BlackBerry Ltd (BB) 2016 Q1 法說會逐字稿

Good day, and welcome to the BlackBerry FY16 Q1 earnings call.

Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Joe del Carrar.

Please go ahead, sir.

Thank you, operator.

Good morning.

Welcome to BlackBerry's FY16 first-quarter 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 first-quarter results.

We will then open up the call for a 30 minute Q&A session.

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.

A replay 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.

Good morning everybody, and welcome.

Let's start with some highlights for the quarter.

Earlier today, we announced revenue of $658 million for the quarter.

Our software business turned in some good results, and revenue of $137 million.

We also reported strong free cash flow of $123 million, and we are expected to keep the business free cash flow positive throughout the year.

We announced a loss per share of $0.05 on a non-GAAP basis, compared to a loss of $0.11 in the same quarter last year, and those of you know me, know how I hate losing money.

James certainly knows that.

But as we have previewed on the last quarter, we are making investment in our software business, including but not limited to the customer-facing area, technology area, and acquiring Company's that we will continue to invest in.

I believe these investments are prudent, as we transition to growing a bigger software business.

As a result, our operating expenses were up $20 million compared to the last quarter.

As I said earlier, these investments support our plans to obtain software growth, to stabilize our revenue, and to achieve profitability, sustainable profitability, starting in the second half of the year, or sometime in the second half of the year, what Joe will always point that out to me.

On the handset front, we are taking steps to get the business to profitability.

A few key actions were taken in the quarter.

Number one, we have reduced our spending in hardware to some level of the organization.

Number two, we moved some hardware resources to our software and our IoT efforts.

And last but not least, in addition to our existing agreement with Foxconn, our handset manufacturers, we expanded our joint development agreement, which are called JDM ODM agreements, with Compal and Wistron, both companies in Taiwan.

In the quarter, we announced a 12 million share buyback plan, pending the shareholder vote on our equity plans later today.

Early indication came in as we probably will get that approved by the shareholders, so the 12 million shares buyback will start.

This will enable us to offer equity programs to our employees to create a ownership mentality, while being anti-dilutive to the investors, and thank you for all of you who have supported it, I've spoken to a number of you, that have supported our plan there.

I'd like to say a few words about security, as it related to cyber security and our mobile security software.

In the quarter, we made a lot of progress in investing in security strategy, starting with the acquisition of WatchDox.

To put this acquisition in context, BlackBerry focuses to expand our leadership in mobile security, connectivity, and communications.

WatchDox expands our portfolio, allows us to protect documents on any device at rest, or in transit, even after they left the network.

WatchDox is classified as a visionary leader in the Gartner's Magic Quadrant for the enterprise file share and sync market, known as EFSS market.

Excuse me, I am losing my voice a little bit, it's early, I guess.

WatchDox joined encrypted voice leader Secusmart, which we acquired a quarter ago, in an ecosystem that includes BES 12, the EMM security leaders, and our enterprise grade portfolio of security-oriented value-added services.

Looking ahead, to influence and to take advantage of future innovation in secure mobile computing, we also established in the quarter an organization called CHACE.

Stands for BlackBerry Center For High Assurance Computing Excellence.

To date, CHACE has brought together five universities with strong computer science programs, including UCSF, University of California San Francisco, as well as University of California Santa Barbara, as well as University of Oxford, just to name a few.

Together with the industry group to create a state-of-the-art toolset to deal with the next-generation mobile security threats.

We release all these investments in security and privacy, and others have established our leadership position in secure connectivity, and we are very well-positioned to leverage -- to grow our business.

Let me provide you my view on the quarter, before I turn the call over to James for financial details.

Let's start with the software side.

I'm obviously quite pleased with the quarter, we have some very good achievements.

As I mentioned earlier, software and technology revenue was $137 million.

This represents a 150% increase on year-over-year.

The enterprise business which included BES and VAS, value-added services, and our QNX business, turned in double-digit growth year-over-year again, and it was two quarters in a row now.

In addition, our technology licensing program made a significant contribution as well, with two technology license deals, one with Cisco, I hope we have announced that one and press released that, and the other with another major technology provider whose name they went kept off the radar I guess.

During the quarter, on the enterprise front, during the quarter, we had 2,600 enterprise customer wins, both new and existing, including many competitive wins.

This is an increase of 400 over a quarter ago.

Around 45% of these licenses sold in these wins are cross-platform.

I know this is the stat that people keep asking me, so I will start providing this.

The healthcare vertical was especially strong, with wins that, bear with me, I'll give you a whole bunch of names, Grand River Hospital, CarePartners, Chatham-Kent, ExtendCare, Garner Medicare, Trillium Health Care, and many more.

Onto the financial vertical, this vertical was also very strong, in the quarter.

Key customer wins included ATB Financial, Blackstone, Broadridge, Waha Capital in the Middle East, MCube Financial, UniCredit in Russia, Farmers and Merchants Bank, Financial Technologies in India, Dragon Capital in Vietnam, and last but not least, the Royal Bank of Scotland, RBS.

Since one of our competitors like to target us in their earnings call, and say they are stealing our business, let me lob one their way, and hopefully I never do it again.

I don't really want to get in the business of lobbing names around, especially these are good customers of ours, but in the RBS case, RBS is a competitive displacement of MobileIron and a few other casualties.

The other people haven't lobbed anything to us, so we won't play that.

RBS is an important win for us, as it establishes BES as a corporate standard for mobile management.

This is a corporate-wide effort, including for all their BYOD policies across all platforms, such as iOS and Android, as well as BlackBerry.

By the way, I think a few of our analyst friends out there will need to broaden their channel check, because I started reading some of the stuff a little bit more.

We believe RBS chose us because of our superior cross-platform security.

We actually have a few more other key customer wins, switching away from these competitors, but we have not obtained permission to use their names on the call publicly.

Wrapping up on our customer wins, my team wanted to make sure that I mentioned the following, because we're very proud of winning them, their business.

NCR, which I think most of you know.

Clifford Chance is one of the biggest law firms in the world, stationed in the UK.

Magna, which is the automotive parts providers in Canada, probably the largest, as well as WatchDox win at NTT DoCoMo in Japan.

Now to update our progress in building software distribution.

We have continued to build traction on this indirect channels.

Up to date now, 19 carriers have signed onto adopt our enhanced SIM-based licensing solution, which allows bundling of BlackBerry solutions with their data plans for billings.

13 of the 19 of these carriers have already rolled out the solution to date.

More recent adopters of our ESBL solution included Telus, A1 in Australia, Telekom Hungary, and [Smarto] in Hong Kong.

In addition, Rogers, Bell, Orange, Cellcom, Maxis in Malaysia, and Indonesia [PTXL] have also agreed to resell our BES and value-added service solution, bringing our total software resellers to date to over 120 partners.

We have made progress as well on the product front, so obviously our newest acquisition, WatchDox had added to our core vertical, and a strong presence in the entertainment industry, a vertical with very high-value documents requirements.

We have two major releases coming up.

One, the first one is with BBM Protect this month, featuring message archiving, and the second major release is the BES 12 support of Android for Work.

That's actually next month.

We are building a pipeline for BBM Protect, and nearly all of our 120 software partners have now agreed to, and will be able to resell the BBM Protect.

A word on our technology solution group, the BTS.

Maybe I will highlight four or five major occurrences in the quarter, or major wins.

First one, I mentioned earlier that the technology licensing program is off to a good start, with Cisco licensing agreement, plus another major one.

Number two, Intel in the quarter announced that it has chosen QNX on the next-generation digital cluster, infotainment, and advanced driver assistance ADR systems to work with us on there for the connected car.

Number three, Certicom won a deal to manage certificates for connected device, and we have began issuing certificates to secure 104 million smart meters in UK.

Number four, Paratek signed a new licensing agreement to provide ON Semi, I think ON Semi is in China, ON Semi, for the antenna-tuning technology.

Lastly, the number of smart cars now on the road using QNX solution is now over 60 million, and in the quarter, we also released our features on over the air, the OTA, and I think this represents a very large opportunity for that product.

To wrap up my software discussion, I recently took a look at a consensus, actually everybody forced me to take a look at the consensus, and I now realize the consensus is our software expectation is around $490 million for FY16.

I'm glad we are in the ballpark, we're in agreement; however, I see a lot of debates or concerns among analysts of how we will achieve our software targets, so maybe I will take you through the taking behind the numbers, at least our thinking behind the numbers.

First, we expect our core software business in enterprise and BTS, which brought us, by the way, to $247 million in revenue last year, will be growing 20% year-over-year as a continued base business.

Then I will add on to that our acquisition of Movirtu, Secusmart, and WatchDox will begin contributing later this year, adding on top of that core growth that I mentioned.

And then on top of that, our licensing business, which is somewhat variable, is off to a good start and will contribute meaningfully to the overall number.

Here, I have to say we have a deep pipeline, but there are variabilities on when we could -- when the deal will be closed.

We do expect it to be this year though, this fiscal year, that is.

We expect to make some more acquisitions in the future that will expand our portfolio and add to this growth, so you can see the layers of our thinking.

And so lastly, BBM will make a contribution, although it is off to a slow start in my opinion, partly because enterprise has to get ready.

BBM had taken a little longer to contribute.

This, however, this regard the BBM, it does not change our $500 million target for the software-only number.

Overall, we have a robust pipeline that should give us a path to get to that target, and thank you for the people here that believe that our model may have some credibility to it.

Let me turn to our handset business for a moment, where the singular focus for the quarter, and will be continued, are on profitability.

Although the business gross margin was profitable for the fourth quarter in a row, we have continued to take steps to steady our path to operating profitability.

We announced today that we enter into a joint development relationship with Wistron and Compal to add to our existing relationship with Foxconn.

In addition, we have reduced our investment in device, redeploying some of these resources to software, IoT, and the go to market effort.

We will continue, however, to execute the road map we introduced at Mobile World Congress in March.

We achieved the initial launch of Leap in April.

Today, it is now available in 22 markets, countries, and the plan is to rollout to a total of 46.

Our new products -- our other new products, which you have seen at Mobile World Congress, at least, will continue to build out -- I'm sorry, our new products will be released toward the end of the calendar year of this year, 2015.

In addition, we will continue to build our handset distributor relationships.

Other big news for the quarter was the renewal of our relationship with T-Mobile USA.

The level of support we get from them is very, very good, and they have now launched our Classic in 400 stores.

We plan to launch an exclusive Passport promotion with them on both or either of our eCommerce site, details to be worked out in the US, so please stay tuned for that to come.

Now let me hand over the call to James for some details on our financials.

James?

Thank you, John.

First, a couple financial highlights from the quarter.

We had positive free cash flow of $123 million.

We had a non-GAAP net loss of $28 million, or approximately $0.05 per share.

These results were largely attributable to disciplined management of expenses, while investing in our growth initiatives, as John just took you through.

Now, let me discuss the income statement.

Revenue for the first quarter was $658 million.

Software and technology licensing represented 21% of revenue.

Software and technology licensing grew 150% on a year-over-year basis.

Hardware represented 40% of revenue.

We recognized revenue related to approximately 1.1 million devices in the first quarter.

Handset ASP was roughly $240 per unit, up from $210 last quarter.

Service revenue was 38% of revenue.

The soft decline is consistent with our expectations for a roughly 15% quarter over quarter decline.

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

Non-GAAP gross margin was 50.3%, compared to 47.9% in the same prior-year quarter.

GAAP gross margin was 47.1%.

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

Non-GAAP operating expenses were $338 million, down from $504 million in the same prior-year quarter.

It would not surprise us to see a minor uptick in the coming quarters, as we continue to invest in software.

GAAP operating expenses were $221 million.

Included in GAAP operating expenses were $61 million of restructuring charges, as well as a non-cash income or gain of $157 million for our convertible debt.

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

The amortization expense was $164 million in Q1 in the P&L.

A few of you I have spoken to look at our business in EBITDA terms.

As our amortization is relatively significant at our current scale, we believe this is a helpful metric for you to understand.

Our adjusted EBITDA for this quarter, which excludes the impact of restructuring charges and the debenture was $157 million, a 5% increase over the same year ago period.

The GAAP taxes in the quarter were $5 million.

Basic GAAP net income which includes the impact of the debt revaluation and restructuring was $68 million, or $0.13 per share.

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

Our cash balance increased by $50 million compared to last quarter.

Total cash, cash equivalents and investments ended at $3.32 billion.

Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments, and other goods and services utilized in operations amounted to approximately $1.2 billion, down from $1.8 billion in the same year ago period.

Purchase orders with contract manufacturers represented approximately $238 million of the total, down from $317 million in the same year ago period.

With this, excluding the impact of foreign exchange, we achieved positive operating cash flow of $134 million, and CapEx was $11 million.

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 it back over to John.

Thank you.

Before we start the Q&A I want to echo James, two points that he made.

Positive cash flow from -- free cash flow, sorry.

Also free cash flow and sustained profitability starting sometime in the second half of the year.

Also, we are very focused on stabilizing our revenue and investing in growth, particularly in software growth areas.

So everything we do, we focus on these goals, and we will hope to be able to deliver and achieve all those.

So, operator, we're now ready for questions.

(Operator Instructions)

Mark Sue with RBC Capital Markets.

Thank you, and good morning.

It's hard for us to model the licensing from some of your new partners, so maybe you could give us a sense of how that might develop over these subsequent quarters.

And so we get a sense of the basic business on BES, how we should think about the traction, the cadence of new customer wins?

And John, it does seem some of your competitors are bundling it with a larger suite of software solutions.

How you might be effectively able to compete against someone that offers a broader suite?

Thank you.

Okay, thank you Mark.

So the licensing business a little but more -- I hate to use the word lumpy, and part of this is because it takes a little longer time to make sure that -- it's a longer sales cycle issue.

But we believe that we have enough in the pipeline to deliver the results from the licensing side of the equation for the year, and to help us contribute the $500 million that we talked about.

So sorry if I can't really help you there, because in our case, we are also looking at it from trying to figure which quarter it will come in.

We know it's going to come in, because we all agree, and all the details that need to be worked out and those are where -- they are hard to predict at this point.

Regarding the bundling part of it, there is no doubt we are seeing bundling happening out there.

And it was starting to come by bundle, I think it played to our strength.

If you look at all our value-added services, especially in security, so maybe I will spend a minute on that.

Thank you for teeing up the ball.

One of the things that I helped the team and everybody to focus on, is that we started the Company with a lot of strong mobile data security technology.

We obviously put that in the BES12, and expand that.

Then, with Secusmart, we got secure voice and secure text.

We moved BBM to emphasizing BBM Protect and for the enterprise market, we now have secure messaging.

And then of course last but not least, we now have secure file sharing with WatchDox.

So you can see, if you just look at it from that, we could probably one day envision ourselves doing it all in one bundle platform, and I don't think anybody could compete with us whatsoever in that.

Now, we obviously will continue to add on to it, there are many things that one could do on the security side.

And then on top of that, you get the privacy side of the equation with Movirtu, two boxes, two sand boxes.

We think could add value for the Samsung KNOX.

There are lots of things, it plays to our strength.

We want to approach the market in that way, and it's a good idea.

We have been thinking about that, we have been talking to customers about it, and obviously, that will raise the ASP or ARPU, depending on what is perpetual or subscription base.

I'm sorry the second question was?

Cadence of new software wins?

The 2,600 software wins?

The cadence of that.

It is very good.

I noticed last quarter, I particularly was paying attention to the product.

A lot of them, the majority of them are on BES.

I think the overwhelming majority are on BES, and quite a big portion on the BES is on BES 12.

I know that people were looking, and I'm starting to see quite a number of gold licenses, too.

So things are trending correctly.

That is helpful.

Thank you.

Maynard Um with Wells Fargo.

I just wanted to get some deeper clarifications, and I'm wondering if you can give us a sense of what the core business growth was, excluding the IP licensing and the acquisitions, because I just want to get a good sense of what the core business growth was?

And then if you can talk about the linearity of the software revenue over the next couple of quarters?

In particular, I am curious about whether the IP licensing is something one-time in nature, or if there are ongoing quarterly payments.

Then whether you are seeing greater perpetual versus annual BES licenses, which obviously has some impact to linearity there, as well.

So if you could provide any color on how to think about the flow of the next two quarters, that would be helpful.

Thanks.

Very good, thank you.

First of all, I said earlier that our base core business, which are BES, are growing at about 20%, and we have seen that now two quarters of a row, looking at the pipeline, there's no reason to believe that we would not be able to grow 20% year-over-year.

And probably, if things created more traction, it would probably be a little higher than that, but is all in the 23%, 22%, 23%, 24% range, so that is question number one.

Number two, it has very little value added services in it, because we are just starting to rollout Movirtu, and it will be probably be more carrier based on the Movirtu side of the equation.

We start rolling out SecuVOICE in Europe, and BBM Protect.

Those three probably are going to start contributing as the year progresses.

And then other, various other stuff that will come in.

So very little from acquisition in the quarter, if at all, not much, and let me see, what was the third question?

Linearity of software revenue.

Linearity of software revenue.

Maynard, the issue just like we spoke to Mark a little earlier, the IP one, first of all, the IP deal that we have done in the quarter and the two of them, I am unable to provide you any more detail contractually, so sorry for that.

We had an agreement with Cisco that neither one of us would disclose any details.

So in the IP pipeline, they actually come in both shape and form.

Some of them are an upfront one-time payment and perpetual, some of them are on a regular ongoing basis, usually on an annual basis.

Those are the -- so not trying to be vague, but I won't be able to provide any more color on that.

It is just safe to say that I am satisfied with the ability in the IP pipeline, this fiscal year, that will help us to reach our $500 million target.

Can I just try that a different way?

Since you've looked at the consensus Street numbers out there for the next couple quarters, do they look reasonable in terms of the linearity of how they are growing?

Thank you.

I'm sorry I did not look at the linearity.

I'm sorry, I only at the numbers that they gave me and what everybody thinks we do in software.

I will take a look at that.

Okay, thank you.

I will take a look at it.

It's obviously quite, to be safe, it is quite back-end loaded, right?

Just to be safe.

As we build up our software team, we have a number of training programs going on all at the same time, the carriers coming online, I feel the direction and the momentum.

And so I will model with a little bit more slope going up type thing.

Not flat.

Okay, thank you.

Steven Li with Raymond James.

On the IP licensing, bit of lumpiness and the contributions this quarter, could software be flat or down next quarter?

Software be flat or down?

No, I think our base software will continue to grow.

I just can't predict whether some of the IP pipeline will come in on Q2 or Q3 or Q4, but as I said earlier, I feel comfortable with them coming in this fiscal year.

So John, you would still expect your software and IP revenues next quarter to grow quarter over quarter?

No.

I don't know that.

I don't know -- I think that would be misleading to say yes or no on that one, because I don't know what my expectation is.

We're working hard at some of the IP deals.

If the IP deals have moved to Q3, than Q2, the numbers will be lower.

I'm only focusing on delivering the entire year at $500 million.

Okay, that helps.

And John just for clarification, the 2,600 customer wins, so are these predominantly 2,600 past customers that are now paying customers?

No, I say from me glancing, because I know you guys are going to ask this question.

So when I glance at the whole list, by the way, it's really hard to glance through 2,600 names, but we have a printout of that.

I would say half-and-half.

I would say more maybe 60/40, 60% based on the EZ Pass convert and 40% are brand-new customers.

Okay, thanks.

Richard Tse with Cormark Securities.

So quick question on the acquisitions.

Are you still focused on pushing into more security markets, or is there a potential for a transformational deal outside of that market here?

I never will turn down a transformational deal.

But I know, I think this year, our plan is to fill in the gap and expand what we offer.

And I don't expect a big deal, but once that comes around, I don't think we will shy away from it, but it has to be the right price and it has to be not only strategic operationally, we know how to take advantage of it.

And then financially, I still have to put us in a very solid footing.

So probably not like that, I don't believe.

It's going to be more of expanding what we have, and also in the IoT world.

I guess on the IoT side, I recall at CES, you had talked about rolling out a fleet management project.

Can you give us an update on the product and where you stand in IoT?

Thanks.

Just so IoT, we started two or three quarters ago, we started our effort on the cloud.

We made a very, very smart decision, a handful of people to launch our cloud effort.

It is being developed right now.

Progress is very acceptable.

Now we are building apps on it.

So services.

One of the areas that we have made some traction is to marry that with Certicom and get some certificates out there.

Earlier I spoke about a UK deal with the smart meters, utility meters, and that we provide all the certificates there from Certicom, over 100 million by the way.

It was a pretty sweet deal there for us, so we will continue to do that.

So while we are building the product suites up, we probably need some acquisitions to help move that along, in addition to the organic part.

But Sandeep and team are very focused on winning customer, and winning designs, because that is ultimately the game.

You have to win designs, and winning designs, like I said, the Paratek that won designs with the semiconductors company, ON Semi.

We won Certicom designs, and I am very comfortable and pleased with that, although the revenue is not really huge, but it set us up good for the future growth.

So pretty good on the IoT front.

And then on the connected cars, I won't overemphasize it, but it is an important win.

We are working with Intel, because as you all know, Intel does have their own technology.

But the fact that they picked QNX speaks volumes of some of our capabilities, and obviously the team has done a good job.

Tim Long with BMO Capital Markets.

Just two, maybe they've been asked but I want to be maybe a little more direct.

If we look at last year's first quarter, we did $54 million in software revenues.

If that was growing low 20s, that would imply that excluding the license fees, license revenues, that the core software business was flat or down sequentially.

I want to make sure that it is accurate math.

No, that is not accurate.

Okay, so then it had to grow much more than low 20s.

Hold on a second.

We will get that number because I look at the number, we have grown rather solidly over the core business.

Okay and maybe just on the licensees, James specifically, I understated you can't explain a lot of the details of the two transactions, but from an accounting treatment standpoint, are these just lump sum payments, or are they -- do they have an ongoing royalty -- is it a lump sum payment where it is amortized over the life of the deal, which is pretty standard for license deals these days?

So the accounting treatment of them would be helpful?

Effectively, Tim, what John said is we can't disclose which bucket that falls into.

I think we are prepared and would account for them appropriately.

If we have ongoing obligations, to your point, they would be amortized over whatever the license period, and if we don't have the obligations, and we meet all the criteria up front, we would recognize them up front.

This is particularly why we cannot disclose the details.

We are only allowed and we agreed to -- we are only allowed to use the names.

Okay, thank you.

That number -- some of you --

25 and 23, so it's mid-20s.

I don't know why, maybe somebody get back to Tim.

Michael Kim with Imperial Capital.

Just talking on the hardware side of the business, if you could provide a little more color on how some of the previous device launches like Passport, and Classic have been ramping, and also your expectations for Leap?

I think there have been mixed commentary on the feature set, but any color on if you see hardware stabilizing around this range?

Okay, thank you.

So Passport is still selling rather steady.

Classic is upticking, and Leap it is a little too early to tell.

You're right, there is a mixed commentary, some people really, really love it, and some are not so crazy about it.

I can understand because our audience base out there.

Having said that, one of the effort of this particular, coming this current quarter, is to bring the awareness of these devices up.

I think that is something that we haven't done for a while, and we decided to invest in that.

And so now that we have distribution out there, you actually could walk into a retail store, at least a lot of the retail store between -- let's just say in the United States and North America, the free Canadian telephone company, as well as AT&T stores and Verizon for Classic and AT&T for both Passport and Classic, T -Mobile for Classic, and we do more online store sales of Passport, but we know that the Passport is still -- people still buy it, so we receive it well.

We just need to bring the awareness up, and so we are doing a few things on that.

Not overly concerned about that, but more of our focus is a Company right now is on expanding the distribution for software.

And I am very focused on -- especially selling software through enterprises, through carriers with the ESBL technology that we have.

I think once it is online, that has good leverage.

And usually, it takes a little longer because the billing system has to match up, so logistically, but seems okay, everything seems to be trending correctly.

Got it, and to achieve your profitability expectations for sometime in the second half of the fiscal year, would your agreements with new partners like Wistron and Compal drive gross margins on the hardware side in the teens or north of 20, or can you frame what your expectations would be for how gross margins stabilize in the hardware business?

Right now, we have gross margin profitability, and I'm working hard on making operating margin profitable.

So we do need to remove -- in my opinion, at least about $100 million to $200 million worth a year in spending on hardware, and divert that into more software.

And so I don't have a number, the gross margin number in my head, but I would like to achieve that point.

Michael maybe just to add some color to that, I don't think we are modeling something that is overly aggressive.

In order to derisk us getting to the objective, we need to be prudent, so it may be towards a lower rate end of the range you quoted three, rather than something that is a little more aggressive.

Okay.

Fair enough, thank you very much.

Amitabh Passi with UBS.

If you could also clarify the same question that Tim asked for us, that would be helpful, because I think the math we're all doing is taking the $54 million last year, and we see 20%, 25% growth we get the base business revenues somewhere between $65 million and $67 million, so that's what we're trying to figure out.

Relative to last quarter, was the base business last year maybe modestly down?

So it will be helpful if, whenever you get a chance, clarify that as well.

We will clarify that.

That is not -- it is not the math.

We did register growth quarter to quarter, and quarter over quarter.

So I have seen the numbers myself a number of times.

There must be something, classification that is not correct.

Got it.

And, John, can I just clarify the $500 million for software revenues versus $600 million previously.

Are you still keeping the BBM buckets separate at $100 million or are you saying $500 million is a more direct goal at this point, versus the $600 million prior?

I just wanted to clarify that.

No, BBM, $500 million for software, $100 million for BBM.

BBM, I still need to work on.

The $500 million I feel that is certainly quite doable, but nobody could say for certain, but I kept two buckets separate.

I guess my real question for you is, can you just give us an update of the 6.8 million licenses that opted into the EZ Pass program?

We are coming up to the July 1 deadline, and I am assuming you have a fairly good idea of what the conversion is like of the 6.8 million, so maybe you could just help us get a sense of conversion rates, silver versus gold tier, how that is progressing?

As I said, I think in the past quarter, maybe 60% are people who convert that we benefited from doing the business.

About 40% of the business are new customers that have not been associated with the EZ Pass.

They might be existing customers, but it was not associated with the EZ Pass.

And gold license is trending up.

BES 12 is the predominant one right now.

Which are all good indicators of customers, the market is starting to embrace our technology there now.

So you think -- the 60% or the 6.8 million actually converted to roughly 4.8 million?

No, the 60% on the 2,600 deals that we won.

Sorry.

I didn't really -- I look at it more on -- you look at the quarter, you break it down to EZ pass conversion, and non-EZ pass conversion by looking at the 2,600.

Got it.

Okay.

Thank you.

Daniel Chan with Scotiabank.

John, did I hear you correctly, you said the Certicom smart meter deal was over $100 million, and when was that --

No, no, no.

100 million certificates.

Okay, got it.

Over 104 million certificates, and the good thing about that is that is not a lot of money, but it is annual.

Okay.

Thanks.

And then on the hardware business, these new JDM agreements you have with Compal and Wistron, are these similar to the same deals you had with Foxconn where they would be variable costs, and they will take on the inventory risk as well?

Yes, everyone of them is slightly different, but same principle, yes.

Okay.

And then, my final question, can you comment about your ranking in the recent Gartner review of the various EMM solutions?

Could I comment on it?

My colleagues have sent blog calls and stuffs.

We're rather -- we obviously respect their independent view, we respectfully disagree with their view.

I can't -- I don't know what else to say.

I think we have a lot more installation in licenses been a lot of the competitors are supposed to be in the Magic Quadrant.

We have a much broader set of technologies, and proven.

One of the reasons I mentioned RBS, it was important for RBS to grant us the permission to use the name publicly, and they were willing to take reference calls on BYOD and stuff.

So what Gartner has been saying is that we weren't able to point to anybody that would speak on our behalf.

A lot of our customers are in highly regulated industries that are not willing for us to use the name, especially in government agencies, and it is safe to say most of the Canadian and government agency users are BES.

But all these things are, unfortunately, I was not able to use, but I think with the RBS situation, and other names that I have mentioned on the call, then Gartner should do their check, and find out that we actually are quite competitive, and we are winning, and in a lot of cases are winning against our competitors.

I can't comment more on that, because as I said, I respect the fact that they are independent analytic agency.

Maybe we will take one more question please.

Rod Hall with JPMorgan.

Thanks for fitting me in.

I just wanted to ask two questions on the sequential growth.

The North American revenue was up $80 million quarter over quarter.

Can you just comment on the makeup of that trajectory, of the change, was this all software revenue?

Does all the software in North America?

Just help us understand why that moved, considering all the other regions were down.

And then I don't know John, if you, whether you have done the math on this $54 million, et cetera.

But to put it really concisely, I'm getting -- you've got to grow about 26% year-over-year to get to $68 million, which would be up $1 million sequentially on the last quarter for the underlying software revenue.

I think if you could just again come back to that and comment on whether we are talking about 25%, 26% growth there, that would be helpful.

Thanks.

When I look at the number, it was a 24% growth year-over-year.

I have to go back and re-look at why that number is a discrepancy.

We will get back to each and every one of you, especially Tim and so forth on that.

Rod, your comment on the US revenue.

If you think of the IP deal that we did announce, it would be classified as US revenue.

And was the underlying, James, up as well?

Or is the underlying US revenue ex that deal down?

Can you help us understand what the underlying trajectory of North America looked like?

Some of it did come from North America, so we are showing progress there, but if you look at the client list that John outlined with Royal Bank of Scotland and some of the other ones, there was a global footprint to it, so some of it is growth in the underlying business, I'd say, as well.

Sequential growth in the underlying North American business?

Yes.

We are scrambling to look for those numbers.

I don't know why that is the case, but anyway.

Okay.

Let me wrap up.

Thank you for -- you guys really want all the numbers.

I have to be careful in the future how we break that down, but thank you for joining us.

While there is a lot of work to be done still, and it makes folks this quarter as we enter into the second phase of our turnaround, we are definitely on solid financial footing.

We are making very good progress in expanding our distributions, we're making good progress on our product portfolio, and we are seeing some solid growth in our software business.

And we believe that remaining milestones in the strategic plan that we have laid and the turnaround plans we have laid out are achievable.

I'm sure that I will see a few of you at the AGM later today this morning, and I look forward to seeing some of you and chatting about things on the upcoming security summit in New York, which is scheduled to be on July 23.

So with that, I thank you all for joining our first-quarter call, and looking forward to chatting soon.

Thank you, and have a good day.

Thank you.

This does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.