BlackBerry Ltd (BB) 2014 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen, and thank you for standing by.

Welcome to the BlackBerry First-Quarter 2014 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 given at that time.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded.

I will now turn the presentation over to Paul Carpino, Vice President of Investor Relations.

Please go ahead, sir.

Great.

Thank you, John.

Welcome to BlackBerry's 2014 First-Quarter results conference call.

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

After I read our cautionary note regarding forward-looking statements, Thorsten will provide a business update, and Brian will then review the fourth-quarter results.

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 BlackBerry.com.

The webcast can be accessed through your BlackBerry 10 Smartphones, your personal computer, or your BlackBerry PlayBook.

A replay of the webcast will be also 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 2014, our plans and expectations regarding the BlackBerry 10 platform including BES 10 and its impact on our business, our vision regarding the new world of mobile computing, our Product Development, Sales, and Marketing initiatives including other investments in the BlackBerry 10 platform, our plans regarding use service offerings and strategy including with respect to BBM and BBM channels, and assumptions regarding our service revenue model.

Our assumptions regarding future revenue recognition for services in Venezuela, our plans regarding PlayBook, our anticipated financial results for Q2, our anticipated cash position and sufficiency of financial resources 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 further 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; risks related to our international operations including in Venezuela; our ability to maintain or increase our cash balance; security risks; our ability to retain and attract key personnel; intellectual property risks; difficulties in forecasting financial results given the rapid technological changes, evolving industry standards, intense competition, and short product life cycles that characterize our industry and other factors set forth in the Risk Factors in MD&A sections in RIM's filings with the SEC and Canadian securities regulations.

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

I will now turn the call over to Thorsten.

Thank you, Paul.

During the first quarter, BlackBerry continued to move forward with its transition, and I'm encouraged that three of our four regions returned to sequential revenue growth as BlackBerry 10 continues its rollout.

I will let Brian take you through the quarter details shortly, but I would like to focus my remarks on how we are positioning the Company in Fiscal 2014.

BlackBerry 10 is still in the early stages of its transition.

In fact, we're only five months into what is the launch of an entirely new mobile computing platform.

We are five months into our platform transformation that we anticipate will drive future Smartphone devices, greater enterprise efficiencies, and new mobile computing opportunities for many years to come.

We have never been a device-only Company, as we are also running a global secure data network and services business, and we don't plan to run the Company with a short-term device-only strategy.

What is exciting about BlackBerry today is that we are getting very comfortable with who we are as a Company and where we will fit in the market.

Embracing our heritage of mobility first is very important as we build our culture and go through this transition.

We don't have to be all things to all people in all markets and embracing this focus allows us to drive efficiency, be flexible and agile, and have ultimately drive best-in-class innovation.

We're continuing to focus on improving all areas of the business as we work towards our near-term objectives of making BlackBerry a leading ecosystem and the Number One in enterprise.

Specifically, let me discuss the Company in terms of our hardware business, enterprise mobility services, BBM platform, and finally, our strong financial position and our continued commitment to driving efficiency and reducing cost.

The BlackBerry 10 Smartphone portfolio is just starting to fill out.

We're only five months in and have since achieved significant numbers of technical acceptances globally.

The current and upcoming products in our portfolio will also allow us to address different market tiers.

Our goal with our Smartphone portfolio is to have no more than six new devices in the market at any given time.

This targeted approach to devices will allow us to efficiently establish and differentiate BlackBerry 10 based on features such as user interface, our iconic QWERTY keyboard, and our secure enterprise productivity strength.

The BlackBerry 10 is now available across 147 countries including the United States.

The BlackBerry Z10 has been an effective launch product to showcase the renewed and reengineered BlackBerry 10 experience to both consumers and Enterprises.

Our BlackBerry 10 QWERTY device started its rollout late in the first quarter and this month with over 320 carrier acceptances completed to date.

The Q10 is now available in 96 countries including the US with 50 more countries expected to launch within Q2.

At BlackBerry Live, we announced the BlackBerry Q5, our latest QWERTY device running on BlackBerry 10, and specifically designed and built for select Markets.

The Q5, available in red, black, and white variations, premiered in Dubai last week, and we now already have 149 carrier technical acceptances completed with 106 carriers in 59 countries expected to launch this exciting product in the second quarter.

While eventually our product will move to BlackBerry 10, our existing BlackBerry 7 customer base remains an important market to us.

Many emerging markets continue to purchase BlackBerry 7 Smartphones based on its effective cost point and features such as BBM.

Enterprise customers continue to leverage the security and cost effectiveness of the platform with products such as the Bold 9900 which continues to be the most productivity-focused and secure Smartphone in the world today.

Our customer base is just starting its transition from the BlackBerry 7 Operating System to BlackBerry 10, but we still intend to launch one additional product this year to support the BlackBerry 7 segment as well.

The second area I want to discuss is enterprise mobility services, which includes both our traditional enterprise business and new mobile computing opportunities in vertical Markets such as automotive.

In our traditional enterprise BES, we have a strong leadership position, and our clear objective is to remain number one in this segment and grow revenues with our BES 10 solution.

BES 10 is the most comprehensive enterprise mobility solution in the market today offering cross platform flexibility, cost effectiveness, security, and scalability.

It's the ultimate mobile platform for business.

Enhancements and new capabilities continue to be rolled out on BES 10, including Secure Work Space which was officially released this week.

Secure Work Space offers an ideal BYOD mobile security solution, providing organizations the flexibility to embrace BYOD on multiple platforms without sacrificing security.

Since announcing BlackBerry enterprise services 10, service has been installed by customers around the world and Secure Work Space for IOS and Android has been tried globally with BlackBerry customers.

At the time of BlackBerry Live in May, we had 12,000 companies that had either ordered, downloaded, or installed BES 10.

Today, this base has grown to 18,000, a clear indication of the strong enterprise interest in the BlackBerry platform.

While the enterprise environment requires a longer sales cycle than consumer-only focused devices, the successful adoption of BES 10 remains an important driver for future unit sales and service revenue opportunities.

60% of BlackBerry Fortune 500 customers have already ordered, downloaded, or installed BES 10.

And, another way we look at the strong interest in BES 10 is by vertical market, which demonstrates the broad enterprise appeal of our platform.

Based on third-party sources ranking size of companies by industry, BES 10 has already been ordered, downloaded, or installed by 3 of the top 10 companies in leisure and hospitality, 4 of the top 10 companies in retail, 5 of the top 10 financial institutions, 3 of the top 10 companies in construction, 4 of the top 10 companies in communication, and 6 of the top 10 companies in healthcare.

Some of these names include Whirlpool, MetLife, LA County Sheriff's Department, 20th Century Fox, the [Keen] Group, just to name a few, as well as piloting with major government departments.

We have a great opportunity with BES 10 in the enterprise.

Not only does BES 10 provide IT Managers with leading security when paired with BlackBerry 10 Smartphones, but it also gives us the opportunity to leverage our product capabilities and revenue opportunities across competing platforms.

Also included in our enterprise mobility efforts is the focus on mobile computing-related opportunities.

While it is still very early in this new market, we have the opportunity to leverage BlackBerry's existing global and secure infrastructure to capitalize on this new market.

Earlier this month, we announced and previewed a new solution for auto makers that allows them the ability to manage and deliver over-the-air software updates to vehicles.

The Software Update Management for Automotive service facilitates machine-to-machine communication directly between the auto maker and the vehicle.

It allows the auto maker to easily provide software updates to vehicles in the field using our infrastructure that today already reliably delivers software updates to millions of BlackBerry devices around the world.

This solution is just another proof point as to how BlackBerry is adapting to the next shift in how enterprises are using mobile computing to communicate and interact with the users anywhere easily and securely.

The third area I want to discuss is our services strategy and some of the revenue opportunities we have to mitigate the decline in our service revenue.

In addition to the new services we are offering to the enterprise with BES 10, we are also targeting new services in consumer starting with leveraging BlackBerry Messenger as announced at BlackBerry Live.

BlackBerry Messenger remains the pre-eminent mobile messaging platform with the hyper-engaged user base using BBM for an average of 90 minutes per user per day.

This type of engagement is truly exceptional, in comparison to other traditional social networks which people utilize on mobile at a rate of only just over 400 minutes per month based on recent reports.

The BBM user base provides the Company with a great opportunity to offer additional value-added services to our global installed base.

Our first offering for BBM users is BBM channels which was launched into beta on May 14.

We now have over 60,000 active users engaged in this beta.

Those users have already created a vibrant ecosystem of over 20,000 channels across more than 160 countries including our own BlackBerry channel.

We will be continually updating the BBM channels experience throughout the beta as we continue to execute towards an expected global rollout of BBM channels across all of our Markets in August.

We've also begun to work with key brand and agency partners to establish a set of business practices to enable users to discover and engage with businesses that are most relevant to them via channels.

And, at BlackBerry Live, we also announced our plan to bring the much-loved BBM service for free to IOS and Android, responding to our users' Number One desire to be able to connect to all of their friends and family, irrespective of which Smartphone they carry.

This announcement was met with tremendous reception and anticipation has been building in the market ever since.

We remain on track to launch the core BBM experience for these platforms, including chat and BBM groups before the end of the Summer.

Our approach to growing BBM cross-platform is an example of the new service revenue opportunities we can capitalize upon with our technology and innovation.

Our goal is to support and resource the new and exciting BBM initiative as needed in order to allow it to be as focused and as agile as other social networking competitors.

This is a very exciting period in the mobile messaging and social networking industry, and we have a great opportunity to more fully participate in this growth market with our BlackBerry messenger platform.

The fourth piece I want to discuss is our financial strength which remains a key asset during our transition year.

Strong products alone are not good enough to ensure solid, long-term turnaround so we have been intensely focused on maintaining a strong balance sheet and delivering efficiency.

We generated cash flow from operations of $630 million this quarter, and we ended Q1 with $3.1 billion in cash, our highest cash position in three years.

We will continue to focus on our financial strength and believe we are well positioned to continue to invest in our platform and compete in a highly competitive market.

In terms of our outlook, this is an exciting and important transition year for the Company.

We are still early in our launch cycle and have yet to see all BlackBerry 10 products and full deployment of BES 10 contribute to revenue.

As we work towards our product and service launches throughout this year, I view Fiscal '14 as our year of investment where we will look to position ourselves appropriately for sustainable growth in Fiscal Year '15.

The decisions we make are particularly important to us this year given that the changes and investments we implement will be the foundation for innovation, quality, cost base, and growth for BlackBerry 10 in the coming years.

The industry remains highly competitive so we are responding with additional Sales and Marketing investments this year to establish the BlackBerry 10 platform and to provide BES 10 with the appropriate support to drive broad-based deployment and future unit growth and service revenue opportunities.

We expect our increased investment during this transition, combined with a more competitive environment, will generate operating losses in the second quarter, but we believe our strong financial position allows us to make these investments.

And, in addition to our investment initiatives, we have very focused on looking at ways to continue to drive greater efficiency to offset these investments.

Our product portfolio decisions based on BlackBerry 10 require much fewer resources to support them compared to previous systems, and we've been investing in internal programs that are evaluating the efficiency of all processes and all costs throughout the organization.

Benefits from programs like these enable us to reduce spending in some areas and deploy the savings in other value-creating opportunities.

Let me also make some comments on PlayBook.

Our teams have spent a great deal of time and energy looking at solutions that could move the BlackBerry 10 experience to PlayBook.

But unfortunately, I am not satisfied with the level of performance and user experience, and I made the difficult decision to stop these efforts and focus on our core hardware portfolio.

We will, however, support PlayBook on the existing software platforms and configurations.

BlackBerry has made a lot of steady progress in the past year.

Just one year ago, the world was totally different not only for BlackBerry but for the whole Smartphone industry.

Things change quickly in our industry, and we have embraced the concept of change and agility, and this has allowed us to move forward quite dramatically.

One year ago, we made the tough decision to delay the launch of BlackBerry 10, and I can tell you it was unbelievably difficult for us to say we had to delay the platform.

In fact I remember the call very well as the volume was pretty loud, and we were told the Company was finished, but we knew the tough decisions we made would generate value for shareholders.

Today, if you look at BlackBerry, we are a leaner, more efficient Company that has brought BlackBerry 10, BES 10, cross-platform BBM, and mobile computing products like Software Update Management for Automotive to the market.

Let's remember one year ago, none of these products existed, and today, they are just launching and are being well received because of the performance and quality of BlackBerry 10.

It has been very exciting and challenging for our teams, and we are looking forward to the next stage of our transition this year.

With strong and steady execution, we will be able to capitalize on what we have created over the past year.

We are one year smarter, one year tougher, and one year more successful than we had this call last year.

And we are confident in the ongoing success of our transformation in the coming year.

We are doing the right things, and importantly, doing what we said we would this quarter, and this is key because a transition takes time.

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

Thank you, Thorsten.

Revenue for the first quarter of fiscal 2014 was $3.1 billion, up 15% from the fourth quarter, and up approximately 9% from one year ago.

Three of our four regions grew sequentially in the first quarter.

Europe, Middle East, Africa, our largest region, represented 43% of revenue in Q1 and was up 9%.

North America represented 25% of revenue and was up 30%.

Asia Pacific represented 17% of revenue and grew 35%, and Latin America represented 15% of our revenue but was down 6% due to service revenues in Venezuela which I will explain further in a moment.

We shipped 6.8 million Smartphones in the first quarter compared to 6 million in the fourth quarter which represented a 13% increase.

Approximately 40% of these devices were BlackBerry 10 devices.

Estimated sell-through in the quarter was approximately 6.8 million units.

As expected, our channel inventory reflected declines in BlackBerry 7 products while BlackBerry 10 channel inventories saw increases on the back of continuing launches of Zed 10, Q10, and early volumes of Q5.

Looking at our revenue mix, hardware revenue grew by 33% when compared to the fourth quarter and was approximately $2.2 billion.

This represented 71% of revenue compared to approximately 61% of revenue in the fourth quarter.

Service revenue was approximately $794 million, or 26% of revenue, and was down $153 million, or 16% from the fourth quarter.

This decline reflects three factors, the $72 million decline in service revenues earned from Venezuelan carriers but could not be recognized for US GAAP due to foreign currency restrictions in the region and the challenges for carriers to remit US dollars to BlackBerry for payment, mix shift to low-tiered service plans in our customer base, and the lower number of subscribers this quarter.

Because of the currency controls in Venezuela, no cash was received in the quarter relating to service revenue which did not allow us to meet the necessary revenue recognition criteria under US GAAP.

While we were not able to recognize the revenue in the quarter, it is important to note that we have been doing business in Venezuela for more than eight years.

We have strong relationships in the region and are working to improve the cash flows in this government-controlled process.

Accounts Receivable exposure from service revenue in this region is approximately 5% of our Q1 consolidated Accounts Receivable balance, and subsequent to the quarter-end, we did receive some funds from our Venezuelan customers.

As a result of the uncertainty on the timing of future cash receipts relating to service revenue from this region, Venezuela service fee revenues are excluded from our base assumptions going forward.

We will provide updates on Venezuela as appropriate.

Excluding the impact of Venezuela, service revenue declined approximately 9%, in line with our previously provided outlook of the single-digit percentage decline quarter-on-quarter.

Hardware revenue in Venezuela is not specifically impacted by the currency restrictions as BlackBerry deals with third-party distributors for the hardware sale and distribution of Smartphones in this country.

In the First Quarter, our subscriber number was approximately 72 million.

The decline of approximately 4 million from the previous quarter reflects decreases in the LATAM, EMEA, and North American regions offset by increases in Asia-Pac.

This number also includes our Venezuelan customers.

There continues to be a high level of churn in our users based on the transition to BlackBerry 10 and the highly competitive environment for Smartphone devices in all regions.

With our transition to BlackBerry 10, our historical subscriber reference does not share the same service revenue dynamic as previous BlackBerry devices.

Starting with Q2, we will not be providing this non-financial metric.

As new service revenue is generated, we will look to provide additional information associated with these services and any other relevant details around service revenue trends.

GAAP gross margin and adjusted gross margin were both 34% in the quarter reflecting the higher mix of hardware revenue in the first quarter compared to the fourth quarter.

This compared to GAAP gross margin of approximately 40% in Q4.

Gross margins were also negatively impacted by 2% in the first quarter as a result of service revenue from Venezuela.

GAAP operating expenses increased by $124 million, or 11.4%, to $1.2 billion compared to the fourth quarter.

This was primarily attributable to an increase in marketing and advertising expenses incurred to support the global launch of BlackBerry 10.

Operating expenses also included approximately $26 million of core-related charges in SG&A and R&D.

The GAAP operating loss in the first quarter was $164 million compared to an operating loss of $18 million in the fourth quarter.

The operating loss reflects the sequential increase of $124 million in Marketing expense, $26 million in charges related to core restructuring activities, and the impact associated with revenue from Venezuela, partially offset by sequential increase in hardware revenues.

The income tax recovery was $80 million, resulting in an effective income tax recovery rate of approximately 49% which includes R&D tax benefits.

GAAP net loss for the first quarter was $84 million, or $0.16 per share, compared to an earnings of $94 million, or $0.18 per share in the fourth quarter.

The adjusted net loss was $67 million, or $0.13 per share compared to an adjusted earnings of $114 million, or $0.22 per share in the fourth quarter.

During this transitional period, our Balance Sheet remains very strong.

Cash increased by $196 million to $3.1 billion from $2.9 billion in the fourth quarter, primarily due to positive operating cash flows.

This increase was generated from changes in working capital which reflect the receipt of corporate tax refunds.

This was partially offset by increases in inventory to support the global launch of BlackBerry 10, as well as the increase in Accounts Receivable reflecting the sequential increase in revenue.

Inventories increased by $284 million to $887 million compared to the fourth quarter primarily to support the continued launch of the BlackBerry 10 Smartphone.

Accounts Receivable were $2.5 billion, or an increase of $183 million from Q4, and Day Sales Outstanding declined to 75 days in the first quarter compared to 80 days at the end of the fourth quarter.

CapEx in the quarter was $83 million in line with our previous run rates.

Intangible asset purchases were $335 million in the quarter, which consists primarily of payments related to amended or renewed licensing agreements.

This quarter included certain additional prepaid license agreements with several IP providers.

However, we anticipate returning to our approximate $240 million run rate in the next quarter.

In terms of our outlook for the second quarter, results are very difficult to estimate during this transition in what remains a highly competitive Smartphone environment.

We intend to leverage our strong cash position to efficiently invest in the launches of BlackBerry 10 Smartphones.

Our investments will also focus on the rollout of BES 10 in order to drive adoption and unit volumes and further penetrate the BlackBerry 10 platform in the market.

We will be investing resources to evolve BlackBerry Messenger into a leading cross-platform application and launch other revenue initiatives associated with new services and emerging mobile computing opportunities.

We anticipate an operating loss in the second quarter.

However, we will continue to implement cost savings initiatives in order to drive greater efficiency throughout the Company and redirect capital from these savings to investments that we would expect to drive future revenue.

That concludes my comments.

We will now take your questions.

(Operator Instructions)

Your first question today comes from Gus Papageorgiou with Scotiabank.

Hi, thanks.

I guess fundamentally, part of your success in the near term here depends on demand for BlackBerry 10 devices.

I'm just wondering if you can kind of characterize how demand has been versus your expectations?

With the launch of the Q5 at lower tiers, do you expect to see your sales improve in the developing world where you've been clearly losing some subscribers?

Gus, this is Thorsten.

If you look at where we are today with the BlackBerry 10 product launches, as I said in my report, we are five months in that 10 launch -- Q10 launch just came to the US in the last week.

Q5 just launching in Dubai.

We're in the middle of launching all of these products in all of our various markets and regions.

Certainly, the Q5 is geared to those selected Markets in Asia-Pac, and it's too early to say how it will be doing.

But, we see strong demand.

We see a good reception of the device, and we'll see how it does in those selected markets where we are pushing it.

Thanks, Gus.

John, next question, please?

Your next question comes from Maynard Um with Wells Fargo.

Hi, thank you.

I know you don't provide gross margin by the segments, but if I look at the mix of your hardware, you had a greater BlackBerry 10 mix which I presume higher margin.

Lower BlackBerry 7, which is lower margin.

And, if I run the math and make some assumptions, it actually looks like the implication is the hardware gross margin declined sequentially.

Can you just maybe just walk us through that?

Why that is despite the mix?

I am a little surprised that despite the number of operators you have, the number of shipments per operator still seems pretty small, particularly in light of the sales and marketing dollars that you're putting out there.

If you could just kind of walk us through that as well, it would be appreciated.

Thanks.

Sure.

Maynard, it's Brian.

So, just on the gross margin.

As it relates to just the overall mix, it's obviously dependent upon the mix of hardware and even inside hardware and then the mix of hardware relative to service revenue.

So, we're continuing to focus on that cost management and make sure we've got the right efficiencies, procurement manufacturing supply chain.

As we look through the mix of our hardware side with Q5 coming on, it does have a different margin stack than the other products, but we are working to drive those efficiencies, and it's early in the cycle and we're looking to get BES 10 deployed and rolled out as well.

Yes, as you were asking, Maynard, about the marketing spend versus results.

I think if you look at the launch schedule that we had, Q10 isn't even available in all markets yet.

We just went to the US last week so I think it's really early to say.

And, as you know, you have to provide these marketing spends earlier to create the promos -- the promotional windows around the various product launches.

Also, it is a very competitive market so yes, we have to take the measures that we have to take to be successful.

But, all-in all, I think it's pretty early days still as we still haven't even completed the entire portfolio.

One more element of this by the way is that we are just launching BES 10 into the market, and as you know there's the correlation between BES 10 -- numbers of BES 10s out there, then testing in enterprises, then purchasing the devices.

So, from that perspective, I think that it's too early to really say there is some sort of stable, predictive way of predicting the future.

But, what we see so far in terms of BES 10, I gave you the numbers in my script of the earnings call -- and on Q10 is encouraging.

Thanks, Maynard.

Next question, John?

Your next question comes from Peter Misek with Jefferies.

Thanks, so two quick questions.

One, you said you sold through 6.8 million total smartphones.

Any way you could give us what you sold through of BlackBerry 10?

You sold -- shipped in 2.7 million, and you said you built some inventory but would love to understand what sell-through was.

And then, really quickly on MDM, your mobile device management opportunity.

Any metrics you have?

Or, how should we think about the success of you managing iPhones and Android devices would be helpful.

Thank you.

Just on the split of -- we're not going to provide the split on sell-through on the BB10 versus BBOS.

I think just relating to channel inventory, we're expecting that we would see BBOS come down and channel build on BB10 -- BlackBerry 10 -- as we started launching across in our global launch.

Peter, it's Thorsten.

On the metric for MDM.

We have an installed base that we are working into, and as I just said, we're just launching BES 10 with its cross-platform capability.

Very excited about the secure work space.

I myself met with a lot of customers.

What I can tell you qualitatively is that I received very, very good feedback.

Those deployment cycles take time because you have to run it through the IT department of our customers.

We are helping them.

We are assisting them.

So, the metrics is really kind of like typical Fortune 500 metrics -- what's the penetration there.

We're looking at our installed base.

How much coverage of the installed base will we be able to achieve.

And also, frankly, how many new customers are we able to win.

So, we're working customer by customer by customer, and that's what you will be seeing us throughout the quarter.

Thanks, Peter.

John, next question, please?

Thank you.

Your next question comes from Todd Coupland with CIBC.

Please go ahead.

Yes.

Good morning, everyone.

On services, so are you saying that we should use $800 million now as the base, and then continue to decline that in the single-digit range?

Yes, Todd.

It's Brian.

That's correct.

So, as we get more information, and we have any updates on Venezuela, we'll provide those as appropriate.

Okay, thanks.

Thanks, Todd.

Next question, John?

The next question comes from Simona Jankowski with Goldman Sachs.

Hi.

Thanks very much.

You sited a more competitive environment is one of the contributors to your expectation for an operating loss this quarter.

Can you just expand on that?

And, just let us know specifically what you mean there?

Are you seeing an impact on pricing?

Or, are you having to do more Marketing promotions, counter to revenues, anything of that nature?

Simona, this is mostly due to if you look at BlackBerry 10 being a whole new platform, we will be investing and really making sure this platform penetrates the market, right?

So, it's really the penetration play that we need to do, and for that you need to invest in marketing.

You need to invest in promotion.

Whatever kind of nature they take, there's very different instruments that you can bring to play here, and we still haven't launched all of our products yet.

We're building our portfolio.

There's more to come -- more exciting products to come, and they will also require investment in order to really manage a broad and high enough penetration of BlackBerry 10 into all the various global markets that we're in.

Thank you, Simona.

John, next question, please?

Your next question comes from Richard Kramer with Arete Research.

Please go ahead.

Hi, thanks very much.

Thorsten, you mentioned several times that you're not a device-only Company, and that you want to get into this mobile computing space.

I guess the question is now with such a difficult and competitive environment in devices, could you see BlackBerry pivoting away from making devices and trying to become over the next couple years just an enterprise software services company?

And, I guess the key question for Brian for all of us is will there be any material services revenues from BES 10 or BB10 in FY '14?

Or, is that something that it's going to take another year to build up the base of that we would see it only in FY '15?

Thanks.

Hi, Richard.

That's a long-term strategic question.

And, as you can imagine, we're also working actually together with our Board on long-term strategic views.

However, I mentioned that I was visiting with a lot of corporate customers and corporate clients, and I really talked big large companies.

And, for them, it was very, very obvious in all of these meetings that they don't look at BlackBerry as elements toward a solution.

They actually look at BlackBerry as an end-to-end solution, and that includes the device as for high-end security device it plays a major part in delivering that best-of-breed security to the market.

Right now, I will not break that logic.

I need to provide my customers what they require.

They require best and highly innovative security, and that for the time being needs the device to be part of that end-to-end solution.

But, what we also do is in order to address the BYOD trend, that's why we launched the Secure Work Space is not as secure as BlackBerry -- if you would, a BlackBerry device.

But, it is paying tribute to what's going on in the market and positioning BlackBerry as a strong, cross-platform security player.

Okay.

Richard, it's Brian.

So, just on the services question.

We're just starting to roll out these services, as everyone knows, and so our focus is on building these out.

We need to invest in them in these services in BES 10 BBM, and I think with our financial positioning allows us to invest for the long-term strategy execution.

So, it is going to take some time for those to develop, but we are also looking to mitigate that exposure that Thorsten referenced in his script about just the declining service revenue.

Thank you, Richard.

John, next question, please?

Thank you.

Your next question comes from Ehud Gelblum with Morgan Stanley.

Please go ahead.

Hello.

Appreciate it, thank you.

A couple questions, just first clarification.

The 72 million subs, Brian, that you said that you have right now.

I think you said you're not going to be repeating that number going forward.

Just want to make sure that with the lack of being able to recognize cash out of Venezuela that that 72 million does or does not include the subscribers in Venezuela?

That's just a clarification.

Yes, it does include Venezuelan subscribers.

Okay, so it continues to.

Okay, appreciate that.

One of the things I didn't hear, and I may have missed, was in terms of units.

If you could give us a sense as to guidance for next quarter.

How are you looking at units for next quarter both on the BB10 side and BB7?

And total, whichever you feel comfortable with?

And then, during the quarter, did you have to adjust going back to a previous question about gross margin on the hardware side.

Was there any adjustment in prices to any of the BB10 devices that you have been selling in the quarter?

Or, did they pretty much sell at the same price points that you initially entered them into the market with?

Thanks.

This is Thorsten.

First, we are not providing really specific guidance at the moment.

I think we all understand why.

It's a very competitive, very volatile market, so many dynamics going on here.

So, it is really, really hard to predict, even with a three-month outlook where are we going to be.

And, what we are doing right now is again, we are pushing the whole portfolio into a Global Market.

That's what we are focusing on.

We're focusing on driving the sell-through so our customers get the devices in their hands, and when they get them in their hands, they seem to be really happy with what they see and what they can experience with the new user experience on BlackBerry.

That's what we are focusing on, and that's what we will be driving.

And, we will report back in Q2 -- by the end of Q2 -- how things are going.

But, full focus is on penetrating the market, the global market, and full focus is on expanding the portfolio.

Just in terms of pricing, we don't give any specifics on price moves on our BB10 devices.

So, as we've mentioned, we are looking to invest with carrier partners on driving and improving that adoption of BB10 as we move forward.

Thanks, Ehud.

John, next question, please?

Thank you.

Your next question comes from Amitabh Passi with UBS.

Hi, thank you.

Brian, a question for you.

If I look at the core elements of working capital, receivables, inventory payables, it looks like the three items were down over a use of cash of about $355 million.

Yet, you generated cash from working capital, and there's a big movement on the other current asset line.

I was wondering if you could clarify what that was?

And, just your expectations for working capital use or source of cash as we move into the next quarter.

Sure.

So, I mentioned in my comments that we were in receipt of a corporate tax refund so that was the one offset to the use of cash related to building out our inventory and the increase -- sequential increase in our revenue quarter on quarter.

So, as we continue to move forward, we're looking at every way we can to more efficiently manage working capital, and we're seeing that we're going to be investing in Q10, Q5 launch -- more launch activity.

So, we're going to see continued pressure on inventories and just building out to support the launches.

Thank you.

Thanks.

John, next question, please?

Thank you.

Your next question comes from Rod Hall with JPMorgan.

Please go ahead.

Yes, thanks for letting me have a question.

Couple of quick questions.

One, I guess Thorsten, if you could comment, I understand the strategic logic on enterprise.

I just wonder if you could comment on how interlinked you see the consumer business with the enterprise business.

Obviously, there's quite a bit of OpEx going out for marketing and so on, distribution in consumer.

Just wondering, do you think that you need that consumer business to lower component costs so that your enterprise devices are more competitive?

Or, can you just help us understand what the interlinkage between consumer and that enterprise business might be in your mind?

Or, if there's no linkage, let us know that, too?

And then, on the BlackBerry Messaging App on iOS and Android.

I'm just wondering how open you guys are to a full-blown BlackBerry App on those platforms, iOS now providing background processing.

So, it seems like it would be possible for you to go more full bore on those platforms and provide a full user experience.

I'm just wondering how open you are to that, thanks.

Okay, Rod.

So, first one, how much is consumer and enterprise linked.

I think we all have seen the BYOD trend that has basically been going on for about probably two years, a bit longer, and it's kind of a little bit of a dichotomy that you have to be good in consumer to be good in enterprise because right now it is actually also the employee in the enterprise deciding which device makes it into the enterprise.

So, from that perspective, there is segmentation in the enterprise which is where can I deploy consumer-ish devices without having too much of a security concern.

And, where do I really need the full-blown BlackBerry security.

There is kind of a -- you have to be good in consumer but you have to be differentiated in enterprise play here.

And, this is what we're doing with BlackBerry and what we're providing is based on our experience in security to bring a good level of security to iOS and Android devices which gives peace of mind to CIOs.

But, that absolutely the full management experience and the security experience on BlackBerry is unmatched.

That's the way we look at it at the moment, and as I said, I think Rich had asked that question right now.

Customers look at us to provide them an end-to-end solution still, and we can't break that paradigm.

Thanks, Rod.

Next question please, John?

Thank you.

Your next question comes from Kulbinder Garcha with Credit Suisse.

Thanks, just a couple of clarifications.

Brian, one thing I'm struggling with is on the cash flow side.

If it wasn't for the income tax receivables benefit you had, you would have burned probably $400 million or $500 million of cash.

And, given the launches you've got ahead, can you actually not burn cash in the next couple of quarters?

That's my first question.

And, the second question for Thorsten is, I understand that you're in the midst of this launch on BlackBerry 10, but the numbers that it is producing at the moment seem to have fallen short of a lot of people's expectations including our own.

I'm kind of wondering, is there anything you look at the launch that you think hasn't gone as well?

You could have done better?

Or, is it just a timing thing that you still feel comfortable with that because I guess unless the volumes pick up quite soon, you are going to become a very niche player in the smartphone business.

Many thanks.

Okay, Kulbinder, it's Brian.

So, just on your comment, we fully anticipated that with the launch of these products we're going to -- as it relates to working capital -- consume some working capital as it relates to investing in these launches.

And, as we move forward, we think we have the right financial strength for the long-term execution on the launch of these products.

As we work through, we'll continue to look at how do we optimize and manage our working capital going forward.

To the second question of how do we feel about BlackBerry 10 and the launch.

I think I've said this in my script.

We're doing what we said we would do, right?

We are launching BES 10, Q10, Q5, more to come.

We're in the middle of it, right?

So, it's really too early to say.

We're building a portfolio right now against what my expectation was in Q1.

We are performing, and from that perspective, I'm confident in the future of BlackBerry 10.

But, there's lots of work to do.

There's lots of new products to be built.

There's lots of new product to be launched.

There's lots of marketing campaigns to be generated so it's going to be ongoing effort.

It's not automatic.

I know sometimes you look at where is this one product that kills everything else.

I tell you it's not out there.

It is a very competitive market.

It has several players, and you've got to be on your tippy toes all the time to perform, and that's what we're doing.

But, we're not ignoring competition either, and what we have done with BlackBerry 10 is just built a fantastic, differentiated user experiences that users now latch on to and that doesn't happen from one week to the other.

It doesn't happen from one month to the other, and it actually doesn't happen from one quarter to the other.

This is a marathon, right?

And, we are ready -- with the financials that we have under our belt, now we are ready to run that marathon.

That's what we're doing.

So, I'm not looking at this short-term.

It's important for me how does BB10 penetrate.

It's important for me how does BES 10 penetrates, and it's important how is BBM cross-platform coming along.

I think all of these three initiatives are very, very exciting growth initiatives, and what we have decided as a Company will be -- we will be investing in them and we will drive them hard.

And, there will be a time where we will see and our shareholders will see the value and the benefit of those initiatives.

That's great.

Thanks, Kulbinder.

John, next question, please?

Your next question comes from Richard Tse with Cormark Securities.

Hi Thorsten.

I know you're early here, but obviously you can't continue at the current run rate.

So, how long has the Board given you to get some meaningful traction on BB10 before you pivot to something else or consider some kind of strategic review?

Because the uptake that you've had now, and again, I know it's early, it looks like it has been pretty soft here.

So, what's the time frame for that?

I love my Board, but it's the C-level at BlackBerry that runs the operations, and we are absolutely bang on with what we want to do with the product.

We're executing as we speak, and whatever is being discussed in the Boardroom, I probably wouldn't discuss that on a public earnings call, but I can tell you that we are in sync with our Board.

We all know what we're up for here.

We're all together in this fight, and we're executing.

I think the last quarter has shown that we execute against what we say we would do in that very quarter, and that matters.

That's the only thing that matters at the moment to the Board and to the executive management of BlackBerry.

Thanks, Richard.

Next question John?

Thank you.

Your next question comes from Jim Suva with Citigroup.

Thanks very much, Thorsten and Brian.

Quick question.

We're starting to already see carriers do price cuts on the Z10, and it's not been out very long.

Net subs, loss of 4 million, was concerning, and you're opening up BlackBerry Messenger to be free.

It seems like the marketing support so far even though you've increased it just really hasn't taken off.

I don't know if it's customers aren't catching the message or carriers aren't catching the message or the product is not clicking.

But, can you just kind of help us understand about where the marketing spend is going, and last quarter, you'd mentioned an increase of 50%.

Should we expect that again going forward?

But, it just seems like all these things you've thrown out there, and it just seems to not really be sticking.

Or, are we simply just too early in the story to know and see the fruits of those efforts.

If you talk about where we spend marketing and how we drive adoption of the portfolio, there's a plethora of different activities that we're actually running and that we're also funding, and this is not just what you see probably in above the line and on TV.

It goes way further than that.

It is really training of the sales reps.

It's video assets that we're deploying in order to get people familiar with the great BlackBerry experience.

It fits in traditional media.

It fits in carrier promotions.

So, there's lots of activities going on, and then we do this product by product, and we do this region by region.

So, it's a huge, let me say, variety within those marketing initiatives.

But again, as I said before, I mean these initiatives need to be planned.

They need to be well executed upon once time comes to execute on them.

Our carriers are with us, and they are helping with promoting BlackBerry 10.

But certainly, there is also -- as I said, it's a new experience.

It's a new platform.

It's a plethora of new products coming out, and you don't do this in step function.

This is stuff that takes a bit of time.

It takes an investment.

But again, we are happy that customers are buying our product.

We're getting great reviews on the user experience being different than what's out there.

I think I said this on the last call, I'm so proud and I'm so happy that we've built our own platform with BB10 that allows us to be different, to be differentiated, to be segmented -- to clearly understand whom we are targeting as BlackBerry and not to be a me-too based on an open OS and based on an open application framework.

That matters to us.

That matters to our customers.

That's what we express in our marketing campaigns, and that's what we're focusing on.

We're seeing good traction with this.

And Jim, it's Brian.

Just on the Quantum that you were asking about for Q2.

It would be similar to Q1, but again, it fluctuates based on different launch activities.

And, we will do what it takes to make this successful so this is not a static number.

We will not sacrifice long-term success for short-term numbers, right.

It's important we get the platform out there.

We get it penetrated, and then we build on it with additional services with the combination of BES, BB10, and BBM cross-platforms.

Great thanks, Jim.

One more question, John, please?

Thank you.

Your last question will come from Ben Bollin with Cleveland Research.

Good morning.

Two-part question.

The first part looking again at this cash flow benefit in the quarter driven by working capital efficiencies.

Brian, how much longer do you anticipate to see benefits from non-core working capital metrics?

And then, the second part is looking at BES 10 and BBM on a go-forward basis, can you give us some specific examples of how you're going to monetize each of those?

Looking at BES 10 is it [Cal, T-support]?

And then, BBM, how do you monetize the social networking aspect?

Thank you.

Okay, thanks.

It's Brian.

Just on the working capital, I wouldn't put a time frame on how we're efficiently managing this.

So, we'll continue to look at ways to maximize what we can do within working capital, and that includes all aspects of inventory management and our receivable balances and other aspects of working capital.

On the second question, Ben, about how to monetize on BES.

The way I look at this and what we're building with BES is not just a cross-platform mobile device management system.

What we're actually building is a mobile enterprise service platform -- a mobile enterprise service platform.

And, if you look at what I just talked about in the script, you can imagine this sitting there as a platform that will be monetized by itself for whatever means.

But then, you put these additional services on top of that platform, one of which then will be cross-platform mobile device management.

One of which will be security, and then one of which will be Secure Work Space for third-party devices.

So, we will monetize through the platform but also through services sitting on top of that.

One of the examples was the over-the-air software download into the automotive sector.

We are working on initiatives that are not just within the classical enterprise workforce or productivity environment.

We're working on examples and on projects where we could actually help vertical industries to get much more productive and efficient and being capable of doing things they couldn't do today on an extremely reliable and secure data network.

Thanks, John.

Thanks everyone for joining us on the call, and we will talk to you next quarter.

Thank you.

Ladies and Gentlemen, that does conclude our Conference Call for today.

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