BlackBerry Ltd (BB) 2015 Q4 法說會逐字稿

Good day, and welcome to the BlackBerry fourth-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, BlackBerry's CEO.

Please go ahead, sir.

Thank you, Kim.

Good morning, everybody.

I'd like to start with Joe first.

Joe, please go ahead.

Okay?

Welcome to BlackBerry's FY15 fourth-quarter and year-end results conference call.

With me on the call today are Executive Chairman and CEO, 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 fourth-quarter results.

We will then open 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.

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 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.

And good morning everybody, and thank you for joining us this morning.

So earlier today, we announced the earnings per share of $0.04 on non-GAAP with revenue of $660 million.

This past quarter, we remained disciplined in our expense management, and increasing our free cash flow to $190 million, which is up 12% up sequentially, and reversing the over $0.5 billion cash use in the prior-year same quarter.

Our software business had a particularly strong quarter, growing 24% quarter-over-quarter and 20% on a year-over-year basis.

With the fourth quarter under our belt, we are now halfway through our two-year turnaround effort, and I'm very pleased to report that our financial house is in order.

Our cash balance reached $3.27 billion, now matches the highest balance in the Company history, which we last achieved in May of 2010 and an increase of $608 million compared to the end of FY14.

Our financial viability is no longer in question.

We are now turning our attention to revenue stabilization, or staying cash flow positive, and achieving sustainable profitability sometime starting this year, this fiscal year.

So we will accomplish this by growing our high-margin software business and focus on profitability in the device business.

Let me take you through some of the highlights that we're seeing in our business that give us some level of confidence.

I'll put it in five different buckets.

First, we are the recognized leader in mobile security and privacy technology, and we will continue to invest in our leadership position and market this as our differentiation.

Secondly, we're seeing traction with our new handsets, and we expect the average selling price, ASP, to trend up, and continue to work hard in the cost of goods sold to lower that cost of goods sold.

Therefore, we do expect the device to become increasingly profitable as we move into the second half of the year.

Third, we are witnessing good momentum in enterprise software and services, BBM and IoT.

We believe we can sustain this momentum with the investment we're making in products and distribution, and we'll continue to make them.

Fourth our technology licensing program, which we started a little while ago, will begin contributing to revenue in the second half of the FY16.

Last but not least, we're renewing our traditional with carriers such as AT&T, Vodafone and Sprint, and distributors such as Bright Star and Ingram Micro.

Many of these resellers are picking up our software products.

We are also broadening our partner base with industry leaders such as Samsung, Google, and salesforce.com, and with many partner industries such as healthcare and transportation.

So I'll take you through a little bit of the details of these points before I turn over to James for the financial details.

Starting with the hardware, in the quarter, over 90% of the products shipped in the quarter were newer generation, higher margin products.

Secondly, in order to minimize exposure, we have been successful in managing inventory to closely match the demand.

Last but not least, AT&T launched the Passport and the Classic in store on February 20, and Verizon launched the Classic in the first week of March.

The early reports of those sales are encouraging.

The dynamic of late quarter release at carrier stores are precisely why James has been suggesting that Q4 was a transition quarter.

Today, the Classic and Passport are carried by over 160 carriers in over 7,000 retail stores in 86 countries, and this number will continue to uptick.

This is the best carrier retail support worldwide we have seen in a number of years.

And based on the very positive discussion I had with carriers at the Mobile World Congress in March around our new product portfolio, I think the momentum will increase over time.

Just as importantly, while ramping up distribution, we are profitable on the gross margin basis for a third quarter in a row.

As part of this commitment, we'll continue to drive margin improvement, and to manage our inventory levels.

We don't have any old device inventory.

Our channel inventory is down 37% year-over-year.

This disciplined execution will underscore our commitment to bringing the device business to operating profitably.

So let's spend a minute on the software business.

Software revenue was $67 million.

This was 24% increase over Q3.

In the enterprise, we are seeing really good traction in our efforts.

I was somewhat surprised by a few negative statements regarding channel checks some of you have done during our quiet period, because our quiet period, I couldn't have responded.

We had 2,200 customer wins in the quarter, including competitive wins.

I'll give you a list of some of the key wins, key account wins in the quarter.

Delta Air Lines, First Great Western trains, Tarpon Energy Services, the Government of Canada, the Social Service Administration of Colombia, the Australia Transportation Safety Bureau, the ESA Group, one of the largest conglomerates in India, Dignity Health, IMS Health, Synova, Quest Labs, and Kyocera-Mita.

We had also very good quarter in the financial vertical, with wins such as SAIC, Citizens Property Insurance, ERGO Insurance in Germany, [Credit Cramilia] South America, HSBC, just to name a few.

Let my highlight two key areas of investment going forward to drive growth.

One is distribution, and the other one is product.

On the distribution side, we just rolled out our SIM based licensing technology with carriers, and expanding our traditional partner network.

The SIM based license technology lets carriers build and bundle BlackBerry services with their air time and data plan, making it very easy for carriers to work with us and monetize our solution, and be part of the revenue, a share part of the revenue.

This technology is a key differentiator that separates BlackBerry from all other competitors.

To date, we have a total of 10 carriers that have announced they will resell our software using the SIM based licensing.

Some of those included Vodafone Germany, Hong Kong Telecom and ChungHwa Telecom in Taiwan.

This morning, we are pleased to announce, I think we put out a press release, we are pleased to announce that China Mobile and Hutchinson in Hong Kong will be also adopting our SIM based licensing technology as well.

In the more traditional reseller programs, resellers we have announced since November, selling our software, that is, includes Orange, Deutsche Telekom, Ingram Micro, Bright Star and Samsung.

At the Mobile World Congress, we also announced that Sprint is now starting to resell our software, and we announced that Vodafone Germany is rolling out our secure core technology across platforms, iOS, Windows, as well as Android.

In addition to that list, we are also in the process of qualifying over 300 resellers that have expressed interest in selling our BES server and our various other services.

So let's move on to the second set of software initiatives.

Our investment in our enterprise product, especially the investment in security, in cross-platform capabilities, and also developing a technology partner network.

First, we are stepping out our investment in security and privacy area.

We're hiring a number of people.

We just closed the acquisition of Secusmart.

We also named a Chief Security Officer in David Kleidermacher, a respected security veteran.

As I pointed earlier, we're adding headcount and launching new projects in this area.

Second, we're expanding the platform and deployment options for our products.

At the Mobile World Congress, we announced BES12 cloud deployment, to bring BES to a broader market, mostly aimed at SME space.

We also announced BlackBerry Experience, which will make our best-in-class security, communication and collaboration solutions available on Android, Windows and iOS.

This will take some time in engineering to roll it out.

So more details to come.

Lastly, we are developing a network of partners to expand the reach and broadening the scope of our products.

During the quarter, we announced BES support for Google Android for work program.

This is of course, will allow the BES to manage any Android device running the latest Android operating system, Lollipop, I guess it's L, and any new operating systems.

We also have broadened our product offering with Samsung KNOX support, which KNOX support was announced I think November of last year, November 12, in San Francisco.

We added at Mobile World Congress to support Samsung Galaxy [at 6] launch the WorkLife virtual SIMS, and the SecuSUITE.

In healthcare, we announced partnership at Mobile World Congress.

I think we are now at uniquely 38 different healthcare partners, application partners, names such as InterRAI, Maestro, [Metaline], Vocare, Care Social and many others, 38 of them.

Healthcare, by the way, is only one of the areas of focus.

We are looking at bundling partnerships, building partnerships with bundling software providers in other regulated industries.

For example, our relationship with salesforce.com is aimed at the public sector vertical.

So to sum up the enterprise, many good things are happening.

We are all very pleased with the progress we are making in the first full quarter, since the introduction of BES12 and our varied other solutions.

Spend a minute on BBM, where the focus is definitely on monetization.

We have three key initiatives in the consumer arena.

The ads, the BBM money, and virtual goods.

So in the ads, we're generating revenue from over 20 billion ad requests per month.

BBM money has over 200,000 registered users already, heading into our commercial release over the next couple months.

Next few months, so sorry.

It could be three, I guess.

We have just introduced virtual goods and premium prescription for the vanity PINs and no-ad that is now generating monthly subscription fees.

On the BBM in the enterprise space, since launching the BBM Protect and BBM Meetings, we are seeing -- we're starting to see the pick-up of strong interest there.

In the quarter, we signed a deal with the Internal Revenue Service of the United States, one agency that I'm very familiar with, for BBM Protected.

And we are pleased to report that there are nearly 400 customers now trying the BBM Meetings, as well as many carriers around the world in addition.

A quick word on our BTS unit.

They of course drive mostly the Internet of Things initiative.

We have unveiled our Internet of Things initiative at CES, the beginning of the year in Las Vegas, and Mobile World Congress in Barcelona.

We have laid out the IoT road map.

We have leveraged many of the BlackBerry assets, such as the global network we have, the security, QNX, embedded software, over-the-air updates, the BES12 device management.

We are now looking to add secure enterprise messaging into the portfolio.

During the quarter, we released our QNX wireless framework API that allowed third party developers to write code that connects embedded systems to end points.

In the quarter, design wins included Volkswagen, [OGE Vehicles], and warehouse automation and robot providers were part of the win.

[Euro Even Piante].

That's pretty good, right?

Sorry about that.

Everybody's had problems in the room.

I've been having trouble with pronouncing this.

Furthermore, we announced a milestone, the QNX is now deployed in 50 million cars worldwide.

As our IoT suite works its way into more products, we anticipate that our IoT subscription will grow, and we believe the IoT market has the potential to be a significant contributor to our software revenue growth in the future.

To sum up the overall, the software overall, we are still on track with our enterprise business.

The BBM is slightly behind in monetization.

The BTS is doing a little bit better than expected.

And together, we will expect a total of $600 million in revenue for FY16 for these businesses.

Let me now talk about numbers.

I'm going to hand the call over to James for some details on our financials.

Thank you, John.

First, a couple financial highlights from the quarter.

Adjusting for items not part of normal operations, we had positive cash flow of $76 million.

We also turned in a non-GAAP net profit of $20 million or $0.04 per share.

These results were largely attributable to disciplined management of margins and expenses, while investing in our growth initiatives.

Now let me discuss the income statement.

Revenue for the fourth quarter was $660 million.

Overall, currency had a negative $12 million impact on total revenue.

Hardware represented 42% of revenue, lower than last quarter.

We recognized revenue related to approximately 1.3 million devices in the fourth quarter.

Handset ASP was roughly $210, up from $180 last quarter.

We expect our ASP to continue to increase on the back of our product releases, and increased scarcity of our legacy devices in the channel.

Service revenue represented 47% of revenue, consistent with last quarter.

Service access fees declined by 16% compared to after quarter.

Service revenue was negatively affected 1% by currency fluctuation.

On a constant currency basis, the SAF decline is in line with our expectations of a 15% quarter-over-quarter reduction.

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

Software represented 10% of revenue.

Software revenue grew 24% quarter-over-quarter, and 20% year-over-year.

Non-GAAP gross margin was 48.3%, compared to 43.1% in the prior year's same quarter.

GAAP gross margin was 48.2%.

Hardware gross margins remained positive, for the third quarter in a row.

Non-GAAP operating expenses were $317 million, down from $394 million last quarter.

We expect a minor uptick in the coming quarters as we invest in distribution and in growth.

GAAP operating expenses were $424 million.

Included in GAAP operating expenses were $57 million in restructuring charges, as well as a non-cash charge of $50 million for our convertible debt.

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 $68 million in Q4.

The GAAP tax recovery in the quarter was $29 million.

GAAP net income, which includes the impacts of the Rockstar sale, the debt revaluation and restructuring, was $28 million, or approximately $0.05 per share.

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

Our cash balance increased by $156 million compared to last quarter.

Aggregate contractual obligations amounted to approximately $1.3 billion, down from $1.6 billion last quarter.

Purchase orders with contract manufacturers represented approximately $394 million of the total, down from $565 million last quarter.

Total cash, cash equivalents and investments ended at $3.27 billion.

With this, and excluding the impact of foreign exchange on cash, we achieved positive operating cash flow of $205 million.

CapEx spending totaled $16 million in the quarter.

Looking forward, we expect to remain cash flow positive and continue to forecast sustainable non-GAAP income statement profitability sometime in FY16.

That concludes my comments, and I'll turn the call back to John.

Thank you, James.

So before we start the Q&A, let me provide some thoughts on the FY16.

Maybe talking about our focus area is the best way to go at it.

Number one focus is sometime in the FY16 quarters, we will start making sure that we have profitability, and be able to sustain it.

That's number one.

Number two, as James just pointed out, we intend to generate cash flow from operations, or free cash flow, every quarter in FY16.

And last but not least, it is now -- all our effort is now spent on stabilizing the revenue.

So I have seen the models and your current non-GAAP EPS expectation of a minus $0.08 to minus $0.13 a share loss are somewhat reasonable, but you could be assured that we do intend to do better.

So with that, operator, we are now ready for questions.

Kim?

(Operator Instructions)

We'll take our first question from Scott Penner of TD Securities.

Just maybe John on the expenses, there was obviously quite a step down in Q4.

Just broadly, how do you suggest we reconcile that expense cuts that we've seen over the past year with the need now to invest in distribution on the new and growth on the new software platforms?

And then James, just on the numbers specifically, is the Q3 level of expenses, is that a better indication for what should be the norm going forward?

Thank you.

Let me answer the first question first and then you answer the second question, James.

Good question, thank you.

What I've been doing, and will continue to do, and I still probably have a couple, two, three quarters to do, is to shift the Company resources.

Not so much sending more.

Some areas we have to spend more.

I will talk about security.

There is some expertise in the area that we need to recruit.

And we have a very strong college recruiting effort going on literally around the globe.

And so those we will.

So it's modest.

This is why we said it will be a modest uptick.

But the majority is about shifting some resources inside the Company into areas like helping other distribution, helping other partners.

So Scott, it's James.

In terms of the overall number, as John had said, or in my remarks, I said modest uptick.

I don't think in the short term that gets you back to the Q3 levels.

There is some reallocation that John said can happen, but we were helped a little bit by FX in the quarter as well, which would kind of take your natural level up a little bit.

But I think the investments happen grad gradually over time, as revenue goes, because we also have to get back to our objective of profitability, as we talked about.

Thank you.

We'll take our next question from Maynard Um of Wells Fargo.

Can you break out the $67 million in revenue between software and other, which you typically do in your MD&A filings?

Because if we assume other revenue was flat from last quarter at about $10 million, that implies the software number was only up slightly, which seems low since EZ PASS kicked in.

Can you talk you us through that?

What gives you comfort in the $600 million software outlook, and what quarter should we start seeing the material ramp in that software line?

Thanks.

Hold on a second.

We're looking for the other.

I know the number's actually very small, the other.

$10 million.

Let me talk about the talk about the confidence of that.

I know most people are somewhat skeptical in the numbers.

I read those.

I can understand that.

It's really a huge jump of that.

And it will come from a number of areas.

I think we will, as I said, the BTS will do a little better.

We also, by the way will do organic investment.

There will be some growth there.

The carrier selling our software is a very important part of our distribution channel.

Then of course the EZ PASS conversion.

So it's really a combination of a number of areas.

And there will be a little bit of a BBM increase, also that we talk about.

So, now, I think -- I still believe that is a reasonable target, and I'm not willing to give up on that target yet.

Maynard, it's James.

Just to confirm, the software revenue itself for the quarter is $67 million.

I think that's the important piece.

On an annual basis, we group the other number with devices, the way that our financial statements come out.

I want to be clear that $67 million is the software.

I didn't see the other numbers.

So it's $67 million.

Okay.

Thanks.

But when should we start to expect that software line to start seeing that material ramp up?

If you're investing in distribution at the moment, is it another two quarters away before we start to see the ramp?

So next quarter sees a modest increase and then starts to ramp up, or what's the time line on how we should think about that?

I expect about mid-year.

I think two quarters are good.

Give us two quarters are good.

Because I've got to get the carrier trained.

They already signed the agreement, like Sprint signed the agreement to distribute -- to resell our software, and so we talk about the SIM based licensing now is at 12, that number will go up.

So it needs a little bit of time to ramp.

Okay.

Great.

Thank you.

We'll move to our next question from Tim Long of BMO Capital Markets.

Just wanted to follow-up on customers and licensees.

You mentioned the 2,200 customer wins, an impressive number.

Could we bring that back to some of the metrics we had been looking at?

Maybe could we talk about maybe in past quarters you've talked about how many EZ PASS subscribers were added.

I know that would only go through December.

On top of that, if you could talk about the following two months, how many BES12 subscribers were added?

So maybe give us a quarterly total and somewhat of a split between the -- while under the EZ PASS program and after the EZ PASS program?

First of all, after the -- well, the EZ PASS program ended at 6.8 million licenses.

No, I have -- I don't have that number with me.

I would have to look at some metrics.

What I didn't want to do is to have metrics that kind of overlap.

So it's hard to separate out which come from the EZ PASS, which come from what.

So the 2,200 customers are people that buy extra -- they ranges from people buying extra licenses to brand-new wins, to upgrade the BES10 to BES12.

A lot of our base is still on BES10, ready to go upgrade to BES12.

That's one of our major efforts going on right now.

So it's really a combination of everything.

Some people are now starting to buy BES10.

You may say why is that?

Because they're now getting ready to pay the support and then upgrade to the BES12.

It's a matter of the -- because it's enterprise, enterprise tends to take their transition time in a more programmatic way.

So, I've seen quite a bit of BES10 purchases with the intention of going to BES12, because we have BES12.

So the reason, Tim, I said it is because it's really like that.

I looked at the numbers the other day and I saw a huge number in BES10 license uptick and I just -- I asked the question.

They said they was all ready go to 12.

Those are the -- I didn't answer your question specifically directly, because I actually don't have the numbers here with me.

Okay.

Maybe just more broadly, how do you think -- you've been adding some non-BlackBerry converts over, how do you think that trend went this quarter, compared to prior quarters?

It went pretty good.

What I decided not to do, originally my script there were wins that specifically targeted some of my competitors.

I thought that was now starting to get silly.

I realize that their earnings call, they're doing the tit-for-tat.

I didn't want to get into that anymore.

So I took out the -- rest assured that in some of the names that I just mentioned, they replaced our competitors.

Okay.

Thank you.

We'll move to our next question from Daniel Chen of Scotiabank.

John, you've done a great job of launching a number of products, to give your sales team something to approach customers with.

Can you talk a little about what changes you have made to the sales team since you took over?

How have the number of employees in that team changes, and how do you incentivize them differently?

And similarly, it also looks like you're making it back in with the carriers for both hardware and software.

However, distributors also carry your competitors' products, both in the smartphone and EMM space.

So can you talk a little bit about how you convince your distributors to push your products over the competitors?

Thanks.

Well, you have to be -- first of all, the product has to make sense.

Just start with that.

It's an effort.

I could say a while back maybe our relationship with the carrier and the distributors were a little slightly broken, would be the right way to say it.

So it was a strong effort on all of our parts, that we go back and re-engage them, and fortunately the carriers around the world and the distributors, the major ones, even technology provider like the Samsung and salesforce.com, some of them we have personal relationship with.

They trust us that we were able to start doing business together again.

So there's a whole range of reasons why, but it's a big push.

So the enterprise sales force right now, roughly about, I'd say 11% of our Company headcount is in sales, direct sales or partner sales organization.

That number, actually, believe it or not, had gone up for like 5%, 6% in the last year to 11%.

I think to reach good parity out there, I need to get it up to at least 15% to 20% of our total headcount, and that's one of the things that I talked about earlier that we're going to start shifting some of our internal resources.

We already are doing it.

We now have organizations that helps train sales people.

We have a plan to set up an ISR call center.

It's a very standard technique, but it's really outreach to customers and the channel.

The carriers is a bright spot.

We're pleasantly surprised that they are very receptive to BlackBerry being successful, and doing business with us.

As I said, we have the SIM based licensing, which is a little different from others.

It gets more seamlessly or easier for them to resell our product and put it in their phone bill.

The billing systems are integrated because of the SAF.

We took advantage of the SAF know-how, which this company has for a very, very long time.

So there are various things.

But it all came back to whether your product makes sense, and they could make money out of it, and so we could help each other there.

By the way, I'd like to comment a little bit about, yes, a lot of them resell a lot of people's product.

That goes back to my comment whether the product makes sense.

Some of them, because of security stuff, we are very unique.

I'll give you -- I think Samsung, we are in a different tier.

Samsung resells this, resells that, partners with this person, partners with that.

But we are one of the three wireless or mobile platinum level partners.

I think the other one are SAP and Cisco and BlackBerry.

So only the three of us.

So even in the partnership, there are tiering in that.

So that's just one example.

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

Just quickly, what's the split between your existing enterprise base, between BES10 and BES12 right now?

Right now, as I said earlier, mostly BES10, but there are a lot of them going to BES12.

So -- and all the carriers are taking up BES12.

So I don't -- they are all ready to move to BES12.

They're mostly BES10 right now.

Of the ones that have gone to 1BES2, have they gone for the silver or gold program?

Maybe give us a bit of color.

Both.

I have seen both.

It varies.

And by the way, the people that have gone to BES12 are very happy with BES12.

Okay.

Great.

Thank you.

Our next question comes from Amitabh Passi of UBS.

I just wanted to follow up on the last question.

Sorry, John.

Can you give us some sense of how many of your 6.8 million people, license that were in the EZ PASS program are actually active customers now?

And can you give us what the split of silver versus gold is?

And then I had a follow-up.

I don't have that number.

Honestly speaking, I don't want to go down that path.

I know this is something that you'd be very interested.

Let me give you one data point.

Everybody's so interested in that EZ PASS situation.

The $13 million of our license in the quarter are either motivated or related or part of the EZ PASS convert.

But we only started with a small portion.

Okay.

And then I just had a quick follow-up.

And I guess this is maybe a bigger picture question.

You've got a great partnership with Samsung.

You're also part of the EMM ecosystem tied to Android for Work.

But the two seem to be on two separate paths.

The Samsung KNOX initiative versus Android for Work.

How do you see this evolving in the marketplace and how do you see your relative position, working with Google as well as Samsung?

It's a great question.

So one of the major strategies that we put forward last year, year and a half, was to make sure that we do cross-platform.

And so we will embrace both of them.

As long as the customer wants -- the customers wants a KNOX, we could use the BES12 to manage it.

The customer wants any of the L Series devices from HTC, LG, Sony or anybody else, as long as they are L Series based, our BES12 now could manage all those.

It's really a choice of the customer.

It's kind of like the check mark.

In the case of the KNOX, we are collaborating a little bit more closer on the security side.

So that's a basic theory.

Basic theory is, we like to make sure we can serve the entire ecosystems.

We're not picking up, well, this is a better technology versus that.

We have our own container technology, the SWS.

So we will present that to a customer as choices, and we do have -- we do sometimes advise and recommend.

We don't necessarily advise or recommend our own stuff only.

We would like to.

But it's really a cross-platform play.

Our whole concept is we want to manage all your devices and end points in your shop.

Okay.

Thank you.

We'll take our next question from Steven Li of Raymond James.

John, any metric that you can share on your value-added services, maybe size of pipeline at this point?

The size of pipelines are pretty good, but our conversion are not so good at this point, because it's early.

Right now, it's still very dominated by BES licenses.

Okay.

And --

Pretty good.

Go ahead, sorry.

And automotive, would you say BBM Meeting is the one showing the highest interest amongst your enterprise customers?

Thank you.

Yes.

Well, WorkLife -- sorry, I would say WorkLife is showing the highest interest.

I would say BBM Meeting is probably less than -- follow that.

WorkLife, is that the bundle of -- what is in that bundle, John?

Well, WorkLife is -- we call it a soft SIM technology, like one physical SIM card with two numbers, one number assigned to the work container and the other number assigned to the personal container.

Let the individual uses the two numbers, two sets of billing systems.

The carrier will have two numbers that they could bill.

That seems to be the highest level of interest.

Okay.

Great.

Thanks.

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

So I guess I've got two questions.

One is, I wanted to ask you, John and James, you guys either one can comment on this, I guess, but the R&D number continues to drop off pretty rapidly, and on the positive side of course, you guys are controlling cost, but on the negative, at some point you need to stabilize that, I guess, to keep your road map going and so on.

Can you talk to us a little bit about where that R&D number stabilizes at?

Bigger picture, John, can you talk about employee morale and how you keep people motivated, considering you continue to cut costs pretty aggressively.

The market always loves that.

But then again, it has repercussions in the business.

Just talk to us a little bit about that.

And then James, can you just clarify the 1%, the FX impact.

Are you at 15% down on software this next quarter, does that -- what currency rate are you marking that at?

Can you just clarify that answer?

Thanks.

Go ahead.

Just on that, I think you said software next quarter down, Rod, you meant services.

I meant services, yes, I'm sorry.

You scared me, by the way.

I have to resuscitate John here.

Basically, we're somewhere in and around 110, I would say, where we are today, Rod.

So really it was Euro that's ultimately driving that.

We've got Euro-based revenue that we're collecting from the European carriers, and that's what's driving that.

That was the driver of the 1% for the most part.

Okay.

So you got some really great questions on the morale side.

Let me address the morale side.

The Company needs to financially be stable.

I don't know of any way to improve the morale of a Company, the people, if the Company's not doing well.

And so all the people here are professionals.

The Company doesn't do well, they know some negative things going to happen down the road.

The number one thing we want to do is stabilize the Company's financials, and people understand it.

I think as we do better financially, and having a good road map, which we did, we are having a good road map and we're delivering these products, my experience is the morale will gradually turn positive.

And I would say, obviously, it's easy for me to say it because I see it from a different lens.

I would say today the morale of the Company's a lot better than a year ago.

It probably still needs to be a lot better than today, but a call like this, my teams are listening to, and my folks are listening to this, and they will understand it.

So I appreciate your questions on that.

As far as R&D is concerned, no, we are looking at various different ways of spending money very wisely.

For example, we have been increasing some offshore investment where the dollar goes a little further, especially nowadays, the dollar goes further.

We have small teams in Ukraine.

We have small teams in India.

We will increase in the other markets that we actually serve.

That's part of the plan.

So you see the numbers there.

That doesn't mean the effort is not there.

On top of that, we rationalize a lot of our technology development, that we don't actually chase a lot of different stuff.

So you see a lot of good delivery from the Company.

For example, we put out four phones last year.

We got the BES12 done and all these partnerships.

We've got the BBM monetization launch.

All in an environment that's being cut back, but it was really more about focus, about delivery, and we don't do -- we don't confuse ourselves and doing a lot of different stuff.

So those are -- it's a day-to-day thing.

The good news is, the management team gets it, and we're working that.

So I'm comfortable with our productivity.

It would be nice to have more money to spend, for sure.

But not necessarily always better.

John, are you -- how far through the process of rationalizing R&D are you?

Do you feel like you're pretty much done now, or do you feel like you've still got --?

I'd say I'm 99%, 95% done.

I'm done.

We have a road map, we're working on towards delivering it.

It's pretty much done.

Okay.

Thank you.

We'll take our next question from Michael Kim of Imperial Capital.

You talked a little about QNX earlier, and certainly QNX has established a pretty strong presence in the automotive space.

Are there other verticals where you see similar scale, especially I think there's been certainly a lot of comments about Internet of Things and how you might see that translate into the software revenue line?

Yes, so a number of ways.

One is embedded.

We embed QNX in a lot of the devices.

I will give you -- yes, we well know about the automotive, but we also are in the medical equipment and control systems, in manufacturing systems, not at the same scale that we're in, but medical -- in the medical and transportation area, we are looking to increase our effort there.

So those two are kind of the major FY16 effort that we're going to put in.

Then that's the cloud, I mentioned the cloud and the API that we released on the platform, the wireless platform.

That is to encourage applications developed on our QNX software.

And so we are -- we also are going to build some applications, so that we could do subscription base charging.

So those are the two areas.

That is a brand-new initiative.

We haven't had any revenue yet, but we have the framework done, and we're delivering those products.

So those are the two ways of monetizing.

But we are branching out more than just automotive.

Is it your sense that the software content would see better revenue pricing than you would in the automotive sector?

Say that again, please.

Would you expect pricing to be above what you're seeing in the automotive sector?

Well, it all depends on application.

So in automotive sectors for example, the Company started a long, long time ago.

This was way before my time here, was doing very well in infotainment systems.

And then we're now gradually getting to telematics and controls.

So each of those areas has revenue associated with it.

So it's really about how many applications, especially like in a car base.

I can't really compare that versus an app.

Kind of depends what your app's doing.

We are embedded in, for example, in the medical equipment, embedded in medical equipment typically, probably you'll be able to charge a little bit more.

I think it all varies, depends on the apps, maybe I would answer that question.

Okay.

Very good.

Thank you very much.

We'll go to our next question from Brian Prohm of Cowen & Company.

A couple quick questions.

One on hardware.

I think you said 90% of revenue was from the new devices?

I didn't say that.

Shipments.

I said we shipped 90%-plus of the shipments in the quarter are new products, Passport, Classic.

Understood.

Digging into that a bit then.

Can you give us any incremental color on the Classic split of those shipments, and whether the demand dynamics for that product are consistent with your expectations?

Thanks.

I always caution with that, the statement.

But look, as I said, the early numbers looks encouraging.

I think Classic is doing reasonably well.

Great.

Thanks.

Any update on the service outlook for 2016 through the balance of the year.

It sounds like consistent 15% declines on a quarterly basis?

That's what we are modeling, yes.

I think that's a reasonably good number.

Okay.

That's great.

Thanks for taking my questions.

One more, maybe?

We'll take our final question from Mark Sue of RBC Capital Markets.

John, are you seeing the -- you're seeing very good customers and competitive wins.

Are you starting to see indications or inclinations for higher ASP trends in some of your early adopters?

Are some customers indicating future additional purchase, or more security and more privacy?

What I'm trying to get at is, I'm trying to project a profile of early BES12 adopters as indicators for this mass of BES12 customers, and what they might do in the future.

I can only tell you that the customers I've spoken with that uses BES12 or started with BES12s are quite happy with BES12.

I don't get any negative pushback, or I don't see any customer issues with BES12.

One here and there, from time to time, they want more features that we're working on, but I don't -- it seems a very solid product, I can tell you that.

The market and the channel checks are good on those.

Carriers likes it.

So from ASP perspective, it kind of -- well, obviously because we do two areas, the gold and silver.

That's one area.

In the area of support, we have Advantage and Premium, the two type of supports.

The Premium actually has account managers or a support account manager tied to it.

This is a new concept.

A lot of the enterprise customers likes that because we have guaranteed response time, an individual you can call, and so forth.

These are all the stuff that I learned from my enterprise days.

And so we feel pretty good about -- so if you add all that together, the ASP will be better.

Okay.

That's helpful.

If I look at conceptually the next four quarters from a quarterly basis and a revenue basis, the rate of decline in services is slowing.

I guess the thought is, we're pretty close to the trough in terms of revenues to rebuild upon?

So that means that -- you can take that one.

Go back to the concept of we're focusing on stabilization and growth, Mark.

I think your color and your comments are focused on reiterating what John said.

I expect this year entirely focused on -- two things are important to us.

We're going to grow our software and related services business, support business to cover the SAF decline.

That's number one.

We're still on that path.

Secondly, to stabilize the total revenue.

If we get lucky, then it's good.

But that's not what we plan to do.

Okay.

Good luck and all the best, gentlemen.

Thank you, Mark.

Okay, gang.

Let me wrap up.

Let me wrap up.

Thank you, though.

A lot of good questions.

So I'd like to give you three key take-aways, and just kind of wrap up everything.

The number one key take-away is that since we reported the second quarter with positive cash flow earnings and positive cash flow, the financial house, I hope you agree with me, the financial house is in order.

By the way, this is a very important message that I need the customers and partners to embrace, and so this will be our continued effort to take that message out.

As we pointed out, we'll continue to invest modestly in both the organic part and the inorganic part of the growth.

Secondly, we are seeing traction in devices, and our product road map is actually quite well received by the carriers.

Last but not least, we could sustain the software momentum.

We do have to make investments.

So we spoke a little about that.

And the investment will be in both the product side as well as the distribution side.

So I like to remind everybody, sometimes like taking a look at this, we are a little ahead of our turnaround milestone.

So I like to remind everybody that we're only halfway through.

Our focus now is turning to stabilizing revenue, and I'm mindful that the transition like this are never easy and never just quite smooth, and I'm very grateful for your support.

So thank you for joining us for our fourth quarter and year-end.

We'll talk again in 90 days.

Have a good day.

That does conclude today's conference.

Thank you for your participation.