BlackBerry Ltd BBRY
Q4 2013 Earnings Call Transcript
Transcript Call Date 03/28/2013

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Blackberry Fourth Quarter and Year-End Fiscal 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time. I would like to remind everyone, this conference call is being recorded today, Thursday, March 28, 2013 at 8.00 am Eastern Time.

I would now like to turn the conference over to (Mr. Paul Carpino), VP, Investor Relations. Please go ahead, sir.

Paul Carpino - VP, IR: Thank you, Luke. Good morning and welcome to BlackBerry's fiscal 2013 fourth quarter conference call. With me on the call today are Thorsten Heins, our Chief Executive Officer; and Brian Bidulka, our Chief Financial Officer. After I read our cautionary note regarding forward-looking statements, Thorsten will provide a business update, and Brian will then review the fourth quarter results. We will then open the call up for questions.

This call is available to the general public via call-in numbers and via webcast on the Investor Relations section at blackberry.com. The webcast can be accessed through your BlackBerry 10 smartphone, your personal computer, or your BlackBerry PlayBook tablet. A replay of the webcast will also be available on the blackberry.com website. We plan to wrap up the call around 9.00 am Eastern this morning. In order to let as many people as possible ask questions, please limit yourself to one question.

Some of the statements we will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. These include statements about our plans, strategies, objectives, and expectations and the anticipated opportunities and challenges in fiscal 2014, our plans and expectations regarding the BlackBerry 10 platform and its impact on our business, our vision regarding the new world of mobile computing, our plans and expectations regarding BlackBerry World, our ability to leverage the changes made over the past year and to realize the benefits of our exciting new platform and more efficient business model, our product development and marketing initiatives and timing, our plans regarding new service offerings and assumptions regarding our new service revenue model, our anticipated financial results for Q1, working capital management and our anticipated cash position, and other statements regarding our plans, objectives and expectations.

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. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements, including our ability to enhance our current products and develop new products and services, risks related to the anticipated decline in our service fees and our ability to generate service revenue through new offerings; risks related to intense competition, our reliance on carrier partners and distributors; risks relating to network disruptions and other business interruptions; our ability to realize the benefits of our CORE program and similar strategies; our ability to maintain or increase our cash balance, security risks; our ability to retain and attract key personnel; intellectual property risks; difficulties in forecasting financial results given the rapid technological changes, evolving industry standards, intense competition and short product life cycles that characterize our industry; and other factors set forth in the Risk Factors and MD&A sections in RIM's filings with the SEC and Canadian securities regulators. We base our forward-looking statements on information currently available to us, and we do not assume any obligation to update them except as required by law.

I will now turn the call over to Thorsten.

Thorsten Heins - President and CEO: Thank you, Paul, and good morning, everybody. Before I start the call, I just wanted to make a few comments on the announcement you saw this morning that Mike Lazaridis has decided to retire as Vice Chair and Director of BlackBerry. Mike co-founded BlackBerry nearly 30 years ago and served as a Co-CEO of the Company until last year when he was elected Vice Chair of the Board. He revolutionized the mobile communications industry when he invented the BlackBerry and he is widely recognized as one of Canada's greatest innovators. Mike has played a pivotal role for the past 15 months in helping with the leadership transition and the successful launch of BlackBerry 10. I deeply respect and appreciate Mike's desire to devote his fulltime efforts to his newly launched venture Quantum Valley Investments. On a personal level, I'm grateful to Mike for his help, guidance and advice during my first 15 months as CEO of BlackBerry and I wish him all the best. From everyone at BlackBerry, thank you Mike for your commitment and passion to the community and to the Company.

Having said this, now let's go back to our results. BlackBerry has gone through a major and exciting transformation this year and it has been exciting. It was a year for change and we delivered significant positive change.

So, let me recap what we have accomplished in the first stage of our transition which has enabled us to return to an operating profit this quarter and given us great momentum as we go into fiscal '14.

Starting from the top, we implemented significant changes at the Board level, adding three outside Board members with extensive mobile communications industry and international business experience and we also made multiple senior management changes. In addition to my appointment as the Company's new CEO, we hired a new Chief Marketing Officer, a new Chief Operating Officer and a new Chief Legal Officer, all with extensive experience in the mobile communications industry.

The senior management additions have continued and I'm pleased to announce the new edition of Nigel Perks as our Executive Vice President to lead the Global Human Resources organization of BlackBerry. Nigel brings over 20 years of extensive international experience within the global technology field and joins us from his most recent role with BT Global Services in London where he was the Chief HR Officer since 2008. Welcome Nigel.

The new executive team responded quickly to driving improvement and implemented personnel changes throughout the global organization, and reduced layers of management and removed complexity that existed within the Company.

New and energized talent has joined the Company in areas that were underperforming and we have also promoted from within to give high potential employees a chance to demonstrate their leadership.

Promoting our high-performance culture throughout the entire organization has been a priority of mine over the past year. We know who BlackBerry is and we will continue to invest in activities that reinvigorate the culture of our Company.

I'm very proud of our team and the tremendous effort they all have put into strengthening the BlackBerry platform. Even during the toughest of times, BlackBerry employees have proven they are engaged, productive, inspired, and creative. That has not been easy, but the BlackBerry team is delivering.

We also have implemented major changes throughout the organization and significantly reduced our cost base with our $1 billion CORE program. We launched that program last year and we achieved our cost target one quarter ahead of schedule. So, not only are we seeing the benefits in our financial results from this cost reduction program, but we're seeing a new attitude and the culture shift in the Company where we continue to look at how to innovate faster and how to do things more efficiently.

Contributing to this transformation is the collaboration between our teams and our strong supplier base, which has delivered a re-architected supply chain. To-date, we have moved from four EMS providers to two, reduced our manufacturing sites from 10 of four, and we have outsourced our global repair operations.

As a result of the changes, our costs are lower, our working capital performance is strong. We are recognizing better production yields and we have a more robust model that is resulting a more efficient way of building our exciting products.

While we have reduced costs and driven efficiency, we have also invested in the significant transformation of application ecosystem. What a year this team has had as they have rebuilt all aspects of the app developer program and they delivered on results.

At launch of BlackBerry 10 we had the most apps available of any mobile ecosystem and platform launch. We started with 70,000 global BlackBerry 10 applications and last week announced we have reached 100,000 already, a 43% increase in the past 60 days and 70% of apps in BlackBerry World are native to BlackBerry 10.

Early indicators are that BlackBerry 10 users are hungry for applications and we are getting more commitments from global app developers daily as our launch continues its rollout. Initial data shows strong download demand in BlackBerry World and revenues for BlackBerry 10 user that are similar to other leading smartphone platforms.

Over the past year, we have also regained the confidence and excitement of our carrier distribution partners with the introduction of the amazing BlackBerry 10 platform for consumers and enterprises. The BlackBerry 10 platform has been worth the wait. Our two new devices, the Z10 and Q10 and our BES 10 Enterprise Management Service has been designed to give enterprises and consumers more features, more flexibility, and the ability to do things smarter and faster.

The excitement for BlackBerry 10 goes beyond our current local customers. Recent data shows that 55% of the Z10 customers globally are coming from platforms other than BlackBerry, more than half. With BES 10, customers will experience the BlackBerry 10 platform with continued confidence and the comfort of the unmatched BlackBerry security.

We've also loaded BES 10 with new capabilities and a more comprehensive set of features, including security for iOS and Android devices through our secure work space products. BlackBerry is the most widely deployed mobility solution in enterprises and government today, as acknowledged, with more than 31 petabytes of traffic passing through the BlackBerry trusted environment every month.

Over the past few weeks, we have been on the road visiting customers through the BlackBerry Experience Forum roadshow for enterprise customers. We wanted to showcase the BlackBerry 10 platform and what a response we got. Approximately 8,400 professionals have attended the BlackBerry Experience Forum event in 17 cities with more to come. 4,600 companies in North America have registered for the BlackBerry 10 Ready Program and 2,300 companies have completed all three training programs for the BlackBerry 10 Ready Program. Partners and customers such as SAP, Cisco, HP, IBM, CDW, Box and Citrix joined us during this tour and exhibited their integration with BlackBerry 10. This has really been very exciting stuff for us and our customers.

Finally, our financial transformation over the past 12 months has been outstanding. To say it was a very challenging environment to deliver improved financial results could well be the understatement of the year.

In the face of numerous challenges this past year, BlackBerry has gone from a significant operating loss in the first quarter of the year to an operating profit in the fourth quarter.

To recap, we started the year with a GAAP loss of $518 million and an adjusted operating loss of $192 million. And here we are, three quarters later, after implementing all these numerous changes and benefiting from a reenergized organization, we returned BlackBerry to an operating profit despite a 23% decline in units shipped versus the first quarter. That says in terms of financial strength, we are very well positioned.

From a cash perspective, we started the year at $2.1 billion and today we have cash of $2.9 billion. This was accomplished actually despite incurring restructuring charges of $220 million as well as other funding commitments.

We've made great progress and we are proud of it, but we are also well-grounded. Everyone at BlackBerry understands there's more work to do, and delivering BlackBerry 10 and getting back to a profitable quarter is just our starting line, not the finish line.

This year, consequently, we'll embark on the second stage of our transition and will be focused on leveraging all the changes made last year. We are running a business, which means we will continue to manage the short-term effectively, while at the same time not compromising on longer-term strategies.

We intend to demonstrate this year that we have transformed the Company with an exciting new platform and a more efficient business model. Great progress, but still more to do.

Before I turn it over to Brian, let me provide some thoughts on our outlook. So let me start with BlackBerry 10. With only a few weeks of availability and in only a couple of countries, BlackBerry 10 made a strong entry into the high-end of these markets with approximately 1 million BlackBerry 10 units. Today our launch is even accelerating. 223 carrier (technical) acceptances have already been completed and over 60 carriers are now launched across 40 countries and there's still more than 30 countries to come. And for Q10, our first lab entry was achieved in late February and Q10 is now testing with over 40 carriers in 20 countries. As mentioned at our launch in January, availability of Q10 will commence in April.

The initial early global demand for the 10 has been better than anticipated and our recent announcement of the largest single purchase order in our history for 1 million units is also indicative of a strong initial support in demand. As a result of this better than expected demand, production was increased in the latter part of the fourth quarter.

We've just started selling in the U.S. and the launch is meeting our early expectations. Interest from corporate customers and our defense solution is also high.

While guessing store lineups has become a bit of expected spot in our industry, I would like to emphasize that BlackBerry 10 has a phased rollout and we'll continue over the next several quarters with various devices and all the major carriers. Lower cost versions of BlackBerry 10 for other global market will also be launched later this year.

Now, moving on to service fees, our existing services fees are in an area of gradual transition as highlighted over the past year. This is an evolutionary process and we are managing this transition with our partners very effectively. We anticipate the single-digit percentage decline in services fees in the first quarter, but are offsetting some of the impact through the progress we made with our cost efficiency and effectiveness program.

While service fees are in the transition, I want to be clear that our existing base of business as well as any new BlackBerry 7 business continues to generate service fees. And we're still selling BlackBerry 7 in many markets and plan to launch new BlackBerry 7 product in certain market segments outside of the United States, and those sales will also generate service revenue. As the business migrates to BlackBerry 10, we intend to enhance our business offering with new value-creating services to continue to generate service revenues.

The areas we plan to leverage through our new service offerings include new services for our strong BlackBerry Messenger base, possible licensing of BlackBerry 10, the creation of cross platform offering, services that leverage BlackBerry's great highly engaged and sophisticated social media community, advanced security tools and additional enterprise services.

The composition of our services revenue model is evolving and you will hear more about these services as they are introduced. But make no mistake about it, we plan to stay in the services business and we are actively building and implementing strategies to support these initiatives in the future.

On the cost side, we anticipate additional benefits to come from our more efficient cost base as volumes of BlackBerry 10 increase. We reported a 40% gross margin this quarter reflecting higher average selling prices and hardware margins. We also benefited from the CORE program and related initiatives implemented over the past year. I am really proud of what our teams have delivered here and we are committed to implementing additional initiatives this year to leverage an even more efficient business model as volumes increase.

About 10 months ago, we started a strategic review to run in parallel with the launch of BlackBerry 10 and our CORE restructuring. While the CORE program was focused on improving our cost structure, working capital performance, and liquidity, we felt it was appropriate to test all options in terms of what our business model could look like with BlackBerry 10.

We have significantly transformed the Company over this period, and today, we have an exciting new mobile computing platform. We are profitable and we have a healthy balance sheet. We are looking to leverage the early success of BlackBerry 10 and our strategic revenue initiatives will be intensifying the focus on opportunities in mobile computing verticals such as automotive, industrial, networking, healthcare, security, and defense. Leveraging our secured network infrastructure for uses beyond those currently deployed by BlackBerry and potential licensing opportunities.

So while we continue to work with our advisors on these initiatives, we have also implemented a thorough planning process that is being rolled out to our employees, detailing our longer term strategy and strategic objectives in all of these areas.

The world of mobile computing is expanding rapidly and it's just starting to be defined. This is not a one or two quarter opportunity. It is an opportunity for the next five or 10 years and our vision is to expand from being a smartphone company to being a leader in the new world of mobile computing. Smartphones will play a vital role in our plans, but our vision also includes expanding into other areas, including vertical markets that can leverage the BlackBerry 10 platform.

This is a very exciting time to be a part of BlackBerry, and I want to thank our employees for the amazing job they have done in the transition we accomplished today. And I would also like to thank our loyal customers, partners, and developers and the passionate supporters in the communities where we operate. You have also been huge contributors to our turnaround. We sincerely thank you for your support during this period and I can assure you it helped and we appreciate it.

I will now turn the call over to Brian to provide more detail on the quarter.

Brian Bidulka - CFO: Thank you, Thorsten. Before I discuss our GAAP and adjusted results, please note my comments relating to our fourth quarter results and their comparisons to prior quarters, primarily focused on continuing operations. Please also note that a reconciliation of our adjusted results to our GAAP results is included in the press release today. Revenue for the fourth quarter of fiscal 2013 was $2.7 billion, virtually unchanged from the third quarter. We shipped 6 million smartphones in the fourth quarter compared to 6.9 million smartphones in the third quarter. Higher ASPs helped maintain relatively flat revenue despite the decline in units.

Starting this quarter we will be presenting our geographic revenue breakdown in four categories; North America, which is U.S. and Canada only; Latin America or LatAm; Europe, Middle East, Africa, or EMEA; and Asia Pacific or APAC. And annual and quarterly revenue split on this segmentation is also available in today's press release.

EMEA grew this quarter and was 46% of revenue compared to the 43% in the third quarter. The U.K. grew 13% from the third quarter and represented 13% of sales. Revenue in the EMEA region included sales of BlackBerry 10 devices in the U.K. and UAE late in the quarter. North America was 22% of revenue compared to 24% in the third quarter.

U.S. market declined and represented 14% of sales while Canada benefited from the launch of BlackBerry 10 and grew 62% sequentially and represented 8% of sales. LatAm was 18% of revenue compared to 20% in the third quarter and finally, APAC represented 14% of revenue, unchanged from the third quarter. Estimated sell-through in the quarter was approximately 7.9 million units including phone-only sales and channel inventory declines.

Looking at our revenue mix, hardware revenue was approximately $1.6 billion or 61% of revenue compared to 60% in the third quarter. Service revenue was approximately $950 million or 36% of revenue and was down $27 million or 3% from the third quarter. This decline reflects some of the changes in pricing pressure we had discussed in the past as well as the decline in subscribers this quarter.

Subscribers were approximately 76 million compared to 79 million in the third quarter. The decline reflects decreases in the North American and EMEA regions offset by increases in APAC and LatAm. GAAP gross margin and adjusted gross margin were both 40% in the quarter. This compared to GAAP gross margin of approximately 30% in Q3 and an adjusted gross margin of 32% in Q3.

The improvement in gross margins was driven by higher average selling prices in hardware margins and cost reductions generated by our CORE programs, including favorable renegotiations of key contracts associated with elements of our hardware business, benefits from a leaner and re-architected supply chain and shipments of new devices with improved margins and higher ASPs compared to Q3.

GAAP operating expenses were just under $1.1 billion, unchanged from Q3. Selling, marketing, and administration expenses increased by $25 million, primarily attributable to the launch of BlackBerry 10 devices. R&D spending was $383 million, down 3% from the third quarter. Operating expenses included approximately $33 million of CORE related charges in SG&A and R&D.

Excluding CORE related charges; adjusted operating expenses were approximately $1 billion, relatively unchanged in the third quarter. Increases in marketing investments around BlackBerry 10 were offset by CORE OpEx reductions.

The GAAP operating loss in the fourth quarter was $18 million compared to an operating loss of $212 million in the third quarter. Excluding restructuring charges and other items, we achieved an adjusted pre-tax operating profit in the fourth quarter of $11 million compared to an adjusted operating loss of $176 million in Q3. The tax recovery on adjusted earnings was $103 million, which primarily reflects the favorable impact of tax loss carryback as well as R&D tax benefits.

The effective tax rate in Q3 was 35%, resulting in a tax recovery on adjusted earnings of $62 million.

GAAP net income for the fourth quarter was $94 million or $0.18 per diluted share, compared to GAAP net income of $14 million or $0.03 per diluted share in Q3. Excluding the impact of restructuring charges, net of tax, we reported adjusted net income of $114 million or $0.22 per diluted share.

Now, moving to our balance sheet and working capital performance, the Company delivered another strong quarter. Despite ramping production of the BlackBerry 10 we generated approximately $219 million in cash flow from operations. This was achieved by strong working capital management and better operating performance in the quarter.

Inventory was $603 million compared to $457 million in the third quarter. The growth reflects the additional materials for the continuing rollout of BlackBerry 10.

CapEx in the quarter was $88 million, unchanged from the third quarter and approximately $400 million for the full year. Specific CORE prioritization actions to drive more efficient investment are reflected in these results.

Intangible asset purchases, which consist primarily of prepaid license agreements, were $235 million compared to $233 million in the third quarter.

Cash and investments in the fourth quarter remained strong at $2.87 billion compared to $2.94 billion in the third quarter. The strong cash position was driven by four key factors; efficient management of accounts receivable and inventory during the ramp of BlackBerry 10 production; continued discipline with CapEx spending; reduced spending associated with CORE activities; and a return to an operating profit. Strong balance sheet was also maintained despite funding a $45 million in restructuring, negotiated royalty settlement payment, and $146 million increase in inventory.

Over the past year, our focus has been on strengthening our balance sheet. With our success in this initiative we are well-positioned to aggressively invest in the growth opportunities of BlackBerry 10. We will deploy cash for working capital, CapEx, and marketing activities in the first quarter for the BlackBerry 10 global launch, and we anticipate a continued strong cash position.

Let me now provide some additional updates in our CORE initiatives. As mentioned last quarter, we achieved our $1 billion in savings, a full quarter ahead of our initial schedule and the benefits from these initiatives are positively impacting our financial results. Benefits from CORE are being realized in reduced component costs, improved working capital management, greater efficiencies in manufacturing and supply chain costs, workforce optimization and leveraging third-party providers to assist in reducing indirect spending.

CORE has helped us transition the Company through a very competitive and dynamic environment and build a leaner more efficient business model. We will continue to pursue efficiency strategies throughout the coming year and anticipate being able to leverage the lower-cost base as unit volumes increase. This quarter, we incurred $29 million in pre-tax restructuring costs associated with CORE, bringing the total costs to-date to approximately $220 million. We ended the quarter with a total workforce of approximately 12,700 full-time employees.

In terms of our outlook, the Company will be increasing its marketing investment in the global launch of BlackBerry 10 during the first quarter by approximately 50%. Including this increased spending, the Company believes it will still approach breakeven financial results in the first quarter based on its lower cost base, more efficient supply chain, and improved hardware margins. We also anticipate continuing to maintain a strong cash position. While we are still completing our transition to BlackBerry 10, we have significantly improved the Company's financial position, lowered our cost base, and established a more robust supply chain.

That concludes my comments and we'll now take your questions.

Transcript Call Date 03/28/2013

Operator: Peter Misek, Jefferies.

Peter Misek - Jefferies & Co.: Just a couple of quick questions here. Firstly, more of a housekeeping item to understand cash flow movements. So just again, you sold through almost 2 million more units than you shipped, which implies channel inventory obviously was down 2 million, and you're talking about basically operating cash flow breakeven in next quarter, which also implies no channel inventory; meaning, or said another way, you're selling through absolutely every item you're building. Can you confirm that logic makes sense and doesn't that mean that you're being a little conservative on the cash flow side? And then secondly, just on your marketing going up 50%; marketing as part of SG&A, can you help us understand, if we look at the SG&A item, how much that is going up? And then lastly, on services revenue, you guys lost around 3 million subs, you've articulated how those broken by geography, but more interested to understand how on the corporate side that's been looking and how the adoption of your mobile device management strategy has been working.

Brian Bidulka - CFO: I'll take the first one, Peter, on the cash flow. Your logic is roughly correctly, although I wasn't entirely sure on one of your points, but we are planning to invest in the launch and that's one of the big cash drivers in the quarter, but also just inventory build-out and just our whole cash flow conversion cycles where we are expecting to see some impact on our cash position. But as I mentioned, we continue to believe we are going to maintain that strong cash position throughout Q1.

Thorsten Heins - President and CEO: This is Thorsten. There are a lot of questions. Let's try to address them really briefly. On the marketing side, I mean, no doubt that we have to market BlackBerry 10 strongly and that's what we will be doing. So, I think this is a very meaningful investment of ours into brining BlackBerry 10 to market and we are actually very fully supportive of those expense and we see good feedback on that one. On the Enterprise, where is the 3 million subscriber loss coming from, our data show that it's actually mostly coming out of what we call the prepaid segment with the strong interest from our corporate customers in maintaining the BES installed base because it means something to them; it means security, it means reliability, it is network connection. And I think the numbers are reported in terms of customers signing up for the BES 10 and BB 10 get ready program. It's testament to them and supporting us in the corporate domain.

Operator: Ehud Gelblum, Morgan Stanley.

Ehud Gelblum - Morgan Stanley: A couple of quick things. First of all, Brian, if you can go back over the taxes this quarter. I didn't quite get it. Last quarter you actually called out the income tax benefit you got of $166 million. This quarter you had $112 million of positive on the tax line and I just want to understand is it all R&D tax credit, so just kind of a clarification there, and is there any way we can kind of normalize that as to what it otherwise would have been? And then, on the back to subscribers, EMEA subs fell, I was under the impression that was a decent part of the BlackBerry 10 launch, and just want to understand what the trend is over there. Are there prepaid markets that are falling? Despite the BB 10 launch, I would've thought we would have seen a little bit – more of a stable platform over there. And then Latin and EMEA on the same thing, those were going up and are they going up for – because of BlackBerry 10 or they were going up because we're still shipping BlackBerry 7, and maybe even BlackBerry 6 units into those markets? Maybe you can give us kind of a sense as to the health of the BlackBerry 6 or BlackBerry 7 shipments into those markets that would be great.

Brian Bidulka - CFO: Okay, I'll take the first one on the taxes. So, the tax benefit, you're right, last quarter we pulled it out because it was a one-time event on our international tax restructuring. This quarter, it's more just tax loss carrybacks, but a large portion of it was R&D tax benefits, including enacted rate or R&D benefit changes that happened in the U.S. in the quarter. So that was part of that. And just on a normalized rate going forward, it's difficult when you're in that – the loss position on that actual tax provision, but normally that we've talked around the 25% rate on a normalized basis on earnings for the tax rate going forward.

Thorsten Heins - President and CEO: Okay. On the question regarding the subscriber number, one general comment I would like to make here is, we've reported subscriber numbers for quite some time. I think actually what's really important is for all of us to understand is what's the dollar value that we generate out of that subscriber base. And I talked in my speech about moving to a different business model on the services, and we're innovating and developing new services as we speak. So I just want everybody to have that in mind. At the end of the day, it's about the dollar number that's being created. So, the BlackBerry 10 introduction is very successful in those markets, but I think we discussed that in prior earnings calls that there is a different business model to some of the revenue fees was BlackBerry 10 than it was for BB 7. So the uptake you see in LatAm and other regions on subscribers is actually really attributed mostly to the BlackBerry 7; so still selling strong in those regions, and on the BB 10 side, we see a strong uptake, both in consumers and in enterprises. But the split between what is registered as a subscriber or not is changing and we know it's changing and that's why we're adapting our business model. But I also said in my speech that we are managing that service schedules decline very, very thoughtfully with our carrier partners, that's why we only had a reduction of 2% in this quarter and we will – we're expecting a decline of maximum single-digit percentage number in the coming quarters.

Operator: Todd Coupland, CIBC.

Todd Coupland - CIBC World Markets: My question is on, does that 10 mix so far 55% from new platforms, I would have thought you would have had a stronger snap from the BlackBerry subscriber base to move to upgrade. What are your thoughts on that and does that still have to play out over the next few quarters? Just talk a little bit about that.

Thorsten Heins - President and CEO: Yeah, happy to. I mean, first we are, as you can imagine, pretty excited by stats that we are getting so far from the market that we are winning more than 50% from other platforms. So I think that's strong testament to the strength of the product and also the differentiating elements like the peak, hub, flow user interface that this product shows. So I think this is a very, very good start. Now, I think you're making a good point. Going into the installed base if you kind of recall the segmentation of BlackBerry is about QWERTY versus full touch devices, we are very, very strong in QWERTY. That's why we are excited to have already more than probably 40 carriers testing the Q10, which then actually will go strongly into that existing BlackBerry base. So, we are all looking forward to launch the Q10 globally and addressing that market segment even stronger and I think this will just yield another good opportunity for us to increase numbers of units and revenues.

Todd Coupland - CIBC World Markets: Does it have anything to do with having to run parallel servers in the backend in terms of the slow upgrade?

Thorsten Heins - President and CEO: No, actually not, Todd, because what we see right now is there is a big uptake of that 10 also in consumers. That's the stat that we see. So, I don't think that these things are related.

Operator: Gus Papageorgiou, Scotia Bank.

Gus Papageorgiou - Scotia Capital: I just kind of want to follow up on Todd's question. I wonder if you could just kind of characterize the initials that 10 sales are, how much of it is consumer, how of it is enterprise and within the enterprise, are they waiting for the Q10 or the BES 10 should occasionally get say finalized before they start adoptions, so just wondering if you could provide a little color on that. Then just Brian down for you, I mean this is I think the fourth or fifth quarter where you sell through more devices than you've shipped in. At what stage do you think you start to get in balance there or perhaps start to feel the channel to support the BlackBerry 10 launch?

Thorsten Heins - President and CEO: Let me take the first one, Gus. I mean, we are starting the global rollout of BlackBerry 10. We are in the middle of it, right. So, we are all learning of how it does in what segment? So, it's really early to kind of give clear data around this. There is, as I said, with the BB 10 Ready Program, just when you look at the (estimate) is there's very strong momentum. We're doing this on a global scale, having touched 17 cities by now. There's strong momentum. And the early indication really, really is very, very positive. Now, I always get this question, why do you come up with a touch device first and not the QWERTY device first? I mean it's just aggressive and it seems to work. It addresses BYOD segment. This is where we need to be because security is segmenting in enterprises. So, actually, yes, the Z10 has also picked up by enterprises through the BYOD channel, let me put it this way, but certainly, enterprises are extremely hot on getting the Q10 because that's a huge segment of die-hard QWERTY lovers out there, and we're looking forward to serve that segment strongly with the Q10 product.

Brian Bidulka - CFO: The question on the sell-through in the channel inventory; so with BB OS, the trend has been that we've been burning down inventory for the last few quarters as we mentioned, Gus, and we do expect in Q1 for that to level off with this sell-in channel (for) BB 10.

Operator: Maynard Um, Wells Fargo Securities.

Maynard Um - Wells Fargo: Can you provide us a way to think about next quarter's selling units, either quantitatively or qualitatively? I think Frank's maybe cited this as saying there's going to be 150 operators globally selling the Z10 by the end of March. So if I'm doing the math correctly to get to breakeven and assuming your gross margin is, let's call it flattish, and marketing up 50%, I think that implies somewhere close to around 3.5 million BlackBerry 10 units next quarter, which is only roughly about 23,000 units per carrier, which seems conservative. So, how should we think about these units per carrier number? Are you seeing any capacity issues? And then, can you talk about the BlackBerry 6 and 7 and how we should think about the ramp down? Will those units shrink meaningfully and become immaterial over the next one or two quarters?

Thorsten Heins - President and CEO: So, on the next quarter sell-in with the operators, I think Maynard you are making a good point. As I said, we're still rolling it out globally, right. We just started in the U.S., very strong support from carriers here now this week with T-Mobile and Verizon launching. So, there is more launches to come. We also have, I think, the significant 1 million order. That shows the huge trust is not in one single market; it really goes into the global market. So, yes, we will be selling the channels as we see. That's why it's really hard to say what a sell-through, what a channel at the moment. We are in a very dynamic situation launching that product on a global scale. So, yes, we're looking forward to actually (fill) more channels in more countries, selling into more carriers. There's still good way to go for us, which means that potential for unit growth and for, yeah, our revenue growth, and then don't forget the Q10 also kicking in Q1, which will also certainly add to those numbers.

Brian Bidulka - CFO: Maynard, it's Brian. Just to comment on the gross margin; so, we continue to expect to have solid gross margins in Q1, driven by improved hardware margins with the launch of BB 10 and leveraging our cost base with all the costs improvements we've laid out in our remarks earlier and that would help offset the gradual decline that we're seeing in our service business that Thorsten mentioned on the single-digit decline.

Operator: Richard Tse, Cormark Securities.

Richard Tse - Cormark Securities: You guys talked about 223 carriers taking technical acceptance. Can you break down from a unit perspective, what sort of market feature going into. You sort of broke down earlier that you've got a new geographic segmentation. So, just to get a better feel for that.

Thorsten Heins - President and CEO: Richard, 223 carriers, yup, that's correct. They are all (NTA). As I said that they are all rolling out. So, right now, given where we are, I think it's too early to really kind of break this down by market or even by country. We talked about Canada being strong, U.K. being strong. We are very strong in the Middle East/Africa region. We have seen tremendous uptake actually in India on the Z10. So, we have data points, but allow me to just say right now just being a few weeks out there breaking it down by region or by country is not meaningful. We will do this when we have more information in Q1 when we basically have launched Z10 in all markets and when we also have some date around the Q10.

Operator: Tal Liani, Bank of America.

Tal Liani - Bank of America: I have two questions. First one is on service revenues – sorry – on total subscribers I mean. I think you changed the way you accounted for number of subscribers last quarter. You disclosed in the filing. And the question is, how does that impact the numbers of subscribers, active subscribers this quarter? The second I have is about the marketing. You said in your prepared remains that marketing expenses will grow 50% quarter-over-quarter. What is the baseline? Is it the entire SG&A or just – can you give us a little bit more color on that?

Brian Bidulka - CFO: Sure. So, on the change in our definition of subscribers, we made that change, there was no impact on the numbers we are reporting, and this quarter in our numbers, we would be including the BB 10 subscribers as well. As it relates to the marketing, 50% increase on the baseline, it won't necessarily all be in SG&A, but the large portion of it will show up on the SG&A line.

Tal Liani - Bank of America: But what's the baseline, which means that your SG&A is roughly $500 million?

Brian Bidulka - CFO: Yeah, we won't get into that detail. But I think we're just trying to indicate the level of increased activity relating to our marketing programs in Q1 to support the global launch.

Tal Liani - Bank of America: So how do we model operating expenses? What is the increase – if we don't get to the actual line level, maybe we can speak about OpEx just in general? What do you think – this quarter, it was about $1 billion, how does it go from here?

Brian Bidulka - CFO: I'm sorry. I missed that last. This quarter…

Tal Liani - Bank of America: Yeah, I said, so if you don't want to provide the details at the marketing expense, maybe we can speak about OpEx, what's the impact…

Brian Bidulka - CFO: I think you could use the SG&A line as a proxy. I mean there's obviously – there's various other costs departments that are rolling up into that. But you can use that as an approximate baseline to model the 50% increase.

Operator: Mark Sue, RBC Capital Markets.

Mark Sue - RBC Capital Markets: I was just looking at the – I'm trying to get a sense of how the split between the spending, between the carriers of BlackBerry will trend over the next several quarters as you move on to this global launch, because clearly it seems as if BlackBerry has to shoulder the bulk of the early expenses. And we're not seeing a lot of commitment thus far in some of the important markets in the U.S. in terms of carriers' commitment to spend. So maybe your sense of what they might be waiting for or how that trend might look like in the upcoming quarters considering they have a lot of choices in terms of devices or we're trying to see how they shift that spend from some of the Apple products and Android products to BB 10?

Thorsten Heins - President and CEO: Mark, first, we are running a global rollout here with BlackBerry 10, so we see strong carrier support, collateral marketing activities with carriers all over the place, and it varies from promotion to promotion. So there is not just one types; it's all kind of an approach. We are still in early days in the U.S. We just launched (indiscernible) the AT&T and now Verizon and T-Mobile are coming onboard. We see strong marketing support from them. It is really too early to talk about what kind of promotions are we going to run in the future, because when we're going to stop in this quarter and we're going to move on. That's why we also have a 50% increase in our own marketing spend. That we would together with the carriers, part on our own, so I think we have a very sound go-to-market plan in terms of marketing activities, in terms of promotions with the carriers, and we will execute on them in Q1.

Brian Bidulka - CFO: Yeah, just one clarifying point, the 50% that we commented on for Q1, that's always been in our forecast to support the global launch

Operator: Tim Long, BMO Capital Markets.

Tim Long - BMO Capital Markets: Just, I was hoping on this sell-through, could you just give us an indication of how the Z10 sell-through was in the quarter? Obviously, it's only a few markets that we're shipping, so just wanted to get a sense of how much of the approximately 1 million actually sold through already?

Thorsten Heins - President and CEO: Yeah. I think you are making the argument yourself, Tim, which is we are in early days actually, right. So, there is a huge dynamic in the market, what is flowing in, what is already flowing out. So, don't take it really kind of like a clear number, but what we see roughly is that from what we have shipped into the market and two-thirds to three quarters already have sold through. I mean it is very dynamic. We need to replenish certain markets as we've sold out, huge dynamics going on. I mean the turnaround cycles for sell-in to sell-through is pretty short, which is a pretty good signal; actually shows that we are higher in demand than in supply. That's why as I said publicly, we have ramped up our production capabilities. So, right now, it's very dynamic, but it all goes in the right direction.

Tim Long - BMO Capital Markets: Just to clarify, that two-thirds to three quarters sold through, is that as of February or is that more sense as of now?

Thorsten Heins - President and CEO: Well, I think that number is – as I said, that number is actually converging to what we sell in; already sell-through pretty quickly. That's why we have to ramp up our production capability. So, the logistics and supply chains are working at high speed at the moment.

Brian Bidulka - CFO: But I think your – but your point though, Tim, is it's more of the recent data points that we've got on the sell-through as we've been just monitoring.

Tim Long - BMO Capital Markets: Okay. So, it's not related to the 1 million, it's related to-date shipments?

Brian Bidulka - CFO: Yeah.

Thorsten Heins - President and CEO: Yeah, kind of. Yeah, yeah.

Operator: Kevin Smithen, Macquarie.

Kevin Smithen - Macquarie: You saw slight slowdown on BB 7 units this quarter, and I wondered if this is due to anticipation of a lower price BB 10 launch in LatAm and Asia, or this is market share losses or inventory reduction and give me when do you expect to launch a midrange BB 10 device at a lower ASP for emerging markets?

Thorsten Heins - President and CEO: I don't make any connection in the slowdown on BB 7 versus a lower price BB 10. I don't understand exactly what you're referring to. The BB 7 slowdown really is part of the uptick of BlackBerry 10, and I think like the Indian example I gave you where we are really sold out with just in two days. It certainly has to do with inventory reduction that is working right now in terms of us converging selling through all the BB 7 inventory. And the midrange BB 10, as I said, expect that kind of around midyear in various markets and that's how we will address that (type of full year) segment properly in the midrange, but I mean fiscal year midrange, right, not calendar year. So that's the years I live in. It was my report. But you are looking forward to that because we know there's a big demand even in the midrange. So, again, it's kind of like – I think what I want to say here is everybody is looking at BB 10 and we're proud of BB 10, make no mistakes. But we're doing much more than that. We are building a portfolio in this fiscal year. So, you will see us getting into the market with various products (one, one, one, one), so we are actually really working on all portfolio that we will take to market this year and that's what we're excited about.

Operator: Shaw Wu, Sterne, Agee.

Shaw Wu - Sterne, Agee & Leach: Just a question on your – I don't know if you can comment on your longer term gross margin. Obviously, today, you still have the mix of business of BB 10, BB 7, BB 6. Any help on what do you think that could go? Could it go back to like mid-40s; just some color there?

Brian Bidulka - CFO: Sure. As mentioned earlier, we continue to expect more in Q1. We don't really provide a lot of color beyond Q1 which we're currently focused on in terms of gross margin, but we continue to expect to see solid gross margin in Q1, driven by the improvement in our hardware margin (stack), plus a lot of benefits that we got through our CORE program, as I mentioned, and then the one factor to consider also is just the offset that we see coming and the gradual decline on service revenue which we signal as the single-digit percentage decline in service revenue in Q1.

Shaw Wu - Sterne, Agee & Leach: And then just to follow-up quickly, longer term, how do you see – I mean, does it make sense to have – I mean, right now you have couple different platforms, I realize it's all BlackBerry, but how do you see that kind of going forward? Do you see segmentation where you're going to continue supporting customers that want to use BlackBerry 7, or see kind of migrating all the BlackBerry 10?

Thorsten Heins - President and CEO: Shaw, it's not a couple of platforms. It's two, right? It's BlackBerry OS and then it's BlackBerry 10. I'm saying that to just make sure everybody understand we are not fragmenting our efforts here. BB 7 is still very successful in various markets. We all know this. Like the Asia Pac, Indonesian markets, South Africa, LatAm and that's why we always said we are planning to launch BB 7 products to really serve that market segmentation in those countries. So, expect something to come from there. We are not just kind of cutting it and then we are out of it. And the good news are on the BB 7 product that we are intending to launch as carrier service revenue, right? So, again, helps the gradual decline and the sound management of our service revenue fees. BB 10, I think I'm repeating myself. We are building a full portfolio and our BB 10 from a technology performance is starting in the high end. We are bringing it into the mid-tier by the mid of the fiscal year and then we are working towards what can we do in the, what we call, typically the BlackBerry entry level. Stay tuned on that one. There is work going on there as well.

Paul Carpino - VP, IR: That's great. Thank you, Shaw. And that concludes the call today. If you have any follow-up questions, definitely just give us a call. Happy to follow up with anything and thanks for joining us.

Thorsten Heins - President and CEO: Thank you, everybody.

Operator: Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and you may now disconnect your lines.