BlackBerry Ltd (BB) 2015 Q2 法說會逐字稿

Good day, and welcome to the BlackBerry second-quarter 2015 results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Joe del Callar.

Please go ahead, sir.

Thank you, operator.

Welcome, everyone, to BlackBerry's Fiscal 2015 second-quarter results conference call.

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

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

We will then open up the call for questions.

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

This call is available to the general public via call in numbers and via webcast on 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.

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 that 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 10-F and the Company's MD&A, copies of which filings may be obtained at www.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 will now turn the call over to John.

Okay, thank you, Joe.

Good morning, everybody, and welcome.

Thank you for joining us.

Let's just dive right into the quarter.

This quarter, from all our key operating measures, this happened to be a very solid quarter.

I'd like to highlight a few things that we were particularly pleased with.

The focus on margins enabled us to achieve a non-GAAP operating profit.

Our non-GAAP loss per had share narrowed down significantly, down to $0.02 a share, which of course compare that to the $0.11 a share last quarter.

Our cash balance, we maintain at $3.1 billion, and we dramatically lowered our use of our cash from normal operations to $36 million.

May I remind you that was from $255 million cash use last quarter.

We added over 1 million new users to BlackBerry 10 in the quarter.

Lastly, I'm pleased to point out that the hardware, our hardware business turned in a non-GAAP gross profit for the first time in five quarters, which is slightly ahead of our expectations.

This is caused directly as a result of our supply chain efficiencies, the improvement in our distribution channel, and the strong focus on margin.

Of course, much more work needs to be done and could be done there.

Revenue came in within our range, at the low end of our range.

I'd like to spend a minute or so to highlight a few factors that affected the revenue this quarter.

First, you know we are all, as a team, very focused on margin, and so we have chose to turn down, and throughout the quarter, a few lower-margin deals.

Secondly, it's our plan to aggressively shift our software business from the perpetual license to subscription base.

As most of you are familiar with this, know the fact that subscription, although have a lower revenue in current quarter but build a much larger and more repeatable revenue stream for future quarters.

We are definitely in the first half of what I refer to the eight-quarters recovery.

From a revenue standpoint, we might not be at the lowest point but we are near the bottoming out of this revenue.

I will make some comments about that later this morning.

Now, let me spend a little bit of time on the growth part.

We had, obviously, done with our workforce restructure portion of our plan.

That was a well leaked document.

We are now making judicious investment in growth.

More specifically, we're focusing on the following four areas.

First, let me start with hardware.

As I mentioned earlier, we turned a profit this quarter.

Last quarter we successfully launched the Z3, as you all know I think is May 12, in Indonesia.

Since then, 12 more countries have been launched including India, Philippines, the UAE and South Africa.

Demand for the products continue to be strong.

In fact, I think our demand is outpacing supply at this point.

We have plans to rollout in 10 more countries beyond this point, so that was about Z3.

A couple of days ago we launched Passport in three cities around the world, quote-unquote simultaneously.

I'm very pleased to announce that we already have orders, over 200,000 Passports, as we ended the day.

For the US, the Passport is available on Lock, on Amazon and BlackBerry.com.

As you all know, we priced the phone at $599 in the United States and CAD699.

At this level, the device is profitable.

I point this out because a lot of people have asked me about this question.

We have extremely good receptivity for the product.

It sold out on BlackBerry.com within 6 hours and sold out within 10 hours on Amazon.com.

In fact, I believe we were the number one selling on Lock smartphone Amazon on the day before it was sold out.

The engineering team is now working hard on the Classic, which some of you who attended the Toronto event has had a glimpse of that, which currently I'm using and testing, personally.

We expect to launch this product before the end of year.

We also have a very strong road map beyond the Classic, but I think I'm going to talk about that a little bit more in detail at the Mobile World Congress in March.

I'll see you guys in Barcelona for those of you who are interested looking at those.

Moving on to the enterprise software side, I think the highlights of the quarter are definitely the success of our EZ Pass program.

It has been extremely successful.

We added 3,500 total customer registration.

By the end of Q1, just as a reminder, a little bit more than 90 days ago, 120 days ago, we were at 1.2 million license traded in.

By the end of last quarters, 3.4 million license has been issued, about three times the number in our last earnings call.

We could just look at a map a little bit.

The quarter brought in 2.2 million new licenses, over 900 new customers, so we're seeing much more bigger, global companies signing on with BlackBerry.

Of the 3.4 million licenses, 840,000 licenses has been traded in from our competitors, such as MobileIron, Good and AirWatch.

This is 25% of the total license, and this, of course, jumped from 10% of the total license from competitors a quarter ago.

With such a strong uptick of our EZ Pass program and our upcoming release of BES 12 in November, we are potentially considering ending the EZ Pass program earlier than January, like we originally intended to.

We currently have 70 customers in our beta program on the BES 12, many of whom are Fortune 500.

Now, moving on to the value-added service, which, as a reminder to everybody, is our positive strategy to grow the value-added services to replace the decline on the service activation fee or known as the SAF.

A couple of key points there.

We just introduced Blend, which is our secure unified communication platform.

It is now available free for all the BlackBerry device who are on BB10.3 releases and on iTunes and Google Play.

The receptivity, again, has been tremendous in the last few days.

We have a pretty strong plan in attacking the enterprise space for monetizing these features.

We're releasing, also, later on this year, the releasing the identity management software, which is different from Blend but in tandem with Blend.

We also know that many customers want to assess cloud services like Box and Workday, so we want to help our customer do this in a secure manner with our identity management solution.

This is part of that release.

Other products that have been introduced, and will be introduced over the next 90 days, will include the BBM Protected, BBM Meetings and BBM Money.

BBM now reported 91 million monthly active user, MAU, which up 6% from a quarter ago and 44%, by the way, over a year ago.

We also recently released BBM on the Window phone.

We started generating revenue for BBM Protected in finance, government and healthcare vertical already.

We also expect to launch the BBM Protect on iOS and Android later in the year.

In addition to the internal value-added services investment, which we talk about, which was Blend and identity management and the BBM part, we have been making some strategic acquisitions.

Particularly, I'd like to point to the two of them in the past 90, 120 days.

First, we acquired a company in Germany by the name of Secusmart, which should be closed with the government and regulatory approval, assuming we get the government regulatory approval, by the end of the year, which will provide a secure voice and text communication.

To put it a little bit in context, BlackBerry has always been known as the leader in secure data with all the encryption technology and so forth.

Of course, we have the BBM Message, which is highly secure, so we have data and messaging covered.

With this acquisition we also covered voice and text.

Thereby, we believe we will cover all the medium of communication and interactions.

The second company acquired is Movirtu.

Movirtu is a UK-based company.

They provide a virtual SIM solution that allow users to have both a corporate or personal number on a single device.

The single device could be Apple iOS, could be Android and could be BlackBerry device.

This is what we've been hearing from a lot of our customers, wanting to implement a secure BYOD solutions and also help them to facilitate the split-billing solutions.

With our 10.3 features called Balance, the Movirtu users now can securely manage work and personal use on one device.

Then, I'll of course assume that's BlackBerry device, but it works on the other two.

Lastly, to begin our effort to license and monetize our technology asset, in the quarter we created BlackBerry Technology Solutions.

The idea behind the BlackBerry Technology Solution is to bring QNX, Certicom, Paratek and many other technology assets including our 44,000 strong patent portfolio as well as the Project Ion.

The BTS, the BlackBerry Technology Solution, will sell and license these products and assets across different industry, including the Connect2Car, the automotive industry, healthcare and many others that we're targeting.

More importantly, BTS will lead the BlackBerry IoT strategy.

The unit will report to Dr. Sandeep Chennakeshu.

Many of you actually know Sandeep from his time as President of Ericsson Mobile.

We also added a seasoned technology leader by the name of Marty Beard as our Chief Operating Officer.

Marty previously served as the CEO of LiveOps and brings with him extensive experience in operations, especially in a cloud-based business.

Talking about cloud-based business our next release will be BES 12 and it is now scheduled for November 13, somewhere in the Bay Area, California that is.

Given the success of our EZ Pass program and all of the growth initiatives I just outlined for you, let me share some of our software expectations with you and again remind you that we're now this is -- well, we have it in the forward-looking statement.

This is really reminding you of forward-looking statement.

I assume that you don't want Joe to repeat what he said.

I was very amazed with the string of the words that he used.

So let me focus on software a little bit.

In this particular fiscal year, we expect the software number to be roughly about $250 million, which includes our software license sales as well as the T support.

Next year, our expectation of our plan is to double that number and that growth in the software and T support should be able to cover the SAF decline for the future.

Our next release will be on BES 12.

BES 12 will be on November 13 in San Francisco, as I said.

And in conjunction with that we also will host a analyst day in the Bay Area, of course, and we will provide you additional details on our growth strategy, the product road map and the makeup of some of those doubling of the software revenue numbers, so please save that date.

Now, I'd like to hand this off to James and for further details and the numbers for the quarter.

Thanks, John, and good morning, everyone.

As I normally do, I'll start with the income statement.

Revenue for the second quarter was $916 million.

Hardware represented 46% of revenue compared to 39% last quarter.

We recognized revenue related to approximately 2.1 million devices in the second quarter, up from 1.6 million in the previous quarter.

Services revenue represented 46% of revenue compared to 54% last quarter.

Service access fees declined 13% compared to last quarter's normalized SAF revenue.

I just want to remind everyone that last quarter's SAF revenue actually benefited from a $30 million cash payment from the carriers in Venezuela, which at the time we said would not repeat.

We continue to model the SAF decline of approximately 10% to 15% in the next quarter.

Software and other revenue represented 8% of revenue.

Non-GAAP gross margin was approximately 45%, consistent with the previous quarter.

GAAP gross margin for the quarter, which includes restructuring costs, was 46.4%.

Hardware gross margins, as John mentioned, were positive this quarter due to an increase in both the number of units recognized and the cost per unit of the current portfolio, as well as a reduction of manufacturing related fixed costs.

Non-GAAP operating expenses were $433 million, down from $504 million last quarter.

GAAP operating expenses were $623 million.

Included in GAAP operating expenses were $33 million of restructuring charges as well as a non-cash charge of $167 million for our convertible debts.

As I've explained in the prior quarters, GAAP requires us that we record a charge as the value of our debt goes up.

This non-cash charge has no impact on the face value of our debt, on our liquidity or on our operations and cash flow.

Amortization expense was $75 million in Q2.

The GAAP tax recovery in the quarter was approximately 5%.

Going forward, we expect a quarterly recovery to be about 15% as the Company still anticipates utilizing all of the available losses available for carry back during the fiscal year.

Non-GAAP net loss was $11 million or $0.02 per share.

GAAP net loss, which includes the impact of the debt and restructuring, was $207 million or $0.39 per share.

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

Our cash balance increased by $11 million compared to last quarter.

Adjusting for items not part of normal operations, we used $36 million of cash in the second quarter, as John previously outlined.

This use of cash declined by over 85% compared to the $255 million from Q1.

The reduction was attributable to improvements in collections of receivables as well as overall reductions in operating expenses and capital expenditures.

During the second quarter, we also completed the Canadian real estate sale as well as some other smaller asset sales.

Total proceeds from these activities amounted to $56 million.

Purchase obligations and other commitments amounted to approximately $1.6 billion.

Purchase orders with contract manufactures represented approximately $344 million of the total, which is up slightly quarter over quarter but expected due to our new hardware launch activities.

Total cash, cash equivalents and investments was $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 Fiscal 2015.

Looking forward we continue to expect the cash flow breakeven before the end of the fiscal year and continue to forecast net income statement, non-GAAP profitability during FY16.

That concludes my comments.

I'll hand it back to John.

Okay, thank you, James.

Operator, could you please open the Q&A part of the session?

Certainly.

(Operator Instructions)

We'll take our first question with Tim Long with BMO Capital Markets.

James, just one quick clarification and then a question.

That down 10% on service this next quarter, is that after we normalize for the $30 million Venezuela?

Then the question on the software side, it looks like this quarter was a nice 9%, 10% improvement sequentially after some declines and it sounds like you're expecting a double next year.

Could you just give us a little insight into maybe what drove the turnaround?

Is this EZ Pass or what is driving us up in the August quarter?

Is that the same, is that main driver to double this business next year?

How broad and diversified does the business get to double that business?

Thank you.

Okay, Jim, you want to take the SAF one?

I'll take the last one?

Tim, just to clarify, I think your question referred to a 10% decline quarter over quarter and normalizing for Venezuela.

My comments were that SAF declined 13% normalizing for Venezuela, so what I'm doing there is taking the $30 million off of Q1, effectively, and then comparing that to where we landed in Q2.

Going forward, again 10% to 15% is what the expectation is.

Tim, the question regarding the software doubling, yes, we have a reasonably good software quarter this quarter compared to the quarter ago and next year is a number of things.

Is not only the EZ Pass, that of course we look to contribute.

EZ Pass will also bring us a good uptick on T support as the program calls for the customer paying T support beginning of February 1 of 2015.

In addition to that is all the software features that I laid out earlier, whether it's in the Movirtu side of the equation, whether it's in identity management of the equations, and the secure voice equation, and of course there are more to be added to this.

It has a lot to do with the combination of all those for the next-year plan.

We will be able to talk more about that on November 13 in San Francisco.

Okay, thank you.

Thanks, Tim.

We'll move along to our next question from Maynard Um with Wells Fargo.

Hi, Maynard.

Morning.

I'm wondering if you can talk a little bit about the conversions in the EZ Pass program?

Specifically, how many of the customers that you're seeing are taking the gold versus silver and then the perpetual versus the annual?

I'm curious if you were to end your program early, that you talked about, would those in the current program be grand-fathered in to that February 1 payment date or would they all start paying?

No, the 3.4 million licenses cross over to 2,500 customers, they're not grand-fathered.

We have agreed that they start paying T support February 1 of next year, so we added the program at the end of the training program.

That implied that then people are interested our technology, especially in the BES 12, then they have to pay for their licenses.

That's all it meant.

You cannot trade in anymore.

We have not made the determination that we will, but I just want to forewarn that we might be doing that because of the numbers coming in pretty strong at this point.

Okay.

Then (multiple speakers)

I'm sorry, regarding the silver and gold, the majorities are silver because of the program conversion, and we are looking forward to enhancing their subscription base with us in gold.

Yes, you're right, the majority -- other than some very specific case, we are now only taking subscription-based software.

Okay.

I guess I'm just a little surprised that the majority would be silver versus gold because my understanding is if the gold gives you all the features of security that BlackBerry provides, I guess what is the opportunity to upgrade them from silver to gold?

That's the thing that I'm looking forward to.

I believe everything you said is what we expect it to be, and then we would not going to start expanding them to gold, because the EZ Pass program only allow you to trade in silver.

You could buy gold, but it will only allow you to trade in silver.

Got it okay, thank you.

Thank you, Maynard.

We'll move along to our next question from Simona Jankowski with Goldman Sachs.

Hi, Simona.

Oh, hi there.

I first just wanted to clarify when you guide for non-GAAP profitability for Fiscal 2016, is that for the entire Fiscal 2016 or just during some quarter in the year?

(laughter) Then I have a question.

You and I talk about that.

It's some part of the 2016, obviously like everybody else we want it earlier than later.

If you look at the trajectory of some of our progress that we made in the last three quarters, I think, personally, I would like to see it sooner rather than later, of course, but I can't promise you that it's entire.

Okay.

Then, can you just give a little more detail on what drove the decline in ASPs?

I imagine there was some kind of mix in there, but if you can just touch on that in a bit more detail including whether you having any inflow shipments of the Bold that you were going to bring back for a period of time, and how to reconcile the decline in ASPs with the expansion in gross margins?

Sure, Simona, it's James.

I can take that one.

You're absolutely right.

That mix did play -- was the primary driver in the decline in ASP.

We are having success with Z3, for example, as John mentioned, and the popularity of that.

Of course, that is a lower cost product as we had talked about, so that will have an influence in it.

Also given the age of our BlackBerry 10 portfolio, you would expect price erosion over time.

So put those two things together, you really get that as the two major factors with that.

Now, flipping to the margin side, that part of it is, we're really helped by volume there and the incremental 0.5 million units that we recognized.

We do have some products that have positive margin left in them, and of course, anything above zero times a bigger volume base will get you improvements in margin.

I don't want to underplay the work that we've done on costs that both John and I talked about, but that's another factor as well.

From an ASP's perspective, now that Passport has a reasonable receptivity, we just released it, we sold out in many places already, so that of course carry a much higher ASP.

Okay, great.

Did you guys have any meaningful shipments of the Bold?

I know you talked about running that again, and is that done or is that going to continue to run in small volumes?

No, we're pretty much done.

Okay, thank you.

Thanks, Simona.

We'll take our next question with Mark Sue from RBC Capital Markets.

Is it Mark or Daniel?

It's Mark Sue.

Good morning, gentlemen.

If we look at the uptake in your software revenues, EZ Pass, BBM, et cetera, can you give us a sense of where and the nature of your share gains from some of the competitors in mobile management?

With the device management they have had an earlier start from you.

I'm just wondering how you're able to convince so many customers to move away from them into BlackBerry.

Well, I think this is about the Company's stability.

The product is better and more -- broader, deeper, and has much more history and experience with most of our customers.

I think the last couple of years we had some turmoils.

That is now behind us.

While we go in and reach out to a customer, I spoke to many of our executives, across-the-board has been visiting a lot of customers.

People are very interested in working with us.

Obviously, our technology works and works well.

They all know that.

The government uses it.

Major banks uses it, so winning back, knock on wood, I don't want to jinx myself.

But winning back, we are starting to see that in many, many places, especially with the very big company, so I feel that -- I don't know where the market share is.

I really -- because I don't track that personally, because I only track the license counts.

As I said, we have over 800,000 win back or conversion from, maybe they have even never been BlackBerry customers before in that mix, but I have to assume that many have been BlackBerry customers and they have found that our competitor solutions definitely are not as good as ours.

Therefore, now they know that we have that commitment and the Company has stabilized and we have good cash positions, good technology and road map and we're starting to win those back and plus some more.

I see so it's not just a comfort level of your stability at the organization, but it's you feel better about the technology migration?

Yes, our stuff is broader and deeper, meaning while most of the industry analysts also confirm that, so --

That's helpful.

And, John, as we move to new revenues and services, is there a way to slow the rate of decline in legacy services?

Is there a way we can manage to close the door behind us a little bit slower or is that we just model that traditional base to drop?

I currently don't see a way, as they convert, but I'm working on it.

There might be, but I don't see on obvious way as we go on, moving on to everybody to BES 10, but I wouldn't be overly pessimistic, no way.

Besides, the basis now is extremely loyal customers.

The good news about that is a lot of them switches to BB10.

The bad news is, of course, you see the numbers come down, but the good news is get to BB10 and get to BB10 and there are other methods and other value that we could provide customers to enhance the software on the handset as revenue source.

That's helpful.

Thank you, gentlemen, good luck.

Thanks Mark.

Now, we'll move on to Daniel Chan with Scotiabank.

Good morning.

Hi.

When do you expect to see some of these value-added services such as Blend and BBM Protected make a meaningful contribution to your revenue?

Then, can you give us an update on the sub count and the proportion of best subs?

I'll take the first one.

It's going to be -- my plan is for FY16.

Okay.

On the sub count, Daniel, we were down a little bit.

I think the rate of decline has slowed.

We were 50% last quarter.

We're definitely less than 10% down I would say.

But in terms of the ratio, I think the 80% of business that John and I have always talked about, we're still in that.

So these value-added services that you have, such as Blend and BBM Protected, those are only available on BES subscribers, though, is that right or can that also be used by guys using a cloud?

Yes, people can use the cloud.

Blend is both, actually both services are cloud based, or premise based depending on the customers.

We like to see it in more in the cloud base, and it's not only on BlackBerry.

It's across-the-board on all other devices, but it will work with a lot of the other people's MDM.

You know that we have opened up our API to many of our peers in the industry, our competitors in the industry on MDM, so it's more than just BlackBerry server.

Okay, thank you.

We'll take our next question from Amitabh Passi with UBS.

Hi there.

Hi.

Hello, this is Evelyn for Amitabh.

Can I just ask you a question more on your --?

You've been rationalizing your OpEx and its been down, R&D, $10 million and SG&A another $30 million plus.

At some point, do you guys need to reinvest in OpEx to support the Passport and other devices launch?

Right.

We are already at that point.

We believe that this expense line, very reasonable.

If there's any uptick, it will not be a huge uptick.

We are managing it very carefully.

I use the word judiciously.

That's exactly what it meant.

We are aligning a lot of the resources a little differently to focus on key drivers like the BES 12, the value-added services, the BlackBerry Technology Solutions, so a little bit more alignment in the Company on a few very major initiative.

We are comfortable with where we are with the expense number.

There's always opportunity, but we are actually hiring people in selected areas and expanding the Company.

Just to add to John's comments, some of the reduction that you're seeing in this quarter was definitely due to timing.

For example, if we did, as part of our restructuring program, let employees go mid quarter, we wouldn't have seen the full benefit.

Whereas, with the restructuring program being done and behind us, effectively you're seeing the savings, if you will, catch up to full quarter impact.

So does that mean we should be expecting OpEx to stabilize at this current level?

Yes, stabilize.

If there's uptick, it will be covered by margin improvement.

Okay, got it.

Thanks.

We'll take our next question from Richard Tse with Cormark Securities.

Hi, Richard.

Hi how are you?

Just a quick one on BTS.

Can you rank the areas of priority in that division, is it QNX first, going after patents?

A related question, what are you guys doing around IoT?

Thanks.

Okay.

Great questions.

QNX and IoT, QNX is a major component to drive that IoT strategy, so that is the number one mandate for the group.

Then of course, we are going to regenerate a lot of the research activities around Certicom and Paratek and then last but not least, but last is about licensing.

It's in that order.

Hello?

That's great, thank you.

We'll take our next question from Rod Hall with JPMorgan.

Hi there.

Hey, guys.

It's Ashwin Kesireddy on behalf of Rod.

I was hoping you could give some commentary around the improvement in North American revenue, and how should we think about that going forward?

Also, if you could comment on how big a portion was North America in terms of helping your gross margin during the quarter, and how should we think about it moving forward?

That would also be helpful.

Also quickly, on the licensing portion of BTS, I was trying to understand what exactly are you trying to license here, and how should we think about some of the monetization opportunities there?

Okay, I missed the first question.

North American revenue.

I can take that.

You're going to take that?

Okay.

The North American increase was actually mostly on the backs of devices.

SAF did stabilize a little bit within North America to help, but really the uptick in revenue can be attributed to devices.

Okay, regarding the licensing, we are just starting to explore this opportunity, so we really don't have any numbers tied to it, but I think there's certainly opportunities there.

We won't see that in the very short term.

Because we believe that we have a lot of technology that we definitely could be beneficial to some of the other people that want to use that technology, so we're not against licensing it, but there's no concrete numbers.

We just started the whole process, thinking about it.

We spoke about this, or I have spoken about this, a number of months ago.

Thinking about, hey, this is an area of revenue and value that we could realize for our shareholders.

That's all it is, and Sandeep is such a industry veteran.

He knows a lot of the players, both in our space and in adjacent space, and think that he will be a good ambassadors of that.

Okay.

So, John, is the idea that you'll probably try to build a patent portfolio and go around the industry trying to see if you can monetize that?

Is that what you're thinking?

No, I'm not selling anything.

I'm literally -- our offering is licensing, but again I don't want to go overplaying this at this point.

Let us accumulate some experience and have some time first, and maybe in the future I could speak a little bit more about it.

Okay, awesome.

Just quickly on BlackBerry 10, is there any shipment number that you can provide, or that's current?

Yes, I think we were up slightly quarter over quarter.

The shipments were about 70% of the volume this quarter.

Great, thank you.

Thank you.

We'll take our next question from James Faucette with Morgan Stanley.

Hello, James.

Good morning.

Thank you very much.

Just a couple quick questions.

First, John, on the software revenue objectives that you've laid out, how does that compare or how do we factor in the target that you laid out last quarter on the $100 million in BBM related revenue?

Are those two tied together or is one part of the other et cetera?

Then, on the EZ Pass, where are we at in terms of getting EZ Pass users to subscribe or commit to T support and beginning to be able to book at least the deferred revenues from those customers?

Thank you very much.

Okay, sure, James.

Great question.

I was hoping nobody would ask me that question.

Now, you remember both earnings call.

They are different.

I do expect from the MDM side and the value-added service side, when I first made the comments about doubling the software revenue, it's really made basically from those buckets.

Then BBM, I'm still believing that BBM could bring in $100 million in revenue.

This is separate, though they are additive.

That's number one.

Your EZ Pass, we cannot book it on deferred because the deal that we structured with the EZ Pass is you sign on, you trade in the licenses, whether it's BlackBerry licenses or competitor's licenses, and then you get the silver, which will provide us an ability to upsell to gold.

And the T-support commitment starts February of next year.

So, starting in February or after, really next fiscal year then, is when we should expect to start to see what levels of T support attach you'll have on those EZ Pass users et cetera.

And then that would start to impact the deferred revenue.

Am I understanding that correctly?

Yes, you understand that correctly, exactly.

Those by the way, that T support is part of my doubling sub revenue, so it's not separate.

Right.

Okay, great, thank you.

Thank you.

We'll move along to our next question from Deepak Kaushal with GMP Securities.

Hi, good morning.

Good morning.

Hi, good.

You can hear me.

Maybe a minor follow up to the previous question, and then another question on sales and marketing plans for BES 12.

First, on the BES services that you guys have installed to date, can you give us any sense of a split between BlackBerry versus non-BlackBerry devices that you're managing and what the trend is in terms of uptake for managing non-BlackBerry devices through BES?

We're going to have to find that.

I don't have the number.

Do you guys have the number?

Let my colleagues start looking for numbers.

If we don't have the number, I'll prepare to speak to that on November 13.

Okay, perfect.

But I really don't have the spread in front of me.

That's fine.

That's something I'll be watching fall out again next quarter, if I have to.

Okay.

(laughter) You won't let me forget.

I won't.

(laughter)

Then the -- what is the second question on?

The second question is really on sales at marketing.

I know you guys have put in some structural changes.

I wanted to know if you could elaborate on the progress of that in terms of how you're planning to sell BES service to enterprises.

What kind of mix will go through a carrier?

How much dependence will you have on the carrier for that, or how much are you going directly, maybe you can elaborate on your plans?

Okay, good question.

Thank you.

Good question.

Right now, the last quarter, mostly of our BES sales are going through directly.

There's some distributors using or distributing our BES.

I would love to have the carrier carry it, so I'm working on that piece.

That's another part of this distribution that we're going to be adding on.

There has been a number of carriers that I have spoken with that are extremely interested on carrying BES 12 and offering that to their customers, so that kind of pilot that might factor in why I'm so bullish about doubling the software number.

Okay.

Then, in terms of that sales -- initial sales for BES 12, you mentioned OpEx at current levels is what you would expect going forward plus a minor uptick.

Does this include a sales push for BES 12?

Or is there an investment for BES 12 on top of that?

No, that's already included.

We are hiring, selectively, in a lot of places, enterprise software salespeople.

But again on this particular one, the focus on distribution expansion is on both carriers and distributors around the world.

We actually have an infrastructure in place already.

We may add some more strength to it, but we don't -- it's not from scratch.

Okay, great.

Thanks for that.

I'll pass the line.

Thank you.

We'll take our next question from Ehud Gelblum with Citi.

Good morning.

How are you?

Good.

Saw the launch the other day.

Good seeing you up there in Toronto.

Question, I want to try and do some parsing on the units that you sold.

Can you give us a sense?

I have got a bunch of questions in here, but they are all getting at the same concept.

If you can give us a sense how many Z3s actually sold?

When you said the Passports sold out, separate question, if you can give a sense as to what that means, so we can get a contextually how many Passports sold out.

But on the Z3s, I was doing some math on what, James, you said before.

BB10 was 70% this quarter.

You did 2.1 million units, so BB10 was about $1.4 million.

That means BB7 was about 700,000 this quarter.

But you did total units last quarter of 1.6 million, so it just appears that your BB7 units of 700,000 this quarter are up a lot.

If that's true, why did BB7 units grow so much?

They're probably looking for BB10s.

The last part of this whole gestalt is, North America revenue, like you said, was up and you said that was due to devices, but there was no Z3 here.

Asia was down, and Z3 went into Asia.

All these things I'm trying to go at and trying to understand are, why was Asia down if the Z3 was there?

Why was North America up?

And why does it look like your BB7 devices were up very strongly to 700,000 this quarter for probably no more than 300,000, 400,000, 500,000 last quarter?

Are they all related?

Then, I have a follow up with something different.

I appreciate it.

I think at the end of it, Ehud, I like what you said last.

I think they are all related because I think your math on the units is right.

If you think about what's popular in North America, would be like the 9,900 in Bold which would drive more BB7 type of units going through there as well.

You're right that the Z3 wasn't there, but effectively I think all of those stories hang together and drive in and around or explain the uptick in BB7 and some of the strength in devices for that.

Now, in terms of numbers for both Z3 and for Passport, we're not going to give those out.

I think John's commentary, in terms of the experience we've had to date and the strong demand, is what we're comfortable in sharing right now.

Right.

I haven't looked at the number, the device from the angle that you two have been discussing.

But on the Passport, as I pointed out, we entered in the launch day with 200,000 units already ordered.

We received PO for those.

The first day it sold out in many, many places, because literally, the real big shipment to everybody who signed up for distribution is actually seven days after that date, whatever the next Wednesday, I suppose.

So we have a limited quantity supply, but it sold out very quickly.

Okay, that's helpful.

One of the things, the growth in software came up before, is it possible -- I think QNX is reported in software; remind me if it's not?

Yes, it is.

I don't know exactly how that line item goes, if you can give us a sense as to how large QNX was within software?

Was that a source of growth?

Given, again, I don't understand exactly the dynamics of that business, but given that we're going at this time of year into a new car auto model year around September, does QNX naturally get larger in your August quarter and was that part of the growth in software?

We did have growth in QNX in the quarter.

It does not explain the whole growth.

We don't really break out every single pieces of this.

The growth -- the majority -- if you look at a percentage of growth, it's mostly come from the MDM side of the equation.

Okay, so QNX was not as big a contributor?

QNX grow pretty well, but it's not the big component that drove our growth in software.

Okay.

One other discrepancy, if I can just get in there?

Sub count, James, you said fell less than 10% but your services revenue, if you compensate for the $30 million Venezuela, was down 13% or so.

It would appear that revenue fell faster than the sub count fell.

I understand there are averages are involved, so it may not work out exactly like that.

Does that appear that ARPU is falling faster and does that mean that your higher ARPU subscribers, which are generally enterprise are falling faster than your consumer subscribers?

Is that the right way to understand that or are there other dynamics in play?

Well, there's other dynamics in play.

It's not -- remember, depending on how you're modeling ARPU, we do have some higher biz-type fees as well that we charge that may be over and above what you're modeling ARPU as well, so it's not just an enterprise story is the way I'll answer that, Ehud.

Okay, appreciate it.

Again, I add this too, because I know it's helpful to the conversation.

There has been a number of big accounts that moved to BB10.

So I'm not saying you're losing them entirely, you're just losing the enterprise subscribers from the SAF?

Right.

There's a 10 side, but you're losing them from the SAF side?

That's right.

There has been that.

And that would make sense.

I appreciate it.

Sure.

We'll take our next question from Todd Coupland with CIBC.

Hi good morning everyone.

Morning, Todd.

I wanted to ask about EZ Pass, if I could.

How much of a factor is just the lower price of silver in getting guys to flip back to you?

The EZ Pass, we charge silver at $19 per year plus 20% on T support, but the EZ Pass, by definition, you don't pay anything so it's not a price-based conversation.

But they know eventually they are going to pay, so --?

Yes.

Well, on the people who trade it in, they don't have to pay other than the T support which is $3, I mean $3.40, I suppose, a year per license.

Then when we buy more, they have to pay, or they upgrade it from the silver to gold and of course they have to pay the delta.

Okay.

Just to follow on to that.

BES 12 coming out in November.

Do you think there is pent-up demand for other enterprises to flip to your MDM?

Are they waiting for that?

I'd like to think so.

Yes, demand has been -- the conversation has been very strong.

I was just in Singapore giving a speech this past weekend and I spoke to a lot of customers there and the demands are quite strong.

Very strong interest level on the BES 12.

Like is there any way to characterize the funnel once you get it out there is it like 2, 3, 4x what you've seen so far?

No, in a software business, 2, 3, 4x are too low to convert.

Typically, on software pipelining, you're going to have to be looking at more like 6 to 8 times.

6 to 8 times what you've done so far?

No, you have to look at 6 to 8 times -- if I'm going to have to bring in $100 million, I have to be working on $600 million to $800 million of pipeline in order to feel like that, you could feel comfortable about $100 million.

Okay, fair enough.

What's that pipeline post BES 12 launch look like now?

This is embedded into my doubling the software numbers for next year.

I shouldn't be reporting on pipeline.

That numbers are -- sometimes are meaningful and sometimes are not as meaningful.

Okay, fair enough.

Thanks very much for the color.

Certainly.

Thanks, Todd.

That's all the time we have for questions.

I'd like to turn the conference back over to our speakers for any closing or additional remarks.

Okay, great.

Thank you.

Thank you, everybody, for staying for the call.

As you said, as we all talk about all the operating metrics, I think want to particularly point to the fact that our margins are good, cash are good, and the cash use has been much lower.

That should be a good testimonial that we will make our cash flow from operation, for normal operation, breakeven or positive by the end of next quarter.

We have six more months of that, and you should see progressively good trends going forward.

We spoke about some of the leadership decision, a lot of people are interested the EZ Pass and the MDM and the value-added services.

We look forward to continuing to have a strong discussion on that.

As far as doubling the software numbers, I know that it will pique a lot of people interest.

We would love to give you a little bit more color on November 13 in San Francisco where we launch the BES 12 as well as the analyst day to follow the launch.

I look forward to meeting you all and have that discussion.

Thank you very much for joining us and have a great day.

That concludes today's conference call.

We thank you for your participation.