BlackBerry Ltd (BB) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the BlackBerry third-quarter fiscal year 2014 results.

(Operator Instructions)

I'd like to remind everyone that this conference is being recorded today, December 20, 2013.

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

Please go ahead.

Great.

Thank you, Luke.

Welcome to BlackBerry's fiscal 2014 third-quarter results conference call.

With me on the call today are John Chen, our Executive Chair and Chief Executive Officer, and James Yersh, our Chief Financial Officer.

After I read our cautionary note regarding forward-looking statements, John will provide a business update and James will then review the third-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 Smartphone, your personal computer or your BlackBerry PlayBook tablet.

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

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

Some of the statements we will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws.

These include statements about our plans, strategies, objectives and expectations, and the anticipated opportunities and challenges in fiscal 2014; our plans and expectations regarding our transition to an operating union structure consisting of enterprise services, messaging, Tunix-embedded business and devices business; our plans and expectations regarding changes to and expected efficiencies in our devices business, including the new partnership with Foxconn; our plans and expectations regarding our BBM platform, including potential new offerings such as cross-platform BBM channels; our plans and expectations regarding the BlackBerry 10 platform, including BES10 and its impact on our business, including our expectations regarding future revenue; our expectations regarding future financial performance and reduction in operating expenses; 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 in our forward-looking statements, including risks relating to our ability to implement and realize the benefits of our strategic initiatives; the risk and uncertainty relating to our recently completed strategic review process, as well as our operational restructuring; recent management changes and workforce reductions; our ability to adapt to and realize anticipated benefits of management changes; our ability to realize benefits of our core program; our ability to maintain existing relationships with our enterprise customers, and ability to transition them to the BES10 platform; our ability to maintain and increase our cash balance; other factors set forth in the risk factors and MD&A sections in BlackBerry filings with the SEC and Canadian securities regulators.

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

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

I will now turn the call over to John.

Thank you, Paul.

Good morning, everybody, and appreciate you all joining us.

That was one of the longer versions of any Safe Harbor, but appreciate it, Paul.

Okay, this is John Chen and I've been here, I think, a sum total of 45 days.

And it's been very exciting.

And I'm very pleased to report on various progress.

And love to have a ongoing discussion and dialogue with each and every one of you.

I apologize for the fact in the last 45 days, despite a number of you plus the media that would like to reach out and have a conversation with myself.

I intentionally spent, I figured it was better for the Company to be more credible to have a conversation with facts with you all, at least to formulate an opinion that is based on some knowledge.

And so I spent most of the time emerging myself into the business, in understanding the organization, the strength, the weaknesses, the opportunities, and the potential pitfalls.

And also, as you could see, we've been very busy relating our management team, organizing ourselves so that we have maximum efficiency, and addressing productivity in our Company.

And also to look out, to reach out, to have partnerships that could really help us in various areas.

For example, in areas of manufacturing and development of handsets.

So this is going to be an ongoing dialogue with all of you.

I'd love to be able to share with you all of that.

The first thing, first, people always ask me about strategy.

I think it's important to understand that BlackBerry has enormous amount of assets -- technology; patents; businesses that we're in, in various stages; very devoted people, very committed devoted, excited people that wanted to do the right thing for the Company, for the customers.

And we admit the fact that in the past maybe we haven't really aligned ourselves up as properly as we should have done.

That have affected our results, the market has spoken.

We listened and we're going to even listen more as we go forward.

So, one of the things that I want to make sure we all understand is, we are in enterprise, mobility, highly secured strategic environment.

That's what we would like to serve and this is how we are going to organize by doing so.

A lot of time when I say something like this, people come back and say -- Oh, therefore you rely on the consumer, you don't care about this.

The answer is no, that's not true.

I like to reach the consumer and the mass audiences maybe through our partnership.

This is only a realization that what do we do well as a Company with our employees and our infrastructure, and how do we leverage others to do.

And I hope you will see that as a basic theme of a turnaround.

It's not so much as when I say we'll do X, therefore everybody concluded we're not going to do Y. And in some cases it might be, but I would like to focus on X or do well on X, and then have somebody else help us to do Y. And so there's always that priority layering.

And, again, I'm sure that over time we're going to have more and more discussion and you'll understand that.

I'm going to talk about the organization a little bit, and the organization is line up around business, it's not line up about organization, it's not line up about people.

I think we're going to make driving the business and making more transparent as the number one goal.

The success of those businesses are the most important thing.

It's not so much as what does the organization look like.

That will all tie to a strategy and a common strategy.

We have very strong balance sheet.

You can see the numbers -- over $3 billion in cash.

And I want to be the first one to tell you the cash position we have today will definitely allow us to engineer our turnaround.

And we are, as I said earlier, we organize ourself to be a lot more nimble.

The good thing is a lot of talents would like to join us, and a lot of good talents.

I have got a lot of e-mail.

People find us intriguing.

Myself find it intriguing.

But those of you who know my background -- probably not too many, it's not as well known -- you'll find that I've done a number of these before.

This is probably the most complicated at this point, but it's a great challenge.

I find it extremely intriguing.

I'm very excited to be able to lead this turnaround effort.

And I think, in my opinion, it's going to do well.

I'm sure the lawyers going crazy by now.

Okay, strategy.

As I said earlier, we're aligning ourselves to focus on the regulator industry.

I think we have, I feel like there's a lot of people attacking our base company that, frankly speaking, doesn't have as robust as our offering.

And some of them are very point products base.

They are some of the pickings from good press.

But this is a time for us to come out and articulate our value, our technology, our reach, and our heritage.

I came from enterprise background.

I feel comfortable in engineering that.

So, we are going to focus on doing secure end-to-end offerings on mobile computing and productivity suites.

We're going to spend more time talking about that.

We're also going to focus a lot on security suites, as well as communication suites.

And we're going to talk about that later I'm sure.

We talked earlier about we have a very solid base, good engineering talents, good assets, good cash, and a very excited group of people that want to see good things happen.

The way I organize the business now is according to -- I put the business in four different units.

I call it operating units.

They're not mature enough, and each and every one of them have some little different reasons so they are not mature enough to have its own segment.

But maybe one of these days I would like to do that.

Now, that particular transparency I will have to ask for your patience on.

I remember when I did it in the past company, it really helps focus the Company and the employee, and motivate people to do well.

But at the same time, I realize that all of you would like to look at all four and then we are expecting all four make tremendous progress.

We would like to do that, too, but we can't guarantee that every quarter will be like that.

And, so, some people have told me that why do I keep poking myself in the eye by laying it out.

But I believe at this stage in our Company, the situation I believe is the most investor friendly to lay out our assets, to showcase our strength, to be transparent.

And I hope you help us by not just keep poking me in the eye, and helping us to achieve that transparency.

The four units are, as you've seen it, handsets, device units; enterprise software and services, the BBM, the BlackBerry Messenger units; and the Q1x, the embedded, I would call it, machine-to-machine business units.

Again, this line up of focusing on execution and operation excellence.

We are making some major changes in the leadership.

I'd like to speak a little bit to each and every one of those segments, or operating units.

My CFO doesn't like me to use the word segment.

I understand that because we're not mature enough to line that up segment.

So, let's start with the device unit, which is obviously the biggest.

And it's the biggest risk exposure for us, as you could see in our last couple of years.

One thing I did is to finish a job, by the way.

It was laid out by both the Board and prior management, a discussion with Foxconn.

So, I wouldn't claim credit that I come in and then just go grab the thing that is the smartest thing that I've done with that.

It's a smart move, I would tell you that.

The only thing I could claim credit is that I saw the opportunity and drove it to completion.

That's the only thing I could claim that credit.

Foxconn and BlackBerry has been, as I said, in discussion of a partnership for a little while.

It's a very good partnership.

People want to talk about detail, I could talk about details.

We have a press release on it.

But what is good for BlackBerry, we now at least have somebody who have the world-class supply chain, not to only manage the cost about devices, and the ability to design newer, faster turnaround, hardware designs, and also position us so well in the developing markets.

But the most amount of thing is it removes our exposure, at least a big part of the exposure, if not the majority of our exposure, of inventory.

So I'm hoping that we never have to have a conversation going forward about inventory writedowns.

You guys could press James on that.

And so we talk about the economic of scale.

They are really efficient, you know them that they are also a JDM partner of some of my major competitors out there in handsets.

And one important thing is we are going to start collaborating on building handsets together.

They will most likely take over the hardware design.

We will continue to provide software technology, our brand, our suites.

And we will collaborate on distribution channels.

So this is going to be very exciting.

Our first joint product, by the way, is going to probably come out March/April-ish time frame, probably more April than March.

It's code name -- actually, [jakarter].

And it's going to be a 3G device but now I'll give you more detail of that.

It's going to be very competitive.

And we are starting with the Indonesian markets.

We have another maybe six or seven different markets that we identify that we'd like to take these devices to.

Again, it's going to be based on BB10.

And I think this is going to be a exciting positive collaboration.

If I move to the enterprise space -- Oh, by the way, and so the device group is going to continue to build out best-of-class technology and software, as well as some very high-end phones.

And our designers is already working on that.

And so this gave us more pipeline in the phones going forward, with minimum exposure, as I said, for financial.

The second thing is, the second area is in enterprise.

The best technology.

We do have a great technology but I think putting the packaging together and the go-to-market is a little bit of our weakness.

And this is an area that we're going work on.

I think there's tremendous opportunity ahead of us in terms of offering more secure layering of software, identity managers, management, lots more integration, for example, with BBM, we call it enterprise BBM.

There's just lots of features and opportunities.

And we are going to focus on it and we're going to focus on the go-to-market.

And stay tuned on that.

Again, as I said earlier, this is an area that I know a little bit about.

And we are going to go back to the market pretty aggressively.

Let's go to the BBM.

As you know, we got good penetration of BBM, especially in the last quarter as we open up for the Android and the IOS environment.

There's a lot of good statistics.

We now have 80 million active users on the month, as they measure about a monthly basis.

And 60% of those active users are using it daily.

And that's a really big number.

The other major good names out there, like Instagram, I was told, was about 50%.

So we're definitely right up there, if not better than everybody else.

The more interesting thing, and the more exciting thing, is, because so many of our users are also prosumer -- professional consumers -- they use our BBM on a daily basis longer in duration every day, almost like 90 minutes on average, than anybody else.

So this is really a very exciting area.

The question then becomes how do we monetize this.

And the reason why we separate this unit out the way that it is right now is to highlight that fact.

I believe that this is one of those start-up node company.

I think in the year, fiscal year '15, we're mostly focusing on investing and building out more features and channels.

Channels both in BBM channels, so the enterprise could use it.

We already have a lot of BBM channels out there, about 250,000 channels out there today.

And also channels as the partnership.

So you will see us focusing on both of those areas.

And then I would expect to see some reasonably good revenue in about FY16 from this business.

Let's go to QNX, which is probably one of the crown jewels.

Every time I come here, our partners call me and customers call me that really want to work with us on QNX.

It is an embedded technology, a microkernel technology, most of you know.

We dominate the automotive industries at 40 OEMs and in all kinds of different type of platforms in cars.

In fact, we're going to showcase one at CES show January 6 to 9, I believe, in Las Vegas.

So, if you happen to be there, please drop by our booth to take a look at our new technology there.

The plan is to invest in this and grow.

The plan is to go by other vertical because we are doing very well in automotive vertical, we are going to continue to focus on that, but we're going to start looking in adjacent verticals to expand the business.

In addition to that, we're going to build a platform that are cloud based, that is going to be machine-to-machine based architecture.

And, again, I think if anybody has been following the all things internet, if you think about that, or all things mobile, that is going to be the next frontier, the M2M.

And the good news about BlackBerry is we already are in that space, and we are working on that, and we have the basic technology for it.

This microkernel is extremely strong.

And anybody who want to talk about that, I'd be more than happy to engage that conversation.

I think that's all I should talk about.

It sets the stage of the future conference call.

I will start describing the progress and the opportunity and the challenges in each of those businesses.

I hope that you will be interested in that, and bear with us on that.

And then I'm going to turn the call to James and will come back on the Q&A.

James?

Thank you, John.

And good morning, everyone.

I'd be happy to take questions in a little while about everything John threw my way.

But there is a lot I want to take you through, so let me get right to it.

Revenue from continuing operations for the third quarter was $1.2 billion, down from $1.6 billion in the second quarter.

Service revenue was the Company's largest this quarter and represented 53% of revenue.

This 13% sequential decline reflects a lower number of BlackBerry users.

And was in line with the Company's expectations communicated last quarter.

This decrease also reflects the impact of a pre-tax $60 million service revenue deferral related to our carrier partners in Venezuela.

Hardware represented 40% of revenue and declined 38% from the second quarter.

The decline reflects the fewer number of devices that were recognized in the quarter as a result of intense competition.

Of the 4.3 million BlackBerry smartphones that sold through to end customers in the quarter approximately 1.1 million were BlackBerry 10 devices.

During the quarter the uncertainty surrounding our recent strategic review process continued to negatively impact demand for our products.

Software and other revenue represented 7% of total revenue in the third quarter.

Software declined by 11% from the second quarter, primarily attributable to decreases in the maintenance and client access license revenue.

Our new BlackBerry Enterprise Service 10 software is currently in trials and is being installed by customers this year.

Since launching BES10 earlier this year, we have provided our customers with free upgrade and free trial arrangements until the end of this calendar year.

No material revenue has been recognized yet but we expect to see gradual revenue contributions starting in fiscal 2015.

Other revenue increased by 81% from the second quarter due to foreign exchange losses on hedging instruments incurred last quarter, not repeating in Q3.

Gross margin in the quarter included a primarily non-cash $1.6 billion inventory charge and $76 million in core restructuring charges.

These results reflect the challenges our hardware device business is undergoing.

As John noted, the announcement of our new approach to jointly design and manufacture certain devices with Foxconn is expected to significantly change how the Company approaches its device business going forward.

And we believe this should help improve these results.

Excluding the impact of the inventory charge and charges related to the core program, adjusted gross margin in the quarter was 34%.

During the quarter the Company also recorded a non-cash long-lived asset impairment charge of approximately $2.7 billion.

The Company reviews any changes and events and circumstances that have occurred on a quarterly basis to determine if indicators of long-lived asset impairment exist.

It was determined that after the strategic review process and corresponding significant decrease in the share price, on the announcement that Fairfax and other institutional investors were investing in the Company through a $1 billion private placement of convertible debentures in lieu of purchasing the Company, that the carrying value of the Company's assets exceeded their fair value based on the impairment testing performed by management.

As a result, the Company recorded the non-cash impairment charge in its operating expenses of approximately $2.7 billion.

The impairment charges recorded in the quarter reflect the realignment of the Company's balance sheet that John took us through, towards the enterprise focus, less device-centric strategy.

Operating expenses also reflected $190 million in charges relating to the Company's core program and strategic review process.

$37 million of these charges were including an R&D expense.

And $153 million was reflected in selling, marketing and administration.

Amortization expense also declined, reflecting some benefit of the lower cost base of long-lived assets as a result of the impairment charge incurred in the quarter.

Adjusted operating expenses, excluding the impact of the impairment charge and the core program charges, were $823 million, down 17% from adjusted operating expenses of $996 million in the second quarter.

As previously announced, cost reduction is and will continue to be a major focus at the Company as we realign the business.

The Company continues to target achieving approximately a 50% reduction in operating expenses by the end of Q1 fiscal 2015 compared to our first-quarter levels.

GAAP loss, including $4.6 billion of primarily non-cash charges, was $4.4 billion or $8.37 per share.

Adjusted loss from continuing operations, excluding the charges, was $354 million or $0.67 per share.

We will be targeting to improve these results in the coming year.

And I can assure you the new team will be focused on delivering significantly better execution to insure this performance is not repeated.

Despite these results, as John mentioned our balance sheet remains very strong.

Cash increased in the quarter to $3.2 billion, up approximately $600 million from $2.6 billion at the end of the second quarter.

This increase reflects the additional $1 billion associated with the convertible debenture offering the Company completed in November, plus improvement in working capital and a significant tax refund received in the quarter.

This increase was offset by cash used associated with operating losses, costs associated with previously announced restructuring programs and the settlement of various manufacturing and related supply chain purchase commitments.

As the Company had discussed in the past, maintaining a strong balance sheet is a priority as it completes this transition.

Financial flexibility is essential to executing on this strategy and implementing a long-term transition.

And our teams are focused on insuring cash generation as a priority, both operationally but also through evaluation of all non-core and non-essential assets.

Inventories were $254 million, down $687 million from the second quarter.

The reduction includes some of the impacts associated with the inventory writedown plus the lower levels of inventory, as well as purchase commitment requirements as volumes declined.

While the partnership with Foxconn represents a new model for production of BlackBerry devices, it also represents a significant change, an important change in our model for managing working capital risk.

Under this new partnership, Foxconn will jointly develop and manufacture certain new BlackBerry devices and manage the inventory associated with those products.

This will allow the Company to participate in new products and new market opportunities with very minimal inventory risk, and therefore allowing us to preserve our liquidity.

Purchase obligations and commitments in the third quarter declined 49% to $1.5 billion compared to $2.9 billion in the second quarter.

Purchase orders with contract manufactures were $664 million, also down 56% from $1.5 billion in Q2.

Accounts receivable was $1.2 billion, a 29% or $500 million decrease from the second quarter.

Accounts payable of $750 million was also lower, and represented a 34% or $380 million decline compared to Q2.

CapEx in the quarter was approximately $46 million compared to $112 million in the second quarter.

Capital investments remain predominantly focused on the BlackBerry network for the quarter.

While we have managed CapEx down to these lower levels as the Company refocuses, we have significant cash to allow our businesses to invest in long-term strategies to drive appropriate returns and allow them to grow.

Intangible asset purchases were $234 million in the quarter, which consists primarily of payments relating to amended or renewed license agreements.

These licensing agreements, of which the majority of the remaining value of approximately $500 million is reflected in our purchase commitments, will be completed by Q3 of fiscal 2015.

As a result, we expect the quarterly cash expenditures to decline substantially at that time.

While we may enter into new licensing agreements, the lower handset volumes will likely significantly reduce the cash outlay, resulting in additional liquidity.

In summary, we've made progress this quarter.

We reduced OpEx, we lowered the levels of capital spending, and we reduced purchase commitments by a significant margin.

While there's still significant work to accomplish, the Company is financially very strong to implement the changes necessary to execute on our long-term strategy.

Both John and I look forward to reporting on our progress over the coming quarters, and we look forward to meeting you in person in the future.

That concludes my comments and John and I will now be happy to take your questions.

Operator, if you could gather the question roster, please.

And while you're doing that let me recap a couple of things.

I think James already took you through the financials and you could see that we have greatly reduced our liability as a whole.

We find a way to manage our device business so that it will be hopefully, going forward, cash flow positive.

And we have laid out our organizations, as well as business focus for growth.

And we are able to invest in that.

This is going to be a little bit longer transition, like everything else.

I normally don't provide outlook, forward-looking.

And, so, James and I had looked at it in many different ways and we believed as our target that we will be able to get to cash flow neutral from operations probably towards the end of the fiscal year, the coming fiscal year, FY15.

And we are very targeted and very focused in turning a profit in FY16.

Now, of course, my lawyers will tell me that you've got to qualify this by, as Paul had laid out earlier, all these words and adjectives.

But the point is, I think there's a really good shot at it.

And this management team is committed in trying our best to achieve that.

So, with that, I would like to open it up for Q&A.

(Operator Instructions)

Maynard Um of Wells Fargo.

Hi, thanks, good morning.

How should we think about the bottoming of your business segments?

In hardware you talked about the Foxconn business.

Will that mark the bottom as those units ramp up?

And then in the services, once those free trials and the license upgrades end at the end of the year, will that uptick there mark the bottom for that segment?

And then if you could, just as a follow-up, talk about bringing BlackBerry to other operating systems, IOS and Android?

Appreciate it, thank you.

Thank you.

Great questions.

I think, first of all, it will probably take us a couple more quarters to engage the Foxconn mood.

For example, we're building these handsets eventually.

We're starting up Indonesian plants -- or, Foxconn is starting up Indonesian plant -- to build our first joint design.

So, I think you might, unfortunately, see our handset volume not going to uptick and might even shrink a little bit before we bounce back.

So, you have to factor that in.

I would say my estimate is probably middle of next year -- fiscal year, when I talk, about fiscal year -- middle of next fiscal year because we're going to launch it in March, April, in both channels, in our channel as well as in Foxconn channels.

So, it's going to take a little bit of time.

So that's how you should think about it.

In terms of the BES, yes, I believe that this is about correct -- James?

-- about our bottom and top of the software numbers.

Agreed.

About the bottoming numbers.

You should start seeing uptick.

This is area that my number one focus is build a field and account engagement from the ground up, again, and invest in that.

That will take a little while.

But on that score, we are seeing some of the trial of coming on to switching online.

So, if you see that, we have the numbers already laid out.

Like 31,000 BES10 servers out there.

Of course not every one of them in production, but that number had grew from 20,000 a quarter ago.

So, I believe that that will be a bottoming out, and I'm comfortable with that, at least for now.

QNX will grow and BBM investment mode.

So that's the first question.

What was the follow-up question?

Maynard, can you ask your follow-up question, as well, please?

Yes, just BlackBerry and IOS and Android, if there was plans to move that over.

We'd love to do it.

I hate to just articulate the plan.

I will give you the statement about we are -- the one great thing about BlackBerry is we are well known not only in security but productivity.

And I would love to find a way to make our BlackBerry experience on the Android and the IOS.

It's not without difficulties, as you all know, but it's something that we would love, we are very interested in trying.

Great, thank you.

Best of luck.

Ehud Gelblum of Citigroup.

Hi, guys, appreciate it, John.

Nice to meet you, virtually.

A couple questions and clarifications actually.

On the phones that Foxconn will be making, their phones that they are making and they are designing.

I was a little fuzzy on whether you actually sell them and/or gain any revenue from them.

Or does that just expand the base?

I wasn't sure if that's something that accrues to you revenue-wise or not.

Can you give us an update also on the sub count -- I know it was auspiciously missing from the press release -- just to give us a sense of that sub count.

How do you see the service revenue?

Because that's the length of your runway that you've got to land the plane in.

It was down only 13% this quarter.

Not that bad.

But that sub count that you have probably gives us a sense as to how long that service revenue lasts before your other pieces of the business have to start lifting up the whole Company.

If you can give us a sense as to what the sub count.

And then what your view of the service revenue looks like.

And then, finally, on BES10, you have 30,000, 31,000 people using or companies, enterprises, using it.

Right now it sounds like they are on free trials.

How many of those do you expect to convert?

And if we're doing modeling how should we look at the revenue from each one of those 30,000 as we go into fiscal '15?

Thanks.

Okay, there are many parts of this.

On the Foxconn revenue, we are selling those handsets.

In fact, it is a joint development manufacturing agreement.

So, as they are successful in selling a handset that revenue will grow for us.

So that's the exciting part.

We are both going to sell it and then the revenue will definitely flow through us.

On the design of that, so everyone need to understand that, it is completely BB10.

All software designs will be provided and be managed by BlackBerry.

And the hardware design, initially, the first one we are jointly designing it together.

We obviously have taken advantage of their efficiency, their parts, the ability, their supply chains and their ability with the logistics.

It's very impressive, as you all know.

But over time I really would love for them to design more and more phones for me from a handset point of view, and I just get out of design, to design some really high-end cool stuff.

That's my thinking, my plan.

And eventually it is going to be the right model for us.

I don't know about the answer to your sub count.

I'll let James answer that questions.

Do you have any of the numbers for sub count?

And the decline, interestingly enough, it is about our model 12%, 13%.

There's one thing about, BlackBerry does have very loyal -- I have seen customers, I've spoken with, the phone was about to fall apart, the BB7, they are still using it.

And so there might be a longer tail than most people think.

And so I'm not counting on it, that it will be an upside for our model if we do have.

Then the rest, of course, I will also ask James --.

Ehud, it's James.

I would say that there is some volatility for that number but we've been fairly consistent on a decline for the last couple of quarters.

On the sub count right?

Even in terms of the revenue decline.

But I think the last couple quarters we've been fairly consistent so for modeling purposes I think that's a good estimate to use going forward.

The same -- 10 to 15 -- low to mid teens decline?

I think you're thinking about it right, Ehud.

Okay.

And on the BES10 revenue opportunity for those 30,000?

The revenue we are expecting to see.

Definitely we still have a strong customer base that will be using the servers.

So, we expect it to start materially contributing, as I said in my prepared remarks, in fiscal '15.

There's still a lot of demand for the product and we expect the conversion rate to start to pick up.

In terms of Quantum, it should, as we go forward, as adoption continue, replace where we go now.

But effectively our aspirations is to exceed it and to start being a more significant contributor of our revenue profile going forward.

Also, the other thing is, I'm really excited about the potential selling or offering more different features on the BES10.

So, I'm really looking at BES10 as a base server and there will be other options that we'll take into the market.

For example, just for one enterprise BBM, for the regulator industry, it's a really strong firm offering, from a compliant, audit, privacy, secure environment.

You guys know a lot about our messaging system.

I think that's also an addition to the BES10 that we differentiate ourselves against other competitors who just have the basic vanilla MDM, for example.

Peter Misek of Jefferies.

Thank you.

Just a couple of questions, one clarification.

Firstly, on the clarification, can you help us understand tax refunds, how much they benefited cash flow in the quarter?

Cash flow was clearly a little bit better than we would have been fearing and modeling.

And then as we look at the strategy for handsets going forward, notwithstanding the Foxconn partnership, maybe you can help us understand how the carrier relationships are, and how to reengage them, whether you're going to reengage them, on both the consumer and business side.

Thank you.

Peter it's James.

I'll take the first one.

In terms of the tax refund, as I mentioned in my prepared remarks, it was a significant number.

We're going to file our disclosure documents this afternoon and more details will be provided to the cash flow reconciliation when we do that.

As far as the strategies, John, as far as strategy handsets, the second part of the question, yes, I'm already in touch with Verizon and AT&T, as well as I'm going to be in touch with Vodafone and a number of really key carrier around the world.

They are very interested in our enterprise offering.

So, the enterprise side I could feel comfortable in telling you that we have established various different reengagement model and engagement model.

On the retail side I'm still working on it.

This is a good thing for me to work on and I can't really tell you a lot about how successful we are going to be.

Of course we want to be successful but this is something that will take a little bit of time to do.

Regarding the strategy of the handset, we talk about the Foxconn JDM, and we also spoke about the fact that we got to focus ourself building high-end handsets.

And we're probably going to continue to work the JDM angle more so than anything else.

Great, thank you.

Gus Papageorgiou of Scotiabank.

Hi, thanks for taking my question.

And thanks for the introduction, John.

Just a couple questions, just on the handsets, just so I'm clear.

Basically you're going to rely on Foxconn to both help you design and manufacture handsets for the developing, fast-growing markets, which are generally lower- to mid-range ASPs.

But it sounds like you're still going to maintain your own designers for the higher-end markets in the enterprise and western world, North America and Europe.

I'm just wondering how do you plan to position these devices in the western world?

Clearly there's been challenges there.

Are you strictly going to address the enterprise?

Is that the strategy for the developed Markets?

Or do you think you can still maintain the high-end consumer?

And then, James, just for you.

This is the second quarter in a row where you've recognized fewer devices in terms of revenue than you shipped.

Should we expect that at some point the revenue recognition will come in and that we will see the revenue from the devices that you've been shipping?

Let me answer the first question.

For the foreseeable future, our designer in North America will focus on enterprise handset only.

This does not imply, again, that over a long term we're not going to get ourselves back into the consumer space.

But in the next foreseeable future, until we get our financial back on solid footing, that is what we are going to do.

Most of all the other designs I'm going to rely on Foxconn to do, included the one that we will take to the five high country and the developed western world.

Those designs we already have an agreement with Foxconn.

Those device will be jointly developed.

But I'm hoping that they do more hardware and I do more software.

And we're going to manufacture and build that from our Mexico plant -- or, their Mexico plant, sorry, we don't have a Mexican plant.

So, they will do it at the Mexico plant, so in a NAFTA country, to supply to the developed and western market.

So, more and more, so this is truly a very collaborative partnership.

Gus, over to your question on deferred revenue.

The activity in the quarter basically resulted in channel inventories going down overall on an absolute basis.

So, if you look at the balance sheet, and the deferred revenue continuity specifically, you actually see a decrease from Q2 to Q3.

So I think some of the phenomenon that you're asking about going forward you're starting to see happen in this quarter.

Now, we're going to continue to work with our carrier partners and some of our enterprise customers, as John described, to make sure that flow through continues, even within some of the challenges we faced recently.

So, yes, definitely I would expect that deferred number to start coming off the balance sheet.

Thank you very much.

Mark Sue of RBC Capital Markets.

Thank you.

John, thank you, and thanks for not being a lawyer.

Probably a lawyer will want to talk to me right after this meeting.

But please go ahead.

Thank you.

If I look at the high-end enterprise, you've been under attack, BlackBerry has been under attack, from so many sides for many years.

And many of your customers, even the most loyal, seems to have made contingency plans.

We understand the risk transfer to Foxconn, yet the competitive landscape still remains the same.

You have one large competitor who's combining hardware and software.

The other has an open OS.

So, if I'm an enterprise customer, what do I get from BlackBerry which I didn't get before, even with the changes that you're making now?

I think, first of all, it has to be very security based.

That's number one.

We are the only one who actually has end-to-end security.

We have the handset, the BES, the messaging, and any of the embedded machine to machine.

Of course our NOX.

We are also, in many of the government arena, we are on the highest-end list to the rights to operate.

For example, in the United States defense and the high-end defense government environment, as well as in NATO.

So I think this heritage is something that we have shifted away from or not paying attention from for a little while.

I'm going to come right back to it.

In that environment, in that secure environment for regulator industry, we'll add more features and more integrations, both in the communication side and the productivity side of the equations.

So, this is going to be coming back and challenging the people who are trying to attack our base, so to speak.

You are correct, this is not, by no means, a slam dunk to be done.

But it's worth a fight and I think has a very good opportunity and good probability of winning.

John, would it be fair to say that you would be narrowing the number of verticals, so you're not going after the enterprise verticals as widely as before but it's just a narrow, specific and deeper penetration into these critical secure verticals?

For the immediate future I am going to focus on the regulator vertical.

I'm building a salesforce to go after that.

Amitabh Passi of UBS.

Hi, thank you.

John, sorry to beat a dead horse but I am a little confused about the devices strategy here.

Why even bother to stay in the devices business?

I think there's only two companies in the industry that have tremendous scale that make money.

So, just trying to understand your strategy.

Would you be happy having a breakeven devices business and then just monetizing software and services?

That was the first question.

And then maybe for James, if you could just clarify how we should be thinking about OpEx for the next quarter.

All right, a great question.

Yes, the short answer to your question is yes.

I'll be happy to have a breakeven or a low-margin device business, and then have that help us to monetize software services by providing an end-to-end solution.

However, I don't think the jury is out.

The one reason why the last 45 days, what I worked on with the Foxconn arrangement, and some of the internal arrangements and investment area, is to make sure that we don't lose money from the device business.

And then I'm going to examine that maybe as soon as we start stabilized, this is going to be an ongoing conversation.

I don't have any preconceived notion of we have to do it this way versus the other way.

I just want to make sure that we serve our customer well and people want to buy our stuff and make money.

And that's what I wanted to make sure we do.

Speaking of making money, coming to the OpEx part of your question, definitely the target that I laid out, the reductions compared to the Q1 base of earlier this year, probably implies another 10% decrease or so, if you just go back and look at the levels versus where we are targeting to take the program.

And, of course, as I said before, it's not necessarily that we're going to stop there.

We are going to look to continue to turn over every rock and look for every dime that we can.

Okay, thanks.

Kulbinder Garcha of Credit Suisse.

Thanks.

A question for John on the services stream.

Today your services, if I understand, they are all linked to your subscriber base.

And we were under the impression from the previous management there that, number one, your subscriber base is probably going to shrink.

I think it's fair to assume that.

But also there's a transition within your BlackBerry subscriber base as you go from BB7 to BB10, where the subscriber access significantly dropped.

And so the question that I really have is, if that's really the dynamic, are we looking, especially as you de-emphasize the unit run rate in the device business, why wouldn't that services really see an accelerating decline going forward?

I'm confused as to why that wouldn't happen.

And then on things like BBM -- just my follow-up linked to this -- on BBM, how do you exactly monetize that?

Because there's lots of these messaging apps out there that are free or integrated.

I'm just trying to understand, is this going to be an advertising business model?

Do you think you actually get paid by the consumer users or the enterprise users?

Or is it bundled as part of enterprise services?

Any clarification there would be helpful.

Thanks.

Okay, good question.

I don't actually -- I have a formulator idea.

I will have to come back and report back to the group here as time progresses on how we monetize it on the BBM side.

Yes, we do have -- currently most of us, first with fees, the majority of them are tied to the SAF, which is the service activation fee.

And that number, as James has pointed out, is going to come down on a quarterly basis, probably about in a mid teens area, or 10%, 11%, 12% area.

And we have 13% last quarter.

So, that's where we are expecting to see.

However, the BES will kick in.

That will offset some of the decline.

We are going to put in -- that ties to the BBM question.

We launched the enterprise BBM.

So, it will be a service that we offer in conjunction with our BES strategy.

And we expect that to be, I think the model is going to come from enterprise paying from the per user per month model.

I will not rule out the monetization from advertising model but, on the other hand, at this point in time I think we're very far away from knowing how to do it.

That doesn't mean we cannot do it through a partner but it's far from -- it's not in my math.

It is an opportunity.

Thank you.

Rod Hall of JPMorgan.

Hi, John, nice to meet you.

Just a couple little questions, maybe clarifications, for you.

On Foxconn, I still am not completely clear how you guys pay Foxconn for management of the inventory.

So, maybe James or you could comment on how the accounting is impacted.

Do we see lower gross margins as those devices mix in or some other costs coming through for that?

And then it would be great to get a little more detail on the asset impairment.

I assume mostly the devices business but were there other things, like the NOC, that you might have impaired in that impairment, as well?

Just maybe walk us through the big chunks of that.

Maybe James could do that.

And then lastly you were asked about Android and IOS strategy.

Could you just give us some indication of when you might be willing to go public with what your plans for an enterprise application for Android and IOS might be?

And that's it.

Okay, Rod, it's James.

I'm going to take the first two aspects, and I'll let John take the IOS and Android one.

The Foxconn relationship, I think you referred to them paying us for inventory, and that's not the model.

No, James, just to be clear, I'm asking what you might pay them, because obviously if they're managing inventory for you there's some value transfer from you to them probably.

And I'm just trying to get a feel for what that looks like.

Okay.

So, here are the big benefits to us, maybe one layer lower than we've been talking about it.

What Foxconn is going to do for us, if I'm thinking about margin holistically, Rod, is we've talked in the past about our fixed cost base associated with manufacturing and some other costs.

Moving things to them basically gives us relief on that.

So, that's more of a cost avoidance type of thing.

And you're right that they are going to take on some of the risk of excess and obsolete inventory.

But that will be built into the product cost effectively that we pay them for.

So, the model that we have with them is, of course, we are going to be paying them for the built product but we're going to resell it.

So, there's some margin inherent in doing that.

And, of course, that margin, where we are as a handset business, is much better than what we're getting here today.

So if I'm just thinking about hardware and devices margin, I can get some benefit as we move that relationship almost immediately from just fixed costs in that particular model.

Moving on to the asset impairment, definitely the bulk of the impairment related to intangible assets and not our own patents.

Really some of the past investments we've made in licensing agreements and effectively prepaying those.

We had a balance sheet that was skewed to a high growth hardware devices company which, as you can appreciate from John's comments, we're at a reset point.

We're pivoting into something else.

So, it was definitely, the largest portion of that was associated with that type of asset and not the network operating center that you just went through.

I'll come back to the IOS conversation, but since I helped negotiate the contract with Foxconn, I'm sorry if there's a little bit of confusion.

It's actually a pretty straightforward.

We both, Foxconn and BlackBerry, will be joining force to design a device, a number of devices.

The first device is going to come out, as I said, in March/April time frame.

And so that you all know, I already held one in my hand that actually runs our BB10 software.

And we have some identified market that we go after through both of our distribution channels.

That first device is going to build in Indonesia.

They will carry all inventory.

They will provide a bill for materials, their logistics to acquire the supply chains.

And then, of course, they will transfer to us that manufacturing cost.

Which is, by the way, much lower than what we're doing today.

And, of course, we no longer pay for fixed costs or inventory exposure, which was the number one thing that I wanted to go after.

Then we, of course, have our software costs on top of that.

Then we will bring it back out into the market.

When they sell it, when we sell it, then we will take the revenue of that sale.

And there is an agreement that if the volume gets to a certain amount that they also should start sharing a little bit of some portion of the margin.

We do hold back.

I mean, we do hold back.

We do enjoy the majority of the margin of all of the handset sales.

So I hope this is a little more clearer.

If I further confused you guys, we have to talk offline on that.

Regarding IOS and Android, I'm working hard at it.

So, I'm going to have to ask you guys to be a little bit more patient and give me a little break here because I've only been here 45 days.

It probably will take me another, I don't know, one or two quarters to formulate our strategy in my head and with the team support and advice.

And, in addition to that, obviously, we also will need to tap various people in the ecosystems to make sure that we're not just smoking our own thing here.

So, collaboration is very important.

So, it's too early for me to talk about it.

And when I'm ready -- I'm working -- the only thing I could promise you is I'm working hard at it.

All right.

Thanks a lot guys.

Tim Long of BMO Capital Markets.

Thank you.

Two questions, if I could here.

First, on the MDM mobile device management, specifically, I think you mentioned about 80,000 subs or so in the press release this morning.

So, obviously, much bigger than your BlackBerry enterprise sub base.

So would just love some thoughts there on how that splits between BlackBerry devices and other.

And maybe just talk about the monetization there and how that might be different on your devices and other devices.

And then, secondly, back to the devices, specifically on gross margin, it looks like a pretty deeply negative number for hardware gross margin this quarter.

Just talk a little bit about the timing for that return back to positive.

Thank you.

The second one is easier one.

You could look at our total numbers and financials you could see that predominantly the negative part comes from our handset business.

We talked last hour on the whole Foxconn equation.

And James talk about our cost reduction and purchasing obligation and inventory clearing costs.

All that combined.

This will tie to our ability to become cash flow positive and profitable.

So, you should be looking at it from towards the end of the fiscal year '15 some time in the early fiscal year '16 as our targeted dates for that to become a hopefully positive number but at least not a negative number.

And regarding the MDM, we sell it as several licenses.

So, I don't think there's any difference whether we're managing an IOS device or Android device or BlackBerry device.

And because we are in the business for so long, this is why the numbers are a lot bigger than everybody else in terms of installation.

We need to refresh that.

This is our base for us to go in and reengage the market, and reenage our customers to be able to offer other beyond MDM.

Like I said, identity management and all the security features.

The list goes on.

And BBM, of course.

The list goes on.

So, this is exciting because it's at least an opportunity for us to go back and reengage and can get focused on that part of the business.

Simona Jankowski of Goldman Sachs.

Hi, thanks very much.

Just had two questions on the cash side.

You mentioned in the press release something about a significant tax refund in the first half of next fiscal year.

Can you just give a little more color on the magnitude of that?

And then, is this a sustainable level of CapEx for you here or should that bounce back higher in future quarters?

Similarly on the spend on intangibles, about $230 million in the quarter.

Is that a sustainable level or should we expect that to go lower?

And then, just lastly, given that you're reducing the fixed cost base, is that already reflected in the writedowns this quarter, so that on a go-forward basis we're going to see that in this new run rate in the operating cost to the business?

Or is there yet another step down to look forward to?

Okay, Simona, it's James.

And let's start with your tax question.

So, two things about tax -- or, I'll start with two things.

We did get a tax refund, as I said in my prepared remarks, in the quarter.

And we did in our last quarter's filings talk about future tax refunds.

So, both of those components are relevant.

And, as I said before, we will provide further details in our disclosure documents this afternoon.

In terms of capital spending, I think in terms of a steady state business, the current levels are appropriate.

But as John and I have been talking about, we know that investment is going to be required.

We have the capital to make those investments, we'll go about it wisely, but we know we have to invest.

And CapEx will be part of that to allow the other businesses to grow.

On the intangible spending, I did give an end date at least to the bigger drivers of our spending -- $500 million as at the end of Q3 that will terminate or be done by our Q3 of fiscal 2015.

Now, it will step down probably in the first or second quarter a little bit.

But once we get to Q3, I would expect that number to decrease drastically.

And, finally, on the fixed cost base, if I'm thinking about depreciation, yes, some of the benefit was reflected based on the writedown.

But as we talked about ad nauseum almost with the Foxconn discussion, there's a lot more that we need to go after on the fixed cost base that we can, not only with Foxconn, and moving to that relationship, but that we need to look at as management, and come up with some efficiencies there.

Thank you.

Ben Bolin of Cleveland Research.

Thanks for taking the call.

I wanted to start looking at BlackBerry 10 as a platform.

Arguably it hasn't been terribly successful.

And I'm curious how you think about the platform going forward.

What features, functions, capabilities can you do with that to improve adoption in the future?

Good question.

Yes, it is something that the result is less than desirable, I would say that.

But, as I said earlier a number of times, there are a lot of features that one could add that are in the productivity area, communication area, security areas, messaging areas.

Well, I guess messaging is part of productivity and communication.

So, I think about us providing those suites on the BES10.

And also making sure it's operating system agnostic.

I don't have the line-by-line functionality but I have groups of people working on it right now that define what that BlackBerry experience and BlackBerry advantage is going to be.

But it's going to help, literally help, our customers using BES10 as a basis to securely communicate and securely make it a work engine, so to speak, especially in the mobile world.

And also machine to machine, and also payments.

There's a whole bunch of things that we have identified that we need to do.

Some of them will be organically done, some of them will be inorganically done.

And as I hope by now all of you realize, that going forward we have a reasonable plan to invest and to clean -- it's already a very clean balance sheet.

We have good cash coming in, we're strong in cash.

We are no longer worrying about whether we're going to be around.

And then I have certain areas where I'd like to really beef up.

We talked about it already a lot.

And with a good relationship on manufacturing side of the equation.

That takes away the biggest choke hold of the Company in the last couple two or three years.

And now, we're ready to fight back.

One other question.

If you look at your installed base, just the users who are currently paying service revenue, what's the mix of existing enterprise users versus consumer type users?

I think majority, 80%-plus, are enterprise users.

Thank you.

Okay, I thank you very much.

I really appreciate, I enjoyed the call.

I hope you do too.

And I look forward to -- and James and I look forward to have the ongoing dialogue with you all in addition, especially we're going to do this quarterly discussion in this kind of format going forward.

Have a good day and hope you guys support the Company.

Thanks, everyone.

Thank you.

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

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