BlackBerry Ltd (BB) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the BlackBerry fourth-quarter and year-end fiscal 2013 results conference call.

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

Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.

(Operator Instructions)

I would like to remind everyone, this conference call is being recorded today, Thursday, March 28, 2013 at 8.00 AM Eastern Time, and I would now like to turn the conference over to Mr. Paul Carpino, VP Investor Relations.

Please go ahead, sir.

Thank you, Luke.

Good morning, and welcome to BlackBerry's fiscal 2013 fourth quarter 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 fourth quarter results.

We will then open the call up to questions.

This call is available to the general public via call in numbers and via Webcast on the Investor Relations section of BlackBerry.com.

The Webcast can be accessed through your BlackBerry 10 Smartphone, your personal computer, or your BlackBerry PlayBook tablet.

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

We plan to wrap up the call around 9.00 AM Eastern this morning.

In order to let as many people as possible ask questions, please limit yourself to one question.

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, objectives and expectations, and the anticipated opportunities and challenges in fiscal 2014, our plans and expectations regarding the BlackBerry 10 platform and its impact on our business, our vision regarding the new world of mobile computing, our plans and expectations regarding BlackBerry World, our ability to leverage the changes made over the past year and to realize the benefits of our exciting new platform and more efficient business model, our product development and marketing initiatives and timing, our plans regarding new service offerings and assumptions regarding our new service revenue model, our anticipated financial results for Q1, working capital management and our anticipated cash position, 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 the anticipated decline in our service fees and our ability to generate service revenue through new offerings, risks related to intense competition, our reliance on carrier partners and distributors, risks relating to network disruptions and other business interruptions, our ability to realize the benefits of our core program and similar strategies, our ability to maintain or increase our cash balance, security risk, our ability to retain and attract key personnel, intellectual property risk, 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 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, and good morning, everybody.

Before I start the call, I just wanted to make a few comments on the announcement you saw this morning that Mike Lazaridis has decided to retire as Vice Chair and Director of BlackBerry.

Mike co-founded BlackBerry nearly 30 years ago, and served as the co-CEO of the Company until last year, when he was elected Vice Chair of the Board.

He revolutionized the mobile communications industry when he invented the BlackBerry, and he's widely recognized as one of Canada's greatest innovators.

Mike has played a pivotal role for the past 15 months in helping with the leadership transition and the successful launch of BlackBerry 10.

I deeply respect and appreciate Mike's desire to devote his full-time efforts to his newly-launched venture, Quantum Valley Investments.

And on a personal level I'm grateful to Mike for his help, guidance and advice during my first 15 months as CEO of BlackBerry, and I wish him all the best.

From everyone at BlackBerry, thank you, Mike for your commitment and passion to the community and to the Company.

Having said this, now let's go back to our results.

BlackBerry has gone through a major and exciting transformation this year, and it has been exciting.

It was a year for change, and we delivered significant positive change.

So let me recap what we have accomplished in the first stage of our transition, which has enabled us to return to an operating profit this quarter, and given us great momentum as we go into fiscal 2014.

Starting from the top, we implemented significant changes at the Board level, adding three outside Board members with extensive mobile communications industry and international business experience, and we also made multiple senior management changes.

In addition to my appointment as the Company's new CEO, we hired a new Chief Marketing Officer, a new Chief Operating Officer, and a new Chief Legal Officer, all with extensive experience in the mobile communications industry.

And the senior management additions have continued, and I'm pleased to announce the new addition of [Nigel Perks] as our Executive Vice President to lead the global Human Resources organization at BlackBerry.

Nigel brings over 20 years of extensive international experience within the global technology field, and joins us from his most recent role with BT Global Services in London, where he was the Chief HR Officer since 2008.

Welcome, Nigel.

The new executive team responded quickly to driving improvement, and implemented personnel changes throughout the global organization, and reduced layers of management and removed complexity that existed within the Company.

New and energized talent has joined the Company in areas that were underperforming and we have also promoted from within to give high-potential employees a chance to demonstrate their leadership.

Promoting our high performance culture across the entire organization has been a priority of mine over the past year.

We know who BlackBerry is, and we will continue to invest in activities that reinvigorate the culture of our Company.

And I'm very proud of our team and the tremendous effort they have all put into strengthening the BlackBerry platform.

Even during the toughest of times, BlackBerry employees have proven they are engaged, productive, inspired, and creative.

It has not been easy, but the BlackBerry team is delivering.

We also have implemented major changes throughout the organization and significantly reduced our cost base with our $1 billion core program.

We launched that program last year, and we achieved our cost target one quarter ahead of schedule.

So not only are we seeing benefits in our financial results from this cost reduction program, but we're seeing a new attitude and the cultural shift in the Company, where we continue to look at how to innovate faster, and how to do things more efficiently.

Contributing to this transformation is the collaboration between our teams and our strong supplier base, which has delivered a rearchitected supply chain.

To date, we have moved from four EMS providers to two, reduced our manufacturing sites from 10 to 4, and we have outsourced our global repair operations.

As a result of these changes, our costs are lower, our working capital performance is strong, we are recognizing better production yields, and we have a more robust model that is resulting in a more efficient way of building our exciting products.

While we have reduced cost and driven efficiency, we have also invested in a significant transformation of application ecosystem.

What a year this team has had, as they have rebuilt all aspects of the app development program, and they delivered on results.

At launch of BlackBerry 10, we had the most apps available of any mobile ecosystem at platform launch.

We started with 70,000 global BlackBerry 10 applications, and last week, we announced we have reached 100,000 already, a 43% increase in the past 60 days.

And 70% of apps in BlackBerry World are native to BlackBerry 10.

Early indicators are that BlackBerry 10 users are hungry for applications, and we're getting more commitments from global app developers daily as our launch continues its rollout.

Initial data shows strong download demand in BlackBerry World and revenues for BlackBerry 10 users that are similar to other leading smartphone platforms.

Over the past year, we have also regained the confidence and excitement of our carrier distribution partners, with the introduction of the amazing BlackBerry 10 platform for consumers and enterprises.

The BlackBerry 10 platform has been worth the wait.

Our two new devices, the Z10 and Q10, and our BES 10 enterprise management service have been designed to give enterprises and consumers more features, more flexibility, and the ability to do things smarter and faster.

The excitement for BlackBerry 10 goes beyond our current local customers.

Recent data shows that 55% of the Z10 customers globally are coming from platforms other than BlackBerry, more than half.

With BES 10, customers will experience the BlackBerry 10 platform with continued confidence and the comfort of the unmatched BlackBerry security.

We've also loaded BES 10 with new capabilities and a more comprehensive set of features, including security for iOS and Android devices through our Secure Work Space product.

BlackBerry is the most widely deployed mobility solution in enterprises and government today.

As acknowledged, with more than 31 petabytes of traffic passing through the BlackBerry trusted environment every month.

Over the past few weeks, we have been on the road visiting customers through the BlackBerry Experience Forum road show for enterprise customers.

We wanted to showcase the BlackBerry 10 platform, and what a response we got.

Approximately 8,400 professionals have attended a BlackBerry Experience Forum event in 17 cities, with more to come.

4,600 companies in North America have registered for the BlackBerry 10 Ready Program, and 2,300 companies have completed all three training programs for the BlackBerry 10 Ready program.

Our present customers, such as SAP, Cisco, HP, IBM, CDW, [Dox] and Citrix joined us during this tour, and exhibited the integration of BlackBerry 10.

This has really been very exciting stuff for us and our customers.

Finally, our financial transformation over the past 12 months has been outstanding.

To say it was a very challenging environment to deliver improved financial results could well be the understatement of the year.

In the face of numerous challenges this past year, BlackBerry has gone from a significant operating loss in the first quarter of the year to an operating profit in the fourth quarter.

To recap, we started the year with a GAAP loss of $518 million and an adjusted operating loss of $192 million, and here we are, three quarters later, after implementing all these numerous changes and benefiting from a reenergized organization, we returned BlackBerry to an operating profit despite a 23% decline in units shipped versus the first quarter.

That said, in terms of financial strength, we are very well positioned.

From a cash perspective, we started the year at $2.1 billion, and today we have cash of $2.9 billion.

This was accomplished, actually despite incurring the restructuring charges of $220 million, as well as other funding commitments.

We've made great progress and we're proud of it, but we're also well grounded.

Everyone at BlackBerry understands there's more work to do, and delivering BlackBerry 10 and getting back to a profitable quarter is just our starting line, not the finish line.

This year, consequently, we'll embark on the second stage of our transition, and we'll be focused on leveraging all the changes made last year.

We are running a business, which means we will continue to manage the short-term effectively while at the same time, not compromising on longer term strategies.

We intend to demonstrate this year that we have transformed the Company with an exciting new platform and a more efficient business model, great progress, but still more to do.

Before I turn it over to Brian, let me provide some thoughts on our outlook, so let me start with BlackBerry 10.

With only a few weeks availability and in only a couple countries, BlackBerry 10 made a strong entry into the high end of these markets, with approximately one million BlackBerry 10 units.

Today, our launch is even accelerating.

223 carrier technical acceptances have already been completed, and over 60 carriers are now launched across 40 countries, and there's still more than 30 countries to come.

And for Q10, our first lab entry was achieved in late February, and Q10 is now testing with over 40 carriers in 20 countries.

As mentioned at our launch in January, the availability of Q10 will commence in April.

The initial early global demand for BES 10 has been better than anticipated, and our recent announcement of the largest single purchase order in our history for one million units is also indicative of a strong initial support in demand.

As a result of this better-than-expected demand, production was increased in the latter part of the fourth quarter.

We've just started selling in the US, and the launch is meeting our early expectations.

Interest from corporate customers and our defense solution is also high.

While getting the store line-ups has become a bit of a spectator sport in our industry, I would like to emphasize that BlackBerry 10 has a phased rollout, and we'll continue over the next several quarters with various devices and all the major carriers.

Lower-cost versions of BlackBerry 10 for other global markets will also be launched later this year.

Now moving on to service fees, our existing service fees are in an area of gradual transition, as highlighted over the past year.

This is an evolutionary process, and we are managing this transition with our partners very effectively.

We anticipate the single-digit percentage decline in service fees in the first quarter, but are offsetting some of the impacts through the progress we made with our cost efficiency and effectiveness program.

While service fees are in this transition, I want to clear that our existing base of business, as well as any new BlackBerry 7 business continues to generate service fees, and we're still selling BlackBerry 7 in many markets, and plan to launch new BlackBerry 7 product in certain market segments outside of the United States, and those sales will also generate service revenues.

As the business migrates to BlackBerry 10, we intend to enhance our business offering with new value-creating services to continue to generate service revenues.

And the areas we plan to leverage with new service offerings include new services for our strong BlackBerry Messenger base, possible licensing of BlackBerry 10, the creation of cross-platform offerings, services that leverage BlackBerry's highly engaged and sophisticated social media community, advanced security tools, and additional enterprise services.

The composition of our services revenue model is evolving, and you will hear more about these services as they are introduced, but make no mistake about it.

We plan to stay in the services business, and we're actively building and implementing strategies to support these initiatives in the future.

On the cost side, we anticipate additional benefits to come from our more-efficient cost base as volumes of BlackBerry 10 increase.

We reported a 40% gross margin this quarter, reflecting higher average selling prices and hardware margins.

We also benefited from the core program and related initiatives, implemented over the past year.

I am really proud of what our teams have delivered here, and we are committed to implementing additional initiatives this year, to leverage an even more efficient business model as volumes increase.

About 10 months ago, we started a strategic review to run in parallel with the launch of BlackBerry 10 and our core restructuring.

While the core program was focused on improving our cost structure, working capital performance, and liquidity, we felt it was appropriate to assess all options in terms of what our business model could look like with BlackBerry 10.

We have significantly transformed the Company over this period, and today, we have an exciting new mobile computing platform.

We are profitable, and we have a healthy balance sheet.

We are looking to leverage the early success of BlackBerry 10 and our strategic review initiatives will be intensifying the focus on opportunities in mobile computing verticals such as automotive, industrial, networking, healthcare, security and defense, leveraging our secure network infrastructures for uses beyond those currently deployed by BlackBerry, and potential licensing opportunities.

So while we continue to work with our advisors on these initiatives, we have also implemented a thorough planning process that is being rolled out to our employees, detailing our longer-term strategy and strategic objectives in all of these areas.

The world of mobile computing is expanding rapidly, and it's just starting to be defined.

This is not a one- or two-quarter opportunity.

It is an opportunity for the next 5 or 10 years, and our vision is to expand from being a smartphone company to being a leader in the new world of mobile computing.

Smartphones will play a vital role in our plans, but our vision also includes expanding into other areas, including vertical markets that can leverage the BlackBerry 10 platform.

This is a very exciting time to be a part of BlackBerry, and I want to thank our employees for the amazing job they have done, and the transition accomplished today.

And I would also like to thank our loyal customers, partners and developers, and the passionate supporters in the communities where we operate.

You have also been huge contributors to our turnaround.

We sincerely thank you for your support during this period, and I can assure you it helped, and we appreciate it.

I will now turn the call over to Brian to provide more detail on the quarter.

Thank you, Thorsten.

Before I discuss our GAAP and adjusted results, please note my comments relating to our fourth-quarter results and their comparison to prior quarters are primarily focused on continuing operations.

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

Revenue for the fourth quarter of fiscal 2013 was $2.7 billion, virtually unchanged from the third quarter.

We shipped 6 million smartphones in the fourth quarter compared to 6.9 million Smartphones in the third quarter.

Higher ASPs helped maintain relatively flat revenue, despite the decline in units.

Starting this quarter, we will be presenting our geographic revenue break down in four categories.

North America, which is US and Canada only, Latin America or LatAm, Europe, Middle East, Africa or EMEA, and Asia Pacific or APAC.

An annual and quarterly revenue split on this segmentation is also available in today's press release.

EMEA grew this quarter and was 46% of revenue, compared to 43% in the third quarter.

The UK grew 13% from the third quarter, and represented 13% of sales.

Revenue in the EMEA region included sales of BlackBerry 10 devices in the UK and UAE, late in the quarter.

North America was 22% of revenue, compared to 24% in the third quarter.

US market declined and represented 14% of sales, while Canada benefited from the launch of BlackBerry 10, and grew 62% sequentially, and represented 8% of sales.

LatAm was 18% of revenue compared to 20% in the third quarter, and finally APAC represented 14% of revenue, unchanged from the third quarter.

Estimated sell-through in the quarter was approximately 7.9 million units, including phone-only sales and channel inventory declines.

Looking at our revenue mix, hardware revenue was approximately $1.6 billion or 61% of revenue, compared to 60% in the third quarter.

Service revenue was approximately $950 million, or 36% of revenue, and was down $27 million or 3% from the third quarter.

This decline reflects some of the changes in pricing pressure we had discussed in the past, as well as the decline in subscribers this quarter.

Subscribers were approximately 76 million, compared to 79 million in the third quarter.

The decline reflects decreases in the North American region and EMEA regions, offset by increases in APAC and LatAm.

GAAP gross margin and adjusted gross margin were both 40% in the quarter.

This compared to GAAP gross margin of approximately 30% in Q3 and an adjusted gross margin of 32% in Q3.

The improvement in gross margins was driven by higher average selling prices in hardware margins, and cost reductions generated by our core programs, including favorable renegotiations of key contracts associated with elements of our hardware business, benefits from a leaner and rearchitected supply chain, and shipments of new devices with improved margins and higher ASPs compared to Q3.

GAAP operating expenses were just under $1.1 billion, unchanged from Q3.

Selling, marketing and administration expenses increased by $25 million, primarily attributable to the launch of BlackBerry 10 devices.

R&D spending was $383 million, down 3% from the third quarter.

Operating expenses included approximately $33 million of core-related charges in SG&A and R&D.

Excluding core-related charges, adjusted operating expenses were approximately $1 billion, relatively unchanged from the third quarter.

Increases in marketing investments around BlackBerry 10 were offset by core OpEx reductions.

The GAAP operating loss in the fourth quarter was $18 million, compared to an operating loss of $212 million in the third quarter.

Excluding restructuring charges and other items, we achieved an adjusted pre-tax operating profit in the fourth quarter of $11 million, compared to an adjusted operating loss of $176 million in Q3.

The tax recovery on adjusted earnings was $103 million, which primarily reflects the favorable impact of tax loss carrybacks, as well as R&D tax benefits.

The effective tax rate in Q3 was 35%, resulting in a tax recovery on adjusted earnings of $62 million.

GAAP net income for the fourth quarter was $94 million or $0.18 per diluted share, compared to GAAP net income of $14 million or $0.03 per diluted share in Q3.

Excluding the impacts of restructuring charges net of tax, we reported adjusted net income of $114 million, or $0.22 per diluted share.

Now moving to our balance sheet and working capital performance, the Company delivered another strong quarter.

Despite ramping production of the BlackBerry 10, we generated approximately $219 million in cash flow from operations.

This was achieved by strong working capital management and better operating performance in the quarter.

Inventory was $603 million, compared to $457 million in the third quarter.

The growth reflects the additional materials for the continuing rollout of BlackBerry 10.

CapEx in the quarter was $88 million, unchanged from the third quarter, and approximately $400 million for the full year.

Specific core prioritization actions to drive more efficient investment are reflected in these results.

Intangible asset purchases, which consist primarily of prepaid license agreements, were $235 million compared to $233 million in the third quarter.

Cash and investments in the fourth quarter remain strong at $2.87 billion, compared with $2.94 billion in the third quarter.

The strong cash position was driven by four key factors-- efficient management of accounts receivable and inventory during the ramp of BlackBerry 10 production; continued discipline with CapEx spending; reduced spending associated with core activities; and a return to an operating profit.

A strong balance sheet was also maintained despite the funding of $45 million in restructuring, negotiated royalty settlement payments and $146 million increase in inventory.

Over the past year, our focus has been on strengthening our balance sheet.

With our success in this initiative, we are well positioned to aggressively invest in the growth opportunities of BlackBerry 10.

We will deploy cash for working capital, CapEx and marketing activities in the first quarter for the BlackBerry 10 global launch, and we anticipate a continued strong cash position.

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

As we mentioned last quarter, we achieved our $1 billion in savings, a full quarter ahead of our initial schedule and the benefits from these initiatives are positively impacting our financial results.

Benefits from core are being realized in reduced component costs, improved working capital management, greater efficiencies in manufacturing and supply chain costs, workforce optimization, and leveraging third-party providers to assist in reducing indirect spending.

Core has helped us transition the Company through a very competitive and dynamic environment, and build a leaner and more efficient business model.

We will continue to pursue efficiency strategies throughout the coming year, and anticipate being able to leverage the lower cost base as unit volumes increase.

This quarter, we incurred $29 million in pre-tax restructuring costs, associated with core, bringing the total cost to date to approximately $220 million.

We ended the quarter with total workforce of approximately 12,700 full-time employees.

In terms of our outlook, the Company will be increasing its marketing investment in the global launch of BlackBerry 10 during the first quarter by approximately 50%.

Including this increased spending, the Company believes it will still approach breakeven financial results in the first quarter based on its lower cost base, more efficient supply chain, and improved hardware margins.

We also anticipate continuing to maintain a strong cash position.

While we are still completing our transition to BlackBerry 10, we have significantly improved the Company's financial position, lowered our cost base, and established a more robust supply chain.

That concludes my comments and we'll now take your questions.

(Operator Instructions)

Your first question today will come from the line of Peter Misek of Jefferies.

Please go ahead.

Just a couple of quick questions here.

Firstly on more of a housekeeping item, to understand cash flow movements.

So just again, you sold through almost two million more units than you shipped, which implies channel inventory obviously was down almost two million, and you're talking about basically operating cash flow breakeven in next quarter, which also implies no channel inventory, meaning, or said another way, you're selling through absolutely every item you're building.

Can you confirm that logic makes sense, and doesn't that mean that you're being a little conservative on the cash flow side?

And then secondly just on your marketing going up 50%, marketing's part of SG&A.

Can you help us understand, if we look at the SG&A item, how much that is going up?

Then lastly on services revenue, you guys lost around three million subs.

You've articulated how that was broken by geography.

I'd be more interested to understand how on the corporate side, that's been looking, and how the adoption of your mobile device management strategy has been working?

Thank you.

Yes, I'll take the first one, Peter, on the cash flow.

Your logic is roughly correct, although I wasn't entirely sure on one of your points, but we are planning to invest in the launch, and that's one of the big cash drivers in the quarter, but also just in an inventory build-out and just our whole cash flow conversion cycle, where we're expecting to see some impact in our cash position.

But we, as I mentioned, we continue to believe we're going to maintain that strong cash position throughout Q1.

This is Thorsten.

Hi, Peter.

Lots of questions, I'll try to address them really briefly.

On the marketing side, no doubt that we have to market BlackBerry 10 strongly, and that's what we will be doing, so I think it's a very meaningful investment of ours into bringing BlackBerry 10 to market.

And we're actually fully supportive of those expenses, and we see good feedback on that one.

On the enterprise, where is the three million subscribers coming from?

Our data show that it's actually mostly coming out of what we call the prepaid segment.

We see strong interest from our corporate customers in maintaining the BES install base, and it means something to them.

It means security, it means reliability.

It is network connection, and I think the numbers I reported in terms of customers signing up for the BES 10 and BB10 Get Ready program is testament to them supporting us in the corporate domain.

Great, thanks Peter.

Next question please?

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

Please go ahead.

Couple quick things.

First of all, Brian, if you can go back over the taxes this quarter, I didn't quite get it.

Last quarter, you actually called out the income tax benefit you got of $166 million.

This quarter, you had $112 million of positive on the tax line, and I just wanted to understand, is it all R&D tax credits, so just kind of a clarification there, and is there any way we can normalize that as to what it otherwise would have been?

And back to the subscribers, EMEA subs fell.

I was under the impression it was a decent part of the BlackBerry 10 launch, and just want to understand what the trend is over there, are there prepaid markets that are falling?

Despite the BB10 launch I would have thought we would have seen more of a stable platform over there.

Then LatAm and EMEA on the same thing.

Those were going up, and are they going up for BlackBerry 10, or are they going up because we're still shipping BlackBerry 7 or maybe even BlackBerry 6 units into those markets?

If you can give us a sense as to the health of the BlackBerry 6 or BlackBerry 7 shipments into those markets, that would be great.

Okay, I'll take the first one on the taxes.

So the tax benefit, you're right.

Last quarter we pulled it out.

There was a one-time event on our international tax restructuring.

This quarter, it's more just tax loss carrybacks, but a large portion it was R&D tax benefits, including enacted rate or R&D benefit changes that happen in the US in the quarter, so that was part of that.

And just on a normalized rate going forward, it's difficult when you're in that loss position on that actual tax provision, but normally we've talked around the 25% rate on a normalized basis, on earnings for a tax rate going forward.

Okay, on the question regarding the subscriber number, one general comment I would like to make here is we've reported subscriber numbers for quite some time.

I think actually what's really important is for all of us to understand is, what's the dollar value that we generate out of that subscriber base, and I talked in my speech about moving to a different business model on the services, and we are innovating and developing new services as we speak, so I just want everybody to have that in mind.

At the end of the day, it's about the dollar number that's being created.

So the BlackBerry 10 introduction is very successful in those markets, but I think we discussed that in prior earnings calls, that there is a different business model to revenue fees with BlackBerry 10 than it was for BB7, so the uptake you'll see in LatAm and other regions on subscribers, Ehud, is really attributed mostly to the BlackBerry 7 is still selling strong in those regions.

And on the BB10 side, we see strong uptake both in consumers and in enterprises, but the split between what is registered as a subscriber or not is changing, and we know it's changing, and that's why we're adapting our business model.

But I also said in my speech that we are managing that service gradual decline very thoughtfully with our carrier partners, and that's why we only had a reduction of 2% in this quarter and we will, we are expecting a decline of at maximum, single-digit percentage number in the coming quarter.

Thanks, Ehud.

Next question?

Your next question will come from the line of Todd Coupland of CIBC.

Please go ahead.

My question is on that 10 mix.

So far, 55% from new platforms.

I would have thought you would have had a stronger snap from the BlackBerry subscriber base to move to upgrade.

What are your thoughts on that, and does that still have to play out over the next few quarters?

Just talk a little bit about that, thank you.

Yes, happy to.

First we are, as you can imagine, we are pretty excited about the stats we're getting so far from market that we're winning more than 50% from other platforms, and I think that's strong testament to the strength of the product, and also the differentiating elements like the [PCOG] flow user interface that this product shows, so I think this is a very good start.

Now, I think you're making a good point.

Going into the installed base, if you recall the segmentation of BlackBerry versus QWERTY versus full touch devices, we are very strong in QWERTY.

That's why we are excited to have already more than 40 carriers testing the Q10, which then actually will go strongly into that existing BlackBerry base, so we are all looking forward to launch the Q10 globally and addressing that market segment even stronger, and I think this will just yield another good opportunity for us to increase numbers of units and revenues.

Does it have anything to do with having to run parallel servers in the back end, in terms of the slow upgrade?

No, actually not, Todd, because what we see right now is as a big uptake of that 10 also in consumers, that's the stats that we see, so I don't think that these things are related.

Great.

Thank you, Todd.

Next question, Luke?

Your next question will come from the line of Gus Papagiorgiou of Scotiabank.

Please go ahead.

I just want to follow-up on Todd's question.

Wonder if you can characterize the initial Z10 sales, how much of it is consumer, how much is enterprise, and within the enterprise, are they waiting for the Q10 or the BES 10 certification to get finalized before they start strong adoption?

Just wondering if you could provide a little color on that.

And then just Brian, for you, I mean this is the fourth or fifth quarter where you've sold through more devices than you've shipped in.

At what stage do you think you'll start to get in balance there, or perhaps start to fill the channel to support the BlackBerry 10 launch?

Let me take the first one, Gus.

I mean, we're starting the global roll-out of BlackBerry 10.

We're in the middle of it, right?

So we're all learning of how it does in what segment, so it's really early to kind of give clear data around this.

There is, as I said with the BB10 Ready programs, just when you look at the guest numbers there's very strong momentum.

We're doing this on a global scale, and having touched 17 cities by now, there's strong momentum, and the early indication really is very positive.

Now I always get this question, why you have come up with the touch device first and not the QWERTY device first.

It just addresses, and it seems to work, it addresses the BYOD segment.

This is where we need to be, because security is segmenting in enterprises so actually yes, Z10 is also picked up by enterprises through the BYOD channel, let me put it this way, but certainly enterprises are extremely hot on getting the Q10, because it's a huge segment of die-hard QWERTY levels out there, and we're looking forward to serve that segment strongly with the Q10 product.

Great, the question on the sell-through and the channel inventory, so with BBOS, the trend has been that we've been burning down inventory over the last few quarters, as you mentioned, Gus, and we do expect in Q1, for that to level off with the sell-in channel for BB10.

Thank you, Gus.

Next question, Luke?

Your next question will come from the line of Maynard Um of Wells Fargo.

Please go ahead.

Can you provide us a way to think about next quarter's sell-in units, either quantitatively or qualitatively?

I think Frank said, things are being cited as saying there's 150 operators globally selling the Z10 by the end of March, so if I'm doing the math correctly, to get to breakeven and assuming gross margin is let's call it flattish and marketing up 50%, I think that implies somewhere closer around 3.5 million BlackBerry 10 units next quarter, which only roughly about 23,000 units per carrier, which seems conservative.

So how should we think about units per carrier number?

Are you seeing any capacity issues?

And then can you talk about the BlackBerry 6 and 7 and how we should think about the ramp down, will those units shrink meaningfully, and become immaterial over the next one or two quarters?

Thanks.

So on the next quarter's sell in with the operators, I think Maynard, you're making a good point.

As I said, we're still rolling it out globally.

We just started in the US, very strong support from carriers here now this week with T-Mobile and Verizon launching, so there's more launches to come.

We also have I think the significant one million order.

That shows a huge trust if not in one single market, it really goes into the global market.

So yes, we will be filling the channels as we speak.

That's why it's really hard to say what is sell-through and what is channel at the moment.

We are in a very dynamic situation launching that product on a global scale.

So yes, we are looking forward to actually filling more channels, in more countries, selling into more carriers.

They're still good in the way to go for us, which means there's potential for unit growth, and for revenue growth.

And then don't forget, the Q10 is also kicking in Q1 which will also certainly add to those numbers.

And Maynard, it's Brian.

Just to comment on the gross margin, so we continue to expect to have solid gross margins in Q1, driven by the improved hardware margins with the launch of BB10, and leveraging our cost base with all of the cost improvements we've laid out in our remarks earlier, and that would help to offset the gradual decline that we're seeing in our service business, that Thorsten mentioned on the single digit decline.

Thanks.

Next question, Luke?

Your next question will come from the line of Richard Tse of Cormark Securities.

Please go ahead.

You talked about 223 carriers taking technical acceptance.

Can you break down from a unit perspective what sort of markets these are going into?

You sort of break down earlier that you've got a new geographic segmentation, so just get a better feel for that?

Richard, 223 carriers, yes that's correct, they're in TA, as I said, they're all rolling out, so right now, given where we are, I think it's too early to really kind of break this down by market or even by country.

We talked about Canada being strong, UK being strong, very strong in the Middle East Africa region.

We have seen tremendous uptake actually in India on the Z10 so we have data points, but allow me to just say right now, just being a few weeks out there, breaking it down by region or by country is not meaningful.

We will do this when we have more information in Q1, when we basically have launched Z10 in all of our markets and also have the data around the Q10.

Great.

Thank you, Richard.

Luke, next question?

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

Please go ahead.

Tal, I believe your line is on mute.

I had a question on -- two questions.

First one is on service revenues.

Sorry on total subscribers, I mean.

I think you changed the way you account for the number of subscribers last quarter.

You disclosed it in the filing.

And the question is, how did that impact the number of subscribers, active subscribers this quarter?

The second question I have is about the marketing.

You said in your prepared remarks that marketing expenses will grow 50% quarter-over-quarter.

What is the best baseline?

Is it the entire SG&A or just a bit.

Can you give us a little bit more color on that?

Thanks.

Sure.

So on the change in our definition of subscriber, when we made that change, there was no impact on the numbers we were reporting, and this quarter, in our numbers, we would be including the BB10 subscribers as well.

And as it relates to the marketing, the 50% increase on the baseline, it won't necessarily all be in SG&A but the large portion of it will show up on the SG&A line.

But what is the baseline, which means that your SG&A is roughly $5 billion?

Yes, we won't get into that detail but I think we're just trying to indicate the level of increased activity relating to our marketing programs in Q1 to support the global launch.

So how do we model operating expenses?

What is the increase, if we don't get to the actual line level, maybe we can speak about OpEx just in general.

What do you think -- this quarter was about $1 billion.

How does it go from here?

I'm sorry.

I missed this quarter was about?

Yes, I said so you don't want to provide the details at the marketing expense, maybe we can speak about OpEx.

What's the impact?

I think you could use the SG&A line as a proxy.

This obviously, there's various other cost departments that are rolling up into that, but you could use that as an approximate baseline to model the 50% increase.

Thanks.

Thanks, Tal.

Next question, Luke?

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

Please go ahead.

Ms. Jankowski, perhaps your line is on mute?

Your next question will come from the line of Mark Sue.

Please go ahead, I'm sorry, of RBC Capital markets.

I was just looking at this.

I'm trying to get a sense of how the split between the spending between the carriers and BlackBerry will trend over the next several quarters, as you move on to this global launch, because clearly, it seems as if BlackBerry has to shoulder the bulk of the early expenses, and we're not seeing a lot of commitment thus far in some of the core markets in the US in terms of carrier's commitment to spend.

So maybe your sense of what they might be waiting for or how that trend might look like in the upcoming quarters, considering they have a lot of choices in terms of devices, and we're trying to see how they shift that spend from some of the Apple products and Android products to BB10.

Mark, first we are running a global rollout here with BlackBerry 10, so we see strong carrier support, collateral marketing activities, with carriers all over the place, and it varies from promotion to promotion, so this is -- there's not just one-size-fits-all kind of an approach.

We're still in early days in the US.

We just launched with AT&T and now Verizon and T-Mobile coming on board.

We see strong marketing support from them.

It is really too early to talk about what kind of promotions are we going to run in the future, because we're going to start in this quarter and move on.

That's why we also have a 50% increase in our own marketing spend, that we will do together with the carriers, not on our own, so I think we have a very sound go-to-market plan in terms of marketing activity and promotions with the carriers, and we will execute on them in Q1.

Yes, just one clarifying point.

The 50% that we commented on for Q1, that's always been in our forecast to support the global launch.

Thanks, Mark.

Next question, Luke?

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

Please go ahead.

Simona Jankowski, are you able to hear us?

I believe you have us on mute.

I will go to the next caller.

Your next question will come from the line of Tim Long.

Please go ahead.

Just I was hoping on this sell-through, could you just give us an indication of how the Z10 sell-through was in the quarter?

Obviously, it's only a few markets that we're shipping, so just wanted to get a sense of how much of the approximately one million actually sold through already?

Yes, I think you're making the argument yourself, Tim which is we are in early days actually, so there's a huge dynamic in the market, what is flowing in, what is already flowing out, so don't take it really like a clear number but what we see roughly is that, from what we have shipped into the markets, two-thirds to three-quarters already have sold through.

I mean it is very dynamic.

We need to replenish certain markets because we have sold out, huge dynamics going on.

The turnaround cycle for sell-in to sell-through is pretty short, which is a pretty good signal, actually shows that we are higher in demand than in supply.

That's why, as I said publicly, we have ramped up our production capabilities.

So right now, it's very dynamic but it all goes in the right direction.

Just to clarify, that's two-thirds to three-quarters sold through.

Is that as of February or is that more a sense as of now?

I think that number is, as I said, that number is actually converging to what we sell-in, already sell-through pretty quickly, that's why we had to ramp up our production capability, so the logistics and supply chains are working at high speed at the moment.

But your point though, Tim, it's more of a, it's a recent data point that we got on the sell-through we've been just monitoring.

Okay, so it's not related to the one million, it's related to to-date shipments.

Yes, yes.

Okay, great.

I'll let you try Simona again.

Thanks, Tim.

Next question, Luke?

Your next question will come from the line of Kevin Smithen of Macquarie.

Please go ahead.

Thank you.

You saw a slight slowdown on BB7 units this quarter, and I wondered if this was due to anticipation of a lower-priced BB10 launch in LatAm and Asia, or this is market share losses or inventory reduction, and maybe when do you expect to launch a mid-range BB10 device at a lower ASP for emerging markets?

I don't make any connection in the slowdown of BB7 versus a lower price for BB10.

I don't understand exactly what you're referring to.

The BB7 slowdown is really part of the uptake of BlackBerry 10, and I think like the India example I gave you where we really sold out within two days, it certainly has to do with inventory reduction that is working right now in terms of us converging to selling through other BB7 inventory.

And the mid-range BB10, as I said expect that around mid-year in various markets and that's how we will address that portfolio segment properly in the mid-range.

But again, I mean fiscal year mid range, right?

Not calendar year, so that's the years I live in with my reports.

But we're looking forward to that because we know that there's a big demand even in the midrange.

So again it's kind of like, I think what I want to say here is everybody's looking at the Z10 and we're proud of the Z10, make no mistake, but we're doing much more than that.

We are building a portfolio in this fiscal year, so you will see us getting into the market with various products, one, one, one, one so we're actually really working on all portfolio that we will take to market this year.

That's what we are excited about.

Thanks, Kevin.

Next question, Luke?

Your next question will come from the line of Shaw Wu of Sterne, Agee.

Please go ahead.

Are you able to hear us?

Yes, I apologize.

I was on mute.

No problem.

You found the button at least.

Okay.

Yes, just a question on your -- I don't know if you can comment on your longer term-gross margin.

Obviously, today you still have the mix of business of BB10, BB7, BB6.

Any help on where do you think that could go?

Could it go back to like mid-40s, just some color there?

Thanks.

Sure.

I had mentioned earlier, we continue to expect in more than Q1, we don't really provide a lot of color beyond Q1, which we're currently focused on in terms of gross margin.

What we continue to expect to see solid gross margin in Q1, driven by the improvement in our hardware margin stack, plus a lot of benefits that we got through our core program as I mentioned, and then the one factor to consider also is just the offset that we see coming, and the gradual decline on service revenue which we signal is the single-digit percentage decline in service revenue in Q1.

Okay, thanks, and just to follow-up quickly, longer term, how do you see -- does it make sense to have -- right now you have a couple different platforms.

I realize it's all BlackBerry but how do you see that going forward?

Do you see segmentation where you're going to continue supporting customers that want to use BlackBerry 7, or do you see migrating all the BlackBerry 10?

Shaw, it's not a couple of platforms, it's two, right?

It's BlackBerry OS and it's BlackBerry 10.

I'm saying that to just make sure everybody understands, we are not fragmenting our efforts here.

BB7 is still very successful in various markets.

We all know this like the Asia-Pac, Indonesia markets, South Africa, LatAm and that's why we always said we're planning to launch BB7 products to really serve that market segmentation in those countries, so we expect something to come from there.

We don't just kind of cutting it and then we're out of it, and the good news around the BB7 product that we are intending to launch is, it carries revenue, right?

So again that helps the gradual decline and the management of our revenue fees.

BB10, I think I'm repeating myself, we are building a full portfolio.

Now BB10 from its technology performance is starting in the high end, we bring it into the mid tier by the middle of the fiscal year and then we are working towards what can we do in what we call typically the BlackBerry entry level, stay tuned on that one.

There's work going on there as well.

That's great.

Thank you, Shaw, and that concludes the call today.

If you have any follow-up questions, definitely just give us a call.

Happy to follow-up with anything and thanks for joining us.

Thank you, everybody.

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.