BlackBerry Ltd (BB) 2015 Q3 法說會逐字稿

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

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. John Chen, CEO of BlackBerry.

Please go ahead, sir.

Thank you very much.

Good morning, everybody, and welcome.

Before we start, I'm going to turn over to Joe for the Safe Harbor language.

Thank you, John.

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

We will then open up the call for questions.

Our Q&A will be slightly shorter today given preexisting commitments.

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

The 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 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 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 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.

Thank you, Joe.

I'm sure you have the results in front you, and again I welcome you all to our call here.

I, and together with my team, are extremely pleased with the management of our finances.

We turned in $0.01 on the non-GAAP profit and a positive cash flow from operation of $43 million, for the first time in two years.

Operating expenses and margins were managed extremely well, while we were able to launch and deliver very important new products.

I will get into that a little later, the detail of those products.

We expect to remain cash flow positive and continue to expect to achieve sustainable profitability sometime in the FY16 timeframe.

Now that the team has a pretty good handle on cost and margin, I myself and a number of our senior executives are spending most of our time on improving and expanding our distribution.

It is my belief that we can stabilize and grow the revenue of the Company in FY16.

While we will make every attempt to stay profitable going forward, sustainable profitability can only come from revenue growth and that is certainly our strategy here.

To see this revenue growth, we probably need a couple quarters and I'll explain that a little later.

One of the things that we already done has been aligning internal resources to support the field, and a couple hundred employees have been commissioned into the field to help drive this growth.

I see about one more transition -- we call it a transition quarters, the one that you just saw in Q3.

In terms of revenue, as we ran up the volume in Classic, which we just announced, followed by revenue stabilizing and sequential growth sometime in FY16 as some of our investments started to gain traction.

I'd like to spend a few minutes on the revenue side.

It is a number that, obviously, to us is not satisfying.

We understand the makeup of the number.

As we all said a number of times, our focus have always been, this year, about margin and cash flow.

We achieved that, but now we're going to turn our attention to revenue.

To give you a little bit of color on the revenue.

On the hardware side, the quarter was pretty much entirely focused on creating our own inventory.

I'll give you some numbers behind it.

This obviously weighted on the ASP of the quarter.

Going forward, because of the new products, we expect the ASP to start ticking back up again.

We're able to fulfill above the 200,000 Passport orders that was pre-ordered at the time we announced it, while reducing the manufacturing lead times to roughly now between four to six weeks.

However, because we have sold out, our stock out a number of times in the quarter waiting for the fulfilment, we were only able to fulfill order backlog of Q3 by December 12, so that was clearly already into Q4.

I also want to remind everybody that our revenue of these devices are all recognized on a sell-through basis, so not every one of those units, in fact, most of those unit's revenue are not recognized in Q3.

We obviously will recognize as they lit up throughout the next few quarters.

I spoke about inventory, clearing our old inventory.

I'm very pleased to announce that or to report that our inventory level, the old device inventory level is down 93% year over year since the 13 months that this team have taken over.

Now, literally, we have very few prior devices left that we could provide.

Despite our orders, we achieved our second quarter in a row with positive hardware gross margin.

That's the old products and where our focus has been.

Then of course, we just launched our Classic.

I could report the fact that the Classic has been extremely well received.

The orders are ahead of where the Passport was at the time of the launch a few months ago.

Finally, we did turn away a number of, I would call, low margin and simply negative margin deals in the quarters.

We will continue to do that, by the way, as a practice going forward.

We will not do deals that we know the margins are hurting to our bottom line.

Moving on to SAF.

The SAF revenue is down about 13% quarter over quarter, which pretty much in the middle of the range that we expected.

With the launch of the Classic, we're modeling a little bit more aggressive SAF decline, which is no different from what we show you in San Francisco on November 12, which was we're modeling a 15% sequential decline.

On software, recall that the enterprise software product we released in the November I just referred to.

The typical enterprise software sales cycles are roughly about six to nine months for the enterprise.

However, we have seen the BES12 gain a lot of traction, probably because of the EZ Pass program that we had in place and the beta program we had placed.

We already had made a number of very notable wins to date.

I'll report on some of the names later.

Now, on an update to our progress in returning to the growth part of the story.

First, on the device side.

On the Passport, we successfully rolled out to 48 different countries in the last couple of months including Canada, US, South Africa, Saudi Arabia and India.

North America and Europe account for 61% of the Passport sales.

On the Z3 that we rolled out about maybe 10 months, 11 months ago, it's still going reasonably strong.

It's been rolled out to over 54 countries to date, total.

We continue to see a reasonable demand for this product, at least for the next couple of quarters, two to three quarters.

Lastly, we referred to the Classic that launched a few days ago.

As I reported, we have very strong support and traction with the product.

People like it.

We have also very strong support from the operators on a worldwide basis.

Initially the carriers that have the Classic at the retail stores, though this is -- as those of you that follow us reasonably closely, this has not been something that we have enjoyed for a while.

There are a number of carriers that have put us on their retail stores, including AT&T, Rogers, Bell, Telus, Deutsche Telecom, Orange, Telefonica, SingTel China Mobile and more, as well as many local operators in Europe, Africa and Middle East.

The list will expand.

We're working on that aggressively right now.

We have a pretty strong device road map going forward.

We will discuss this at the Mobile World Congress in March, so I invite you to make sure you don't miss that.

I think you'll find that interesting and exciting.

I'd like to move to the enterprise software side.

BES12 and our value-added services solution launched last month.

We are committed the to making the BES12 the leader in the cross platform EMM, the enterprise mobility management segment.

This commitment is highlighted with our support for the Samsung KNOX solutions.

In fact, I wasn't able to stay, I understand from my colleague that there was a pretty good reception at the NASDAT when we have a joint event with Samsung in New York just Wednesday.

The one that we saw James Church had been seven story tall.

I, unfortunately, had to attend Board meeting

Anyway, this commitment is highlighted with our support of the Samsung KNOX, that we talk about.

We also make two major announcements today to reinforce past platform commitment.

The first, we are pleased to announce the support of Lollipop, the code name version of the latest Android.

I guess it's known as the L Series.

Second, we're pleased to announce that Boeing is collaborating with BlackBerry to provide secure mobile solution for Android devices utilizing our BES12 platform.

That's, by the way, is all they allow me to say, so sorry.

It seems like I'm reading it word for word.

I'm committed to -- true to my commitment here.

We believe this cross platform EMM message is resonating with customers.

I'll give you some wins.

Just a month into the BES12 release, we are pleased to announce that firms all around the world such as Tata Energy, McKenzie Health, Bombardier, the trusted source of unit of Temasek in Singapore and more have decided to go with the BES12.

These are wins that we already recorded.

Then in addition to that, Ocean Capital Investment, which is an affiliated unit of Irving Oil is moving away from Mobile ION and will be our first BES12 hosted customers.

Air Canada has also been testing our BES12 hosted solution and is planning to deploy it.

So, that's already a number of wins.

I'm sure -- the wins, obviously we have a longer list of that, but I think I should just stop right there.

We have a successful BES12 beta program with 89 customers already fully deployed, only one month after we launched our BES12.

174 more beta customers have planned to roll out the BES12 within the next 12 months.

By the way, of all these beta customers, 70% of that -- all the number of the beta customers, are on mixed OS environment.

That means that they are cross platform, managing Windows and iOS devices and Android devices in addition to BlackBerry devices.

Our BES12 seating program, the EZ Pass, now has over 4,900 total customer registration, which is about 1,300 more than last quarter when we reported.

As of today, we have 6.8 million licenses turned in, 100% growth over last quarter.

So very, very well received.

Of these licenses, about 1/3 were traded in from competitors.

With this uptick exceeding our goal, obviously, -- somewhat way exceeded my goal, our attention is now turning to monetizing it for FY16, so we have decided to end the EZ Pass sign up at the end of this month, at the end of December.

Launch of the value-added services.

On Wednesday when we launched our classic in New York and Frankfurt and Singapore, we also launched two bundles.

First our secure productivity bundles, which include VPN solution, BBM Protected and Blend for $6 a user per month.

The second bundle is the enterprise communicator bundle, which includes the BBM Protected, and BBM Meetings for $12 per user per month.

I think some of you who have been to our launch event have seen the power of that and we have done a good demo in.

Those of you who haven't seen it and would like to see it, I'm sure that calling our team, we'll make sure that we could arrange to show you that.

Lastly, we successfully completed our acquisition of Secusmart, which is the encrypted voice solution, encrypted voice and encrypted text solutions in Germany, as well as Movirtu, which is the soft sim Company in UK.

On the distribution front, we also had made good progress, and we're going to make more of that.

We are deploying -- as I pointed out earlier, internal resources to boost our effort there already.

On the indirect channel side, we have signed a couple of new agreements including Ingram Micros and Brightstar.

They, by the way, are not only in the hardware side of the equation, as well as the software side, they are reselling some of our software solutions.

Carrier, who has also agreed to resell our software included Vodafone, Verizon, China Mobile and India Idea Cellular and more, but we picked this out because they have pretty broad reach.

We are one of the first and the only company that we know of that provide the so-called enhanced SIM-based licensing billings for the enterprise software.

This means that software could be charged to the phone bill, and it is really facilitate how businesses buy our software or use our software through carriers and our partners.

We, on that solution, they enhance the SIM-based licensing, we are now live with not only the Idea Cellular India but we're also live with Vodafone in Germany.

Then, of course we intend to roll out more carriers in more countries over the next 12 months.

I'd like to spend a minute on the online side.

We've been stepping up our effort on the online channels, and this will be a strong continual focus of ours going forward.

There are now over 170 websites selling our products around the world.

In addition to our initial core of the Amazon and BlackBerry.com, we'll have more on our way.

We've been doing very good business on both the Amazon as well as the BlackBerry.

Amazon, of course, you all know that has stocked out a number of times and so has BlackBerry.com.

Receptivity has been very strong.

We also have, on a vertical partner side and application partner side, we have extended our ecosystem to embed some of our solutions in some of these partnerships like Nanhealth on the human genome projects, cancer research projects.

And Samsung, of course, we talk about helping each other on the KNOX space, Salesforce.com and more and stay tuned and more to come.

Last but not least, I'd like to spend a minute on the BlackBerry Technology Solutions as well as BBM.

I believe the investment that we made in our technology portfolio, which are devices, BES12 messages, BBM, software along with our very extensive carrier relationship as well as the investment we already ahead in the security and the infrastructure, will serve as probably the industry most complete as well as most integrated platform for managing and securing Internet of Things platform or the most completed IOT platform.

We are intending to review the platform road map, the IOT platform road map, and the technology behind it at our CES in January.

Some of you I thinks already have the invitations from us.

Please do come and I think you will find that pretty exciting.

I find it pretty exciting for the future.

You could also see how everything that we do actually integrate together as one, and we certainly hope to see you there.

You will also see, by the way, the BBM road map, in addition to the IOT road map.

Now, I'd like to turn the call over to James, who will provide you the detail and some color of the quarters.

Okay, thanks, John.

I'm going to start with a couple financial highlights from the quarter.

In the quarter, we did have positive cash flow of $43 million, adjusting for items not part of normal operations, meaning that we achieved our first financial milestone that John and I started talking about a year ago.

In the quarter, we also turned in a non-GAAP net profit of $6 million or $0.01 per share.

These results were largely attributable to disciplined management of margins and expenses.

Now turning to the income statement.

Revenue for the third quarter was $793 million.

Hardware represented 46% of revenue, the same as last quarter.

We recognized revenue related to approximately 2 million devices in the third quarter, consistent with the previous quarter.

Legacy BB10 and BBOS product inventory is down 93% year over year, as John mentioned previously.

ASP in the quarter was roughly $180 and we expect this to increase on the back of our new product releases.

Service revenue represented 46% of revenue, consistent with last quarter.

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

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

Software and other revenue represented 8% of revenue.

Both GAAP and non-GAAP gross margins were 51.7%.

Hardware gross margins were positive for the second quarter in a row.

We continue to model gross margins to be in the high 40% range for the next couple of quarters.

Non-GAAP operating expenses were $394 million, down from $433 million last quarter.

GAAP operating expenses were $549 million, and included in GAAP OpEx were $5 million of restructuring charges as well as a non-cash charge of $150 million for our convertible debt, which as I've explained in prior quarters, GAAP requires that we record a charge as the value of our debt increases.

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

In the quarter amortization expense was $74 million.

The GAAP tax recovery in the quarter was approximately 8%.

GAAP net loss, which includes the impact of debt and restructuring, was $148 million or $0.28 per share.

Now moving on to our balance sheets and operating working capital performance.

Our cash balance increased by $12 million quarter over quarter.

Purchase obligations and other commitments amounted to approximately $1.6 billion relatively flat to last quarter.

Purchase orders with contract manufacturers represented approximately $565 million of the total.

This is up 64% quarter over quarter, due to our new product launches that will occur over the next couple of quarters.

These purchase commitments are still ramping up and are back-end loaded.

Total cash, cash equivalents and investments amounted to $3.1 billion.

Looking forward, we expect to remain cash flow positive and continue to forecast a non-GAAP income statement profitability at some point during FY16.

That concludes my comments and I'll send it back to John.

Very good.

Thank you.

Alright, operator, could you help by polling the Q&A, please.

Thank you.

(Operator Instructions)

We'll go first to Tim Long with BMO Capital Markets.

Good morning, Tim.

Morning, Tim.

Good morning, guys.

Two, if I could.

John, to you, I know you said you talked a little bit, it takes a little while for the new software to run through the system and convert to revenues.

Are you still thinking about this doubling of software revenues next year?

Maybe give us a sense what we should look at to start to see that number start to inflect more positive?

Obviously the beta trials are good, but what should we look at for conversion there?

Then, James, it seems like the hardware gross margins were up pretty meaningfully in the quarter.

Was there anything else in there?

Then just related to it, when we start getting more Passports and particularly Classics, do you think that will wind up being an accretive to that hardware gross margin?

Thank you.

Okay.

Tim, I'll take the first one and James will take the second one as you point out.

First of all, yes, I am still on the path of doubling our software revenue for next year.

So, just to make sure we all grounded the numbers correctly.

Today was roughly about $250 million, that's inclusive of licensing, license and technical support.

We are expecting, in our plan, to double that numbers, for next year.

I expect to see the monetization to start kicking in, in second quarter, Q2.

It's roughly about six to nine quarters thing, so you start at about November timeframe.

I think by June of next year I should see some good traction.

Okay, Tim.

On the margin question, so I'll acknowledge that, yes, hardware margins did improve quarter over quarter.

I used the word meaningfully.

I think they did go up.

In terms of the pattern going forward, just remember as we go through Q4 and even into Q1, we have two things.

We have the new products, which as you said, should increase.

They'll make a bigger contribution to margins, but it will also have deferred revenue coming off the balance sheet that's going to have lower margins attached to it given where we were.

As you can see from the ASP in the quarter, for example, that will be an offsetting to that.

I think your trend is right over time, but it's going to be a couple quarters before we see the full impact of that.

Okay.

Thank you.

We'll take Colin Gillis with BGC Financial next.

Hi, Colin.

Morning, Colin.

Good morning, guys.

Can you update us, John, on the trend for handset discounts as the distribution channel evolves?

Normally the distribution channel is roughly about 25 to 30 points.

I don't see -- well, first of all, with our Passport and Classic, I don't see any different trends not accelerated.

I think probably behind your question is about whether you see acceleration of the discounting.

I don't really see the acceleration of discounting.

Seems to be moving pretty good, depending on where you buy it, $499, $599, a Passport, $499, $599, and in some cases $699 for the red one, and so, no, we are planning on some modest discount, but that's no different from the normal trend that we're always seeing.

Perfect.

Thank you.

We'll go next to Maynard Um with Wells Fargo.

Hi, Maynard.

Congratulations on your profit and your cash flow.

Thank you.

A couple questions.

On sustainable profits in FY16, you've hit the profits here this quarter.

You've got the Classic ramp coming, despite the decline in the SAF revenue.

I'm just curious, does this imply that your spending in the OpEx side will jump up materially due to the new launches?

Then separately, John, I just wanted to confirm that the run rate for software and the increase that we're going to start to see in June of next year, is that run rate going to reflect the $500 million?

I'm just curious, because typically large enterprises don't buy the first revision of the software.

They wait for all the bugs to come out and then they sort of ramp in small pilots and then ramp up over time.

I'm just curious if that ramp, the expectation should be that when we see that, that will be a run rate to the $500 million or how do we think about that ramp in the June quarter?

Thanks.

That's a good question.

That's an interesting question.

First of all, no, you should not expect to see expenses jumped up.

Even if it's jumped up, it is not because of launch activities.

We have already paid for the launch activities, so you've already seen it.

Now, we will obviously manage expenses extremely conservative.

We're not going to let this thing get ahead of its own head light.

I will make you that commitment.

You have a good point there.

That is going to be a danger.

On a $500 million run rate, that shouldn't be too difficult to be really honest with you, because we have very, very deep pipeline right now.

The question is do we actually register $500 million of revenue in FY16?

And that's what I'm shooting for.

I'm not only shooting for the run rate part.

The run rate, of course, that's also a great achievement.

There's no question about that, but I'm hoping to do better than that.

I take your point by the way.

I've been in the software business for a long time.

Regarding the piloting and the first, second version and all that, our BES12, you could do some general checks, BES12, it's solid.

Thank you.

Thank you.

We'll go next to Ehud Gelblum with Citi.

Hi, guys, thank you.

Good seeing you the other day.

Thanks for all the activity this week.

A couple questions, just wanted to understand a couple of the moving parts in the quarter.

The software, James, the software and other revenues seemed to fall this quarter.

Your other revenue line has always been kind of constant in the mid-teens, about $16 million last quarter.

If you do that math on the software and other this time you back into a software number that seems to have declined by a decent amount.

Was that a QNX decline, and if you can give a little color into that?

Or was it license or a software decline, just give us a sense as to kind of what happened with that?

Also the ASPs, clearly, you shipped a good number of units at 2 million.

The ASP obviously fell, even with assuming 200,000, so roughly 10% of those were Passports, at a pretty high ASP.

The other ASP must have fallen.

If you can give us a sense, was that -- I would have thought it would have been a lot of Z3s that did that.

John, your commentary seemed to -- maybe I misread it, but it sounded like Z3 wasn't that strong in the quarter.

So, I just wanted to understand what was it that really puts that ASP down?

Finally, the 6.9 EZ Pass subs, really nice number.

That keeps growing.

Can you give us a sense, if we, as EZ Pass ends today, if nothing else happens and you stick with the 6.9 million EZ Pass subs and they stay on whatever plan they are, it would be great if you can give us a sense if they are all silver or what percentage of those are gold?

What type of revenue does that generate right off the bat, if you don't get any more subs?

Then, if we can get a modeling sense as to how that grows with each incremental sub you bring in?

But assuming you just have those 6.9 million EZ Pass subs on your program going forward, once the program ends, what does that generate on a monthly basis going forward?

Right there will be really helpful.

Thank you.

Okay.

There's a lot of questions here, but I'll answer a couple.

James, also to maybe even augment the answers I have.

First of all, the software line is not because of QNX.

QNX is actually performing pretty good.

It has to do with the -- we are turning perpetual license to subscription based license, more so than anything else.

It's not so much it's the volume of the business, it is the recognizing of the revenue of the business.

Let me jump to the last one, the EZ Pass one.

The model -- first of all, I think you need to give us about a quarter so that we actually accumulate the actual experience.

Because, we're going to cut it off end of December and then we're going to start converting people and then when they convert they pay us fee support as the first move.

Then, we will up sell them into the gold level of the Pass or the license.

Then, we will broaden out the number of device being managed, so that's the monetization strategy behind it.

It goes through multiple channels, the carriers, the distributors, and our direct sales force.

So, you're going to have to give us a little bit of time to understand that we have a model but we haven't started that monetization effort yet.

All I could give you right now is kind of a model on our own.

I think I should just refrain from just giving that.

But in a quarter, I will provide some of our early findings of that.

Ehud, I think your last question in terms of ASP in the quarter, you threw a lot of stats at us, but the one thing that I did pick up on, you did say for example that 10% was associated with Passport in the quarter.

I think you're high on that assumption.

Really, the impact of ASP was driven by the near the end of inventory for the legacy product.

That was probably the biggest impact that had it there, I would say.

We do expect that the change going forward as Passport and Classic become more -- well, Z portfolio, I would say, because there's really nothing left of the old stuff.

The 200,000 for the ASP for Passport is actually not a correct figures, because, again, I want to remind you that we are on sell-through.

So only a portion of that is in -- only a portion of the 200,000 actually is in the revenue number you saw.

Okay.

That's very helpful.

Is there a fit for subscriber number?

I'm sorry?

Is there a subscriber number update that we can hang our hat on?

Oh, no, not right now.

Okay.

Thank you.

Thank you.

We'll go next to Simona Jankowski with Goldman Sachs.

Thank you.

I just wanted to --

Hi, Simona.

Hi.

I just wanted to clarify something first.

I think you said in the press release and in the remarks that you expect P&L breakeven at some point in FY16.

I think earlier you were talking about breakeven or positive EPS for the whole FY16.

Just wanted to clarify that first?

No, I meant -- if I said it, I apologize.

That was just a little ahead of my own reading.

Sometime in FY16, we'll turn profitable.

Our plan is, once we turn profitable we'll sustain it.

And so that was all.

I didn't really have a model.

I don't have any -- I didn't mean to give any guidance of the entire FY16.

Simona, I think -- I hope you know that this management team are very focused on making the bottom line.

Last quarter we lost only a couple of pennies a share.

This quarter, we made one.

I don't think anybody should model that we all of a sudden have these strong expenses that go off track.

I don't intend to be there.

I can't promise you that, but it is our intent to get to sustainable profitability as quickly as we can.

If for some reason that we were able to do it sooner in the year, then of course you add everything to together, then in FY16 we'll be profitable.

That will be music to my ears.

I will at least committed to everybody that I'll work hard a at it, but I can't make that promise.

Just a couple questions around the Classic.

You said that the purchase commitments were up quite a bit.

Can you just clarify, the Classic is manufactured with Foxconn?

Is it still on a variable cost model like what you had negotiated earlier, or is there any fixed element to defer these purchase commitments have to happen regardless of the sell-through of the product?

No, it is on exactly the same model, the manufacturing model, the cost model, the variable cost model that we talk about.

And yes, Classic is being manufactured by Foxconn.

Lastly, you are guiding for an acceleration in the declines next quarter of the service access fees, and presumably that's accounting for an accelerated hardware conversion to the Classic.

Can you just talk a little bit about what assumption is embedded there?

Well, you already said it.

We actually seen our 13%, and that's probably a reasonably good rate, some bounce between 12% to 13%.

We're just being conservative and add a couple 2, 3 points more to it.

We think that's reasonable as the Classic goes into the market.

The Classic goes to the market, as you know, a lot of the 9,900 current users, quote, unquote, dying for it.

That of course will then turn off the SAF for those individuals that upgrade.

The math obviously is -- I'm not going to be providing you the margin of the Classic, but it is a positive margin and revenue of course is in the $400 plus.

Then I loses $3 to $5 a month when that conversion happens.

Sometime over the lifetime of this we'll cross over.

I know I'm making it more complicated than it sounds, but the point is, this is why we assume it's 15% decline.

There's no really big science behind it at this point.

Okay.

Great.

Thank you.

Thank you.

We will go next to Mark Sue with RBC Capital Markets.

Hey, Mark.

Thank you.

Hi, John.

I actually paid $349 for my Classic.

(laughter) Well, you were there at our launch.

You're one of the lucky ones.

We won't sell them for $349 now.

Okay.

Thank you.

Maybe just recognizing that the revenues will come, what about the carrier's promise to push and promote the new devices?

BlackBerry has had a lot of new devices and a lot of the success is predicated on just the push by the carriers.

Also, if you could weave if in the qualitative comments by the enterprises?

James, a quick one for you.

As we move toward software, notably perpetual-based subscriptions, will you share with us some of the billings growth so we have tangible evidence we can get to your software revenue growth in the future?

You want a crack at it?

I think the short answer to that, Mark, is once we get to a different model we will evolve our metrics and that seems like a logical one to get to.

So you're talking about booking.

The booking center.

We should get probably mid-year --

Yes.

Re-evaluate.

Okay.

The first question is the carriers.

With the carriers --

Yes, the dollars at the advertisements to push the products as opposed to just BlackBerry pushing and promoting?

For a lot of the -- John went through the list of some of them that have at least gone through testing and have committed to it.

You saw a lot of those in the press releases, Mark, that we put out around Classic time.

I think the big difference here is we're seeing a lot of support from these carriers also to put it in the retail stores and have a physical presence there, which was a bit of a change where we've been with the carriers recently.

So, I think even with that in itself shows a lot more momentum behind Classic than we had for a lot of the portfolio recently.

I think, Mark, your question really is -- are you aiming at whether the costs will all of a sudden jump up on our part?

John, it's more of the service providers will say, yes, we'll carry it, yes, we'll push it but then we don't really see the ad dollars.

We don't really see the promotions.

We don't see the excitement from the carriers, so I'm just trying to see how different it might be this time around?

With the Classic, all the carriers I spoke to are very excited and they will put out the dollars.

In fact, if I'm not mistaking, Bell just sent out fliers for Christmas shopping and a number of stores in Toronto that my guys visited, told me that Classic was prominently displayed in the stores.

Maybe you should go to the stores.

(laughter)

I know Telus and Bell and Rogers are spot on, on those.

AT&T, as you heard the other day, is committed to put in 2,200 retail stores.

Vodafone in UK, I mean, things are happening.

Now, as you all know, over the last two years we had many challenges with the carriers and our distributors and this is why I named the distributors like we have a lot of renewed interest and momentum with Ingram and Brightstar.

Things are happening.

I'm encouraged that things are happening, but I wouldn't say that all things are well.

I mean, we still needs a lot of work and a lot of attention and working well together and that's what I'm spending most of all my times on.

It also sounds, John, you're open to re-engaging with carriers you have not done business with recently?

Yes, absolutely.

This is a business.

If they treat us respectfully, I will definitely do anything I can to reciprocate that.

Thank you.

Good luck.

Yes, thanks.

We'll go flex to Rod Hall with JPMorgan.

Morning, Rod.

Hey, Rod.

Thanks for the question.

I just had a couple things.

I wanted to ask you guys about the old inventory unit number or the impact on ASPs.

Can you give us any idea what the clear out impact on the ASPs was or what the unit numbers there were?

Then, I also wanted to clarify on the gross margins.

I think, James, you said you guys are internally modeling high 40%s for the next couple quarters, but then I think in response to Tim's question you said that the new units are going to drive better gross margin.

So I'm just trying to figure out what are the puts and takes around that gross margin and why are you modeling high 40%s two quarters out if you think the new products are going to drive better gross margins?

Lastly, can you give us any idea of where you think channel inventory ends up in Q4?

Thanks.

Okay.

So a lot there, Rod.

Let me start with the gross margins one.

I think that the biggest difference that you have to account for quarter over quarter over the next couple is the decline in SAF.

As that happens, it will be offset, as John had said, economically by selling these products.

Again, that's a very high margin, very high cash type of he device that I think you need to account for in the model.

Going from 51% down to high 40%s, you can almost explain it on the back of that, as Passport and Classic continue to ramp.

Now, onto the total impact of just the end-of-life portfolio deals on ASP, I don't actually have a number to show of what the impact was, but effectively that's probably the bulk of the change from where we were last quarter to where we ended up this time.

In terms of channel inventory, overall with where we ended up, in terms of number of products in the channel from what we're looking at, we're pretty flat from the quarter.

I think the channel's pretty healthy to support the new product launches, Rod.

James, absolute level of channel inventory next quarter, roughly similar or you think they'll be down somewhat?

I think it will be down somewhat as sell-through out paces the, let's call it, the ramp of Classic and another quarter of Passport is the primary things, Rod.

Any idea roughly what that might look like, 250,000 units down or more or less?

Tell me what you think?

I think that's a reasonable number, depending on where we head to supply of Classic, which is probably the biggest variable, Rod.

But it's a reasonable assumption.

Okay.

Alright.

Right now, the channel's inventory are quite healthy.

I'm comfortable with where we are.

Hey, John, I just -- one more question for you.

I've been talking to buyers out there.

There's this perception that you guys are -- which I think is a wrong perception, but you guys are financially less healthy than some of these other competitors like Good and so on.

Are you running across that, and how do you correct that out in the market place?

I think -- that's a great question, my friend.

It's a great question.

No, I have not run in to that.

The conversation really has changed since I started.

A year ago, people were just worried that we were not going to be around and even my friends, who are decision makers, have said to me, you showed up too late or it's too late or whatever.

The year has gone by, it's completely different.

The conversation I have with these people -- the buyers, are very different.

They want to know what the interesting things are.

The only question they have is are you going across too broad.

I said no and here's the reason why.

Making money and generating cash have got to be the number one priority and this is what I'm pleased with all that this past quarter and we'll continue to drive that forward.

Because there's nothing that is more powerful than people would say financially, I say what do you mean.

I've got $3.1 billion of cash in the bank.

I generate cash.

I make money.

I've got fresh products.

I'm not quite sure exactly what you meant by whether you have any concern of ours.

It's a short conversation if it's even a conversation.

I hope you agree -- maybe we'll continue to exchange notes, that the perception should be changing, if not already.

Okay.

Thanks a lot, John.

Thank you.

I think I only have time for two more.

I've got to run to the next meeting.

How's that?

We'll go next to Amitabh Passi with UBS.

Hi.

Hi, morning, thanks for squeezing me in.

I just had a couple.

James, the first one for you was on the OpEx line.

I think a couple of quarters ago you said that you thought the OpEx was at fairly healthy levels, you're down $100 million in the last two quarters.

I'm not worried about an uptick in OpEx.

I'm just trying to figure out how much more should we expect OpEx to continue to decline?

Maybe when you answer that, if you could also just help us understand the fixed versus variable component?

Because as I said, I am a little surprised it's down another $100 million just in the last couple of quarters.

Then, I had a follow up for John.

In terms of OpEx, I don't think you can expect a significant decline from where we are.

Ultimately, we worked hard to make sure that we get the right resources to support growth and that they're aligned to the proper functions, Amitabh, as John had talked about.

In terms of fixed versus variable, definitely something like amortization would be fixed and a little bit harder to influence although we are focused on working with that.

Headcount, we talked about being through the reduction plans and -- so there's a -- definitely that's a fixed piece that we're dealing with now, but we still do have a lot of discretionary spend.

In terms of a percentage, we are skewed to salaries and benefits.

So, we do have some leverage, but again, we have to plan to now support growth from where we are.

Right.

Okay.

John, just a follow up for you.

You threw out quite an impressive list of BES12 customers, Tata, Boeing, Temasek, a whole bunch.

Can you give us a sense of just the scope of the deployment?

Are these all pilots?

Are they revenue paying customers?

Are you 100% the choice of EMM or is it, again, a mixed environment?

Just some context around some of these customer deployments for BES12?

Right.

The stack that I have, 70% of our customers, customers being paying customers, the list I gave you are all paying customer.

The ones that you mentioned, Tata and McKenzie and Temasek and all that.

They're all paying customers.

The stat I have is about 70% on cross platform, meaning they're using our EMM solutions on the iPhones and iPads and the Android and other devices in addition to the BlackBerries.

I think in a couple cases there were no BlackBerries involved at all, so it seems like the wind is rather healthy.

I appreciate it.

Thank you.

Thank you.

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

Hi, Richard.

Hey.

Thanks for getting me in here.

Listen, on your press release here you said 30% of licenses are traded from competing platforms.

I just wanted to see if you guys could run through some of the main reasons why they're converting over here to your BES12?

Honestly, it's a much deeper and broader platform and we have a very healthy road map.

A lot of people kicked the tires of the BES12, and then security is probably the number one cited reason for it.

Okay.

Of your sub base today, how many would you say are enterprise customers that are not necessarily on BES, percentage breakdown?

In terms of the mix, it's the same that we've been talking about before, roughly, Richard, 80% business users.

If we stick with the 20% enterprise, the answer to your question by math would be 60% then.

Okay, so the $6 million is basically a very small number off of what potentially could be a huge base?

Is that a fair assumption?

The $6 million of what?

The EZ Pass program, what he's talking about.

With the 6 million, if you look at the number of BES, enterprise server paying customers in the sub base, it's roughly about 8 million to 10 million, about that, when you adding up all the math.

So, 6 million and 30% of that are from competitors, so you take off that and so 7 times 6, 4.7 million, so almost half of our base have upgraded, if that's the metrics you're looking for.

Okay.

Alright.

That's great.

Thank you.

Thank you.

Okay, let me wrap up because I'm sorry, I have to go do my town hall meeting.

I have all my employees waiting for me.

I appreciate you all tuning in for today.

I'd like to summarize the fact that we're very proud of the fact we delivered a profitable quarters, very positive cash flow.

We now have work to do on revenue, and we have a number of growth engine.

We've talked about that in hardware, and software and value-added services, QNX and the like.

We're going to talk about IOT at CES.

We're also going to give you our BBM technology road map with CES with those people who are planning to join us.

Please do make sure that you come and get the time and day and locations from our team.

We're also going to review our handset strategy at Mobile World Congress, just like last year.

We did the handset strategy last year at MWC in Barcelona.

That I guess is the first week of March in Barcelona.

With that, I wish you all a happy and safe holidays and thank you very much for tuning in.

That concludes today's conference call.

Thank you for your participation.