BlackBerry Ltd (BB) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the BlackBerry first-quarter 2015 results conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Thursday, June 19, 2014 at 8 AM Eastern time.

I'll now turn the conference over to Mr. John Chen, CEO of BlackBerry.

Please go ahead, sir.

Thank you very much, Ron.

Good morning, everybody, and welcome to our first-quarter -- FY15 first-quarter results call.

I'd like to first turn the call to James Yersh, our CFO, to make some introductory remarks and Safe Harbor statement that everybody loves to hear.

Thanks, John.

Good morning, everyone.

After I read our cautionary note regarding forward-looking statements, John will provide a business update and I will then review the first-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 tablets.

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 Litigation 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 perception 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.

Thank you.

After hearing the forward-looking statement, I have nothing to say.

(laughter) Okay.

Thank you, everybody, and good morning again.

Welcome to our call.

I'm very pleased to report that we continue to make significant progress on our plan to return BlackBerry to growth and profitability.

In Q1, all financial metrics show stabilizations or improvement.

The revenue came in at $966 million, relatively flat compared to last quarter.

Adjusted gross margin of 48%, up from 43% last quarter due to favorable portfolio and revenue mix.

The GAAP EPS was a profit $0.04 a share, adjusted EPS loss was $0.11 a share.

Cash at $3.1 billion, up from $2.7 billion at the end of last quarter.

The overall cash is actually increased by $429 million, after accounting for the real estate proceeds of $287 million and the tax refund of $397 million, which we do not consider that as part of the normal operations.

Our cash burn in the quarter was $255 million, which is down by over two-third compared to last quarter.

Adjusted for the one-time events, the decline in the sev revenue came in at a low end of our range, roughly about 11%.

Channel inventory declined further by 22%.

James will take you through the financial in a lot more details.

I'd like to spend a few minutes on what we accomplished from the product and strategy side of the equations for the quarter, Q1, and provide some forward-looking conversation about Q2.

We have a very good product road map across the board, very pleased with that; in enterprise, in device, in BBM and in QNX.

It has a very robust roll-out between now and the end of the year, which I'm going to get to a little later.

We're executing against this plan and I would have some proof points too.

Here are some examples of what we have accomplished and achieved in Q1.

On the BES front, the enterprise server front, we have a very strong uptick of the EZ Pass program.

Over 2,600 customer have registered with us.

We have issued 1.2 million plus, meaning more than 1.2 million licenses, and over 10% of those licenses were traded in from competitive MDM platforms, most notably from Good Technology and MobileIron.

The EZ Pass is important to our future monetizations -- I'm more than happy to discuss much further with you on that -- which included the up selling from the silver license to gold license, the very secure version, and the new value-added service like identity management.

To qualify for our EZ Pass, which by the way I was told just now they're going to run all the way to the end of the year, to qualify for the EZ Pass, the customer must sign up for our T support.

With BES12 we have six beta customer installation completed in Europe and North America and we have six more in the plans, starting July.

Feedback has been very positive regarding our features, functionality and stability.

Now moving on to our Z3 launch, which we code named Jakarta -- we actually call it Jakarta.

There was nearly about 900 press article and coverage was predominantly positive in Indonesia, which was the first country we launch.

This indicates that the BlackBerry brand is strong in Indonesia and the BlackBerry device and BBM are very popular with the people there.

Demand looks strong, as inventory ran low during certain periods.

We never ran out.

We ran low in certain periods.

Volume forecasts are now running ahead of our expectation.

We also launched the Z3 yesterday in Vietnam, and a number of additional countries are coming next week, including India where early indications are showing extremely strong support and interest.

Moving on to BBM.

We're very pleased that we have released BBM Protected ahead of schedule this week, and the reception has been very strong.

We have now a pipeline of opportunities, include 15 existing BES customer that has participated in the beta program and more than 450 inquiries within the first 24 hours.

During the quarter, we closed a strategic investment in NantHealth.

We're currently working on the partnering agreement.

Give you maybe a minute on NantHealth.

NantHealth provides a cloud-based intelligent, healthcare platform, used to connect physicians, patients, payers, researchers and clinical labs.

The platform is installed in 250 hospital today and connects more than 16,000 medical devices.

The investment fits into our vertical strategy.

What is exciting about it is the potential to cover all aspects of our portfolio using for the next generation of this application from devices to QNX, to secure BBM, to the secure enterprise server as well as the NOCs.

Last but not least, we announced Project Ion for the Internet of Things opportunity, which of course involves a secure public cloud platform powered by the QNX technology as well as the BlackBerry secure enterprise mobility management.

Project Ion will also focus on building a very strong ecosystem of carriers and application partners alike.

Yesterday, we announced a major partnership with Amazon for mobile apps on BlackBerry 10.3, which is coming out this fall.

This will add more than 240,000 Android apps including popular consumer apps.

Going forward, the significance of this agreement will allow us free BlackBerry up and our resources up to go after secure enterprise-class applications.

This partnership address the key issues with customer adoption of BlackBerry 10 devices, which was the availability of an expensive application eco systems.

The Amazon app store will be pre loaded with the BlackBerry 10.3 OS and available through a maintenance release for all existing BlackBerry 10 devices.

I�ll spend a minute on looking forward for this quarter.

We obviously will continue on our strong execution on the product road map.

In Q2, we're planning a BlackBerry security summit event in July, most likely in New York City.

I don't think we have secured a venue yet, but we would like to do it in New York City.

In September, we will host an event to showcase our device portfolio for the FY15.

We're launching a brand-new device called passport in September in London.

Most of the information has been leaked to website, so you guys should go ahead and check that out.

This will follow by the Classic coming out in November.

Other major releases planned for FY15 including the BBM for Windows in July.

In September we intended to release the BBM meetings.

In November we will release our BES12 and QNX cloud will come in in December.

As you can see, we have a very, very busy product rollout schedules.

Almost every month but the month of August, to celebrate everybody's going away, everywhere.

In the past quarter we came up with a comprehensive monetization plan for BBM and value-added service.

The focus is on enterprise in the developed markets and consumer in developing markets.

We have an overall revenue target of $100 million in BlackBerry FY16.

The principal drivers, first, is the eBBM suite for secure collaboration including secure messaging, voice, and data.

More to say about that in the future.

Second is our mobile payments system.

BBM Money has already launch and is available in Indonesia.

We also announced most recently our agreement with Endstream, which is a joint venture of Bell, Rogers and Telus, the three major Telcos in Canada.

This venture supports mobile payments on behalf of Royal Bank of Canada, TD Bank Group, CIBC, Desjardins, MasterCard and Visa.

On the BES front we will launch our new value-added services targeting enterprise.

One of the first such services will be identity management capability.

To summarize, all areas of our business are making very good progress.

Financial objectives are on track and strategy is on track.

Bottom line, we feel good about where we are and what it will take to get BlackBerry back to cash flow breakeven at the end of FY15, our FY15, and to profitability sometime in the FY16.

I would like to now turn the call to James for a detailed review of our financial performance.

James?

Thanks, John and I'll start with the income statement.

Revenue for the first quarter was $966 million versus $976 million last quarter.

Hardware represented 39% of revenue compared to 37% last quarter.

We recognized revenue related to approximately 1.6 million devices in the first quarter, compared to 1.3 million in the previous quarter.

Service revenue represented 54% of revenue compared to 56% last quarter.

This quarter the Company also settled all outstanding amounts with carriers in Venezuela.

Software represented 7% of consolidated revenue versus 6% last quarter.

Gross margin for the quarter was 46.7% on a GAAP basis.

Adjusted gross margin excluding restructuring costs was 47.9%, up approximately 500 basis points from last quarter.

GAAP operating expenses were $431 million.

Adjusted operating expenses were $504 million, down from $577 million last quarter.

Amortization expense was $81 million in Q1.

GAAP net income was $23 million or $0.04 per share.

This includes a non-cash accounting gain on the value of the Company's convertible debt, an income of $287 million, and pretax restructuring charges of $226 million.

Adjusted loss was $60 million or a loss of $0.11 per share.

The tax recovery in the quarter was approximately 9%.

Going forward, we expect the quarterly recovery to be about 10% as the Company anticipates utilizing all the available loss carry back amounts during this fiscal year.

Now moving on to balance sheet and working capital performance.

Our cash balance increased by $429 million compared to last quarter.

Adjusting for items not part of normal operations, we used $255 million of cash in the first quarter.

This represents a decline of 68% compared to last quarter.

The largest nonrecurring item was an income tax refund of $397 million.

We also closed on the sale of our Canadian real estate portfolio at a price of $287 million.

We received proceeds of $227 million in the first quarter, and will receive the remainder in Q2.

We also closed on the sale of additional real estate in the quarter and received proceeds of $60 million.

Reduction in cash used was attributable to strong collections in AR, as well as lower inventory related outlays.

Purchase obligations and other commitments amounted to approximately $1.8 billion with purchase orders with contract manufacturers representing approximately $317 million of the total, a 46% decrease from the previous quarter.

Total cash, cash equivalents and investment was approximately $3.1 billion.

Taking into account strategic investments in the business, we do not expect our cash balance to fall below $2.5 billion at any point in FY15.

That concludes my comments.

And I'll send it back to John.

Thank you.

Ron, we're ready for the Q&A.

Thank you.

Ladies and gentlemen, we'll now conduct a question-and-answer session.

(Operator Instructions)

Maynard Um, Wells Fargo.

By my calculations you weren't too far off from being gross margin breakeven on the hardware this quarter versus your previous target of getting to profit by the end of the fiscal year or early next.

Can you update us on when you expect to get to profitability?

Secondly on the services side, I estimated that last quarter a little more than half of your services revenue came from consumer and presumably a good portion from the emerging countries.

If your Z3 is successful, your services revenue on the consumer side would be adversely impacted.

I'm just curious how you plan to manage through this?

In terms of the services side, I guess, how should we think about that revenue decline over the next few quarters?

Because obviously it was much better than expected this quarter.

Good question, Maynard.

On the hardware, you are correct.

I don't know what your calculation model is, but I would love to see it because I could use it.

We are getting very close to making money or at least breakeven on hardware.

Not quite there yet, but close.

I think our timing of what we talk about, sometime in 2016 will be the right timing.

The other questions about the Z3 being successful and that might negatively affect our SaaS fee, we actually don't see that as -- because of this, a lot of the Z3 in these countries are actually, I would call it, additional handset or people using our handset, winning over others, because there was a phone that we are selling $179.

That's not exactly the same group of people, but of course there will be overlap that I would admit to that.

This is the reason why -- but the bigger picture of this is, as the BB10 get more successful, we're seeing that right now, and with the Amazon announcement and our partnership there, I would expect BB10 to get even more successful.

That's at least the concept.

This is why the VAS, the value-added service, under the BES and other BBM is so important for us, because then that way it will cover the SaaS and it will give us a platform to continue to add more value-added services that the consumer as well as enterprise will pay for.

Colin Gillis, BCG Financials.

Great quarter.

Thank you.

John, when you talk about BBM and you mentioned that $100 million number for BlackBerry's FY16, can you just give us a sense as to how that target grows?

Is there going to be much seasonality, do you expect in that business?

No, we hope not.

I'm trying -- this is not a one-time perpetual thing.

Maybe we'll start growing lower in the beginning, just because of an element of time.

And then after that, we're hoping to expand the monthly subscription base.

I don't think there's any seasonalization.

I'm hoping for steady subscription.

In terms of sell-in versus sell-through, the gap between those two numbers narrowed quite a bit in the last quarter.

When do you expect them to be on parity?

(laughter) I don't know the answer to the question, honestly.

I would love to be on parity.

We're working hard at it.

I really don't know.

It's not because I don't want to answer it.

I don't think that I have a clear model in my head.

I'm just pushing, first reducing inventories out there as much as we can, opening up new channels and distribution agreement.

Maybe James has some ideas.

Colin, the only thing I was going to say, John mentioned for example a couple new launches in the back half of the fiscal year.

Of course, we'll have channel fill and sell-through to follow after that.

So parity and conceptually, as John had said, we're focused on that.

New products, of course, will increase channel inventory first with sell-through to follow after.

Okay, makes sense.

Lots of positives.

Thank you.

James Faucette, Morgan Stanley.

A couple of questions from me.

First, you highlighted in your press release and prepared remarks that you had about $1.8 billion in purchase commitments of which about $317 million was purchase orders.

Can you explain the difference between those two?

I'm wondering how much of those purchase commitments are historical or older products versus how much are for new products?

I'm just trying to get a sense of how much of that $1.8 billion you may have to eventually pay out without really much opportunities to generate revenue against it?

Okay.

I'll let James answer the question.

James, the answer is in terms of the $1.8 billion, that includes the purchase orders with the CMs of $317 million as I said, but it also has, for example, the interest on the convertible debenture.

It has the royalty payments that we are contractually obligated to pay, as well as, for example, what's new this quarter for us is some lease obligations, given the sale lease back.

As far as the $317 million itself goes, that is our view to demand for the existing suite of products.

I'm not sure how you're defining historical versus what we're selling today.

But effectively the portfolio, as it stands today, those are the commitments that we've given our manufacturing partners for that demand that we see.

Great.

John, you mentioned that you started to roll out some BES12 beta deployments.

How large is the BES12 database?

I guess more importantly, how large would you like it to be by the time BES12 becomes generally available?

Good question.

We have 30,000 plus installation of the BES10.

80,000 installations all together from the BB OS 7s.

I don't know the exact count of it.

Obviously, the 1.2 million is low in my book.

I don't know how big I should be looking at.

Next time we see each other I'll come up with an answer to that question.

I would expect it to literally in tens of millions.

They has to be.

Okay.

Great.

Thank you very much.

Tim Long, BMO Capital Markets.

Just two ones here, one's pretty quick.

James, can you give us a sense on the BB7 and BB10 mix?

On the services side, I think it looks like you beat by maybe $50 million or so, which is probably a good deal less than what was initially owed and I'm sure there was other payments supposed to come from Venezuela.

Maybe if you would just talk about the gap there?

Are there any implications on what happened there or potentially with other markets given there was probably some underpayment going on there and/or how do we look at the Venezuelan market going forward?

Is it just a different service revenue environment for BlackBerry?

Thank you.

Okay, let me answer the question about the market and then I'll turn the call to James.

Venezuela's a great market.

There's a reason why we would like to settle all the payment with the carriers.

And you all know, everybody on the call knows that Venezuela's government and the economy down there and the situation are not in the most cash-rich conditions.

However, because BlackBerry's so important to them that we were very pleased that we could sit down with the government and the free carriers to settle this.

The agreement include going forward robustly working in the market together and building subscribers.

Very pleased with, not only the cash itself, which we love, but the market itself.

You hit it right on on that.

There are other markets -- I know Argentina's going through the same thing, but they love us, so we're going to sit down and see what we could do there and I think that's about it.

Argentina's the only one I remember now.

I'll turn the question back to James.

Tim, just to finish up on what John said in terms of revenue, from Venezuela specifically, the impact was about $30 million on service revenue.

The rest of it in terms of the GAAP and let's call it the over performance, I think was the word that you used, was just due to us holding the line and being able to control the decline.

Your first question in terms of the mix and the revenue, effectively it was about 65% BB10 and 35% BB OS.

Is that on the sell-in?

The recognized number.

That's the revenue.

Alright, thank you very much.

Mark Sue, RBC Capital Markets.

You're doing a lot of new things, some of which will take some time to impact the financial model on a positive basis going forward.

At a high level, from your traditional enterprise customers, do you feel that the core enterprise customers are deciding to stay?

Is there still some hesitation or do you feel from the discussions that there's a behavior change and they're starting to embrace the strategies of that model, not the near term but also the longer term in terms of how they're buying into your new strategy and vision?

Very good question, Mark.

We have ran a number of, call it BlackBerry Experience Days around the world, Toronto, London, New York, and a lot of different cities and we'll continue to do that going to Asia countries now in the next couple of quarters, and Middle East.

Where we have the ability to go those places, we have great receptivity.

For example, my understanding we have over 250 customers came to our London event a couple weeks ago.

And where we laid out our strategy, our road map, our enterprise offerings and stuff.

I personally spoke to a lot of people and have met a lot of customers, very big names.

The answer to your question is when we have a chance to lay out our plans and visions, the majority of the time we get them to support us, to stay there.

What I have found is people like to stay with BlackBerry.

They were concerned a little while back, and I need to try to regain back that confidence.

I cannot tell you 100% that is the case.

Some of the cases unfortunately when I showed up it's a little too late.

However, because of the breadth of our product, a little too late is -- we could gain some back.

I have a situation where I was able to stop people roll out, especially in the BES world, in the MDM world, with our competitors, partly because of the EZ Pass program.

I want to spend a minute on the power of the EZ Pass program.

Because we accept licenses paid us already of the old BB7, 5 and 10 and we also allow trading for competitor licenses, customers, if they buy into our robustness and security, they are going to cost them no more money to use our new technology.

Versus they have to leave us and go off and pay yet a bunch of other licenses to other people, so that's a very powerful argument.

I have stopped -- stopped is the wrong word.

I was able to convince a number of major customers that they should at least try it out, our BES12.

It cost them nothing to do so and BES10 and 12, and I was successful in some cases, which of course I'm pleased with that.

I'm sorry to give you a very long answer, but I don't want to tell you that yes, we're gaining everybody back.

I think that would be an over-exaggerated statement.

On the other hand, I think my success rate is ticking up.

I think quarters like these and ability to reach them allows the market to return some confidence in us.

It will even help.

This thing will hopefully have positive effect.

Am I making sense to you, Mark?

That's helpful.

Some people are no longer crossing their arms, you're actually getting people to knock.

Yes, no definitely.

We have a name of major win in the quarter on BES, and in some cases handsets.

Yesterday I think our colleagues in India announced that we won a major law firm's roll-out on BB10 process server.

Europe's very strong for us.

Germany's very strong for us.

Where companies are very high and very focused on security, we have much better win rate.

We are winning out there, but I can't say you this is overwhelmingly successful.

That would mislead you.

That was not the intent.

That's helpful.

Thank you.

Good luck, gentlemen.

Daniel Chan, Scotiabank.

John, as you start to depend more on the Android ecosystem to fill the gap on your platform, how will you encourage developers to support your platform?

For the enterprise apps developer, especially with our Internet of Things vision, they are very keen in working with us mostly because of the securities nature of all our components.

By the way, I'm very keen working with them because I want to go in the vertical space.

For the more consumer oriented, I think I have gotten nothing but positive response to our yesterday's Amazon app store connectivity.

There are a lot of BB10 world app providers that are skewed to a little bit of a consumer's angle.

I'm encouraging them to work with our Amazon partners.

Amazon developer ecosystem and the tools they have and the ability to reach out to a lot more people and customers are a really welcome thing for our own developer space.

I like to think that everybody wins in this.

My developers, I help them to open up the market.

Whatever they do help my BB10 world because of the Amazon relationship.

Amazon loves it because they got more subscribers, so-to-speak, and user base and more searches.

I love it because I don't have to spend the money on the consumer side.

I can focus on my enterprise side.

The enterprise loves it because there will be more focus.

I haven't found a negative angle to this.

Very pleased with the team that was able to pull this off.

Obviously, these are major, major negotiations.

Thanks, John.

If I could have a follow up with you, James.

Just curious on how many previously recognized devices you think are still in the channel and when can we expect that to be cleared out?

As John had mentioned in his prepared remarks, channel inventory was down about 26% or so.

Depending on the model that you're running, given more sell-through it's maybe another quarter a little bit more.

It's timed very well with the launch of the new products to the back half of the year, Daniel.

Thanks, guys.

Good luck.

Richard Tse, Cormark Securities.

John, you gave us some metrics on BBM in 2016.

Can you give us a similar -- ?

You do like that, right?

Yes, I do.

Because every time I figure that instead of you asking, I'll just give it to you.

(laughter) Well, thanks for that.

Can you give us some similar metrics on the QNX side, the size of that business and what you think that could scale to?

Not right now.

I'm working that.

Not right now.

It's a royalty base and the royalty usually lags about a couple of years after the design wins.

That's the next thing that I'm going to work on to see whether I could expand that a lot more, but it will still be a lagger in terms of what revenue comes in.

On the other hand, when revenue comes in, the margins are very high.

Okay.

Great.

Thank you.

Richard Kramer, Arete Research.

Trying to square your comments about the interest in the new devices with the move in purchase obligations from $586 million last quarter to $317 million as well as the inventory dropping by more than half.

Are you suggesting that even despite this interest, there's just going to be a trough until you get these new products out?

A second question.

Can you give us a sense of the number of BBM users you've got today and how we work through this transition to getting people pay for subscriptions?

Last question about the EZ Pass subscribers, are any of these revenue generating today?

How long would the free-of-charge period last for someone who's transitioning in EZ Pass?

Thanks.

Okay.

Let's see.

You have to remind me.

You threw a lot of questions on that.

You have to remind me.

Will there be a trough?

Yes, I would suggest -- I think we timed it reasonably well.

The Passport and the Classic device, which by the way Classic device is generating an immense amount of interest in our base, both of those devices comes out in the second half of the calendar year.

It's going to be more like September to November time frame for those device comes out.

Those will ramp up and we have, like James said earlier, about another quarter of clearing through the inventory, which is now a lot less than we started with about seven months ago.

We still have productions going, where especially in the Z3 we're ramping that up because of demand.

I think it balanced out.

There will be a trough.

I would say there will be a trough.

I hope it's not a dramatic one, and then we'll hopefully come back with a stronger, new roll-outs and that's number one.

The second question is about --

How many BBM users have you got today?

We have registration of 160 million monthly active users, a little bit over 85 million.

We expect that number to push into 100 million MAU, probably by the end of this calendar year, and the reason is we're waiting for the Windows version to release and the Nokia pre load to happen.

We also made a lot of changes to much easier to invite connectivities, in the last few weeks, and so a lot of good things is happening there.

You have a question regarding revenue on that.

How do you generate subscription revenue from that once you've got people using a free connectivity service?

You're talking BBM now, right?

Yes.

Okay.

BBM, that's okay, I'll give more than that.

My team here is waving at me and saying no you didn't ask for BBM, you want BES.

I'll give you the answer to that question.

I like to expand it more into the mobile payment side of the equations.

And there are some consumer oriented play but we don't -- it's important in the sense of it has keep the interest level high, the revenue numbers isn't exactly -- will not turn the dial so-to-speak.

There will be channels, advertising for example, but we gave it to people that traditional advertising placement firms to put in the channel.

We don't do channel advertising ourselves.

Of course there will be stickers and stuff like that, but those are really small numbers at this point.

Mobile payment is probably the big thing, secure voice probably downstream and the enterprise use of that is a bigger focus of ours.

As far as the BES is concerned, today when the 1.2 million turn in to exchange for the new upgrade, they don't have to pay anything.

They will have to pay us support fees starting January 1, 2016.

This would be a really strong base for us to up sell a lot of things into, including the gold.

Everybody trade in for the silver CAL, which is $19 a year, but they don't have to pay that.

Now, when they expand in their enterprise to cover iPhone, iPad, Android and whatever they like to convert and win those, then of course each devices is $19 a year.

Then, we would like to provide them a capability to really up the game in security, and when that happens then they have to trade in for the gold and the gold is $60 a year subscription.

Then, we obviously will recognize some of those $19 value of the silver.

Then, there are a lot more ideas behind it.

The whole strategy is to create a big enough base so we could offer value-added services that are on a monthly subscription base that will cover our decline of SaaS over time, plus some more.

Okay.

Thank you very much.

Simona Jankowski, Goldman Sachs.

Just wanted to ask a couple of more clarifications on the 1.2 million BES licenses.

Do you have a sense for, of those customers who converted, how many additional non-BlackBerry devices they might have in their organizations that you'd have the possibility to up sell to?

No, I don't have that number.

Obviously, as time progresses, you know that it's a very mixed -- even my BlackBerry users, there are mix, the people are using iPhone, iPad.

I see a lot of combination of BlackBerry devices and iPad out there.

Maybe people use -- some people might be using a Windows phone, some people may be using an Android phone.

I really don't know.

Safe to say that if you look at the BlackBerry share of the market, although in the regulated industry it's a lot higher, and you look at everybody else in the market and the CIO can securely manage with one infrastructure for the BES12, I think they will be very enticed to move everything onto it.

So that's the general -- that's my thinking about it.

I test it out with enough big company CIO that nobody had challenged me on that.

Okay.

For the BES12, what is your estimate of how big your enterprise subscriber install base is right now?

I think you consider within that some of your BIS subscribers as well that are actually within enterprises.

Do you have an estimate for that?

If you think about us having 50 million subscribers out there today, I know some of you are looking at BIS differently than the way I look at the BIS.

I always think that today the people stay with BlackBerry because they're enterprise user, high productivity of security.

I would say 80% of that 50 million is this perfect base for us.

That's my calculation.

Okay.

Lastly, can you give us a little more detail on how you monetize mobile payments?

Yes.

I have to be very careful.

In some cases is transaction.

We have charge on a per-transaction basis.

The reason I be careful is there are contractual agreement that we signed, I am unable to disclose the financial arrangement.

Safe to say, it's transaction based.

I like the transaction base.

I don't like the one-time thing.

Great.

Thank you very much.

Amitabh Passi, UBS.

James, I had one for you and then one for you, John.

On the working capital side, as you have all these device launches planned for the rest of the year, how should we think about working capital gyrations?

Is most of this risk now being assumed by Foxconn or will it depend by device?

Would you need to rebuild inventory?

John, just for you.

I'm still trying to understand this announcement yesterday on the Amazon app store.

You talked about it freeing up resources on the consumer side.

Can you give us any help in terms of are there tangible incremental OpEx savings you can garner out of this deal?

You've already got R&D at $196 million, sales and marketing, $227 million.

Just trying to understand whether there's any quantifiable benefits from this announcement?

Okay, I'm going to let James take the first one.

I'll take the second one.

Definitely to the question around the NPI launches and the investment in working capital, everything is in Foxconn as I think we�ve talked about before.

It is device by device to answer that one, so we will have to make some investments in the back half of the year.

We have changed our model, and it goes back to the discussion we were having about the contractual obligations, for example.

We have shortened the lead time about which we have to make that, so it allows us to be more nimble so we can more prudently manage those investments as well.

I'd also like to add a statement on that particular question.

Our arrangement with Foxconn, in some cases they help out in distributions, in a lot of cases that it is our distribution network.

It will still cost us money.

We just have to spend it judiciously.

I don't think people should think that Foxconn is paying the bill.

Foxconn is back-stopping our inventory exposure, should we be wrong.

Looks like so far, so good.

The question about savings, I am really at the tail end of our restructure programs.

Right now everything that I'm doing is judiciously starting to lay the groundwork for revenue growth for next year.

The freeing up resources, it's not so much as to cut costs, the freeing up resources is so that we don't do so many things at the same time and we go deeper in what we do.

That really is the more of the model.

Would that be saving along the way?

Yes, probably.

I'm not looking to take $500 million of OpEx to $400 million, for example.

I actually don't think it's necessary for us to do that to return to profitability in FY16.

Got it.

Okay.

Thank you.

Steven Li, Raymond James.

Just a couple of clarifications.

James, on Venezuela, if I understood you correctly, $30 million of services revenues was collected and recognized?

Correct.

In the May quarter?

Correct.

So what would be the guidance for next quarter?

Would it be a bigger decline because of that collection?

I think if you take that out of it, then I think we're trying our best to, of course, control the decline and we did have some success this time.

Going forward, it is probably something that we would have been experiencing in the past.

I think the way you're thinking about it, with the Venezuela being unique to this quarter and then taking a model off of that is the right way to think about it.

All right.

Take out the $30 million and then -- ?

That's probably a normal -- you take out the $30 million, and probably the normal reduction but we're hoping to back it up somewhat with others things.

Okay, great.

John, a clarification on an earlier question.

You said 50 million subscribers.

What was 80% and what was 20%?

The 50 million subscriber, 80% is on the business side.

80% is on the business side.

Yes.

Then just one last question.

The EZ Pass metric, the 1.2 million licenses, was that at quarter end or is it a current number?

We're close enough at quarter end.

Because they came in with a number 1.2 million plus, so, yes, close enough at quarter end.

Okay.

Great.

Thanks, guys.

Ehud Gelblum, Citi Research.

It's actually Stan Kovler calling in for Ehud.

Couple questions, first, on the balance sheet to clarify.

The cash burn you mentioned this quarter, the $255 million, and the comparison to that is $784 million.

I think last quarter you reported that the cash burn was $838 million, so just curious what the change was in that?

As far as questions, one on the BES situation there.

How are you thinking about the third-party ecosystem?

You started to mention that a little bit with enterprise developers for IoT.

A lot of the other MDM competitors also have ecosystems for the enterprise apps, in-house apps and some third-party apps that they've started to talk about to bring on the platform.

Perhaps you can give us an update on how many you have there?

On the units, the unit shipments of 1.6 million, obviously the Z3 sell-in there, excuse me, battling a cold.

In terms of the run rate there, how do you think about the steady run rate of unit shipments that you need to stay profitable and get there?

By our estimates seems like the gross margin there, profitability was probably around negative 10%, still for that, so closer to breakeven, but how many units do you think you need to ship per quarter to get to breakeven on the devices side?

That would be helpful.

You got 10%, right.

If everything goes the same and ASP doesn't change, isn't that going to be 1.76 million?

Well, thanks for confirming the 10% is correct.

(laughter) No, sorry.

I was just playing with you a little bit.

I hope you're doing better with your cold.

The answer to your question is I always tell people that because of the high end nature of our phones, I think we have a model that for next year we ship 10 million phones for the year, we will be profitable on phones.

That's been the model that we're going after.

Regarding the IOT, it's early for us.

We have a lot of partners.

I remember a few hundreds of them.

But it's still very early for us and the one thing you probably should think about is we're not going to just try to do it one at a time.

We will provide that ecosystem, that application, APIs as well as the tools to do so.

We're hoping to connect with some -- my view is -- I'm not saying anything about making any announcement, but I'm hoping to get some really bigger ecosystem to join in with us.

I don't have anything else to talk about there.

I have to defer to James about a cash burn.

Stan, I don't recognize [C38].

I know there was a lot of discussion when we were in New York with Ehud about this.

Definitely there was a lot of noise in and around real estate sales and how to normalize those out.

I know we'll be talking later on, over the next couple of days, so let's take that offline and we can work through the calcs then.

I think the key, the highlight there is we're running at, let's call it $784 million.

You could call it $800 million.

Our cash burn now is firmly within control.

We have a quarter of $255 million.

It will go down from there.

I promise that we're going to get to -- not promise.

Promise is not a forward-looking statement term.

I expect to be cash flow breakeven or positive from operations by the end of this fiscal year we're in.

Got it.

That's very helpful.

The baseline is the $255 million on the cash burn.

Even though that actually included the benefit of the real estate, but despite that, still that's the baseline for improving.

No.

We took out the benefit.

If I included a benefit of the real estate, if I included a benefit of the tax return, we actually made $430 million, but I don't think you'll let me get away with that statement.

Got it.

Thank you.

The cash burn is $255 million net of all these one-time things.

Correct.

Got it.

Thanks for clarifying.

Go ahead.

I'm sorry.

I have a shareholder meeting coming up, so five more minutes.

Deepak Kaushal, GMP Securities.

I appreciate it's last minute.

Two quickly parts to this.

First, restructuring charges of about $226 million in the quarter for core.

That seems like it's more than the core budget set out by the prior management team.

I'm just wondering what your expectations are going forward for the restructuring charges programs?

The follow up on that, on the cost of services and software, last year it was roughly $475 million.

Can you give us a sense of fixed versus variable costs?

I presume most of the fixed costs are associated with running the NOCs, the network operating center, to provide your BES services.

Can you give us a sense of that and if you guys have any plans of reducing that fixed cost or what that might be on a sustainable basis going forward?

Thanks for taking my questions.

Deepak, I'll take the first one.

The $226 million in the quarter is larger, I think, than the previous budget.

I think those are the words that you used.

A lot of those charges, by the way, are non cash.

You'll see the breakdown when we get to the filings.

For example, we did record a non-cash loss in terms of the real estate disposal, so that would be one difference I can point you to.

But the breakdown in the filings will show you where the $226 million is coming from.

Hopefully, we get that out this afternoon.

The question of the majority, the majority is in NOCs fixed cost, the network costs, and the variable cost is actually a much smaller component of it.

Okay.

Are there any plans to bring that fixed cost down?

Are there any opportunities to do that going forward?

Work in progress.

It's important that -- because our customers expect us to continue to invest in the NOCs and because they view that, especially my government customers, they view that as a very important aspect of our security ecosystem.

I have to be very careful in how I address the cost reduction on that.

I don't have any update at this point, but it is a good question.

Part of the thing on my list of hundreds to do.

I'm serious; it's on my list.

Thank you for that.

I appreciate the time to take my questions.

How about we take the last question, please.

Mark McKechnie, Evercore.

John, thank you, I appreciate you taking the call.

One question I wanted to ask, I wondered if you could describe some of the EZ Pass win?

You said you had some win-backs from Good and MobileIron.

Can you give a little more detail as to what's going on there and do you see a lot more of those going forward?

Thanks.

I only reported that because of I asked the team yesterday, we had win-backs actually from almost a lot of people.

There are over 100,000 licenses trade in from a number of competitors.

These happened to be the name I recognized on the top of the list.

So, there are no specific thing about that.

I expect, because our offerings -- as I said earlier, as the Company gets better in terms of visibility, viability, which I believe we're there, the CIOs trust BlackBerry more than a lot.

The fact that we have a very, very strong, secure protocol, everything we do, secure standards, that CIO would rather stay with us.

As I said, the window that opened in the past that gets our customers to move or consider moving away has to do with the fact that they believe the Company's viability was in question.

I think as we sit down and talk through them, and as I said earlier, as we showed our financials and the progress, customers said, thank god, we don't want to change.

Why we want to change?

The fact that we were offering to exchange competitor license for free, that was a big thing.

Most people, by the way, when they even have a competitor's MDM has BlackBerry MDM already.

They don't want many infrastructure.

There is some advantage to our sales and go to market.

Because of interest of time, because I apologize, I have to go to our shareholder meeting, let me conclude this particular call.

I have a prepared thinking statement about that.

Obviously, I hope you guys share our small celebration of a successful quarters.

We very pleased with the progress.

The teams have worked very, very hard.

I strongly believe we can meet the milestone that we laid out earlier about generating cash flow from operation by the end of this fiscal year and starting to get into profitability the FY16.

Our initial focus, we only took seven months by the way.

Our initial focus, when we first came in, was do the supply chain management, the balance sheets improvement, and I think we've done quite a bit of good work on that.

We then start fixing the distribution channels in the Q4 quarters.

Some of you don't like it, obviously, though I thought it was tremendous progress that we made.

That helps drive the margin improvement.

Now, most of my time, now, is not only speaking to customers, it's to really focus on growth, on laying down the path to growth and while keeping an eye on, still, on the expenses and all that and cash flow and so forth.

I believe if we execute a couple of quarters like this, we definitely will meet all the goals and return us to profitability in FY16.

In forward, we're looking forward to seeing you all in the quarter and updating you on progress in 90 days.

Thank very much for joining us today.

Have a good day.

Ladies and gentlemen, this concludes the conference call for today.

Thanks for participating.

You may now disconnect your line.