BlackBerry Ltd (BB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Research in Motion third-quarter fiscal 2013 results conference call.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded today, Thursday, December 20, 2012, at 5.00 PM Eastern time.

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

Please go ahead.

Great.

Thank you, Luke.

Welcome to RIM's fiscal 2013 third-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 update, and Brian will then review the third-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 can be accessed 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 6.00 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 includes statements about our plans, strategies, and objectives, and the anticipated challenges and opportunities in Q4 and fiscal 2014, our plans and expectations relating to the upcoming launch of BlackBerry 10 and its impact on our business, our expectations with respect to unit volumes, subscribers, service fees, and marketing initiatives, revenue, gross margin, ARPU, and operating expenses, our anticipated operating loss in Q4, working capital management and our anticipated cash position, our product development and marketing initiatives and timing, plans and expectations relating to our core program and our strategic review, 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 by our forward-looking statements, including 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 competition both in North America and internationally, our reliance on carrier partners and distributors, risks related to pressure on our service fees and our ability to generate service revenue through new offerings, risks relating to network disruptions and other business interruptions, security risks, and risks related to the collection, storage, transmission, use, and disclosure of personal information, our ability to maintain or increase our cash balance, our ability to implement and realize the benefits of our core program, our ability to retain and attract key personnel, our ability to maintain and enhance the BlackBerry brand, and 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 lifecycles that characterize our industry, and other factors set forth in the risk factors and MD&A section in RIM's filings with the SEC and Canadian securities regulators.

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

I will now turn the call over to Thorsten.

Thank you, Paul.

As you can imagine, this is a very dynamic time at Research in Motion, and Q3 was a very busy and active quarter for the Company.

Since becoming CEO just less than 1 year ago, we have put in place a clear roadmap to transition us into our new mobile computing platform, running a leaner and much more efficient organization.

Today, we are on the verge of launching BlackBerry 10, and our core restructuring process has delivered results.

This highlights the talent of the group that we have put together in RIM to run our business.

I want to start by giving you a high-level recap of Q3, which Brian will discuss in more detail later.

I will also provide you an update on our three main initiatives, the upcoming launch of BlackBerry 10, our core program, and our strategic reviews.

Q3 results continued to reflect the successful transition the Company is making, as it moves toward the launch event for our BlackBerry 10 mobile computing platform on January 30.

We sold just under 7 million smartphones this quarter and generated revenue of $2.7 billion.

Gross margins strengthened, cash flow was strong, and our cash position increased significantly.

We continued to deliver very strong cash flow from operations and maintained a very strong balance sheet at quarter-end.

Cash grew by more than $600 million in the quarter to $2.9 billion, even after the funding of all of our restructuring activities.

The BlackBerry subscriber base at the end of Q3 was approximately 79 million.

This is slightly lower than the prior quarter, but was up by approximately 2 million from the beginning of this fiscal year and up approximately 3 million from a year ago.

Subscribers in North America actually showed the largest decline, while EMEA, Latin and Asia-Pac were stable or showed growth.

We are pleased we have been able to maintain a stable subscriber base during this transition year, as we head into the launch of BlackBerry 10.

Brian will provide more detail shortly, but our global teams are executing well, and demonstrating that with laser focus, they can deliver the results to help us navigate through this challenging transition to BlackBerry 10.

As we've also announced in our press release a short time ago, our Chief Information Officer, Robin Bienfait has decided to retire from RIM after six years of outstanding service to the Company.

Robin has been an outstanding CIO and has build a world-class organization.

I am deeply grateful to Robin for her contributions and services to RIM over the last six years, and we wish her all the best for the future.

Now let me move onto our on to our three main initiatives, starting with BlackBerry 10.

This has been a very exciting past few months for us, as my senior team and I have been on an extensive global carrier roadshow, sharing BlackBerry 10 with our partners.

The reaction has been exceptional from carriers, as they understand the need for the smartphone industry to continue to deliver innovation to their global smartphone customers.

With BlackBerry 10, they see the potential to enrich the user experience using the navigation of BlackBerry Flow, the integration of the BlackBerry Hub, the speed and convenience of our repeat gesture, and the uniqueness of the touch BlackBerry keyboard, and the elegance and security of BlackBerry Balance for enterprise users, which separates all work content and apps securely from private personal content.

Plus many other features and more surprises that will be unveiled at launch.

In October, we delivered on another commitment, and achieved the start of our carrier lab entry timeline and announced that 50 carriers have begun their lab entry process with BlackBerry 10.

As of today, that number is now over 150, and we expect more will follow as we head towards our launch.

Also this week, carriers began announcing their plans to carry BlackBerry 10, and consumers around the globe will be able to buy the new BlackBerry 10 shortly after our launch event on January 30.

In addition to our carrier activities, our technical preview of BlackBerry Enterprise Service 10, that our program has commenced with more than 120 companies, including 64 Fortune 500 customers who are looking at bringing security, control and a great user experience to the BYOD environment.

In addition, we are also prepping the broader global enterprise environment for the launch of BlackBerry 10, through our BlackBerry 10 Ready Program launched earlier this month.

This program is designed to address the needs of BlackBerry Enterprise customers as they prepare their environment for the launch of BlackBerry 10 and BlackBerry Enterprise Service 10, our powerful new multi-platform enterprise mobility management solution.

On the developer front, the momentum of our BlackBerry Jam and developer program has been outstanding over the past few months and throughout this year.

Since starting our BlackBerry Jam developer sessions in May of this year, we have had 44 Jam sessions in 37 countries with more than 9,300 attendees.

We've been actively engaged with developers from around the world for many months, and as we near the final weeks towards the launch of BlackBerry 10, the growing dedication and commitment we see from our developer community is truly outstanding.

And we further enhanced our BlackBerry Jam for developers with our Enterprise Jam world tour this fall.

This tour covered 11 global cities with more than 1,000 enterprise app developers and partners registering, and it was very well received.

With the BlackBerry 10 platform, both enterprise and consumer developers are able to create visually beautiful and powerful applications, with features such as easy sharing and integration with social media, corporate security, and the ability to seamlessly flow between apps.

As we move towards the launch of BlackBerry 10, leading brands across the globe want the recognition and advantage of being first to market on our exciting new platform, as they see that BlackBerry 10 is designed to enable compelling customer experiences that can lead to high adoption rates and engagement.

January 30 will be an exciting day for Research In Motion and all of its customers, and our teams can't wait to share this experience with you.

So now, next, let me briefly touch on the progress of our core programs, where we are on track to realize in excess of our original $1 billion savings target in fiscal year 2013.

Our teams are executing very well, and meeting their commitments during a period that has involved hard work, long hours, and very difficult decisions associated with headcount reductions.

Working capital performance has been very strong, resulting in significant cash flow, and these resources will be reinvested in our BlackBerry 10 launch.

We are now nearing the end of our headcount reduction, and I appreciate the professionalism of those who have been affected by these very difficult decisions.

Importantly, this process has helped significantly change the culture at RIM in terms of driving efficiency and improving processes in everything we do as a Company, each and every day, in all organizations.

Our core financial objectives have been achieved one quarter ahead of our initial targets, and we have already delivered $1 billion in cost reductions this year, and we expect to pursue more opportunities in the coming quarters as we pursue new ways to accomplish things smarter and drive greater efficiency within the Company.

We believe that this ability to adapt, anticipate faster, and deliver better solutions in the things we do every day will serve us well, as we move into the next phase of mobile computing with BlackBerry 10.

The third major area I want to comment on is RIM's strategic review.

While we have been receiving great feedback from our partners on the capabilities of BlackBerry 10, we also continue to meet with potential partners interested in exploring how we may be able to leverage each other's strengths.

Businesses are not standing still when it comes to the opportunities in mobile computing.

They understand the pace of change, and are interested in technologies that delivers innovation, embraces openness, delivers security, and unleashes entirely new capabilities for the industry.

As you can appreciate, I won't provide details on any discussions at this time, nor will we comment on rumors or speculation, but we will share that information when appropriate.

Our view of strategic review as one of the three key components in creating new opportunities, focusing on areas where we will be more effective partnering rather than going it alone, and ultimately maximizing volume for our shareholders.

So before I turn the call over to Brian, let me provide a few comments on our outlook.

While our customers, partners, and employees are very excited about the BlackBerry 10 launch, I also want to be clear that the management team remains laser-focused on continuing to make the necessary changes to return the Company back to stable profitability.

We have made great progress in the past several months in demonstrating our financial strength, with cash growing to $2.9 billion, but we will continue to implement plans and make decisions and changes that allow us to demonstrate steady progress, as we work back towards profitability.

We are committed to an amazing launch for BlackBerry 10, and we, in conjunction with our carrier partners, will be showcasing the redesigned innovation of reengineered, reinvented BlackBerry to the world.

We have demonstrated how efficiently we have been able to convert working capital into cash, as we've become a leaner organization over the past few months, and we are now in a very strong position to reinvest into our launch and into our new platform, which I know Frank Boulben and his market team will do an amazing job with.

And we have also demonstrated our ability to work effectively in resolving the patent complexities that face our industry.

In the last couple of days, you have seen our participation in the consortium to acquire patents from Kodak, and going into the fourth quarter, we will begin to leverage those partnerships into our future portfolio, and it will also become part of our core activities.

Starting in the fourth quarter, we will begin seeing revenue from BlackBerry 10 devices.

With the introduction of the BlackBerry 10 mobile computing platform, we will be transforming our service revenue model to reflect different usage levels of our network infrastructure, and different value-added software security and service packages, so we plan to offer a range of security, mobile device, and application management services, in addition to communication services.

We will position BlackBerry Enterprise Service as the leading cross-platform enterprise mobile device management service, and continue to invest and grow its capabilities.

Subscribers that require enhanced services, including advanced security, mobile device management, and other services, are expected to continue to generate monthly service revenue.

Other subscribers, who do not utilize such services, are expected to generate less or no service revenue.

However, I want to be very clear on this.

Service revenues are not going away, but our business model and service offerings are going to evolve.

Our vision is to position BlackBerry as the clear leader in the enterprise mobility market.

So the mix and level of service fees revenue will change going forward, and will be under pressure over the next year during this transition, but we are targeting to grow service revenue in smartphones, tablets, and embedded applications, for new offerings with new partners, and across platforms other than BlackBerry 10.

We are making these changes to meet the competitive dynamics of the marketplace, but more importantly, to allow us to pursue the broader opportunities in mobile computing that BlackBerry 10 and our infrastructure enables us to do.

We feel our strategy will help broaden the BlackBerry ecosystem over time, and will allow application developers and other potential partners access to a broader subscriber market.

This is an exciting time for our Company.

Yes, it is challenging, too, and there are many things we continue to work on in execution, but we believe the Company has stabilized and will turn the corner in the next year.

BlackBerry is set to launch an exceptional mobile computing platform, and in the past year has rediscovered and nourished its technology and innovation groups.

We have focused on cultural change, and I'm excited for our teams and the progress we have made.

New leaders are emerging, and we've seen increased engagement and accountability and morale in the Company.

People are what ultimately drives turnaround, and I believe the commitment and talent of our people has allowed us to turn this corner.

I have seen the changes at this Company firsthand, and I'm very proud of the results so far.

All we have achieved has been the fruit of a tremendous effort by our very dedicated teams.

Our new platform is innovative, and allows us to pursue the next generation of opportunities in the mobile computing industry.

Our balance sheet is strong as we head into launch, including a cash position of $2.9 billion and no debt, and we will invest as necessary in both launching BlackBerry 10 are pursuing new opportunities.

We are revisiting how we do business, and exploring strategic opportunities to leverage our technology, and to partner with other innovative technology leaders.

We have added new people at all levels of the Company who are motivated and thrilled to be part of an amazing opportunity, to not only turn the Company around, but to participate in next-generation technology and growth curve.

We have an unbelievable fan base that is supportive and excited about being BlackBerry by choice.

We are realistic about our competitors and the great devices in our industry, but we know that customers in this industry demand and respond to innovation, and we believe BlackBerry 10 truly delivers on this request.

And we are investing in reinvigorating our enterprise heritage with BlackBerry Enterprise Service 10, where we plan to bring control to IT managers through strong, secure, multi-device management solutions.

There is a great opportunity in BYOD multi-device management, and BlackBerry expects to play an important role in this environment going forward.

Excitement for BlackBerry 10 is high throughout the entire organization.

Our employees are working incredibly hard and are extremely committed to our launch.

I describe the environment as one where our employees are wearing the badge of honor right now, and that despite the many critics who have forecasted our demise, we are strong, we are excited and we are in a position to demonstrate the next stage of mobile computing.

It is a great time to be with BlackBerry.

That concludes my remarks, and I want to sincerely thank all of our customers, corporate and consumer, our shareholders, and all supporters that have been committed to both the people and future of the organization.

I will now turn the call over to Brian, who will take you through the quarter in more detail.

Brian, over to you.

Thank you, Thorsten.

Before I discuss our GAAP and adjusted results this afternoon, I would like to note that the comments I make today related to our third-quarter results, and their comparisons to prior quarters, are primarily focused on continuing operations.

I will discuss discontinued operations shortly.

Please also note that a reconciliation of our adjusted results to our GAAP results was included in the press release today.

Revenue for the third quarter of fiscal 2013 was $2.7 billion, compared to $2.9 billion in the second quarter.

The decline was driven primarily by lower volumes of handsets, where we shipped 6.9 million smartphones compared to 7.4 million in the second quarter.

Sales outside the US, UK, and Canada grew 7% this quarter, and made up approximately 65% of total revenue, compared to 58% in Q2.

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

In the US, sales were 19% of consolidated revenue, compared to 22% in the second quarter.

Sales in Canada and the UK this quarter represented 5% and 11% of revenue, respectively, compared to 8% and 12%, respectively, last quarter.

Estimated sell-through in the quarter was approximately 8.4 million units, including phone-only sales and channel inventory declined slightly.

Shipments of PlayBook were approximately 255,000 units, compared to approximately 130,000 last quarter.

Strong promotional activity with our retail partners on our WiFi tablet continues through the holiday season, particularly in North America and the UK.

Our overall inventory position in PlayBook is significantly improved over the prior quarters, and we are continuing to sell our 4G PlayBook in North America and Europe, with a focus on enterprise users.

Looking at our revenue mix, hardware revenue was approximately $1.6 billion or 60% of revenue, similar to 60% in the second quarter.

Service revenue was $974 million, and represented approximately 36% of revenue.

On a dollar basis, this was down $19 million from Q2, reflecting the pricing pressures and fee reduction activities we have discussed throughout the year.

Subscribers were approximately 79 million compared to 80 million in the second quarter.

The declines in the US were the predominant factor for the reduction in the base, offset by more stable and slightly growing subscribers in non-US regions.

Software and other revenue represented 4% of consolidated revenue in the third quarter, compared to 5% in Q2.

As part of the core program, and our strategic review process, the Company has been reviewing all aspects of its operations, including the sale of certain assets.

In the second quarter, we classified some assets as held for sale, which will now be reflected in our statements as discontinued operations, until we dispose of them.

Assets held for sale include businesses, property plant and equipment, as well as certain intangible assets, which are expected to be sold within the next 12 months.

Revenue from discontinued operations in the third quarter was $11 million, and operating losses were $7 million.

This compared to revenue of $12 million and operating losses of $5 million from discontinued operations in Q2.

GAAP gross margin was approximately 30% in the quarter, compared to gross margin of approximately 26% in Q2.

Excluding pretax core restructuring charges of approximately $32 million, included in cost of sales, adjusted gross margin was approximately 32%.

This was driven by three key items.

A favorable mix in hardware sold, service revenue being a larger percentage of sales, and benefits associated with cost reductions generated by our core programs.

GAAP operating expenses were just under $1.1 billion, down slightly from Q2.

R&D spending increased by approximately $27 million, associated with our ongoing investment of BlackBerry 10 and related development activities, while SG&A decreased by $69 million from Q2.

Operating expenses included approximately $23 million of core-related charges in selling, marketing, and administration and research and development.

Operating expenses also included foreign exchange gains of approximately $11 million associated with the tax benefits.

Excluding core charges and foreign exchange gain, adjusted operating expenses were just over $1.05 billion, up slightly from the second quarter as a result of R&D investment on BlackBerry 10 development, as well as costs for retention programs.

Our GAAP operating loss in the third quarter was $212 million.

Excluding restructuring charges and other items, the adjusted operating loss for Q3 was $176 million, compared to an adjusted operating loss in the second quarter of $222 million.

The effective tax rate recovery on adjusted earnings was 35%, compared to 39% in Q2.

The higher effective tax rate recovery on GAAP earnings in the third quarter reflects the favorable impact from the tax benefit from RIM's international operations.

GAAP net income for the third quarter was $14 million, or $0.03 per share diluted, versus a GAAP net loss of $229 million or $0.44 per share in Q2.

Excluding the impacts of restructuring charges and the income tax benefit, we reported an adjusted net loss from continuing operations of $114 million or $0.22 per share, compared to an adjusted net loss of $136 million or $0.26 per share in the second quarter.

Now moving to our balance sheet and working capital performance, the Company continued to deliver strong results.

We generated approximately $950 million in cash flow from operations in the quarter driven by strong working capital management.

Inventory was $457 million, compared to $785 million in the second quarter.

The decline reflected reductions of smartphone inventory on hand, through improved supply chain efficiency and continued reduction of PlayBook inventory.

Since the fourth quarter of last year, inventory turns have improved 50% from their lows, and working capital has declined significantly.

This strong performance reflects the Company's ability to effectively convert working capital into cash, as it manages the transition to BlackBerry 10.

CapEx in the quarter was $85 million, unchanged from the second quarter.

Intangible asset purchases, which consist primarily of prepaid license agreements, were $233 million compared to $253 million in the second quarter.

Cash and investments in the third quarter increased by approximately $600 million from the second quarter to $2.94 billion.

The increase reflects strong cash from operations, including favorable working capital management as well as the tax benefit received in the quarter.

As the Company moves into the fourth quarter, we will redeploy cash into working capital and marketing activities for the BlackBerry 10 launch.

However, we anticipate that we will still end the fiscal year with a cash position substantially higher than the $2.1 billion, when we started the year, including the funding of all restructuring costs.

We have demonstrated our ability to maintain a strong financial position throughout our transition to BlackBerry 10, and we will continue to work towards a return to profitability.

Let me now provide some additional updates on our core initiatives.

As previously committed, the financial objectives for the core program were targeted to drive $1 billion in savings by the end of fiscal 2013, based on our Q4 2012 run rates.

We are pleased to announce that we have achieved approximately $1 billion in savings as of the end of Q3, one quarter ahead of target.

Benefits have been achieved in lower material costs, working capital improvements, greater efficiencies in manufacturing and supply chain costs, overall headcount reductions, and leveraging third-party providers to assist in reducing indirect spending.

This quarter, we spent $55 million in pretax restructuring costs associated with core, bringing the total cost to date to approximately $190 million.

In terms of headcount reductions, the total previously announced net workforce reduction, including exits, attrition, and net of new hires is approximately 75% complete.

We ended the quarter with a total workforce of approximately 13,400 full-time employees and we expect the majority of the remaining reductions to occur by the end of the fiscal year.

Based on the success of the program, we now expect the total cash cost of the core activities to be approximately $250 million by the end of fiscal 2013, compared to the initial estimated cost of $350 million, both estimates being before tax.

We expect to see incremental benefits from this program in the fourth quarter, but we will continue to aggressively target additional cost reduction activities throughout fiscal 2014.

Let me provide some color on near-term dynamics as we move into the next quarter.

As we get set to launch BlackBerry 10, we expect competitive market dynamics to continue into the fourth quarter, which will impact unit volumes, subscribers and service fees.

As we have been discussing throughout the year, we will continue to consider using pricing initiatives on BlackBerry 7 devices and service fees in some markets as a way to maintain our subscriber base and drive more BlackBerry users, which will continue to put increasing pressure on service fees in the coming year.

The timing of the BlackBerry 10 launch event for January 30, 2013 could also impact sales of current BlackBerry 7 products, as of some customers may wait for BlackBerry 10 devices.

In addition, we will be significantly increasing our marketing spending this quarter as expected, as we get set for the global launch of BlackBerry 10.

All these factors are likely to have an impact on revenue, unit volumes, gross margins, ARPU, and operating expenses, and we expect to report an operating loss in the fourth quarter.

For the next quarter, we expect our CapEx to continue to run below $100 million.

As I mentioned, we will start using cash in the fourth quarter for both working capital and marketing activities for BlackBerry 10.

However, we anticipate that we will still end the fiscal year with a cash position substantially higher than the $2.1 billion when we started the year, including the funding of all restructuring costs.

As demonstrated this quarter, maintaining the Company's financial strength continues to be a strategic imperative for the Company, through the transition to BlackBerry 10, and into fiscal 2014.

That concludes our call.

I will now ask the operator to start taking questions.

(Operator Instructions)

Your first question today comes from the line of Kevin Smithen of Macquarie.

Please go ahead.

Can you discuss pricing trends for the tiering of services going forward?

I think you mentioned there will be some premium service tiers and there will be some basic tiers, and how quickly would that impact service revenue over the coming quarters?

What we see, Kevin, in the market is that instead of one service fits all, that security, mobile device management, is basically segmenting across various sizes of enterprises and various businesses get regulated or not.

So there is not just one entity or question of what are the right pricing tiers.

It depends on the industry, it depends on the set of services that are being subscribed, but it is variable additional services.

It is a little bit of a menu thing that you can choose and pick, and that then will basically govern the pricing, but clearly the service offering in those enterprises are going to be segmented and specific to those segments.

Thanks.

How quickly will that impact your service revenue?

Will it have an adverse impact in the short-term, or is this more of the longer-term mix issue?

As we transition to BlackBerry 10 as a mobile computing platform, we do the same transition basically in our service environment, moving from BBOS services to BES 10 services.

So we're working on that transition, we're trying and working hard to make this as easy as possible, in terms of the financial impact.

As of right now, it is too early to say how that will evolve really in concrete numbers, but we are absolutely confident that we can manage that transition competently, and also achieve the objective that we want to achieve in BES 10.

Thanks, Kevin.

Next question?

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

Please go ahead.

The same question I'm afraid, I guess what I really want to understand is just in terms of the service fees that you will collect, you go to an enterprise or a customer, you give them BB 10's menu service.

At that point, they can start, just to be clear, they can start deciding which service menu offerings they want, and they can stop paying you altogether?

Or can you explain the dynamics, because that's going to really impact the rate at which your service revenues start declining over the next 12 months.

Again, it is a segment of service packages that we are going to offer, and we have to realize that some of the smaller enterprises, they are actually good enough with just some e-mail Exchange product or connectivity to their main server or their exchange server that they are running.

There is very little value-add in this.

And then as we invest into BES 10, we think about cross-platform mobile management, you think about security that you can offer, and you think about a platinum package that is basically the all-in package that I would describe today as being the full BlackBerry package as we know it today.

Right, all in.

So how that's going to be priced, what is the penetration rate into the market, that depends also on what is the BB10 penetration rate into those enterprises, so these things are dependent on each other, and we will provide more insight into this once we have a clear view on those launch numbers and those launch plans.

Great.

Thanks, Kulbinder.

Next question, Luke?

Your next question comes from the line of Jim Suva of Citi.

Please go ahead.

Can you comment on, we talked about going into mobile device management.

There's a lot of companies in there.

A lot of them are very ingrained, very big, rooted in it, and already have had a lot of traction and history.

How you will you be able to do that?

What type of services, and how will you basically unseat those people that are in MDM, when they are already embracing MDM rolling out with Android, iPhone, BlackBerry, lots of MDM management today?

Thanks.

The very first step here is, Jim, that we have a pretty large installed base out there, right?

Of customers that use BlackBerries and that manage BlackBerries overall.

So that is the first starting point.

Then second there is the BYOD trend out there, but I think that it is fair to say that BlackBerry, the BlackBerry mobile device management is a leading-edge solution, that we will even enhance further with BES 10.

On top of that, we will provide additional services that go beyond just the pure mobile device management, and I think that is an area of innovation.

You're right, it is an area of competition, you're also right with that, but I feel that the Company is very well-positioned based on its installed base, based on BB10 platform and BES 10 capabilities to compete successfully in that domain.

Thanks, Jim.

Next question, Luke?

Your next question comes from the line of Todd Coupland of CIBC.

Please go ahead.

Two quick questions, firstly, some carriers are already opening up for pre-orders of BB10, would you expect to make public comment on that firstly, and secondly, when will the QWERTY BB10 device be available?

Thank you.

So, it is with the carriers that they basically decide along their marketing and promotional windows when they are really going to launch.

What I can see is, we see them placing orders with us way ahead of time, and that is a very good thing for us.

As I said in my earnings call, there is quite an excitement around BlackBerry 10 out there, and I wouldn't go so far as to say there is a rush to be the first, but there is certainly quite a dynamic now that we -- the partners that we have want to be really fast and early to market.

So from their perspective, we will announce those dates collectively with our carriers on January 30, but I think there is a very good dynamic at play here, and I'm looking forward to fulfill those requirements and requests and purchase orders from our customers.

Thanks, Todd.

Next question, Luke?

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

Please go ahead.

I wanted to understand the OpEx gyrations for the fourth fiscal quarter.

R&D, I think was at probably the second-highest level we seen in the last 12 quarters.

Just wanted to understand, you expect R&D to sustain at these high 300s level, and with respect to sales and marketing, should we look at your prior history, the incremental spend 3Q to 4Q, and assume it will be something similar?

In terms of the R&D, it is dependent upon some of the timing of the BlackBerry 10 initiatives that we are undertaking, but I think what we are certainly trying to do is maintain some efficiencies within R&D group, and that is part of our ongoing core program.

I did mention that part of the increase quarter-on-quarter was really some of the retention packages and just incentive plans that we've got in place, and that was impacting the Q3 numbers as well.

And then in terms of the sales and marketing, we are certainly looking to, as Frank is rolling out his marketing program, that number is going to increase quarter-on-quarter and into Q1 as well.

So, in terms of just benchmarking it to prior, I don't necessarily think that to a prior quarter can really be articulated right now.

I think it is just, we are going to continue to look at efficient ways to spend marketing dollars.

Frank's team is obviously on that, and we're also looking at it on a country-by-country basis in the timing of the rollouts.

Thanks, Amitabh.

Next question?

Your next question will come from the line of Simona Jankowski of Goldman Sachs.

Please go ahead.

It is a two-part question, just the first part is back on the services side, so you commented on the enterprise piece of that, but is it fair to assume that by and large on the consumer side, is where you no longer would expect to get meaningful services revenues going forward, whereas on the enterprise side, you have more of this tiering approach?

And then the second question was, as you look at the timing of when either consumers or enterprises will move to BB10, is it fair to assume that most of the enterprise upgrade opportunity is in the second half of the calendar year, given that it sounds like the full functionality of BES 10 does not become available until May?

Those transitions, Simona, don't happen overnight, right, specifically in enterprise, there are budget cycles, there are planning cycles, and we know from our experience in corporations that actually product lifetimes is longer than in the consumer domain.

So, I think the timeline is very well aligned to what our customers can do and want to, and as I said we have those better tests going on in another 20 of our enterprise installations, which is actually quite exciting, and allows us to really prove the process of introducing BB10, BES 10, and the additional new services into the enterprise market.

So from that perspective, I feel that the process of introducing this and getting this into the market is actually pretty well aligned from a timing perspective.

Now on the consumer services, there is, we discussed that in a prior earnings call, there is a strong trend that is bring your own device to work trend, so you have to be attractive to consumers first with a device which BB10 will absolutely cover, and then when these devices get connected to whatever corporate infrastructure and the selection of services that then is being done by the Corporation, then that creates additional service revenue for us.

It's an additional channel, it's an additional go-to-market that we are going to go after.

And then, as you can imagine, we have a very strong installed BBM base out there, BBM is a fantastic social network that is really distinct from other messaging applications, because of its intermediacies, because of its richness of services, and we are going to evolve that.

So the point is, that what we are working on is, how do we evolve BBM services to a stage where we can actually also create additional service revenues out of BBM.

Thanks Simona.

Next question, Luke?

Your next question will come from the line of Ehud Gelblum of Morgan Stanley.

Please go ahead.

I'm just trying to clarify a bunch of things around the structure of the service contracts and your service ARPUs.

Just to rattle off a couple of points, just to make sure we understand, the current service fees that you collect on BB7 and below, are those contract and are they long-term contracts?

And when you're talking about moving to a new fee structure, does that impact any current BB7 subscribers, or as long as they stay with their current BlackBerry, nothing changes for them?

And if they upgrade, or someone comes into a BlackBerry 7 device, putting aside BlackBerry 10, does the new fee structure impact them, are they still under the old -- the current structure right now of $4, $5, $6, $7?

And the other thing is that, for people that are under the new fee structure and hopefully can answer the first question will know if it's only BB10 device holders going forward, or if it is existing BB7 or future BB7, but for anyone under the new subscription service, are we to understand that all services fees, whenever they may be are going to be paid by the user and no longer paid by the carrier?

As in the user will pay a fee, it will flow through the carrier to you, but the carrier will no longer pay anything out of its own pocket?

Thank you.

Yes, that is a lot of questions in there.

So, generally, right now the Company is starting to roll out its plans on the service plans.

As we get into launching services, we will provide more details around some of the activities that we will be offering to the enterprises.

We just aren't providing the detail on it at this time, Ehud, you'll have to wait until we start to launch some of these services to get more detail.

Next question, please?

Your next question will come from the line of Rod Hall of JPMorgan.

Please go ahead.

I just want to ask you, you've been reducing channel inventory over the last few quarters, which is commendable, and I just wondering what you're thinking about channel inventory as you head into BlackBerry 10?

Are you happy with current levels of channel inventory, or do you think channel inventory needs to go quite a bit, because it sounds like you've got quite a bit of demand, and you need to have availability?

And I wanted, Brian if you could, to just clarify his commentary in the gross margin, you mentioned three drivers.

Brian, can you rank order those at all, were cost reductions the number one driver?

If you can put those in rank order, that would be helpful.

Thanks.

To the channel inventory question, I think at the moment, we're doing a really good job at managing our channel inventory on the BlackBerry 7 devices, which I think is really important in the transition phase.

We are very comfortable where we are today in inventory at hand.

Also, what Brian was alluding to on the call, we have changed our manufacturing and our delivery logistics process quite substantially, so we are able to react way quicker and faster than we were in the past, so we are in a pretty good position to fulfill demand on BlackBerry 7. Naturally, y as we are heading into the launch and into building BB10 devices you will see an increase in inventory, first in our factories and our warehouses, and then loading the channels on BB10.

That is expected, and that is part of our reinvestment of cash into inventory.

Brian, I'll let you comment on the point of the gross margin.

Sure, Rod.

I don't have the details on how to rank order those, but I would say two of them are mix-related in favorable mix and hardware, but also our service revenue, but I would stress the benefits that we've achieved through the core program in helping drive that favorable gross margin.

Thanks, Rod.

Next question, Luke?

Your next question will come from the line of Ben Bollin of Cleveland Research.

Please go ahead.

Two-part question.

When you look at CapEx can you talk about how you're thinking about that into fiscal 2014 and how it might change as you start to support this new menu-driven service approach?

And then the second part, does the implied margin of the service revenue look different with BB10 than it does with the current service revenue?

Thanks.

In terms of the CapEx question, I think we are certainly, and we are working this through our core program as well, and looking at prioritizing different programs, so we are obviously doing it with the eye how we get our overall cost structure competitive.

And so, as we roll out into fiscal 2014 we will continue on that track.

You can see in our last few quarters, the amount of our CapEx has come down to around the $87 million, $85 million mark.

And we are going to continue to drive efficiencies on how we are spending CapEx and making sure that we're doing it on a thoughtful program-by-program basis.

And I would say that if we are looking at expanding in any particular markets, we may see some need to do some type of investing as well, and we will look at that on a pragmatic basis.

Thanks, Ben.

Next question, Luke?

Your next question comes from the line of Mark Sue of RBC.

Please go ahead.

Maybe additional thoughts on the early feedback on BlackBerry 10.

You spoke about the positive order trends.

Is that concentrated in North America or is that more broad-based?

And also some thoughts on just the marketing dollars.

We understand that you have to spend quite a bit to drive the success of the product.

Wondering if the carriers are also committing meaningful advertising dollars for the launch?

So, on the early feedback, I referenced to the global roadshow that we were doing, Mark, and we basically hit all continents, I think we hit something like 120 carriers.

We also met with CIO and CEO teams.

No, it is absolutely global feedback, because BlackBerry today is a globally used device and service.

So, we were actually really getting into the aspects of that wherever we went, in all those various region that sometimes have different drivers to being attracted to BlackBerry, that all of them were very positive.

And what really struck me as being really the excitement was, it was not around that much specifications, although BlackBerry 10 has great hardware specs, it was really around the next-generation user interface, the innovation around Peak, Hub, and Flow that just caught their attention, right?

And we will talk about this on January 30, and you will see that it is just -- that was really the core, that is at the core, besides the new architecture for mobile computing as the feedback of the carriers.

Absolutely global, good feedback.

Marketing base, yes, absolutely, as Brian said, we are ready to invest in some very exciting marketing activities that you will see coming.

We have on the front leadership, I think we have developed, and you can see this already happening today.

We have developed a pretty subtle way of getting into the marketing domain, and absolutely in part of talking to our carrier partners, they want to launch this product as one of their forefront products.

So, yes, they are absolutely ready, and they are committed to spending marketing dollars on BB10, as well.

Thanks, Mark.

Next question, Luke?

Your next question will come from the line of Tal Liani at Bank of America.

Please go ahead.

My question is about the migration to BB10.

For an average corporate user, what do they have to do in order to migrate to BB10?

Do they have -- is there a new server that needs to be installed, and do they need to go through new specification processes, given that the system is so different?

What can be done on your side to shorten the migration to BB10?

Thanks.

There is, as you can imagine, when we do those tests with those 120 corporate customers, there is a BES 10 Ready program where we lead them through the process, together with them, training, education, actually really installing this how to we move to BES 10, and BES 10 will be a fully integrated capability to manage BlackBerries, but also manage other manufacturing brands' devices.

And this is a detailed process we are going through with our customers, and it has been way too much in detail to explain to you in the earnings call, but I have to share that and get you in touch with our experts on the BES 10 side if you want more detailed information.

Tal, it's Paul.

There are programs that we have announced and stuff that is on the web talking about some of the certification, and some of the stuff that is going on now, but more detail will follow as well.

It is a very well programmed, managed, and executed process, Paul.

Thanks.

Next question, Luke?

Your next question will come from the line of Jeff Kvaal with Barclays.

Please go ahead.

I was wondering if we could focus in specifically on the non-enterprise service fees and the fee structure there.

It has been many years, but in the past, you talked about $3 a month in that particular segment.

And this is, I think, emerging market consumer segment.

Could you talk about not obviously, not an absolute sense, but in general sense, what the trends are there?

Are the same pressures that are hitting the enterprise portion of that service fee also applicable to the consumer side as well?

And then on top of that, I think Thorsten, you might that you might expect service revenues to grow next year, I just wanted to clarify that.

Hello, Jeff, it is Brian.

So just on the service revenue as it relates to the consumer side, I don't think I mentioned in my comments, our ARPU was down slightly quarter-on-quarter, and that reflects some of the initiatives that we're doing with some of the carriers on, like we said, on how we are trying to use pricing initiatives in certain instances, in order to drive and maintain our subscriber base.

So, as it relates to our current view, we've seen the ARPU coming down slightly quarter-on- quarter.

Yes, and your discussion about the question about are our services revenue going to grow next year?

As Brian just said, we will see pressure on pricing for BBOS-based services in order to make sure we stay relevant in our markets and we manage through the transition phase.

So that was not my statement, just to really clarify this.

What I was talking about is we are in a transition, we have to manage that transition not just from BB10, from BBOS to BB10, we have to manage the same transition in our service business, and that is what we are doing.

Thanks, Jeff.

Next question, Luke?

Your next question will come from the line of Richard Kramer of Arete.

Please go ahead.

Thorsten, I'd like to ask a little bit more about your software strategy.

When Nokia announced that they were going to end-of-life Symbian, the platform and sales fell off very quickly, and given the need to support both BB7 and BB10, can you talk about what steps you might take to support and to avoid that problem?

And equally, if you are considering licensing BB10, have you set up a group within your organization to support licensees, which obviously would need a lot of hand-holding and a new platform to get anything, any products to market?

Thanks.

Hello Rich so just to be very clear, we will not stop BB7 from being supported.

We have a significant R&D team working and continuing to work on BB7, and you just saw us innovating on BB7 as well when we announced the BBM voice capability.

So we will maintain BB7.

There is a strong success with BB7 devices in the Asia-Pac markets and as you can see, on the devices that we're launching with BB10, you can probably get an idea from what price point they fit.

So, no, we will support those onboarding entry-level smartphone markets.

We will continue to support them with BlackBerry 7, and you might expect us to even build the one of the other new products, based on BlackBerry 7, because for those messaging-oriented markets, it is an exciting platform and it is a really perfect platform.

Licensing BB10, I think what is important here is that we prove and we are ready to do this, we have the capability of BlackBerry 10, once we launch it on January 30, and then to your question do we have the tools, the people, the processes?

You're absolutely right that requires a certain business set up.

However we have, as you know, QNX as the Company that runs our OS business, and they are already in it.

The QNX business model is exactly licensing, BBOS, licensing the toolkits into embedded systems.

So, yes, the Company has knowledge about how to do this.

Would we have to expand this and grow this and build on this?

Yes, certainly.

Thanks, Richard.

That concludes the call for tonight.

I hope everyone has a happy holiday season, and all the best in 2013 as well.

Thank you.

And thank you.

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

We do thank you for your participation, and you may now disconnect your lines.