BlackBerry Limited (BB) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Blackberry fourth quarter and year-end fiscal 2013 results conference call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, March 28, 2013 at 8:00 a.m. Eastern time. And I would now like to turn the conference over to Mr. Paul Carpino, VP, Investor Relations. Please go ahead, sir.

Thank you, operator. 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 third quarter results and our outlook. We will then open up the call for questions. This call is available to the general public via call-in numbers and via webcast on the Investor Relations section of 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 be available on the blackberry.com website. We plan to wrap up the call around 9:00 p.m. Eastern this evening. 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 fiscal 2014; our plans and expectations relating 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 revenues 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 lifecycles 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.

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 cofounded Blackberry nearly 30 years ago, and served as the 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 full time efforts to his newly launched venture, Quantum Valley Investment. And 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 days 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. 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. And the senior management [unintelligible] have continued, and I’m pleased to announce the new addition 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 pertinent 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. And 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’re engaged, productive, inspired, and creative. It 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 the 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 a culture shift in the company where we continually 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 rearchitectured supply chain. To date, we have moved from four EMS providers to two, reduced our manufacturing sites from 10 to 4, and we have outsourced our global repair operations. As a result of these 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 in a more efficient way of building our existing products. While we have reduced cost and driven efficiency, we have also invested in the significant transformation of our 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 the launch of Blackberry 10, we had the most apps available of any mobile ecosystem [unintelligible] from launch. We started with 70,000 global Blackberry 10 apps and last week we announced we have reached 100,000 already, a 43% increase in the past 60 days. And 70% of apps in the Blackberry world are native to Blackberry 10. Early indicators are that Blackberry 10 users are hungry for applications, and we are getting more commitment 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 users that are similar to other leading smartphone platforms. Of the past year, we have also regained the confidence and excitement of our carrier distribution partners with the introducing 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 have 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 workspace product. Blackberry is the most widely deployed mobility solution in enterprises and government today, as acknowledged with the 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. [unintelligible] customers, such as SAP, Cisco, HP, IBM, CDW, [Box], and Citrix joined us during this tour, and exhibited their integration of Blackberry 10. This has really been very exciting stuff for us and our customers. And 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 benefitting from a reenergized organization. We returned Blackberry to an operating profit despite a 26% decline in units shipped versus the first quarter. That said, 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’re proud of it. But we’re 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 will embark on the second phase of our transition, and we 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. 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 are 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 and 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 [unintelligible] solution is also high. While guessing the store lineups has become a bit of a spectator sport in our industry, I would like to emphasize that Blackberry 10 has a phased rollout, and will continue over the next several quarters with various devices and all the major carriers. Lower-cost versions of Blackberry 10 for other global markets will also be launched later this year. Now, moving on to service fees, our existing service 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 a single digit percentage point decline in service 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 our service fees are in 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 are still selling Blackberry 7 in many markets, and plan to launch new Blackberry 7 products in certain market segments outside of the U.S. 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 sales revenues. And the areas we plan to leverage for new service offerings include new services for our strong Blackberry messenger base, possible licensing of Blackberry 10, the creation of cross-platform offerings, services that leverage Blackberry’s 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’re 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 launches 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 review initiatives will be intensifying their focus on opportunities in mobile computing verticals such as automotive, industrial, networking, healthcare, security, and defense, leveraging our secure network infrastructures 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 long-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 plan, 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 accomplished to date. And I would also like to thank our loyal customers, partners, and developers for the passionate support of 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 helps and we appreciate it. I will now turn the call over to Brian to provide more detail on the quarter.

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 are 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. An 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 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 U.A.E. 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 benefitted 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 declined. 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 margins 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 and 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 rearchitected 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 from 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 pretax 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 carrybacks 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 investments 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 disciplined capex spending, reduced spending associated with CORE activities, and a return to an operating profit. The strong balance sheet was also maintained despite the funding of $45 million in restructuring, negotiated royalty settlement payments, and a $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 on our CORE initiative. As we 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 share count costs, workforce optimization, and leveraging third-party providers to assist in reducing indirect spending. CORE has helped this transition of the company through a very competitive and dynamic environment, and built a leaner and 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 pretax restructuring costs associated with CORE, bringing the total cost 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 will now take your questions.

[Operator instructions.] Your first question today will come from the line of Peter Misek of Jefferies. Please go ahead.

Just a couple of quick questions here. Firstly on more of a housekeeping item, to understand cash flow movements. Just again, you sold through almost 2 million more units than you shipped, which implies channel inventory obviously was down almost 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 senses? 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’s 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 are 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. Thank you.

I’ll take the first one on the cash flow. Your logic is roughly correct, 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 in an inventory buildout and just our whole cash flow conversion cycle is where we’re expecting to see some impact on our cash position. But as I mentioned, we continue to believe we’re going to maintain that strong cash position throughout Q1.

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 strong, and that’s what we will be doing. So I think this is a very meaningful investment of ours to bring Blackberry 10 to market. And we’re actually fully supportive of those expenses, and we see good feedback on that one. On the enterprise, where is the 3 million subscribers coming from, our data show that it’s actually mostly coming out of what we call the pre-paid segment. We see 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 a network connection. And I think the numbers are reported in terms of customers signing up for the BES 10 and BB10 Get Ready program is testament them supporting us in the corporate domain.

Your next question will come from the line of Ehud Gelblum of Morgan Stanley. Please go ahead.

First of all, Brian, if you could 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 wanted 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 back to the 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 BB10 launch? I would have 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 Blackberry, because of Blackberry 10, or are they going up because we’re still [unintelligible] in Blackberry 7 or maybe Blackberry 6 units into those markets? And if you could just give us of the health of the Blackberry 6 or Blackberry 7 shipments into those markets, that would be great.

I’ll take the first one, on the taxes. The tax benefit, you’re right, last quarter we pulled it out, because there 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 loss position on that actual tax provision, but normally we’ve talked around the 25% rate on a normalized basis on earnings for a tax rate going forward.

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 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 for service revenue fees with Blackberry 10 than it was for BB7. So the uptake is, in LatAm and other regions, on subscribers, it is actually really attributed mostly to the Blackberry 7, so still selling strong in those regions. And on the BB10 side, you know, we see 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 are adapting our business model. But I also said in my speech that we are managing that service’s gradual decline very, very thoughtfully with our carrier partners. That’s why we only had a reduction of 2% in this quarter and we’re expecting a decline of a maximum single digit [unintelligible] number in the coming quarter.

Your next question will come from the line of Todd Coupland of CIBC. Please go ahead.

My question is on 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. Thank you.

First, we are, as you can imagine, pretty excited by the stats that we’re getting so far from the market that we’re winning more than 50% from other platforms. So I think that’s strong testament to the strength of the product and also the different [unintelligible] elements, like the [unintelligible] 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. We are going into the installed base. If you kind of recall the segmentation of Blackberry, as far as QWERTYs versus full touch devices, we are very, very strong in QWERTY. That’s why we’re excited to have already more than 40 carriers testing the Q10, which then actually will grow strongly into that existing Blackberry base. So we are all looking forward to launch the Q10 globally and to 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.

Does it have anything to do with having to run parallel servers in the back end, in terms of the slow upgrade?

No, actually not, because what we see right now is there was a big uptake of that 10 also in consumers. That’s the stats that we see. So I don’t think that these things are related.

Your next question will come from the line of Gus Papageorgiou, Scotia Bank. Please go ahead.

I just kind of want to follow up on Todd’s question. I wonder if you could just kind of characterize the initial Z10 sales, or how much of it is consumer, how much of it is enterprise? And within the enterprise, are they waiting for the Q10 or the BES10 certification to get finalized before they start strong adoption? Just wondered if you could provide a little color on that. And then just Brian, for you, 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 fill the channels to support the Blackberry 10 launch?

Let me take the first one. We’re starting the global rollout of Blackberry 10. We’re in the middle of it. So we’re all learning of how it does in what segments. So it’s really early to kind of give clear data around this. There is, as I said with the BB10 ready programs, just when you look at the [yes] numbers, there’s very strong momentum. We’re doing this on a global scale, having tested 17 cities by now. There’s strong momentum. And the early indication is really it’s very very positive. Now, I always get this question, why did you guys come up with a touch device? First, and that’s the QWERTY device first, it just addresses, and it seems to work, it addresses the BYOD segment. This is where we need to be, because security is segmenting in enterprises. So actually, yes, the Z10 is 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 there’s a huge segment of diehard QWERTY lovers out there, and we’re looking forward to serve that segment strongly with the Q10 product.

And the question on the sell-through in the channel inventory, so with BBOS, the trend has been that we’ve been burning down inventory over the last few quarters, as you mentioned. And we do expect, in Q1, for that to level off, [with the channel selling] BB10.

Your next question will come from the line of Maynard Um of Wells Fargo. Please go ahead.

Can you provide us a way to think about next quarter’s sell in units, either quantitatively or qualitatively? I think [unintelligible] was 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 closer 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 this 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?

On the next quarter sell-in with the operators, I think Maynard you’re making a good point. As I said, we are still rolling it out globally. We just started in the U.S. Very strong support from carriers here now this week with T-Mobile and Verizon launching. So there’s more launches to come. We also have, I think, the significant 1 million order. That shows a huge trust. It’s not in one single market. It really goes into the global market. So yes, we will be [filling] the channels as we speak. So that’s why it’s really hard to say what is sell-through, what is 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 a good way to go for us, which means there’s potential for unit growth and [unintelligible] revenue growth. And then don’t forget the Q10 is also kicking in in Q1, which will also certainly add to those numbers.

And just to comment on the gross margins, so we continue to expect to have solid gross margins in Q1, driven by the improved hardware margins of the launch of BB10 and leveraging our cost base with all the cost 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.

Your next question will come from the line of Richard Tse of Cormark Securities. Please go ahead.

You guys talked about 223 carriers taking technical acceptance. Can you break down from a unit perspective what sort of markets these are 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?

We’ve got 223 carriers, yes, that’s correct. They’re all [NTA], as I said. They’re 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’re 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 of a 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 data around the q10.

Your next question will come from the line of Tal Liani of Bank of America. Please go ahead.

I had two questions. First one is on total subscribers. I think you changed the way you count for number of subscribers last quarter, or you disclosed it in the filing. And the question is how did that impact the number of subscribers, active subscribers, this quarter? The second question I have is about the marketing. You said in your prepared remarks that marketing expenses will grow 50% quarter over quarter. What is the baseline? Is it the entire SG&A, or just [unintelligible]. Can you give us a little more color on that?

Sure, so on the change in our definition of subscriber, when we made that change, there was no impact on the numbers we were reporting. And this quarter, in our numbers, we would be including the BB10 subscribers as well. And as it relates to the marketing, the 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.

But what is the baseline? Which means that your SG&A is roughly [crosstalk]…

Yeah, we won’t get into that detail. 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.

So how do we model operating expenses? What is the increase? If you don’t want to provide the details, the marketing expense, maybe we can speak about opex. What’s the impact?

You could use the SG&A line as a proxy. I mean, obviously there’s various other costs, departments that are rolling up into that, but you could use that as an approximate baseline to model the 50% increase.

Your next question will come from the line of Mark Sue of RBC Capital Markets. Please go ahead.

I’m trying to get a sense of how the split between the carriers and Blackberry all trend over the next several quarters as you move on to this global launch. Because clearly it seems that Blackberry has shouldered 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 in the upcoming quarters, considering they have a lot of choices in terms of [unintelligible]. But we’re trying to see how they shift expense in some of the Apple products, [unintelligible] products, to BB10.

We are running a global rollout here, with Blackberry 10, so we see strong carrier support, you know, collateral marketing activities with carriers all over the place. And it varies from promotion to promotion, so there’s not just one size fits all kind of an approach. We are still in early days in the U.S. We just launched with AT&T, now Verizon and T-Mobile are coming on board. 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 we’re going to stop in this quarter. We’re going to move on. That’s why we also have a 50% increase in our own marketing spend. But we will do it 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.

And just one clarifying point. The 50% that we commented on for Q1, that’s always been in our forecast to support the global launch.

Your next question will come from the line of Tim Long. Please go ahead.

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 was only a few markets that were shipping, so just wanted to get a sense of how much of the approximately 1 million actually sold through already.

I think you’re making the argument itself, Tim, which is we are in early days, actually, right? So there’s 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, two-thirds to three-quarters already have sold through. It is very dynamic. We need to replenish certain markets, because we have 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 supply. That’s why, as I’ve said publicly, we have ramped up our production capabilities. So right now it’s very dynamic, but it all goes in the right direction.

And just to clarify that two thirds to three quarters sold through, is that as of February, or is that more a sense as of now?

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 the ramp of our production capability for the logistics and supply chains are working at high speed at the moment.

But I think to your point, though, Tim, it’s more of a recent data point that we’ve got on the sell through as we’ve just been monitoring [crosstalk].

Okay, so it’s not related to the millions, it’s related to to date shipments.

Yeah, kind of.

Your next question will come from the line of Kevin Smithen of Macquarie. Please go ahead.

You saw a slight slowdown on BB7 units this quarter, and I wondered if this is just due to anticipation of a lower priced BB10 launch in LatAm and Asia. Or this is market share losses or inventory reduction? And when do you expect to launch a midrange BB10 device at a lower ASP for emerging markets?

I don’t make any connection in the slowdown of BB7 versus a lower priced BB10. I don’t understand exactly what you’re referring to. The BB7 slowdown really is part of the uptake of Blackberry 10. And I think like the EMEA example I gave you, where we really sold out [unintelligible] in two days, it certainly has to do with inventory reduction that is working right now in terms of us converging to selling through all the BB7 inventory. And the midrange BB10, as I said, expect that kind of around midyear in various markets and we will address that [unintelligible] properly in the midrange. But I mean fiscal year midrange, not calendar year. That’s the years I live in, my report. But we’re looking forward to that, because we know there’s a big demand even in the midrange. I think what I want to say here is everybody’s looking at the Z10, and we are proud of the Z10, make no mistake, but we’re doing much more than that. We’re building a portfolio in this fiscal year, so you will see us getting into the market with various products. You know, 1-1-1-1. So we’re actually really working on a whole portfolio that we will take to market this year. That’s what we’re excited about.

Your next question will come from the line of Shaw Wu of Sterne Agee. Please go ahead.

I don’t know if you can comment on your longer-term gross margin. Obviously today you still have the mix of business with BB10, BB7, BB6. Any help on where you think that could go? Could it go back to like mid-40s? Just some color there.

I had mentioned earlier we continue to expect - and 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 [unintelligible], plus a lot of benefits that we go 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 services revenue, which we signal as the single digit percentage decline in service revenue in Q1.

And just a follow up quickly. Longer term, right now you have a couple of different platforms. I realize it’s all Blackberry, but how do you see that going forward? Do you see segmentation where you’re going to continue supporting customers that want to use Blackberry 7, or do you see kind of migrating all the Blackberry 10?

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 understands, we’re not fragmenting our efforts here. BB7 is still very successful in various markets. We all know this, like the Asia-Pac, EMEA markets, South Africa, LatAm. And that’s like we always said, we’re planning to launch BB7 products to really serve that market segmentation in those countries. So expect something to come from there. We’re not just sort of cutting and then we’re out of it. And the good news around the BB7 product that we’re intending to launch is it carries service revenue. So again, that’s [half] the gradual decline, and the sound management of our service revenue fees. BB10, I think I’m repeating myself, we’re building a full portfolio. BB10, from a technology performance, is starting in the high end. We bring it into the mid tier by the middle of the fiscal year. And then we are working toward, you know, what can we do in the what we call typically the Blackberry entry level. Stay tuned on that one. There’s work going on there as well.