BlackBerry Ltd (BB) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the BlackBerry fourth-quarter 2014 results conference call.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded, and I will now turn the conference over to Mr. James Yersh, Chief Financial Officer.

Please go ahead, sir.

Thanks, Luke.

Good morning everyone, and welcome to BlackBerry's FY14 fourth-quarter and year-end results conference call.

I'm James Yersh, the Company's Chief Financial Officer, and with me today is Chief Executive Officer, John Chen.

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

We will then open the call up for questions.

This call is available to the general public via call-in numbers and via webcast, as noted 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 the BlackBerry.com website.

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, and are made pursuant to the Safe Harbor Provisions of the US Private Securities Legislation Reform Act of 1995 and Canadian securities laws.

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.

Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perceptions of historical trends, current conditions, and expected future developments, as well as other factors that the Company believes are appropriate in the circumstances.

Many factors could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the Company that are discussed in the risk factors section of our annual information form, which is included in the Company's Annual Report on Form 40-F and the Company's MD&A, copies of which filings may be obtained at BlackBerry.com.

These factors should be considered carefully, and you should not place undue reliance on the Company's forward-looking statements.

The Company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

I'll now turn the call over to John.

Okay, thank you, James.

I was listening intensely about the undue reliance on some of my comments.

So good morning, everybody and welcome to our call.

On our last earnings call we laid out a eight-quarter plan and our strategic priorities for returning the Company to growth, and as far as profitability, so I'm obviously extremely pleased with the Q4 results, because it put us on the track and is now slightly ahead.

So I'd like to, on the financial side, of course James will go into much more detail.

I'd like to just kind of focus on the few things that I feel pretty good about.

The first thing is our operating expenses.

It's on target and it's actually ahead of target, and I understand the Company had made some statement in the past, and I think the numbers show that we are about a quarter ahead of schedule at this point.

More importantly, our normalized use of cash from operations is now 30% lower compared to last quarter.

Our adjusted EPS loss is down to $0.08, compared to $0.67 a quarter ago, and as I pointed out, James certainly will go through all of the financial details.

Maybe I'll just focus more on the activities of the past quarter and going forward.

So the last few months, we have spent a lot of time streamlining, I spent a lot of time understanding our channels, and we spent a lot of time streamlining and rationalizing our channels.

As a result, channel inventory is down by one-third from the work we've done.

We have moved all our distributors on their contracts and the marketing plan, pricing, go-to-market, and various elements that's important.

Also, we're getting ready to ship our first device that is collaboration with Foxconn, the Jakarta, the Z3, just about four months after we announced the partnership, and that will obviously follow by the long-awaited Classic.

Our BES12 announcement at Mobile World Congress and its related migration program, called the EZ Pass has generated a lot of interest, significant interest from enterprise customers all over the world.

We actually have over 100,000 hits to our landing site, our landing page on our website, from the interested party, I'll go into a little more detail later.

So all in all, I'm very pleased with the fact that the Company is now back in execution mode, and I'd like to maybe -- for those of you maybe either new to the story or just need a little bit of refreshing on what we try to focus on doing, I'd like to maybe give you a little bit of a layout of the strategy.

The first strategy in the very near term or current term is about the priority of BlackBerry to return to financial soundness.

This means a few things to us.

First, the handset business must be made profitable, and we're working on our supply chains with the like of Foxconn, Wistron, and other suppliers all across the world.

We are focusing on regulated industry, who value the BlackBerry strength, and the tent pole technology that we offer, in security, in productivity, and in communication.

And also, we're putting a big emphasis on protecting our customer investment of the past, I'll spend some time on that, and it has a lot to do with the BB OS devices, the EZ Pass program and so forth.

We will of course continue to put a lot of effort on reducing expenses and streamlining our operations to generate positive cash flow and return to profitability.

The next focus area, which I started with my team here is on growth, and there are obviously many opportunities.

We just need to make sure that we do it in a well-paced manner and don't want to get too much ahead of ourself.

This will, a lot of our growth, I believe will come at least in the immediate future, will come from software and services, messaging like BBM, and embedded software, like QNX.

We're building new features and value-added services into the BES12, and we have a very solid BBM monetization plan.

As I pointed out earlier, one of the big items for us in the last few months, talking to customers, is to be able to bridge the install base into the new devices and new technology, both BB10 and as well as the going-forward BB12, and we are putting a lot of emphasis on that on 12, BB12 as well as the Classic device.

The next thing that we are all working on is on go to market strategy, and we're identifying new routes.

It's a lot of effort, but we are pre-set, we're starting it, and we have some good new recruits coming into the Company to assist that.

We are aligning and streamlining our sales force to increase the effectiveness of the direct to enterprise model, as well as we continue to support our carrier channels.

We are looking at expanding into non-traditional channels such as e-commerce, this like to shop BlackBerry.com, and now on our own site, you could buy the Unlock, the 10, 30, Q10 and Q5 phones there, and we are also working with other third parties on e-commerce and stay tuned for that, as we obviously will report that as we get more progress.

We've been rationalizing and expanding our distributor relationships.

As I pointed out, inventory has been coming down, and things are starting to move again.

On the longer term, we could see a lot of opportunity to leverage our full portfolio in end-to-end mobile solutions, and connected cloud solutions, and this of course covers the whole gamut, from the device strategy, both handsets and other devices, the messaging strategy, the server strategy, the embedded software strategy, the NOCs, and so they all come in as a coherent set of solutions, and also a vertical focus.

So I'm very pleased with that, I'll spend a little bit of time later on that point.

Obviously, our Q4 performance gives us increasing confidence towards meeting our first financial milestone.

That is to achieve a goal of cash flow breakeven by the end of the fiscal year and to reach profitability in FY16.

That said, we have a very sensible investment plan, which include new product launches and building our new channels over the next few quarters and so expect some fluctuations of our loss, as we work towards the profitability, but then we are reaffirming our goals that we laid out in terms of cash flow breakeven from operations, as well as profitability in FY16.

So now I'd like to just spend a minute on a few of the business highlights, and I'm sure we're going to go into it a lot in Q&A.

So on the enterprise side, well I guess the big news was yesterday.

We announced BlackBerry is the first and only mobile solution provider to achieve the full operational capability certification to run on the US Department of Defense network.

We were also the first MDM vendor to achieve the authority to operate certificate, they call it the ATO.

That means the government uses now, could use the BlackBerry 10 smartphone, managed by the BES10 platform, and they could securely access e-mail, data, apps, and other resources on the DoD network of the US.

I always remind myself I'm in Canada, otherwise my colleague will point that out to me, that I'm in Canada.

We now have nearly 33,000 BES10 commercial and test service installed globally, so according to one industry analyst firm, the BlackBerry ha s over 60% of the MDM market, mobile device management, that is, market, among the large enterprise system.

Furthermore, we also find out that our competitors install base, over half of those, their needs are not being addressed.

This is from their own survey, so this represents great opportunity for BlackBerry.

To strengthen our position and market share with the enterprise, we announced the BES12 at the Mobile World Congress.

Many of the features and new programs around BES12 such as the compatibility, backwards compatibility, cross-platform support and simplified version -- simplified pricing, I'm sorry, we address critical needs for BlackBerry customer, as well as others.

So BES12 highlights will include the following: We have a new architecture offering customers the option of on premise, cloud or hybrid solutions.

Backward compatibility allows the unifications of the BES10 and BES5 deployment into a single platform and console, supporting the BES10 and BBOS device.

This is huge, and when I went and talked to -- have time to visit customers, the customer likes a lot of the BES10 features, but they were complaining about having two infrastructures that they have to manage, which is the old BBOS infrastructure, as well as the BB10 infrastructure.

This is the first attempt to merge that two into one, so the customer could move on to newer technology, and yet still protect the investment they already made at BlackBerry.

So I know this is huge, and I pointed out some of the website hits and stuff, I'm going to go into it a little bit more, and so I'm very encouraged by that.

We obviously also enhanced the platform support for the iOS devices, Androids and Window Phone 8 so this, BES12, will take care and will be able to manage all of the different devices out there, plus all of the old BB device and the new BB device.

Then we provide an EZ Pass program that makes it simpler for the customer to move to BES10, and then subsequently BES12.

We are offering free upgrades to our BlackBerry customers and free migration for companies on competing MDM platforms.

Customers will also find far simpler pricing and licensing.

Where it now only goes down to two tiers, the silver and gold, and each providing different values and differentiated BlackBerry capabilities and features.

As I pointed out earlier, we've seen great receptivity, very strong customer interest in a number of large customers, including in financial services has planned to exchange their competitor licenses as part of this EZ Pass program, and by the way, EZ Pass programs start April 1, which is in a couple of days.

We have over about 100,000 visitors, as I pointed out, to our EZ Pass landing page, and nearly 1,900 registration for more information.

We're seeing customers around the world firming commitments to our BES with wins in the US, Germany, UK, India, Australia, and Latin America in the last quarter.

There's some very notable names.

I think we have talked about Daimler in the past, Daimler AG Group, and the Airbus Group, ITC Limited in India, Australia National Audit Office, and Itau Unibanco in the South America region.

So we're encouraged with the fact that we're starting to see good customer win and traction.

I'd like to spend a minute on device.

Another big part about us going out and talking to customers in the last few months, that we found that our customers still love the BBOS device, particularly the BB7 device, and a lot of them have been asking for it.

And this is really the motivation and the idea of driving, of what's building the Classic.

Therefore, I'm very pleased that I'm formally announcing that we're starting a new production run with Wistron on the BBOS device for worldwide distribution.

I think that most of you know this as the Bold.

We'll continue to make these devices available and support the operating system of course, as long as there's customer demand.

We have a number of exciting new launches lining up also, as we go forward in the year.

First off is of course the Z3 or of the Jakarta program, we'll be launching for our Indonesian customers.

Jakarta has leveraged a solid BlackBerry user base in Indonesia, and tactically positions us for growth in the emerging market, with a very attractive price offering, which is under $200.

After signing our partnership with Foxconn, we executed and delivered quickly.

In just four months, Jakarta was designed, tested, and delivered, including having a carrier arrangement, so I'm extremely proud of the ability of the speed of both teams executing.

Training for our distribution channel for this particular device in Indonesia will start late April, the product will then be in store shortly after that, and available nationwide in Indonesia.

And the PR launch will follow that, and I plan to be there in person.

Later in the year, we plan to expand the Z3 to other regions in Southeast Asia, that is Thailand, as well as India.

We will also launch a LTE version of the Z3 phone for global distribution.

Another device announced at Mobile World Congress was the Classic, formerly known as Q20.

That's a very big part of it.

Marketing people wants to name it Q20.

I named it Classic.

We did a survey of one, that's me, and we won.

Classic won.

We're targeting the calendar Q4 for the Classic to be released.

It probably is going to be in tandem with the BES12 releases.

This device is obviously for true BlackBerry loyalists, and return ourselves to the roots.

The customer loves our keyboard, the track pads, the utility belt, the e-mail services, the cut and paste, everybody loves, and the battery life.

To these users, their BlackBerries are the indispensable productivity tools, so early customer feedback on the Classic concept is extremely positive, and I've been going around and talking about that.

Spend a minute on BBM.

Obviously, it's now a lot of excitement regarding BBM, because of Facebook and Ali Baba, not that they're doing, they're using BBM, their entry into the market.

At present, we have roughly about 85 million monthly active users and a total of 113 million registrations to date.

We're seeing solid uptick in multi-platform users, driving growth in total registration.

Like last quarter, growing the BBM user base is a top priority, and we have a number of initiatives driving this.

We announced some of these at Mobile World Congress already.

One is the expanding platform reach.

BBM will be available on Windows phones, adding to our support for iOS and Android.

Like LG Group, BBM is now featured on the Nokia X platform device.

This will include pre-loading BBM in selected markets today, joint development efforts on its way for Windows phone platform, for global availability targeted for fiscal Q2.

This will also include, and for some selected device on Nokia like in the Lumia portfolio, we will have pre-load of BBM, when it's shipped.

In February, we launched our BBM 2.0, which includes several new features, where we have location services, Dropbox integration, we also added the voice and channel for cross-platform users.

BBM channel has drawn some strong interest from brands and businesses, so we add a lot of new channels daily.

Recent partners will include CNBC, Time, Rolling Stone and Virgin Atlantic.

The channel delivers to our partner a highly engaged and targeted mobile audience, so we now actually have 0.5 million BBM channels, and then this number is growing very fast.

I think when I first started four months ago, we were in the 200,000 number, so in four months, we are double a number of channels, and the user of this service on average reads 11.5 posts per day, so that's a highly engaging model, that's quite good, so a pay media model with BBM channel is a potential monetization opportunity.

The other monetization strategies of the near term, obviously including the [stickers] and the BBM shop, and those will be available in some markets soon.

For Apps, the most strategic part of this is the EBBM suites, which obviously initially will work with the BlackBerry smartphone and the BES, and we use this to offer the enterprise class mobile messaging technology.

The first solution we have announced as part of the suite, let's call it BBM Protect, and BBM Protect will provide enhanced end-to-end security in a real-time messaging platform for enterprise, or for groups.

With BBM Protect employees will use a single apps for both internal use under the regulated level of enhanced security and external use to outside the BBM context.

We are introducing customers to BBM Protect in the public sector, the financial services, mostly focused on the regulated security conscious vertical.

We have already got really high interest levels from those.

Going further, our team is working on a potential mobile payment for the financial services and industry at large, as a longer-term monetization play.

Moving on to QNX, which is also a lot of buzz around QNX in the last quarter, QNX is obviously our microkernel, suitable for embedding, the embedded technology world.

We are pretty dominant in the automotive industry, as far as the embedded space is concerned.

We also have started having seeing new traction in the medical and consumer electronics industries.

There is a consortium for the connected car, called the MirrorLink and they have a standard so bear with me, this is a little bit of a mouthful here, they have a standard called DLNA, and now Apple CarPlay is also compatible with QNX, and so QNX is really the underlying technology that connects to a lot of the initiatives, whether it's with that particular consortium called the MirrorLink, the Apple push, as well as other major technology company push.

We have showcased some of these capabilities, if you have seen or went to the Mobile World Congress, as well as the CES at the beginning of the year, as well as the Embedded World Conference in Germany, so it's very excited about our market penetration and leadership in this connected car world.

Obviously, as part of our long-term strategy we aim to fully leverage the potential of QNX in the M2M world and the Internet of Things, that those opportunities present itself.

Obviously, please stay tuned.

This is an area that I'm also very excited about for our future.

So, let me just kind of wrap up.

The focus in the coming quarters is obviously get the Jakarta phone launched, finish the Classic, get the BES12 released, get EBBM connected with the BES12, in connection with the Classic, and work on the go-to-market, building -- it's a lot of things to do -- building the direct sales force or for the vertical industry, regulated, and expanding our channel strategy.

We are obviously very focused on execution and very fortunate to have a great team of people supporting all these initiatives, are pretty excited on executing.

Obviously we have shown you that we have a lot of good focus, great products coming out, we have done good work in reducing our inventory, we're still focusing laser eyes on the OpEx and cash management to deliver the two milestones that we're striving, and so all these add up to a very strong long-term strategic path to grow in profitability.

So I'd now like to send the call to James, and then we'll come back for the Q&A.

James?

Thanks, John.

There's a lot I want to take you through this morning, so let's get right to it.

Revenue from continuing operations for the fourth quarter was approximately $976 million, compared to $1.2 billion in the third quarter.

In the fourth quarter, hardware represented 37% of revenue, compared to 40% in the previous quarter.

The Company recognized revenue related to approximately 1.3 million BlackBerry handheld devices in the fourth quarter, compared to 1.9 million in the previous quarter.

Although the number of devices recognized decreased quarter-over-quarter, we have been working with our partners to improve sell-through levels, and to stimulate global demand for BlackBerry devices.

3.4 million BlackBerry smartphones were sold through to end-users in the quarter, which included shipments made and recognized prior to the fourth quarter, and which reduced the Company's inventory channel.

We continue to implement programs with existing partners, and as John mentioned, we've actually expanded our reach into some non-traditional channels as well.

These efforts were instrumental in decreasing channel inventory of existing products by a third, and it allowed us to broaden our global reach.

Service revenue represented 56% of revenue, compared to 53% last quarter.

While service revenue will continue to be generated by current and future users of BBOS devices, we expect revenue to decline in the first quarter of FY15 by a percentage consistent with the decline experienced this quarter.

As John noted, we continue to see good traction with the adoption of BES10.

To help offset the lower service revenue generated by customers using BBOS devices, we expect to see gradual revenue contributions from BES10 and the recently announced BES12 beginning in FY15.

Software revenue represented 6% of the consolidated revenue, compared to 5% last quarter.

Gross margin for the quarter was approximately 57% on a GAAP basis.

Adjusted gross margin, excluding core costs and the benefits from the reversal of previously-recorded inventory provisions was 43%, up approximately 9% compared to the third quarter.

This improvement in margins is attributed to the reductions in the cost of goods for handhelds, and the cost of services, as well as to revenue mix.

Spending one second on the inventory provisions.

Effectively, when we booked the original provisions, we underestimated the future sell-in for some of our models back in Q2 and Q3.

We're now experiencing higher demand, and we've adjusted the assumptions to reflect that.

Last quarter, I made the comment that the Company had work to do on reducing elements of fixed costs impacting margins.

During the quarter, we began executing on a variety of those tasks focused on doing that, and we have started to see the positive results.

Operating expenses decreased by approximately 30% in the fourth quarter compared to the third quarter of FY14, on an adjusted basis.

The decrease is attributed to reductions we made in outsourcing and consulting services for the Company, reduced marketing driven by seasonality, and a more focused spend prioritization, as well as headcount reductions.

GAAP operating expenses reflected $131 million in charges relating to the Company's restructuring program, with $21 million included in R&D expense and $110 million reflected in selling, marketing and administration.

Amortization expense was $107 million in Q4, declining by 28% from the previous quarter.

This decline reflects the lower cost base due to the long lived asset impairment charge recorded in the third quarter, as well as reduced CapEx spending.

The goal that was originally communicated in September was to reduce adjusted operating expenses by 50%, compared to the Q1 FY14 run rate of approximately $1.2 billion.

With the adjusted OpEx levels reported in Q4, I'm pleased to say that through relentless focus on execution, we were able to deliver on this goal one quarter ahead of schedule.

There's still improvement to be made, and the Company will continue to make cost reduction a major focus as it realigns its business; however, I do want to make it clear that investments are required going forward to support the execution of this strategy, and ultimately the Company's future growth.

GAAP loss from continuing operations was $423 million, or $0.80 per share.

This includes a non-cash accounting adjustment on the value of the Company's convertible debt of approximately $382 million.

The GAAP loss also includes a pre-tax reversal of the previously-recorded inventory charges, as I previously described, as well as a pre-tax restructuring charge of approximately $148 million.

Adjusted loss from continuing operations was $42 million or $0.08 per share.

Now moving on to our balance sheet and working capital performance.

Cash flow used in operations in the fourth quarter was approximately $553 million.

Cash flows provided from financing activities were approximately $251 million, which includes the proceeds of the additional issuance of $250 million of convertible debentures.

Cash flows used in investing activities included intangible asset additions of $243 million.

Purchase obligations and other commitments amounted to approximately $1.9 billion, with purchase orders at contract manufacturers representing approximately $586 million, a further 12% decrease from the previous quarter.

CapEx was approximately $22 million in the quarter.

Our balance sheet remains strong.

Total cash, cash equivalents and investments was approximately $2.7 billion.

Also, when compared to Q3, the quarter-over-quarter cash burn decreased by approximately $300 million, as John mentioned.

As we have discussed in the past, maintaining a strong balance sheet is a priority and will continue to be, as we work through our continued transition, and we are doing this in a number of different ways.

Just last week, we announced that we have entered an agreement to sell the majority of our real estate holdings in Canada.

This announcement is part of the Company's ongoing program to improve operational efficiencies, optimize resource usage and generate liquidity to support operations, as the business continues to evolve.

Looking ahead, the Company anticipates maintaining its strong cash position, and continuing to look for opportunities to streamline our operations.

The Company is targeting to return to breakeven by the end of FY15, from a cash flow perspective.

In summary, we've made great progress this quarter.

We've reduced OpEx.

We've lowered the levels of capital spending, and we've maintained a strong cash position.

The Company is financially strong, and we're well-positioned to execute in the turnaround strategy that John previously outlined.

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

Okay, gang.

Let's start.

Operator, could you please poll the questions for us?

(Operator Instructions)

Your first question will come from the line of Mark Sue of RBC Capital Markets.

John, maybe a question on just the window of opportunity to recompose the business.

If I look at your sub base, it's still eroding, maybe less than 50 million now.

So will you have a customer base to upgrade and migrate to new software and services, how can you proactively bridge this installed gap and its further rate of decline as you get them to a new destination, and what can we do to stabilize that base?

And then James real quickly, CapEx plans for the year, and maybe how we should think about intangible payments, if there are fixed components or payments or is it tied to the number of units, and does that actually go away over time?

Thank you, gentlemen.

Thank you Mark.

I'll go to your first question first.

This is a whole reason why we created the BES12 as an integral part of our strategy.

So with BES12, if you see why the trap is going down, it's because that people think that they need to move to the BB10 environment, and therefore have to leave the BB7 environment or 5. And part of the reason of that is because of the fact that I spoke about to infrastructure, and enterprise obviously are cost conscious and not only on the cost of the servers and software, but the ongoing administrative costs and so forth.

In addition to that a lot of people don't know how good we are in the cross-platforms capabilities, managing iPhones, managing Android devices, managing Windows devices, so it was important for us to solve those migration issues or dual infrastructure issues, as well as making sure that people know that we have very strong offerings, so probably the best-of-class offering.

Therefore, the BES12 is why it's important.

It will roll out probably the October-November time frame, more November than October.

Every time I talk, I reduce it by one month, and put pressure on engineering people, but it's really more of a November time frame.

And the classic will also come out, and it's all going to be very exciting for our end-users.

I pointed out the productivity gain of using Classic and so-called muscle memory and having the fastest internet browser and great multi-media capabilities.

So it's the best of both worlds for the BBOS and the BB10.

So those are our bridging strategies, and I feel very good about -- I was talking to a customer, and people are now pausing or at least consider, I shouldn't use the word pausing, I think consider pausing before they get off our platform.

And in addition to that, with our push on the BES10/12, it's a server.

Especially in the cross-platform world and it's also a device, we can also manage devices, not only just phones.

There are a lot of interest from our competitor base that is coming over, and then as I said earlier, we now generating quite a bit of a marketing buzz and people are visiting our sites, and registering with us to learn more about it.

So I see this as a good turnaround plan and it will, hoping, knock on wood, I'm hoping that it will also slowdown the erosion.

Mark, it's James.

Per your questions on the financials, so CapEx, in terms of $22 million, I mentioned we need to make investments going forward to support the new services.

That will require CapEx, so I would expect that number, it's going to vary by quarter, I would expect it to be higher as we get through FY15.

And your question on intangibles, I would say most of our agreements do scale up and down with the business.

Last quarter we did talk about the one particular agreement in the fixed payments, ending in the November quarter in Q3, so we're still on that timing to execute that, okay?

Thanks for the question.

Operator, next question?

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

John, if we could just get into the growth side of this again, I hear you on the service and software business.

Just curious how we get there.

Per James' discussion on service, it still seems like we're going to see double digit declines sequentially there, and software is only 6% of the business, and I don't think it ever really got over $300 million.

So is this just including when the Company had huge scale, so are we in a different dynamic now, where you think this all of this monetization of some of these software things which had been free for BlackBerry, will be able to be monetized, or is it a different world?

Or is BlackBerry able to leverage itself in a more aggressive manner on the software side?

I'm just curious why we haven't seen this in the past, and what's going to cause this to offset some of the declines that we'll see in the other businesses.

Thank you.

Yes, it's a great question.

So there's a couple dynamics.

First of all, you pointed out exactly -- before I go into just software and services, I hope nobody's thinking that we don't take seriously our handset business.

One of the reasons why we are introducing not reintroducing, wrong word, but we will still supply the BB7 device is because customer wants it, there's a lot of demand out there.

The Classic is a great product.

There are other products that will come out that I think people will like, and obviously we think they will like, otherwise we won't be building it.

And then of course the Jakarta phone, and the Jakarta phone pushing into more the emerging world.

That will bring up a lot more BBM, plus other areas, like we're working with Windows and Nokia and so forth.

So there's still a strong return of the revenue base on that.

The difference this time is as we work ourselves out of the prior contractual agreements, and generating new agreements, we are very focused on making money from the handset.

That will take a little bit of time, but you will see both the uptick on revenue as time progresses, as well as the margin of the handsets.

So but in the software world, you hit one right, the nail right on the head, which is, there is a practice of us quote-unquote giving software away for free, and I came from the software background.

I don't find that practice very sensible.

It's actually so much IP and services one could add that are extremely valuable, and I don't think giving software away is the right strategy going forward.

We're building the sales force that are more towards software and messaging and services sales force.

We're building our comp plan around it.

We're building our account plan around it, so you will see that, a stronger growth going forward.

Having said that, we still need to wait for BES12 to come out, because you can't really quote-unquote sell software into the Bold infrastructure base today, so you have to bear with me a little bit.

That's why I didn't say everything was going to be coming back, and rolling success.

I keep reminding somebody the other day, this is like my 26 weeks or something, or 24 weeks with the Company.

So we still have a lot of work to do, but are very hopeful.

I know how to get there, there are the EMM solutions, and enterprise mobile management solutions, the vertical application solutions, there are partnerships we can do.

There are so many opportunities there, and of course the EBBM, with the NOCs providing security and reliability is going to be a differentiator across-the-board.

I don't think anybody else could touch us from a mobile enterprise solution standpoint, or even come close.

So I'm very hopeful, you just have to stay tuned, and I just talked a little bit about EBBM.

EBBM has a number of stages of services.

Those are being developed by our engineer, I think the market will like it.

They will have, it will provide some strong capability for enterprise.

Okay, thank you.

Thank you.

Next question?

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

Please go ahead.

So just to clarify, you said enterprise customers are holding off churning of BlackBerry now, so does that mean the decline in FY15 is coming more from consumer rather than enterprise?

And then for the question, I'm just wondering if you have an expectation of whether your target customers are more likely to buy perpetual versus annual, gold versus silver, and then also whether you think customers might wait for the BES12 release, before making their purchase?

Okay, Maynard, first of all let me clarify.

No enterprise, well only a few enterprise that I have met when we talk about the BES trials, they said yes, we're holding off and waiting for BES12 and Classic.

I have those, but I'm not making this, it's an overarching statement like the entire market is doing that.

So where James guided about the service revenue going down, all I'm saying earlier to both him and Mark was, I'm hoping that the BES12 strategy as we laid out right now, will help enterprise to reconsider and start slowing it down.

And we will have some positive effect, but it's not going to be an overnight instant churn.

So please don't, I don't want to mislead anybody on the call.

Yes, I believed most customers will wait for the BES12, and because that's the most sensible, go to one infrastructure play, so I believe that's true.

Does that make sense?

(Operator Instructions)

Oh, that's okay.

We can go to the next question.

Great, your next question will come from the line of Peter Misek of Jefferies.

So John, maybe you can help us understand the mobile device management market.

We're starting to see some price aggression coming out of AirWatch and MobileIron, and good.

AirWatch is retooling, and VMware is absorbing it.

I really do want to understand how the differentiation will work there, how you see that market evolving for your own services?

Clearly, you have an unhackable network, but that doesn't seem to be always top of mind for these enterprises.

It's surprising to see some of the more regulated or government industries suggesting that maybe they don't need that level of security, so I'd like to understand that.

And then just very quickly on the free cash flow, what kind of level, James should we see in terms of cash, or what do you think is a safe cash level?

Should we see the cash remain above $2 billion, $2.5 billion, if you can help us understand that, that would be great.

Peter let's talk about the MDM market.

The MDM market, which is one that I've been in for a very long time, we created, I was a team who created the MDM solution for the SAP, so I know the market quite well.

It's really not only the MDM market.

The MDM market right now is kind of mature.

It is getting bigger and bigger, but like you pointed out, the price competitiveness is very high.

That is the basic foundation to play.

I spoke about EMM, the enterprise mobile management market.

It's a much bigger market but it has to build on MDM.

So this is why it's so important to become a player in the MDM world.

I personally feel that out there, for enterprise, they're still buying perpetual, and still buying site-type licenses or licenses by accounts.

That's why it's so important for us to provide both that solution as well as a cloud-based solution, as well as a hybrid solution.

So this is why I made a statement but thank you for allowing me to repeat it, just in case anybody missed it.

So the real idea is not just compete on MDM but anything that's beyond MDM.

As far as security is concerned, I'm with you.

I don't know why the regulated industry would think that security is not top of mind.

In fact, I know most enterprise Company Boards look at risk management, IT risk management and mobile risk management as a really big item, so I think this will come around.

It's one of the things always tell people, this is like an earthquake-type thing and where I live in California, right before the earthquake, nobody care about earthquakes, like most people won't be prepared for it.

Right after the earthquake, there's a little joke, people rush and buy all of the batteries and bottled water and everything else.

So it's a matter of is it an important element of running a Company and running government agency, and my conversation with a lot of the people, they are starting to come around that.

Now in addition to that, there's also a big movement of protecting identity.

So I just don't want to think that people think data security in the mobile world is the only thing, or transaction security is the only thing, which of course we do very well with the NOCs and with encryption on [ONs or on Sodacom] technology and so forth, but identity security is very important.

This is why a lot of the BBM pin-to-pin messaging technologies are aimed to solve or to address, so there's just a lot of -- the good thing about BlackBerry, and I've only been here about 4.5 months is that we just have very deep technology know-how and when the Company could get back to execution and do well, there's just a lot of area that we could explore.

Peter, it's James.

On the financial part of your questions, in terms of cash flow, we've made some progress quarter over quarter, and given where we are, we've got to continue to show progress to get to the objective of being cash flow breakeven.

In terms of the numbers you threw out, modeling on our side, I think numbers starting with a two I think you're thinking about that right.

Thanks for the question.

Next question, Luke please?

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

Please go ahead.

My question or clarification is really around the balance sheet, so maybe for James.

The net cash number halved to $1 billion, and I'm trying to reconcile that with the cash flow movements, how much of it was cash burn, and how much was your debt being for some reason revised up?

Can you just talk through that?

And then beyond that, if you take out one-time items what was this quarter's free cash flow burn, and what do you think it will be over the balance of the year?

The reason why I'm asking is, I think at some point, your net level of net cash may have issues with some of your debt covenants, so I'm trying to understand how that dynamic may work.

And then for John, just on the services side, you said people will hold out for BES12.

Your service has been declining, so then this Company can't get back to a stable services revenue stream until some time in the middle of next year, is that right when we're thinking about timing?

Many thanks.

Okay, I'll start.

The way that we talked about the $300 million improvement, I think if you ignore the tax refund in Q3, you ignore the debt in Q3, you ignore the debt in Q4.

If you look at the cash burn just from that perspective, that's where you get to the $300 million, so I think that answers both of those questions.

Just to be clear, you mentioned debt covenants.

I'm not quite sure where you're getting that.

Our debt doesn't really have any financial covenants associated with it, so just want to be clear on that point.

Actually, Jim, I'm still a bit confused.

Your net cash went from $2.2 billion to $1 billion, it declined sequentially by that much.

The components of that reduction in net cash were exactly what then?

Can you explain that so that $1 billion decline in your net cash number from last quarter to this quarter, how did it decline by $1 billion?

I'm not sure I follow your math, Kulbinder.

Maybe we can just take it offline and we'll get back to you on that.

Right.

This is about the service revenue.

We have a decline of roughly about 12% to 15%, and I'm hoping that our strategy when you start tracking, it would slow that decline down as time progresses, and wait for the BES12 to take hold in the market, and we'll introduce new services and technology that a customer will want to use and pay for.

So the answer to your question I don't know whether mid year or next year.

That certainly will be, I hope to see good progress by mid year next year, I'm hoping to see it a little sooner than that personally.

But if you want to use that model, that would probably reasonably conservative.

Jim just want to clarify one thing, then.

Your net cash number according to you right now is $1 billion; correct?

We're at $2.7 billion.

Gross cash.

You've got debt of $1.6 billion, it's about $1.1 billion.

Oh, I see what's going on.

You're talking -- what's clouding the picture, Kulbinder, is the fair value adjustment.

Right.

That's totally non-cash.

But you actually owe that money now?

No, we don't.

And that's the point.

It doesn't change any of the carrying value of the debt, the face value, or it doesn't change any of the conversion option.

It's purely, let's call it a paper adjustment, required by the accounting rules, so the net cash calculation would still, you would subtract the $1.25 billion.

Let me add a layman's view on this, non-accountant view of this thing.

The debt convert was at $10.

In the last quarter, there were -- the volatility of the trade, and the fact that at the end of the quarter it went beyond $10.

And so therefore, we have to take a valuation charge, which are non-cash, no effects of anything, and last quarter on an earnings call I said a lot about lawyers, and now I'll apply the same to accountants.

It actually makes absolutely no sense, took me awhile to learn it, but I just have to accept it, but it has no impact to the Company.

It's not a liability, and it's not cash.

Kulbinder, going forward, as long as the debt instrument is outstanding, we're going to have fluctuations in this number, so we'll continue to report what the impact is.

I get it, okay.

Thanks for the question.

Next question, Luke?

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

Couple questions.

On the channel inventory that fell 30%, if I'm doing the math right, that 30% was the 2.1 million units, the difference between your sell-through and your shipped units.

So it means that channel inventory before the quarter was 7 million and channel inventory today is 4.9 million.

And if you do a little bit more math, I get that 4.9 million of channel inventory right now is about 20 weeks worth of inventory on your current sell-through, so that's usually much higher than we see for handset companies, we usually just used to see at least four to six weeks, maybe a little higher today.

So just wondering, is that the right calculation, and should we see that 20 weeks of inventory still come down over the next couple quarters, so that will restrict the sell-in, so that's question number one.

Second question is on the services revenue, the sequential decline, was that mainly, should we assume from subscriber decline as opposed from ARPU decline?

And last quarter you said that enterprise was 20% of the subs outstanding, I want to just see if we can get an update.

Is it still at 20%, or does enterprise fall faster or slower than the consumer?

And then on the new run with Wistron, on the Bold, John.

Previously, from last conference call and then conversations you had earlier, you were averse to the hardware business and everything going forward was software.

And my understanding was that the whole move to Foxconn was to bring the hardware business to a gross margin breakeven, and the that older units you were still selling BlackBerry 7s were at a loss.

So is this new run of the Bold at Wistron, is that still at a loss, or did you work out a new deal with Wistron as well, so that you're at least gross margin breakeven on those new Bolds?

Thanks.

Let me address that.

That's important, thank you for pointing that out.

Sure.

No, this is not at a loss.

We did work it out with Wistron, and in addition to that, we have the demand.

Correct, but even with the demand before, that you were selling BB7s at a loss, so I'm assuming all Bolds going forward are no longer at a loss, or just the new run of them?

At least this new run.

I can't tell you all Bolds, but at least this one.

I don't think that this new run, obviously, is that material.

More important to material in terms of revenue and the margin.

And it's not, I don't know whether it's going to be a long term run that will carry the same margins, but this set of runs will give us positive margin.

Ehud, back to your questions on channel inventory, your calculation was right, but your numbers are, I'm going to call it considerably higher than mine.

So I'm not sure if there's an issue we can maybe talk about afterwards, but at least on the existing products we definitely do expect channel inventory to continue to go down, based on some of the programs and some of the work we're doing with our partners.

Now, we are going to launch new product, which of course will require channel fill, and that may bring those levels up, but it's for a good reason and for an isolated reason.

And enterprise subscribers?

And then I have a BBM question as well on subscribers.

Yes, I think the mix is constant.

So they both fell in concert, they both fell to 14% or so?

I think the enterprise is slower than the consumer, but not appreciably different.

But with that we'll have the opportunity there.

That's great and last one on the BBM, the 85 million active users, is that comparable to the 80 million you were talking about last quarter?

Yes, apples-to-apples.

80 million to 85 million?

Thank you.

Yes.

Thanks, Ehud.

Next question, Luke?

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

I wanted to know if you could tell us how many non-BlackBerry users your BES10 systems are running now?

Oh, I don't know.

I don't have that number.

Sorry about that.

We will find that out, and we will make sure that people get back to you.

Then just a point of clarification on the BES12 coming together for common infrastructure.

Are you saying that IT managers then can bring that together by November, and then after that, you'd start to see take up in non-BlackBerry management?

Is that the goal, so you'll put the sales team in place and then hope to bring them on after the November quarter?

We're putting a sales team in place.

Yes they only need, a customer will only need one infrastructure when we get to BES12 that manages all devices, BlackBerry old, BlackBerry new, iPhone, Windows and Androids.

And the availability for that, you'll market it now, but enterprises can start to deploy that after November?

Correct.

Okay, great.

Thanks very much.

Thanks, Todd.

Luke, we'll take one more question.

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

Wanted to go back to the question about Wistron.

You talked about negotiating that similar variable cost model for the new BB7 run.

Are you still trying to do that for the rest of your manufacturing base?

And if you can just give us a sense as you are exiting this year, what percent of your device volume will be on this kind of a variable cost model?

Like what you have at Foxconn and this new BB7 run at Wistron, versus the more traditional purchase commitment model?

Yes, the problem is I don't want to go down this path, because then I will then force to reveal some information that I'm not comfortable with, to of our partners.

So, I can only tell you directionally I have no intention to lose money on handsets, so the handset volume itself isn't as big a concern for me, but the margin is.

And I'm sorry that I couldn't give you more detail than that but we are working out very well, with Foxconn obviously, and in some instances and some model with Wistron, but they are both good partners, very good partners.

Okay, and maybe just so then to ask that another way, what is your expectation for reaching breakeven on the hardware side of the business, in terms of timing, and how does that look both from a gross profit perspective but also an operating profit perspective?

It will be FY16.

For which one, gross or operating or both?

For both.

Okay, and then just last question is on for you, John, is on QNX, where you talked about having a dominant position and certainly we saw a lot of buzz around QNX at both CES and MWC.

Can you just give us a few more parameters around that?

What kind of penetration or market share do you see, how should we think about the content per car, or the revenue level?

Just anything you can disclose would be helpful, as we start thinking about that business.

I think, okay, the good news about QNX is it's an embedded play, we already have about half of all the cars out there and with other players coming in and also connected with the QNX, so being compatible with the QNX, I wouldn't say 100%, but the majority of all of the cars out there, the connected car world will be compatible with QNX.

And some of them we have direct design win revenue on licenses, some we have an indirect side of the equation.

And this is why we're also building a cloud-based solution to connect with QNX, so I don't want to say 100%, but normally when you say 100%, it's like overly aggressive, but quite dominant.

I don't have the numbers, and I'd rather not disclose the actual number itself.

That's not what we're preparing to do, at least not at this point.

So I don't know whether I answered your questions.

But now if you want more detail we could connect some people at QNX with you, be more than happy to do that.

Appreciate it.

Luke, I'll turn the call back to you.

Excellent.

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

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