill.

Despite all of the challenges from an operational and financial perspective, we continue to make significant progress in some of the initiatives that are intended to help us reach a $1 billion cost savings goal.

With the changes executed to date we expect to realize savings of $300 million in fiscal 2013.

We plan to streamline the BlackBerry smartphone product portfolio to offer a fewer number of devices in market at any given time.

The new portfolio will continue to offer both the iconic BlackBerry keyboard, and touchscreen devices.

Manufacturing supply chain is one of the focus areas of our CORE program.

And in Q1 we began to implement changes that will drive savings throughout fiscal 2013.

We started the process to outsource our global repair services and we expect the transition to be complete in the third quarter of this fiscal year.

As mentioned on the last conference call, we are optimizing our global EMS manufacturing footprint to reduce complexity and improve delivery performance.

This process is underway and we expect to move from a manufacturing network of 10 EMS sites to 3 EMS sites by the end of the calendar year.

We will also include an in-region fulfillment model for closer proximity to our customers.

Additionally we recently met with our suppliers to discuss further ways to reduce costs and meet our target savings for the end of fiscal 2013.

We've realigned our quality organization by centralizing resources to streamline and improve execution, reduce complexity and focus on value-add.

We'll move forward by providing suppliers with clear quality standards and accountability to drive additional savings.

We are aligning our sales and marketing teams to prioritize our marketing efforts and spend in regions that offer the highest opportunity and return, while scaling back activities or exiting in regions that don't meet our criteria.

Through this targeted use of resources and more effectively leveraging our marketing windows we have been able to he reduce the budget for fiscal 2013.

In addition to the above efforts where we see organizational efficiency, we plan on driving further efficiency through a reduction in the number of layers of management to drive accelerated execution and decision making, improve performance and more transparent accountability.

We expect further outsourcing of non-core functions identified by the CORE program will also contribute to the restructuring.

As Thorsten mentioned, it is always difficult to include headcount when making decisions to cut costs.

However, it is necessary that we make these organizational changes in order to improve the Company's performance in the long run.

We expect the restructuring, which has already begun, will affect approximately 5,000 positions by the end of the fiscal year.

The Company expects to incur restructuring-related charges of approximately $350 million by the end of fiscal 2013, primarily associated with the global workforce reduction.

Other charges and cash costs may occur during this process.

And the Company intends to share more details throughout the year regarding our progress as programs are implemented or changes are completed.

The Company expects the next several quarters to continue to be very challenging for its business based on the increasing competitive environment, lower handset volumes, potential financial impacts, and other impacts from the timing of the BlackBerry 10 launch, pressure on RIM to reduce their monthly infrastructure access fees, higher mix of entry-level products, and plans to continue to aggressively drive sales of BlackBerry 7 handhelds, as our portfolio of higher ASP products begins to age before the launch of our new BlackBerry 10 devices.

These factors will have an impact on both revenue and gross margin.

As a result, the Company currently expects to report an operating loss in the second quarter of fiscal 2013 as we continue to invest in targeted marketing and sales programs, and continue to work through the transition to BlackBerry 10.

As well as the impact of certain of the Company's fixed costs being spread over a lower volume of handhelds.

We expect the downward pressure on operating results to continue for the remainder of the fiscal year based on the market dynamics I mentioned, as well as the timing of the BlackBerry 10 launch.

This outlook excludes the impact of the charges related to the CORE program.

The CORE team is looking at all opportunities to accelerate the implementation of cost-saving initiatives earlier in the fiscal year.

We intend to provide quarterly updates as significant milestones are achieved.

The BlackBerry subscriber base grew to approximately 78 million in Q1.

However, we expect net subscribers in the United States to remain under pressure.

And we will be looking to international markets to help maintain and grow the base.

However, given the anticipated change in the mix of our subscriber base reflecting growth in lower-tiered plans and continued pressure in the US market, we expect the ARPU will continue to decline in the second quarter.

As I mentioned above, RIM has a $2.2 billion cash position at the end of Q1.

And we're focused on maintaining a strong cash position through prudent working capital management and reduced levels of capital investments as part of our CORE program.

That concludes our call and I will now ask the operator to start polling for questions.

(Operator Instructions) Mark Sue of RBC Capital Markets.

It sounds like it will have to be BlackBerry 10, whatever it takes.

So the question is, how do you bridge the gap between now and then?

What can you do to protect your installed base outside of major price cuts so that you'll have a base to upgrade later?

And also, what else can you do to reduce your cost structure because with the announcement it does seem like you're getting to the bones of things.

I'm not sure what other options you might have.

Okay.

Let me respond to that, Mark.

On the question how do we bridge the gap, we intended to have BlackBerry 10 launched later this year.

Now we move into calendar Q1.

We still are in the process, as I described, to aggressively put BlackBerry 7 into the market.

We still have a lot of BlackBerry 5, BlackBerry 6 out there.

And we also have in those regions where we are very strong in the entry level and mid-tier smartphone portfolio, we just recently launched Jazz series, as I said in my text.

And we're seeing quite some good pickup on that.

So I expect that to help us in the next quarters.

And to stay relevant in those markets and have offering for our customers in this market.

And in enterprise, as I said, we are still upgrading our enterprise customers towards BlackBerry 7, making good progress with this.

I expect us to be successful in bridging this gap and protecting our installed base through those measures.

On a cost structure, I would let Brian comment on any further actions and activities that we could take.

Sure.

As I mentioned, the CORE team's looking at all opportunities to try and accelerate cost savings earlier in the process, earlier in this fiscal year.

And certainly as it relates to manufacturing and our product, actual product costs, we're looking at everything we can do on bringing those product costs down.

And I think we can gain a lot on the efficiency side with our EMS sites that I mentioned.

And, again, we're looking at every opportunity to push the savings as early as we can in this fiscal year.

I think that's what the team is focused on.

Kulbinder Garcha from Credit Suisse.

I have just a clarification and a question.

My clarification is for Brian.

Did you guys have negative gross margins in your hardware business this quarter?

I'm backing into it given that your services gross margins should be in the 80%s or 90%.

If that is the case, I'm not sure what gets that better on top of BlackBerry 10.

Because your products you're selling, unless you've got something major coming out new product-wise in the next three months, you're probably going to operate at that level for some time.

Number one.

That's my first question.

The second one is for Thorsten.

With respect to the strategic conversations you're having, I'm sure you can't disclose too much, but how extreme a scenario are you prepared to consider in the next six months?

Like, is a breakup of RIM really in the cards?

Or is it that the conversations you've had lead you to believe your best course of action for shareholders is to really continue with your existing strategy?

I'll take the hardware gross margin.

I mentioned that there was some sales activities that were reclassed into the off-revenue category.

So that did have an impact on our hardware margin, as well.

But certainly our hardware margins were at a low point for what we've seen.

But that, again, speaks to the opportunities we're trying to drive in terms of pricing initiatives to drive sell-in and sell-through of our BB7 device.

But the question, Brian, is you have negative gross margins in hardware.

That's why I struggle and find it hard to believe that that's happened so quickly.

Or is that just the way the business has evolved so rapidly?

I'd say there were certain products that we definitely had seen some push-down on, on ASP.

And again, I go back to the point about on lower volumes and the fixed costs being absorbed over the lower volumes.

That did have an effect on our overall handheld margin relative to Q4.

Okay, let me answer on the strategy question.

You're absolutely right.

We have engaged, and the teams are working together on evaluating strategic options and various dimensions.

And we're working through this, as we speak, with the teams.

And we will have to share results probably later when the teams are done.

However, I want to really make clear that we're not just putting a new product.

We're building a full new mobile computing platform that cannot be underestimated.

So I think in terms of long-term stakeholder value, this platform will provide a basis to really create that long-term stakeholder value.

It's not just about the next smartphone or the next tablet.

It is really about a great new platform that we're building.

So the teams are fully focused on this.

They're working hard to get that done.

Would we have loved to be a bit earlier?

For sure.

But we are where we are.

And quality and just an outstanding user experience, that is what we want to deliver when we bring BlackBerry 10 to market.

And we will do this.

In parallel, we are running those strategic assessments as you have asked about.

They range from RIM executing on its planned standalone to whatever other model you could think about.

However, this is not the time to share any detail.

We will share the details and the progress we are making when we have those results.

And it's actually also a matter of the Board deciding on what strategic direction they want to take the Company into.

Jim Suva of Citi.

Just a clarification.

It sounds like you're saying the operating loss in Q2 is going to be even greater than Q1.

Did I hear that correctly?

I didn't say that.

You did or did not?

I didn't.

I just said we were going to have an operating loss in the quarter.

Okay.

And then do you think RIM is going to be able to maintain its cash flow generation or start burning cash?

Thanks for that question.

In terms of our cash flow, it's obviously a priority.

And within our CORE program, working cap management is one of the areas of focus.

So we're looking at inventory turns, CapEx investment.

And you can see the trending in the last few quarters on our CapEx investments or spend has gone down based on our current liquidity and cash flow projections.

And we also have an unused credit facility.

We think it's sufficient in the near term to support our business but we are continuing to work with our banks on renewing that facility, as well.

And we continually evaluate our needs for our business.

As I mentioned, the focus within the CORE program in ensuring the liquidity of the Company is critical for us.

So no comment about using cash as opposed to understanding your bank lines of credit and such?

I said that in this coming fiscal quarter, we're going to maintain our cash position.

And it's a continual focus on our CORE program to drive opportunities for efficiency in our cash flow management.

Inventory is one huge area of focus and our CapEx spend and where we're investing is another.

Amitabh Passi of UBS.

Just a clarification from my end, as well.

I think you talked about OpEx savings, about $300 million this fiscal year, fiscal year '13.

Just wanted to clarify, is that total savings you'll see relative to your fiscal '12?

Or if I took the existing OpEx structure you think you could drive another $75 million of savings on a quarterly basis by the time we exit fiscal '13?

What I was referring to is in all the initiatives we've done it within the CORE program, we've executed on initiatives that will affect $300 million of savings in the rest of this fiscal year.

So it could come through our cost of materials, it could come through OpEx.

And I won't get into the specifics of the allocation.

And then just as a follow-up, maybe for you Thorsten.

Can you, Thorsten, remind us what key performance metrics is your compensation based on.

And similarly the Chief Marketing Officer coming in, the Chief Operating Officer.

How should we think about what metrics will you be assessing their performance on, or the Board, in terms of their compensation?

I think that question is a discussion between me and the Board, and the relation between the Board and I. So I'm not in any way in a position to comment on that or give any information.

Thanks, Amitabh.

Just a reminder, just so everyone can ask a question, just one question at a time, please.

Rod Hall of JPMorgan.

My question pertains to the services business and the ARPU.

If we calculate right, the ARPU decline year-over-year is around 10% in the quarter.

And so I just wonder Brian, you mention there's continuous pressure on those ARPUs.

I wonder if you could walk us through maybe a little more color on exactly what's going on there.

And also it would just be interesting if you could help us understand what the mechanics of the ARPU renegotiation process are.

Are there contractual terms that may cause that process to go more quickly or more slowly.

If you could give us any idea on that.

And then I just also, on services, while you're at it, could you help us understand whether you'd be willing to give us more detail on that services business?

We all can take a guess that it's high margin and so on but it would be helpful to know a little bit more about it, to be able to calculate returns on capital in that business and so on.

A lot of people out here trying to value that business.

Just wonder if you guys would be willing to give us any more detail on it.

Your first question on the ARPU change, I don't have the exact number year-on-year in front of me, but just some of the mechanics of the change I had mentioned.

How the sub base in some of the churn that we're seeing in the US, that churn may be coming off the higher-tiered plans.

And where we're actually picking up subscriber growth internationally is coming on the lower-tiered plans.

So that's where you get a significant ARPU change quarter-on-quarter, which is impacting the overall base on our ARPU change.

We continue to see that in our forecast coming forward.

And that's the reference point I was making on the ARPU change.

Simona Jankowski of Goldman Sachs.

I just wanted to ask about the delay in the timing on BlackBerry 10.

Given how fast we tend to see innovations in things like chipset road maps and displays and so forth.

By definition wouldn't you expect it to have slipped back in terms of its competitiveness, even just from a hardware perspective if it's going to have six month older technology at that point?

Thanks for asking that question.

When we designed BlackBerry 10, we did not just design a product, we designed a platform.

And consequently in this platform we were going for really high-end spec because that is an aspirational product that is supposed to really excite the customer.

So without going into specifics before we actually really launch it and disclose all elements that make up this great product, good question, but I'm very confident that this product will absolutely deliver on its performance.

And hardware plays a key role in it but what will be really different and exciting about BlackBerry 10 will be the entire user experience.

Will be the applications that you will see on that product, will be the features that are really targeted to the BlackBerry segment of people that use a BlackBerry for their purpose.

So hardware plays a role in it.

In my view, that is very well covered.

I'm not concerned about that.

And I think based on the hardware we provide we will be more than competitive and we will have a great user experience based on the BlackBerry 10 platform on it.

Scott Sutherland of Wedbush Morgan Securities.

When you look at the ecosystem of the BlackBerry 10 launch, and I know you did some acquisitions on some cloud-based solutions, your competitor out there has 125 million subscribers.

How do you plan to create a road map, maybe your 78 million subscribers or other device users, to move to a cloud-based system that could make this a more successful launch?

The way I look at this is two-fold.

You have applications that reside on the device itself, like the whole thin suite or all of your communication channels.

And then today the cloud is basically used to store data on the cloud.

We have designed BlackBerry 10 to be a real open system for its end users.

So you basically can use the cloud of your choice.

And it's extremely easy and comfortable to connect to the cloud of your choice and build and drive that.

BlackBerry 10 is really an all-encompassing architecture.

It's not just, as I said, a device with software on it.

The way it connects to the ecosystem, the way it leverages the ecosystem, the way it leverages media content coming to the device is a whole new user experience.

So I think it's important to take away from this question that the BlackBerry 10 platform is a fully open platform.

And it's really easy through the developer tool kit, through the run times that we have, to really easily connect to that system.

Tal Liani, Bank of America.

The question is, what are the arguments for maybe doing something completely different in a sense that it seems to me like you're trying to do exactly what Nokia has tried to do initially and others.

Don't you think it's a little bit too late to try to develop another ecosystem and another set of applications, et cetera?

So the question is really going back to core discussion of strategic value and what are the values of the Company and how can you create value.

Or rather maybe the right strategy is to focus and shrink and go only to the corporate market and focus on this market.

I really want to hear just your line of thinking when it comes to long-term strategy rather than quarters, how they play out.

Thanks.

Yes.

So I think the answer to your question is that exactly in light of the long-term strategy, long-term value creation we came to the decision that joining the family of the Android players, for example, would not suit RIM's strategy and its customers.

We are not trying to be one of many.

We are trying to be different.

We're trying to be the best solution for our customers that buy a BlackBerry and know why they want a BlackBerry.

And we're aiming for nothing less than being a viable, successful, mobile computing platform of the future.

This is what we're aiming at.

And I think that's the difference if you compare it with others.

Did we take the hard road?

Absolutely.

Absolutely.

But having done this, and building and completing this new mobile computing platform that then expresses itself as a smartphone or as a tablet or as a vertical application or embedded in card, whatever you want to do, that is where we will take BlackBerry.

And that's why it was absolutely required and necessary to build its own platform.

I would argue the other way around.

If I continue to rely on somebody else's OS and somebody else's platform, would that allow me in the long run to really differentiate towards my customers and provide them the services and the environment that they request from me, and that they would like to have?

I have a big question mark around it.

So I think going this way and building the platform we are building has the absolute intent to serve our customers and our markets better than on a standard based OS platform.

Kevin Smith of Macquarie.

I wondered if you could go through some of the amortization here.

It looks like there's obviously a wide gap between that you reported $136 million in positive free cash flow this quarter, yet you had a large operating loss.

Your amortization, it looks like it was up close to $80 million year-over-year in the quarter.

Why are you still adding intangibles?

And can you explain this discrepancy?

And when does amortization peak out?

Thanks for the question.

I'm not sure what you mean by the discrepancy.

But in terms of the increase year-on-year, it's obviously reflecting CapEx investments that we've made.

And the other question on the intangibles, we do have ongoing investments in prepaid license agreements that we've been seeing over the last number of quarters.

As you can see that, as I mentioned earlier, our CapEx investments have been coming down quarter-on-quarter and that should reflect in lower amortization.

And that is another focus on our CORE team in how we're actually managing CapEx investment relative to our amortization line and how that gets depleted.

So from an EBITDA perspective you're right, we do have positive EBITDA and the increase year-on-year on the amortization reflects those investments over the last 12 months.

Is that likely to keep cash flow positive over the next couple quarters even if there's an operating loss?

I don't want to comment on the next couple quarters but in terms of what I was saying about next quarter, in terms of maintaining our cash position, that's accurate.

Daniel Ernst of Hudson Square Research.

In the competitive landscape, you have a lot of developments and competition at that high end with now iOS 6 coming out and with Windows Phone 8 coming out and Android 4.1, all going into devices at the high end.

BlackBerry 10, which addresses that high end, is late and so I imagine you'll continue to have customer erosion in that segment.

But also, you're seeing pressure at the low end of the market, which is being served by Android devices which are still app- and touch-centric devices.

What do you have in the pipeline?

What can we say about your competitive response to also trying to maintain that low end of the market as it goes more app-centric, cloud-based, low-end devices?

Thank you.

Thanks, Daniel, for that question.

Yes, there's a lot of competition coming.

That's the nature of consumer electronic business and being in a growing market.

And we're not afraid of this.

Again, as I said to the question before, this is why we've built our own platform because we want to be distinct.

We want to be differentiated.

And we want to deliver to the BlackBerry people.

We really want to serve our market segment.

And we want to be the best in helping BlackBerry people to achieve what they want to achieve.

And I think with our future BlackBerry 10 offering we have a very distinct value that we can bring to the market and that you will hear later about.

As far as the low end is concerned, yes, I think the trend you're describing is correct.

That's where the volume segment is.

This is where the majority of the onboarding happens from feature phones and regular phones into the smartphone segment.

And we're addressing this through the recently launched Jazz series, a 2G and a 3G product.

And we have had great success with our former product, the 8520.

So we strongly feel about being able to cover that segment even in a more competitive environment.

The question about the form factor, you were talking about touch-, app-centric, if you look specifically into those markets where we're very strong, like Latin America, Africa, certain countries and regions in Asia-Pac, this is actually where messaging still plays a major role.

This is also where many BBM users are out there.

And they're still very much attracted by the QWERTY form factor that we provide them.

So we see the competition.

We know we have to be able to compete but also with the new product line on the Jazz series we feel we're prepared to do this.

Scott Thomson of FBR Capital.

A quick question on patents.

There's a lot of valuing of these assets going on.

Can you give us a little more detail around what type and what you hold and what they might be worth and that sort of thing moving forward?

Thank you.

On the patent side, you're right, the whole industry is focusing around patents and what is the various patent holding of various companies.

Given the activity in the sector, I ask for your understanding that I'm not in a position to really give you detailed information here.

What I can say is that RIM is a very innovative company.

We employ strong research groups.

And writing patents, getting good patents, meaningful patents has and always will be part of RIM's DNA.

And I think we're pretty successful in getting there.

So without getting into any further detail, I think we are in a good position on patents.

Mark McKechnie of ThinkEquity.

Just a simple question.

I don't know if you said this already but one is how many employees will you have before and after the 5,000 reduction?

And then if you could just clarify also, I heard a bunch of different answers but on the net cash balance do you expect it up, down or flat at the end of August versus the $2.2 billion?

That's it.

Thanks.

On the employee number, we have 16,500 people onboard right now.

And the math tells us that reducing this by 5,000 people will lead us to 11,500.

Now, the way we do this has different strategies.

As Brian was talking about, potentially outsourcing certain functions that are meaningful to the business but are not key, and are not core to the business.

So we can leverage and we can use economy of scale of other companies.

So it will be a mix of various activities that we will be taking.

But it will be around 11,000 number globally, employee number for RIM.

That's by year end, right?

By fiscal year end?

As I said, we're trying to be as responsible and as respectful to our employees and the communities we are in.

So we're trying to do this as fast as we can to really avoid any uncertainty with the people that are affected.

But the number is supposed to be reached by the end of the fiscal year.

And as it relates to the cash balance, I mentioned earlier that based on our current projections and expectations that we would expect to maintain our cash position at the end of Q2.

However, that could be impacted by, as Thorsten just mentioned, the implementation of some of these CORE activities which could have -- likely would have -- a cash impact on it.

And that would depend on the timing of those initiatives.

Great.

Thank you.

And thanks everyone listening on the call.

And we look forward to speaking to you on the next conference call.

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.