BlackBerry Limited (BB) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the BlackBerry Fourth Quarter 2014 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 with instructions provided. [Operator Instructions] I would like to remind everyone that this conference is being recorded. And I will now turn the conference over to Mr. James Yersh, Chief Financial Officer. Please go ahead sir.

Thank you, Luke. Good morning everyone and welcome to BlackBerry’s fiscal 2014 fourth-quarter and year-end results conference call. I’m James Yersh; the Company’s Chief Financial Officer and with me today is Chief Executive Officer, John Chen. After I read our cautionary note regarding forward-looking statements, John will provide a business update, and I will then review the fourth quarter and year-end 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 as noted in 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. 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 and are made pursuant for the Safe Harbor Provisions of the U.S. Private Securities Legislation Reform Act of 1995 and Canadian securities laws. We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intend, believe, continue, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perceptions of historical trends, current conditions and expected future developments as well as other factors that the Company believes are appropriate in such circumstances. Many factors could cause the Company’s actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the company that are discussed in the Risk Factors section of our annual information form, which is included in the Company’s annual report on form 40F and the Company’s MD&A, copies of which filings may be obtained at blackberry.com. These factors should be considered carefully and you should not place undue reliance on the Company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. I’ll now turn the call over to John.

Thank you, James. I was listening intently about the undue reliance on some of my comments. So good morning everybody and welcome to our call. On our last earnings call we laid out an eight quarter plan and our strategic priorities for returning the Company to growth and as well as profitability. So I'm obviously extremely pleased with the Q4 results because it put us on the track and it is not - slightly ahead. So I would like to on the financial side -- of course James is going to go into much more details -- I'd like to just kind of focus on a few things that I feel pretty good about. The first thing is our operating expenses. It’s on target and it’s actually ahead of target and I understand the Company had made some statements in the past, and I think the numbers shown that we’re about a quarter ahead of schedule at this point. More importantly, our normalized use of cash from operation is now 30% lower compared to last quarter. Our adjusted EPS loss is down to $0.08 compared to $0.67 a quarter ago and as I pointed out, James certainly will go through all the financial details. Maybe I’ll just focus more on the activities for the past quarter and going forward. So in the last few months, we have spent a lot of time streamlining -- I spend a lot of time understanding our channels, and we spent a lot of time streamlining and rationalizing our channels. As a result, channel inventory is down by one third from the work we have done. We have moved all our distributors on their contracts, on their marketing plan, pricing, go to market and various elements, that’s important. So all-in-all, I’m very pleased with the fact that the Company is now back in execution mode. And I would like to maybe, for those of you who may be a little -- either new to the story or just need a little bit of refreshing on what we try focus on doing; I'd like to maybe give you a little bit of our layout of strategy. The first strategy in the very near term, or current term is about the priority of BlackBerry to return to financial soundness. This means a few things to us. First our handset business must be made profitable and we're working on our supply chains with the likes of Foxconn, Wistron and other suppliers, all across the world. And we're focusing on regulated industry who value the BlackBerry strength and the tent pole technology that we offer and security and productivity and in communication and also we’re putting a big emphasis of protecting our custom investment of the past. I'll spend some time on that. It has a lot to do with the BB OS devices, the EZ Pass program and so forth. We will of course continue to put a lot of effort in reducing expenses and streamlining our operations to generate profitable cash flow and return to profitability. So the next focus area which I started with my team here is on growth. And there are obviously many opportunities. We just need to make sure that we do it in a well-paced manner, and don’t want to get too much ahead of ourselves. This will -- a lot of our growth, I believe will come -- at least in the immediate future will come from software and services, messaging like BBM and embedded software like QNX. We're building new features and value-added services into BES 12, and we have a very solid BBM monetization plan. As I pointed out earlier, one of the big, big item for us in the last few months talking to customers is to be able to bridge the installed base into the new devices and new technology, both the BB10 and as well as the going forward BB12, and we are putting a lot of efforts on that on BB12 as well as the Classic device. The next thing that we’re all working on is on go-to-market strategy, and we're identifying new routes. It’s a lot of effort, but we are pleased that we're starting it and we have some good new recruits coming in to the Company to assist that. We are lining, and streamlining our sales force to increase the effectiveness of the direct-to-enterprise model as well as we continue to support our carrier channels. We’re looking at expanding into non-traditional channels such as e-commerce, just like the shopBerry BlackBerry.com. Now on our own site, you could buy the unlock the Z10, Z30, Q10, and Q5 phones there. And we’re also working with other third parties on e-commerce and stay tuned for that, as we will always report them as we get more progress. We have been rationalizing and expanding our distributor relationships. As I pointed out inventory has been coming down and things are starting to move again. On the longer term, we see a lot of opportunity to leverage our full portfolio in end-to-end mobile solutions and connected cloud solutions. And this of course covers the whole gamut, from the device strategy, both handsets and other devices, the messaging strategy, the server strategy, the embedded software strategy, the knocks, and so they’re all coming as a coherent set of solutions. And also a vertical focus. So I'm very pleased with that and I'll spend a little bit time later on, on that point. Obviously, our Q4 performance, that give us increasing confidence towards meeting our first financial milestone that is to achieve goal of cash flow breakeven by the end of the fiscal year and to reach profitability in fiscal 2016. That said, we have a very sensible investment plan, which include new product launches and building our new channels over the next few quarters, and so expect some fluctuations of our loss as we work towards profitability. But then we are reaffirming our goal as we have laid out in terms of cash flow breakeven from operations as well as profitability in the FY16. So now I like to just spend a minute on few of the business highlights, and I’m sure we're going to go into it a lot in Q&A. On the enterprise side, well, I guess the big news is -- was yesterday. We announced that BlackBerry is the first and only mobile solution provider to achieve the full operational capability certification to run on the U.S. Department of Defense network. We’re also the first MDM vendors to achieve their authority to operate certificates, they state, they call it the ATO. That means the government uses now could use the BlackBerry 10 Smartphone, managed by the BES 10 platform and they can securely assess email, data, apps and other resources on the DOD network of the U.S. I always remind myself [indiscernible] Canada. Otherwise my colleague will point that out to me. And we now have nearly 33,000 BES 10 commercial and text service installed globally. So according to one industry analyst firm, BlackBerry has over 60% of the MDM market, mobile-device-management that is, market among the large enterprises. Furthermore we also find out that our competitors’ install base, over half of those, their needs are not been addressed. This is from their own survey. So this represents great opportunity for BlackBerry. To strengthen our position and market share with the enterprise we announced the BES 12 at the Mobile World Congress. Many of the features of the new program around BES 12, such as the compatibility, backwards compatibility, cross-platform support, and a simplified version -- simplified pricing, I’m sorry, will address critical needs for BlackBerry customer as well as others. So BES 12 highlights will include the following. We have a new architecture offering customers the option of on-premise cloud on a hybrid solutions. Backward compatibility allow the unifications of the BES 10 and BES 5 deployment into a single platform end console, supporting the BES 10 and BB OS device. This is huge. When I went around and talked to -- had time to visit customers, the customer likes a lot of the BES 10 features, but they were complaining about, having two infrastructures that they have to manage, which is the old BB OS infrastructure as well as the BB10 infrastructure. This is the first attempt to merge that two into one, so the customer could move on newer technology and yet still protect the investment they already made at Blackberry. So I know this is huge and I pointed out some of the website hits an so it’s -- I’m going to go into it a little bit more. And so I’m very encouraged by that. We obviously also enhanced the platform support for the iOS devices, androids, and window phone app. So this one -- BES 12 will take care of; will be able to manage all the different devices out there, plus all the old BB devices and the new BB device. Then we provide a EZ Pass program. That makes it simpler for the customer to move to BES 10 and then subsequently BES 12. We are offering free upgrades for BlackBerry customers and free migrations for companies on competing MDM platforms. Customer will also find far simpler pricing in licensing, we not only goes down to two tiers, the silver and gold, and each providing different values and differentiated BlackBerry capabilities and features. As I pointed it out earlier, we have seen great receptivity, very strong customer interest, a number of large customers, including in Financial Services has planned to exchange the competitive licenses as part of this EZ Pass programs. By the way, the EZ Pass program start April 1, which is in a couple of days. We have already about a hundred thousand visitors, I pointed out, to our EZ Pass landing page; and nearly 1900 registrations for more information. We've seen customers around the world affirming commitments to our BES. We had wins in U.S., Germany, UK, India, Australia, and Latin America in the last quarter. There is some very notable names; I think we have talked about Daimler in the past, Daimler EG group and the Airbus Group, ITC limited in India, Australia National Audit Office and Itaú Unibanco in the South America region. So we’re quite encouraged in fact that we're starting to see good customer win and tractions. I'd like to spend a minute on device. Another big part about us going out and talking to customers in the last few months, we found that our customers still love the BB OS device. It’s particularly the BB 7 device and a lot of them have been asking for it. And this is really the motivation and the idea of driving -- of what’s building the Classic. Therefore I'm very pleased in formally announcing that we’re starting a new production run with Wistron on the BB OS device for worldwide distribution. I think that most of you know this. We will continue to make these devices available, and support the operating system across, as long as there is customer demand. We have a number of exciting new launches sliding up also, as we go forward in the year. First off is of course is Z3 of the Jakarta program, we will be launching for our Indonesian customers. Jakarta has a lavish solid BlackBerry user base in Indonesia and technically positioned us for growth in the emerging market with very attractive price offerings, which is under $300. After signing our partnership with Foxconn, we executed delivery quickly. In just four months. Jakarta was designed, tested and delivered, including having a carrier arrangement. So I'm extremely proud of the ability, the speed of both team executing. Training for our distribution channel for this particular device in Indonesia will start late April. The product will then be in stores shortly after that and available nationwide in Indonesia. And the PR launch will follow that and I plan to be there in person. Later in the year, we plan to expand the Z3 to other regions in South East Asia, that is, Thailand, as well as India. We’ll also launch a OTE version of the Z3 phone for the global distribution. Another device announced at Mobile World Congress was the Classic, formally known as Q20. That’s the very big part of it. Our marketing people want to name it Q20. I named it Classic. We did a survey of one, that’s me and we won; Classic won. We are targeting the calendar Q4 for the Classic to be released. It probably got to be in tandem with the BES 12 releases. This device is obviously for true BlackBerry loyalists and return ourselves to the roots. The customers loves our keyboard, the track pads, the utility belt, the email services, the cut and paste everybody love, and the battery life. To these users, their BlackBerrys are indispensable productivity tools. So early customer feedback on the Classic concept is extremely, extremely positive, and I've been going around and talking about that. To spend a minute on BBM, obviously there's a lot of excitement regarding BBM because of Facebook and Alibaba, not that they're using BBM, just their entry into the market. At present we have roughly about 85 million monthly active users and a total of 113 million registrations to date. We’re seeing solid uptick in multi-platform users driving growth in total registration. Like last quarter, growing the BMM user base is a top priority and we have a number of initiatives driving this. We announced some of these on Mobile World Congress already. One is the expanding platform reach. BBM would be available on Windows phones adding to our support to iOS and Android. Like LG group BBM is now featured on Nokia X platform device. This will improve preloading BBM in selected markets today, joint development efforts on its way for Windows phone platform and for a global availability target for fiscal Q2. This will also include for some selected device on Nokia like the Lumia -- in the Lumia portfolio, we will have preload of BBM when it’s shipped. In February, we launched our BBM 2.0 which includes several new features. While we have location services, Dropbox integration, we also added the voice and channel for cross platform users. BBM channel has drawn some strong interest for brands and businesses. So we added a lot of new channels daily. Recent partners will include CNBC, Time, Rolling Stone and Virgin Atlantic. The channel delivers to our partner a highly engaged and targeted mobile audience. So we now actually have 1 million BBM channels and this number is growing very fast. I think when I first started four months ago we were in the 200,000 number. So in four months we have doubled the number of channels. And the user of this service on average reads 11.5 posts per day. So that’s highly engaging model. So a pioneer model with BBM channel is a potential monetization opportunity. The other monetization strategies of the near-term obviously including the stickers and the BBM shop and those will be available in some markets soon. For apps, the most strategic part of this is the eBBM suites, which obviously initially will work with the BlackBerry smartphone and the BES. And we use this to offer the enterprise class mobile messaging technology. The first solution we have announced as part of the suite was called BBM Protect, and BBM Protect will provide enhanced end-to-end security in a real-time messaging platform for enterprise or for groups. With BBM Protect, employee will use a single app for both internal use under the regulator level of enhanced security and external use to outside BBM contacts. We’re introducing customers for BBM Protect in the public sector, the Financial Services, mostly focus on the regulated security conscious vertical. We have already got really high interest level from those. So going further, our team is working on potential mobile payment for the financial services and industry at large as a longer term monetization play. And moving on to QNX, which is also a lot of buzz around QNX in the last quarter, QNX is obviously our microkernel suitable for embedding the embedded technology world. We are pretty dominant in the automotive industry as far as the embedded space is concerned. We also have started seeing new tractions in the medical and consumer electronics industries. There is a consortium for the connected car called the MirrorLink and they have a standard, and so bear with me -- seem a little bit mouthful here. They have a standard called DLNA. And now Apple is also compatible with QNX. And so QNX is really the underlying technology that connect to a lot of the initiative, whether it's back to particular consortium called the MirrorLink, the Apple Push as well as other major technology company Push [ph]. We have showcased some of these capabilities if you have seen and went through Mobile World Congress as well as the CES in the beginning of the year as well as the Embedded World Conference in Germany. So we’re very excited about our market penetration and leadership in this connected car world. And obviously as part of our long-term strategy, we aim to fully leverage the potential of QNX in the M2M world and Internet of things that those opportunities present itself and obviously please stay tuned. This is an area that I'm also very excited about for our future. So let me just kind of wrap up. The focus in the coming quarter is obviously get the Jakarta phone launched, finish the Classic, get the BES 12 released, get eBBM connected with the BES 12 in connection with the Classic and work on the go-to-market building -- there is a lot of things to do, building the direct sales force for the vertical industry, regulated and expanding our channel strategy. We are obviously very focused on execution, very fortunate to have a great team of people supporting all these initiatives are pretty excited on executing. And obviously we’ve shown you that we have a lot of good focus, great products coming out. We have done good work in reducing our inventory. We are still focusing laser wise on the OpEx and cash management to deliver the two milestones that we’re striving. And so all these add up to a very strong long term strategic path to growth and profitably. So I'd now like to turn the call to James and then we’ll come back for Q&A. James?

Thanks John. There is a lot I want to take you through this morning. So let’s get right to it. Revenue from continuing operations for the fourth quarter was approximately $976 million compared to $1.2 billion in the third quarter. In the fourth quarter hardware represented 37% of revenue compared to 40% in the previous quarter. The Company recognized revenue related to approximately 1.3 million BlackBerry handheld devices in the fourth quarter compared to 1.9 million in the previous quarter. Although the number of devices recognized decreased quarter over quarter, we have been working with our partners to improve sell through levels and to stimulate global demand for BlackBerry devices. 3.4 million BlackBerry smartphones were sold through to end users in the quarter which included shipments made and recognized prior to the fourth quarter and which reduced the Company’s inventory channel. We continue to implement programs with existing partners, and as John mentioned, we’ve actually expanded our reach into some non-traditional channels as well. These efforts were instrumental in decreasing channel inventory of existing products by a third and it allowed us to broaden our global reach. Service revenue represented 56% of revenue compared to 53% last quarter. While service revenue will continue to be generated by current and future users of BB OS devices, we expect revenue to decline in the first quarter of fiscal 2015 by a percentage consistent with the decline experienced this quarter. As John noted, we continue to see good traction with the adoption of BES 10. To help offset the lower service revenue generated by customers using BB OS devices, we expect to see gradual revenue contributions from BES 10 and the recently announced BES 12 beginning in fiscal 2015. Software revenue represented 6% of the consolidated revenue compared to 5% in last quarter. Gross margin for the quarter was approximately 57% on a GAAP basis. Adjusted gross margin, excluding core costs and the benefits from the reversal of previously recorded inventory provisions was 43%, up approximately 9% compared to the third quarter. This improvement in margins is attributed to the reductions in the cost of goods for handhelds and the cost of services as well as the revenue mix. Spending one second on the inventory provisions, effectively when we booked the original provisions we underestimated the future selling for some of our models back in Q2 and Q3. We’re now experiencing higher demand and we’ve adjusted the assumptions to reflect that. Last quarter I made the comment that the Company had work to do on reducing elements of fixed cost impacting margins. During the quarter, we began executing on a variety of those paths focused on doing that and we have started to see the positive results. Operating expenses decreased by approximately 30% in the fourth quarter compared to the third quarter of fiscal 2014 on an adjusted basis. The decrease is attributed to reductions we made in outsourcing and consulting services for the Company, reduced marketing driven by seasonality and a more focused spend prioritization as well as headcount reductions. GAAP operating expenses reflected a $131 million in charges relating to the Company’s restructuring program with $21 million included in R&D expense and $110 million reflected in selling marketing and administration. Amortization expense was $107 million in Q4, declining by 28% from the previous quarter. This decline reflects the lower cost base due to long lived asset impairment charge recorded in the third quarter as well as reduced CapEx spending. The goal that was originally communicated in September was to reduce adjusted operating expenses by 50% compared to the Q1 F14 run rate of approximately $1.2 billion. With the adjusted OpEx levels reported in Q4 I’m pleased to say that through relentless focus and execution, we were able to deliver on this goal one quarter ahead of schedule. There's still improvement to be made and the Company will continue to make cost reduction a major focus as it realigns its business. However I do want to make it clear that investments are required going forward to support the execution of this strategy and ultimately the company’s future growth. GAAP loss from continuing operations was $423 million or $0.80 per share. This includes a non-cash accounting adjusting on the value of the Company’s convertible debt of approximately $382 million. The GAAP loss also includes a pre-tax reversal of the previously recorded inventory charges as I previously described as well as a pre-tax restructuring charge of approximately $148 million. Adjusted loss from continuing operations was $42 million or $0.08 per share. Now moving on to our balance sheet and working capital performance. Cash flow used in operations in the fourth quarter was approximately $553 million. Cash flows provided from financing activities were approximately $251 million, which includes the proceeds of the additional issuance of 250 million of convertible debentures. Cash flow is used in investing activities includes intangible asset additions of $243 million. Purchas obligations and other commitments amounted to approximately $1.9 billion with purchase orders contract manufactures representing approximately $586 million, a further decrease from the previous -- further 12% decrease from the previous quarter. CapEx was approximately $22 million in the quarter. Our balance sheet remains strong. Total cash, cash equivalents and investments was approximately $2.7 billion. Also when compared to Q3 the quarter-over-quarter cash burn decreased by approximately $300 million as John mentioned. As we have discussed in the past, maintaining a strong balance sheet is a priority and will continue to be as we work through our continued transition and we are doing this in a number of different ways. Just last week, we announced that we have entered into an agreement to sell the majority of our real estate holdings in Canada. This announcement is part of the Company’s on-going program to improve operational efficiencies, optimize resource usage and generate liquidity to support operations as the business continues to evolve. Looking ahead, the Company anticipates maintaining in strong cash position and continuing to look for opportunities to streamline our operations. The Company is targeting to return to breakeven by the end of fiscal 2015 from a cash flow perspective. In summary, we’ve made great progress this quarter. We’ve reduced OpEx, we’ve lowered the levels of capital spending and we’ve maintained a strong cash position. The Company is financially strong and we are well positioned to execute on the turnaround strategy that John previously outlined. That concludes my comments. John and I will now take your questions.

Okay. All right gang, let’s start. Operator, could you please poll the questions for us.

(Operator Instruction). Your first question today will come from the line of Mark Sue of RBC Capital Markets. Please go ahead.

John, maybe a question on just kind of the window of opportunity to kind of recompose the business. If I look at your sub base, it’s still eroding maybe less than 50 million now. So well you have a customer base to upgrade and migrate to new software and services. How can you proactively bridge this installed [inaudible]and slow the rate of decline there as you get them to a new destination and what can we do to kind of stabilize that base? And then James real quickly, CapEx plans for the year and maybe how we should think about intangible payments? Is there a fixed component to payments or is it perhaps the number of units and that they actually go away over time.

Thank you, Mark. I’ll go to your first question first. This is a whole reason by we created the BES 12 as an integral part of our strategy. So with the BES 12, if you see why the sub is going down, it’s because people think that they need to move to the BB10 environment and therefore have to leave the BB7 environment or BB5 and part of the reason of that is because of the fact that I spoke about two infrastructure and enterprise obviously are cost conscious and not only on the cost of the servers and the software, but the on-going administrative cost and so forth. In addition to that I think a lot of people doesn’t know how good we are in the cross platforms capabilities, managing iPhones, managing Android devices, managing Window devices. So it was important for us to solve those migration issues or dual infrastructure issues as well as making sure that people know that we have very strong offering, probably the best of class offering. Therefore the BES 12 is why it is important. It will roll out probably the October, November timeframe, more November than October. Every time I talk I reduce it by one month to put pressure on engineering people but it’s really more of a November timeframe and the Classic will also come out and I think it's all going to be very exciting for our end users I pointed out the productivity gain of using Classic and so called muscle memory and having the fastest Internet browser and great multimedia capability. So it’s kind of the best of both worlds for the BBOS and BB10. So, those are our bridging strategy and I feel very good about it whist talking to a customer and people are now pausing, or at least consider, I shouldn’t use the word pausing, I think consider pausing before they get off our platform. And in addition to that, with our push on the BES 10/12 as a server, especially in the cross platform world and it is also -- we could also manage devices, not only just phones. There are a lot of interest from our competitor base that is coming over and as I said earlier, we're now generating quite a bit of a marketing buzz in that and people are visiting our sites and registering with us to learn more about it. So I see this as a good turnaround plan and it will – hoping, knocking on wood, I am hoping that it will help also slowdown the sub erosion.

Mark, it’s James. For your questions on the financials, so CapEx in terms of $22 million, I mentioned that we need to make some investments going forward to support the new services. That will require CapEx. So I would expect that number. It’s going to vary by quarter. I would expect it to be higher as we get through fiscal ‘15. And your question on intangibles, I would say most of our agreements do kind of scale up and down with the business. Last quarter we did talk about the one particular agreement and the fixed payments ending in the November quarter in Q3. So that -- we're still on that timing to execute on that.

Your next question will come from the line of Tim long of BMO Capital Markets. Please go ahead.

John, if we could just get into the growth side of this again. I hear you on the servicing and software business. Just curious how we get there, per James’ discussion on service it still seems like we're going to see double-digit declines sequentially there and software is only 6% of the business and I don’t think it ever really got over 300 million. So, is this just -- including when the Company had huge scale. So are we in a different dynamic now where you think this -- all these monetization of some of these software things which have been free for BlackBerry, will be able to be monetized? So is it a different world or is BlackBerry able to leverage itself in a more aggressive manner on the software side? I am just curious why we haven’t seen this in the past and what’s going to cause this to offset some of the declines that we'll see in the other businesses? Thank you.

Yes, it is a great question. So, there’s couple of dynamics. First of all you pointed out exactly, before I go into just software and services, I hope nobody think that we don’t take seriously our handset business. One of the reason why we introducing the -- not introducing, wrong word -- but we will still supply the BB7 devices because customer wants it. There's a lot of demand out there. The Classic is a great product. There are other products going to come out that I think people will like. Obviously we think they will like. Otherwise we won’t be building it. And then of course the Jakarta phone and the Jakarta phone pushing into more in the emerging world. That will bring up a lot more BBM plus other areas like we’re working with Windows and Nokia and so forth. So there is still a strong return of the revenue base on that. The difference this time is as we work ourselves out of the prior contractual agreements and generating new agreements, we are very focused on making money from the handset. That will take a little bit of time but you would see both the uptick on revenue as time progresses and as well as the margin of the handsets. But in the software world, you hit one right -- your nail right on the head which is, there is a practice of us "giving software away for free". And I came from the software background. I don’t find that practice very sensible and actually so much IP and services one could add that are extremely valuable and I don’t think giving software away is right strategy going forward. We are building the sales force more towards software and messaging and services sale force. We are building our com plan around it. We are building our account plan around it. So you will see a stronger growth going forward. Having said that, we still need to wait for BES 12 to come out, because you can’t really "sell software" onto the [Bold] [ph] infrastructure base today. So you have to bear with me a little bit. That’s why I didn’t say well, everything was going to be coming back and rolling success. I keep reminding somebody the other day, this is like my 26 weeks or something or 24 weeks at the company. So we still have a lot of work to do but very hopeful that I know how to get there. There are the EMM solutions, the Enterprise Mobile Management Solutions. There are the vertical application solutions, there are [inaudible] that one could do. There are so many opportunities there and of course the eBBM with the NOC providing security and reliability it’s going to be a differentiator across the board. I don’t think anybody else could touch us from a mobile enterprise solution standpoint or come -- even come close. So I'm very hopeful. You just have to stay tuned and I should talk a little bit about eBBM. eBBM has a number of stages of services, those are being developed by our engineer. I think the market will like it. It will provide some strong capability for enterprise.

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

So just to clarify you said enterprise customers are holding off turning off Blackberry now. So does that mean the teens decline in fiscal ’15 is coming more from consumer rather than enterprise and then further question, I’m just wondering if you have an expectation of whether your target customers are more likely to buy perpetual versus annual, gold versus silver and then also whether you think customers might wait for the BES 12 release before making that purchase? Thanks.

Okay Maynard, first of all let me clarify. Only a few enterprise that I have met, when we talk about the BES 12 they said yes, we’re holding off and waiting for BES 12 and Classic. I have those, but this is -- I’m not making this overarching statement like the entire market is doing that. So where James had guided about the service revenue going down and all I’m saying earlier to both Kim and Mark was I’m hoping that the BES 12 strategy as we laid out right now will help enterprise to reconsider and start slowing it down and we will some positive effect but it’s not going to be like an overnight instant turn. So please don’t, I don’t want to mislead anybody on the call. Yes I believed most customer will wait for the BES 12, because that’s the most sensible; go to one infrastructure kind of a play. So I believe that’s true. That makes sense?

Great. Your next question will come from the line of Peter Misek of Jefferies. Please go ahead.

So John maybe, you can help us understand the mobile device management market. We’re starting to see some price aggression coming out of AirWatch and MobileIron and good -- AirWatch retooling as [indiscernible] is absorbing it. I really do want to understand how the differentiation will work there, how you guys see that market evolving through your own services. Clearly you have an immaculate [ph] network. That doesn’t some to be always top of mind for these enterprises. It’s a bit surprising to see someone brought our -- some of the more regulator government industries suggesting that maybe they don’t need that level of security. So I’d like to understand that and then just very quickly on the pre cash flow, what kind of level James should we see in terms of cash? What do think is a safe cash level? Should we see the cash remain above $2 billion, $2.5 billion? If you can help us understand that, that’d be great.

Okay, Peter let’s talk about the MDM market. The MDM market, which one, the one that I’ve been in for a very long time; we created -- I was the team who created the MDM solution for the SAP. So I know the market quite well. It’s really not only the MDM market. The MDM market right now is kind of mature. It is getting bigger and bigger but like you pointed out the price comparison is really, really high. That is the basic foundation to play. I spoke about EMM, the Enterprise Mobile Management market. That’s a much bigger market that you have to build on MDM. So this is why it’s so important to become a player in the MDM world. I personally feel that out there for enterprise there's still buying potential and they’re still signing site [ph] type licenses or licenses by count. This is why it is so important for us to provide both that solution as well as a cloud based solution as well as a hybrid solution. So this is why I made a statement but thank you for allowing me to kind of repeat it, just in case anybody missed it. So the real idea is not just compete on MDM but anything that’s beyond MDM. As far as security is concerned, I’m with you. I don’t know why the regulator industry will think that the security is not at the top of my. In fact I know most enterprise company boards look at risk management, IT risk management and mobile risk management as a really big item. So I think this will come around. This is one of the things -- I always tell people this is like an earthquake type thing and where I live in California, right before the earthquake nobody cared about earthquake, it won’t end up, most people won’t be prepared for it. Right after the earthquake, even a little jolt, people rush and buy all the batteries and bottled water and everything else. So it’s a matter of, it’s an important element of running a company and running government agency and my conversation with a lot of the people, it’s starting to come around that. Now in addition to that, there's a also a big movement of protecting identity. So I just don’t want to think that people think data security in a mobile world is the only thing or transaction security is the only thing, which of course we do very well and with NOC and with encryption in OS and [indiscernible] technology and so far and so forth. But identity security is very important. This is why a lot of the BBM, PIN-to-PIN messaging technologies are aimed to solve or to address. So there is just a lot of -- the good thing about BlackBerry -- I’ve only been here about 4.5 months says that we just have very deep technology knowhow. And when the company could get back to execution and do well, just there's a lot of area that we could explore.

Hey, Peter, it’s James. On the financial part of your questions, in terms of cash flow, we’ve made some progress quarter-over-quarter and given where we are we’ve got to continue to show progress to get to the objective, being cash flow breakeven. In terms of the numbers you threw out, modeling on our side, I think number is starting with two. I think you’re thinking about that right.

Your next question will come from the line of Kulbinder Garcha of Credit Suisse. Please go ahead.

My question or clarification is really on the balance sheet. So maybe for James. The net cash halved to $1 billion. I’m just trying to still reconcile that with the cash flow movement. How much of it was cash burn and how much was you debt being for reasons revised up? Can you just talk through that? And then beyond that, what was -- if you take out one time items, what was this quarter’s free cash flow burn? And what do you think it will be over the balance of the year. The reason why I’m asking is I think at a some point your net cash may have - your net level of net cash may have issues with some of your debt covenants. I’m trying to understand how that dynamic may work? And then for John, just on the service side, you’ve said the people will hold off for BES 12. Your services premium is declining. So then this Company can’t get back to stable services revenue stream until sometime in the middle of next year, is that right when thinking about timing?

Okay, Kulbinder, I'll start. The way that we’ve talked with the $300 million improvement, I think if you ignore the tax refunds in Q3, you ignore kind of the debt in Q3, you ignore the debt in Q4, if you look at the cash burn just from that perspective, that’s where you get to the $300 million. So I think that kind of answers both of those questions. Just to be clear, you mentioned debt covenants. I’m quite sure where you’re getting that. Debt doesn’t really have any financial covenants associated with it. So I just wanted to be clear on that point.

Actually, James, I’m still a bit confused. You net cash went from $2.2 billion to $1 billion. It declined sequentially by that much. The components of that reduction in net cash were exactly what then? Can you explain that -- so that 1 billion decline in your net cash number from last quarter to this quarter, how did it decline by 1 billion?

I’m not sure I follow your math, Kulbinder. Maybe we can just take it off line and we’ll get back to you on that.

Okay, this is about services revenue. We have a decline of roughly about 12% to 15% and I’m hoping that our strategy, when you start tracking, it would slow that decline down that as time progresses and wait for the BES 12 to take hold in the market and then we’ll introduce new services and technology that the customer will want to use and pay for. So the answer of your question is I don’t by mid-year or next year. That certainly will be -- I hope to see good progress by mid-year next year. I’m hoping to see little sooner than that personally, but if you want to use that model, that'd probably be reasonably conservative.

Okay and James just want to clarify one thing then. Your net cash number according to you right now is what $1 billion, correct?

We’re at 2.7, right.

Gross cash [indiscernible] 1.6 it’s about.

But actually own that money now, you actually 1.6 billion.

No, it doesn’t change any of the carrying value of debt, the face value or doesn’t change any of the conversion option. It’s purely -- let’s call it a paper adjustment required by the accounting rules. So the net cash calculation, which still you would subtract to 1.25.

Let me add a layman's view on this, non-accountant view of this thing. The debt convert was $10. In the last quarter there were - the volatility of the trade and in the fact that at the end of the quarter, it went beyond $10. And so therefore we have to take a valuation charge, which are noncash -- though no effects on anything and last quarter on an earnings call -- I say a about lawyers. Now I’m going to apply the same to accountants. It actually makes absolutely no sense. It took me a lot to learn it but I just have to accept it. They had no effect to the Company. It's not a liability and it’s not cash.

And Kulbinder, going forward, as long as the debt instrument is outstanding we’re going to have fluctuations in this number. So we’ll continue to report what the impact is.

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

A couple of question. On the channel inventory that fell 30%, if I'm doing the math right, that 30% was the 2.1 million units. There's a difference in your sell through and your shifting. So which means that channel inventory before the quarter was 7 million and channel inventory today is 4.9 million. If we do a little bit more math I get that channel inventory -- that 4.9 million of channel inventory right now is about 20 weeks' worth of inventory on your current sell through. So that’s usually much higher than we see for half the companies -- we used to at least four to six weeks, maybe a little bit higher today. So just wondering, is that the right calculation and should we see that 20 weeks of inventory still come down over the next couple of quarters and so that will restrict the selling. So that’s question number one. Second question is on the services revenue the sequential decline, was that mainly should we assume from subscriber to client as supposed to from ARPU decline. And last quarter you said that enterprise was 20% of the subs outstanding. I want just to see if we can get it updated, it’s still 20%? Or did enterprise fall faster or slower than the consumer? And then on this new run with Vistron on the Bold John, previously from last conference call and conversations you had earlier, you were sort of averse to the hardware business and everything going forward was software. And my understanding was that the whole move to Foxconn was to bring the hardware business to a gross margin breakeven and that the older units that you were still selling, Blackberry 7s were at loss? So is this new run at the Bold at Vistron, is that still at a loss or did you work out a new deal with Vistron as well so that you're at least gross margin breakeven on those new Bolds?

Let me address that. That’s important. Thank you bringing that out. No this is not at a loss. We did work it out with Vistron and in addition to that we have the demand.

Correct but even with the demand before, you are selling BB7s at a loss. So I am assuming -- so all Bolds going forward are no longer at a loss or just the new run of them?

At least this new run. I can’t tell you all Bolds but at least this one. I don’t think this new run obviously is that material. More important to that material in terms of revenue and the margin and I agree -- I don’t know whether it’s going to be a long long-term run that will carry the same margins. But this set of runs will give positive margins.

And back to your questions on channel inventory, your calculation was right but your numbers are -- I am going to call it considerably higher than mine. So I am not sure if there is an issue there that maybe we can talk about afterwards but at least from the existing products, we definitely do can expect channel inventory to continue to go down based on some of the programs and some of the works we’re doing with our partners. Now we are going to launch new product which of course will require channel fill and that may bring those levels up but it’s for a good reason and for an isolated reason.

Enterprise subscribers and then I have a BBM question as well on subscribers.

Yeah I think the mix is constant.

So they both fell -- in concert they both fell to 14% or so.

I think the enterprise is slower than the consumer but not appreciably different but that I think we’ll have opportunity there.

Last on BBM, the 85 million active users, is that comparable to the 80 million you were talking about last quarter or that apples-to-oranges?

Apple-to-apple.

80 million to 85 million?

Yeah.

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

I wanted to know if you could tell us how many non-BlackBerry users your BES 10 systems are running now?

I don’t know. I don’t have that number. Sorry about that. We’ll find that out and make sure that people get back to you.

And then just a point of clarification on the BES 12 coming together for common infrastructure. So are you saying that IT managers then can being that together by November and then after that you’d start to see tick up in non-BlackBerry management? Is that the goal? So you’ll put the sales team in place and then hope to being them on after the November quarter?

The sales team -- yes we’re putting a sales team in place. It only needs -- the customer will only need one infrastructure when we got to BES 12 that manages all devices, BlackBerry old, BlackBerry new, iPhone, Windows and Android.

And the availability for that, you'll market it now but enterprises can start to deploy that after November?

Right.

Your final question will come from the line of Simona Jankowski of Goldman Sachs. Please go ahead.

I wanted to go back to the question about Vistron. You talked about negotiating that similar kind of variable cost model for the new BB7 run. Are you still trying to do that for the rest of your manufacturing base and if you can just give us a sense, as you’re existing this year, what percent of your device volume will be on this kind of variable cost model like what you had at Foxconn and this new BB7 run at Vistron versus the more traditional purchase commitments kind of model?

Simona, the problem is I don’t want to do go down this path because I will be forced to reveal some information that I’m not comfortable with two of our partners. And so I could only tell you directionally, I have no intention to lose money on handset. So the handset volume itself isn’t as big a concern for me but the margin is and I’m sorry that I couldn’t give you more detail than that, but we are working out very well with Foxconn obviously and in some instances, and some model with Vistron, but they are both good partners, very good partners.

Okay. And maybe just to then ask that another way, what is your expectation to reaching breakeven on the hardware side of the business in terms of timing and how does that look both from a gross profit perspective but then also from an operating profit perspective?

It will be fiscal year ’16.

For which one, grow or operating, or both?

For both.

Okay. And then just last question is for you John is on QNX where you talked about having a dominant position and certainly we saw a lot of buzz around QNX at both CES and MWC. Can you just give us a few more parameters around that? What kind of penetration or market share do you see? How should we think about the content per car or the revenue level? Just anything you can disclose would be helpful as we start thinking about that business?

I think, okay. The good news about QNX is it’s an embedded play. We already have about half of all the cars out there and with others players coming in and also connected with the QNX, so being compatible with the QNX, I wouldn’t say 100% but the majority of all the cars out there with the connected car will be compatible with QNX and some of them we have direct design win revenue and licenses some we will have indirect side of the equation and this is why we’re also building a cloud based solution to connect with QNX. So I don’t want to say 100% but normally when you say 100% that’s like overly aggressive but quite dominant. I don’t have the numbers and I'd rather not disclose the actual number itself. That’s not what we’re preparing to do, at least not at this point. So I don’t know whether I answer your questions but now if you want more detail that we could connect some people at QNX with you. We're more than happy to do that.

I appreciate it.

Thank you. Hey Luke I’ll turn the call back to you.

Excellent. Ladies and gentlemen, this will conclude the conference call for today. Again we do thank you for your participation and you may now disconnect your lines.