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Home » BlackBerry (BBRY) Q2 2015 Results Earnings Call Transcript

BlackBerry (BBRY) Q2 2015 Results Earnings Call Transcript

John Chen, BlackBerry’s Chief Executive Officer discusses Q2 2015 earnings results in a conference call held on September 26, 2014.

Edited Transcript of BlackBerry (BBRY) Q2 2015 Earnings Conference Call..

Company: BlackBerry (BBRY)

Event Name: Q2 2015 Earnings Conference Call

Date: September 26, 2014, 08:00 AM ET


Good day, and welcome to the BlackBerry second quarter 2015 results conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Joe del Callar. Please go ahead sir.

Joe del Callar – Head of Investor Relations

Thank you, operator. Welcome everyone to BlackBerry’s fiscal 2015 second quarter results conference call. With me on the call today are Chief Executive Officer, John Chen and Chief Financial Officer, James Yersh. After I read our cautionary note regarding forward-looking statements, John will provide a business update and James will then review the second quarter results. We will then open up the call for questions.

In order to let as many people as possible ask questions, please limit yourself to one question. This call is available to the general public via call-in numbers and via webcast on the investor relations section at 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 website.

Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the 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 perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are appropriate under in the circumstances.

Many factors could cause the company’s actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the company that are discussed in the Risk Factors section of our annual information form, which is included in the company’s annual report on Form 40-F and the company’s MD&A, copies of which filings may be obtained at

These factors should be considered carefully and you should not place undue reliance on the company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

I will now turn the call over to John.

John Chen – CEO

Okay, thank you, Joe. Good morning everybody and welcome. Thank you for joining us. Let’s just start right into the quarter.

This quarter from all our key operating measures, was happened to be a very solid quarter. I like to highlight a few things that we were particularly pleased with.

The focus on margins enabled us to achieve a non-GAAP operating profit. Our non-GAAP loss per share narrowed down — significantly down to $0.02 a share which of course compare that to the $0.11 a share last quarter.

Our cash balance, we maintained at $3.1 billion and we dramatically lowered our use of our cash from normal operations to $36 million and may I remind you that was from $255 million cash use of last quarter. We added over a million new users to Blackberry 10 in the quarter.

And lastly, I am pleased to point out that the hardware business turned in a non-GAAP gross profit for the first time in five quarters which is slightly ahead of our expectation. This is, of course, directly as a result of our supply chain efficiencies, the improvement in our distribution channel and the strong focus on margin and of course much more work needs to be done and could be done there.

Revenue came in within our range, at the low end of our range. I like to spend a minute or so to just highlight a few factors that affected the revenue this quarter.

First, you know we are all as a team very focused on margin and so we have chose to turn down — and throughout the quarter a few lower margin deals.

Secondly, it’s our plan to aggressively shift our software business from the perpetual license to a subscription base. So as most of you were familiar with this know the fact that subscription although have a lower revenue in the current quarter but build a much larger and more repeatable revenue stream for future quarters.

We are definitely in the first half of what I refer to the eight quarters recovery and from a revenue standpoint we might not be at the lowest point but we are near the bottoming of those revenue. I will make some comments about that later this morning.

Now let me spend a little bit time on the growth part. We had obviously done with our workforce restructure portion of our plan that was a well leaked document and we are now making judicious investment in growth. Most specifically we are focusing on the following four areas.

So first let me start with hardware.

As I mentioned earlier we turned to profit this quarter. Last quarter, we successfully launched the Z3 as you may all know, I think it’s May 12, in Indonesia and since then 12 more countries had been launched including India, Philippines, the UAE and South Africa.

Demand of the products continues to be strong. In fact, I think our demand is pacing supply at this point –outpacing supply at this point. We have plans to roll out in 10 more countries beyond this point. We just – so that was about the Z3.

Couple of days ago we launched Passport in three cities around the world “simultaneously”. And I’m very pleased to announce that we already have orders over 200,000 Passports as we enter the day.

For the U.S. the Passport is available Unlocked on Amazon and If you all know we price the phone at $599 U.S. in the United States and $699 in Canada. And at this level the device is profitable, because many people — I point this out because a lot of people have asked me about this question.

We have extremely good receptivity for the product. It’s sold out on within six hours and sold out within 10 hours on In fact, I believe we were the number one selling Unlocked smartphone on Amazon on the day that before it was sold out.

The engineering team is now working hard on the Classic which some of you who attended the Toronto event had a glimpse of that, which currently I am using and testing personally, and we expect to launch this product before the end of the year.

We also have a very strong roadmap beyond the Classic. I think, I’m going to talk about that a little bit more in detail at the Mobile World Congress in March and I will see you guys in Barcelona for those of you interested in looking at those.

Moving on to the Enterprise software side. I think the highlights of the quarter are definitely the success of our EZ Pass Program. It has been extremely successful. We added 3500 total registration — customer registration. By the end of Q1, just as a reminder, 90 days ago or a little more than 90 days ago, 120 days ago we were at 1.2 million license traded in, by the end of last quarter 3.4 million license has been issued, about three times the number in our last earnings call.

And we could just look at the math a little bit. The quarter brought in 2.2 million new licenses, over 900 new customers. So we are seeing a much more bigger global companies signing on with BlackBerry.

Of the 3.4 million licenses, 840,000 licenses has been traded in from our competitors, such as Mobile Iron, Good and AirWatch, this is 25% of the total license. And this of course jumped from 10% of the total license from competitors a quarter ago.

With such a strong uptick of our EZ Pass Program and our upcoming release of BES 12 in November, we are potentially considering ending the EZ Pass Program earlier than January like we originally intended to. We currently have 70 customers in our beta program on the BES 12 many of whom are Fortune 500.

Now moving onto the value-added service, which as a reminder to everybody, is our part of the strategy to grow the value-added services to replace the decline on the service activation fee or known as the SAF. We just introduced – so a couple of key points there. We just introduced Blend, which is our secure unified communication platform. It is now available free for all the BlackBerry device who are on BB10.3 releases and on iTunes and Google Play.

The receptivity again has been tremendous in the last few days and we have enterprise and we have a pretty strong plan in attacking the enterprise space for monetizing these features. We are releasing also later on this year, releasing the identity management software, which is of different from Blend but in tandem with Blend.

We also know that many customers want to access cloud services like Box and Workday, so we want to have our customer do this in a secure manner with our identity management solution, this is part of that release.

Other products that have been introduced and will be introduced over the next 90 days will include the BBM Protected, BBM Meetings and BBM Money.

BBM now reported 91 million monthly active user, MAU which is up 6% from a quarter ago, and 44% by the way over a year ago. We also recently released BBM on the Window Phone. We started generating revenue for BBM Protected in finance, government and healthcare vertical already. And we also expect to launch the BBM Protected on iOS and Android later in the year.

In addition to the internal value added services investment which we talk about, which was Blend and identity management and the BBM part. We have been making some acquisitions, strategic acquisitions; particularly I like to point to the two of them in the past 90, 120 days.

First, we acquired company in Germany by the name of Secusmart, which should be closed with the government regulatory approval assuming we get the government regulatory approval by the end of the year, which will provide us a secure voice and text communication.

To put a little bit in context, BlackBerry has always been known as the leader in secure data with all the encryption technology and so forth. And of course we have the BBM Message which is highly secure, so we have data and messaging covered. With this acquisition we also cover voice and text, thereby we believe we have covered all the medium of the communication interactions.

The second company acquired is Movirtu. Movirtu is a UK based company. They provide a virtual Sim solution that allow users to have both the corporate or personal number on a single device. The single device could be Apple iOS, could be Android and could be BlackBerry device. This is what we’ve been hearing from a lot of our customers wanting to implement a secure BYOD Solutions and also help them to facilitate the split-billing solutions.

So with our balance — with our 10.3 features it is called Balance, the Movirtu users now could securely manage work and personal use on one device, then I’ll of course assume that’s BlackBerry device but it works on the other two.

Lastly to begin our effort to license and monetize our technology asset, in the quarter we created BlackBerry Technology Solutions. The idea behind the BlackBerry Technology Solutions is to bring QNX, Certicom, Paratec and many other technology assets, including our 44,000 strong patent portfolio as well as the Project Ion.

The BTS, the BlackBerry Technology Solutions will sell and license these products and assets across different industry including the connector cod, automotive industry, healthcare and many others that we are targeting. And more importantly, BTS will lead the BlackBerry IoT strategy.

The unit will report to Dr. Sandeep Chennakeshu, many of you actually know Sandeep from his time as President of Ericsson Mobile. We also added seasoned technology leaders like the name of Marty Beard as our Chief Operating Officer. Marty had previously served as the CEO of LiveOps and brings with him extensive experience in operations especially in cloud based business.

Talking about cloud-based business, our next release will be BES 12 and it is now scheduled for November 13 somewhere in the Bay area, California that is.

Given the success of our EZ Pass Program and all the growth initiative I just outlined for you, let me share some of our software expectation with you and again remind you that we are – well, we are happy in the forward looking statement, this is really reminding you of forward-looking statement. I assume that you don’t want Joe to repeat what he said. I was very amazed with the string of the words that he used.

But, so let me focus on software a little bit.

In this particular fiscal year we expect the software number to be roughly about 250 million, which includes software as a software license sales as well as the T support. Next year, our plan – expectation of our plan is to double that number and that growth in a software and T support should be able to cover the SAF decline to the future.

Our next release will be on BES 12 on November 13 at San Francisco as I said and in conjunction with that we also will host a Analyst Day in the Bay area of course. And we will provide you additional details on our growth strategy, the product road map and the make up of some of those doubling of the software revenue numbers. So please save that date.

Now I like to hand this off to James and for further details – then the numbers for the quarter.

James Yersh – CFO

Thanks John and good morning everyone. And as I normally do I’ll start with the income statement.

Revenue for the second quarter was $916 million. Hardware represented 46% of revenue compared to 39% last quarter. We recognized revenue related to approximately 2.1 million devices in the second quarter, up from 1.6 million in the previous quarter.

Services revenue represented 46% of revenue compared to 54% last quarter. Service access fees declined 13% compared to last quarter’s normalized SAF revenue. I just want to remind everyone that last quarter SAF revenue actually benefited from a $30 million cash payment from the carriers in Venezuela which at the time we said would not repeat. We continue to model the SAF decline of approximately 10% to 15% in the next quarter. Software and other revenue represented 8% of revenue.

Non-GAAP gross margin was approximately 45%, consistent with the previous quarter. GAAP gross margin for the quarter, which includes restructuring costs, was 46.4%. Hardware gross margins, as John mentioned, were positive this quarter due to an increase in both the number of units recognized and the cost per units on the current portfolio as well as the reduction of manufacturing related fixed costs.

Non-GAAP operating expenses were $433 million, down from $504 million last quarter. GAAP operating expenses were $623 million and included in GAAP operating expenses were $33 million of restructuring charges as well as a non-cash charge of $167 million for our convertible debt.

As I have explained in the prior quarters, GAAP requires us that we record a charge as the value of our debt goes up. This non-cash charge has no impact on the face value of our debt, on our liquidity or on our operations and cash flow.

Amortization expense was $75 million in Q2. The GAAP tax recovery in the quarter was approximately 5% and going forward, we expect the quarterly recovery to be about 15% as the company still anticipates utilizing all the available losses available for carry back during the fiscal year.

Non-GAAP net loss was $11 million or $0.02 per share. GAAP net loss, which includes the impact of the debt and restructuring, was $207 million or $0.39 per share.

Now moving on to the balance sheet and working capital performance. Our cash balance increased by $11 million compared to last quarter. Adjusting for items not part of normal operations, we used $36 million of cash in the second quarter as John previously outlined. This use of cash decline by over 85% compared to the 255 from Q1. The reduction was attributable to improvements in collections of receivable as well as overall reductions in operating expenses and capital expenditures.

During the second quarter, we also completed the Canadian real estate sale as well as some other smaller asset sales. Total proceeds from these activities amounted to $56 million.

Purchase obligations and other commitments amounted to approximately $1.6 billion. Purchase orders with contract manufacturers represented approximately $344 million of the total, which is up slightly quarter over quarter but expected due to our new hardware launch activities.

Total cash, cash equivalents and investments was $3.1 billion. Taking into account strategic investments in the business, we do not expect our cash balance to fall below $2.5 billion at any point in fiscal 2015.

Looking forward, we continue to expect the cash flow breakeven before the end of fiscal year and continue to forecast income statement, non-GAAP profitability during fiscal year 2016.

That concludes my comments. And I’ll hand it back to John.

John Chen – CEO

Okay, thank you James. Okay, operator could you please open the Q&A part of the session?

Question-and-Answer Session

Operator: (Operator Instructions) We’ll take our first question from Tim Long with BMO Capital Markets.

Tim Long – Analyst, BMO Capital Markets

James, just one quick clarification and then a question. That down 10% on service this next quarter, is that after we normalize for the $30 million Venezuela? And then the question on the software side it looks like this quarter was a nice 9%, 10% improvement sequentially after some declines and it sounds like you’re expecting a double next year. Could you just give us a little insight into maybe what drove the turnaround? Is this EZ Pass or what is driving us up in the August quarter? And is that the same — is that the main driver to double this business next year? Or how broad and diversified does the business get to double that business? Thank you.

John Chen: Okay, Jim you want to take the SAF one, I’ll take the software…

James Yersh: Tim, just to clarify I think your question referred to a 10% decline quarter over quarter and normalizing for Venezuela. My comments were that SAF declined 13% normalizing for Venezuela. So what I am doing there is taking the $30 million off of Q1 effectively and then comparing that to where we landed in Q2. Going forward, again, 10% to 15% is what the expectation is.

John Chen: So Tim, the question regarding the software doubling, I guess we have a reasonably good software quarters this quarter compared to the quarter ago. And next year there is a number of things. It’s not only the EZ Pass that of course we look to contribute. EZ Pass will also bring us a good uptick on T support as — the program calls for the customer paying T support beginning of February 1 of 2015. And in addition to that it’s all the software features that I laid out earlier, whether it’s in the Movirtu side of the equation, whether it’s in the identity management of the equation and the secure voice equations. And so, and of course there are more to be added to this. So I have a lot to do with the combination of all those for the next year plan. We will be able to talk more about that on November 13 in San Francisco.

Operator: And we’ll move on to our next question from Maynard Um with Wells Fargo.

Maynard Um – Analyst, Wells Fargo Securities

So I’m wondering if you can talk a little bit about the conversions in the EZ Pass program? Specifically, how many of the customers that you’re seeing are taking the gold versus silver and then the perpetual versus the annual? And I’m curious if you were to end your program early that you talked about, would those in the current program be grand-fathered in to that February 1 payment date or would they all start paying?

John Chen: No, no the 3.4 million licenses cross over to 2500 customers, they are not grand-fathered. We have agreed that they start paying T support February 1 of next year. So if we added the program as we ended the trade-in programs that imply that then people are interested in our technology especially in the BES 12, then they have to pay for their licenses, that’s all I meant, you cannot trade-in anymore. And we have not made the determination that we will but I just want to forewarn that we might be doing that because of the numbers coming in pretty strong at this point.

John Chen: Sorry, the silver and gold the majorities are silver because of the program conversion and we’re looking forward to enhancing their subscription base with us in gold. And yes, you are right other than some very specific case we are now only taking subscription based software.

Maynard Um – Analyst, Wells Fargo Securities

Okay. I guess I’m just a little surprised that the majority would be silver versus gold because my understanding is if the gold gives you all the features of security that BlackBerry provides, I guess what is the opportunity to upgrade them from silver to gold?

John Chen: That is the thing that I am looking forward to. I believe — I believe everything you said is what we expected to be like and then we’re going to start expanding them to gold. Because the EZ Pass program only allows you to trade in silver, you could buy gold but it will only allow you to trade in silver.

Operator: And we’ll move along to our next question from Simona Jankowski with Goldman Sachs.

Simona Jankowski – Analyst, Goldman Sachs

Hi there. I first just wanted to clarify when you guide for non-GAAP profitability for fiscal 2016, is that for the entire fiscal 2016 or just during some quarter in the year? I then have a question.

John Chen: Yeah, I’ll talk about that. At some part of the 2016 obviously we wanted — like everybody else we want it earlier than later. So if you look at the trajectory of some of our progress that we made in the last three quarters, I think, you know I mean personally I would like to see it sooner rather than later of course. But I can promise you that it’s entire.

Simona Jankowski – Analyst, Goldman Sachs

And then can you just give a little more detail on what drove the decline in ASPs? I imagine there was some kind of mix in there, but if you can just touch on that in a bit more detail, including whether you had any meaningful shipments of the Bold that you are going to bring back for a period of time, and how to reconcile the decline in ASPs with the expansion in gross margins?

James Yersh: Surely Simona, it’s James; I can take that one. You are absolutely right that mix did play a – was the primary driver in the decline in ASP. We are having success with Z3, for example, as John mentioned and the popularity of that of course and that is a lower cost product as we had talked about. So that will have an influence in it. And also given the age of our Blackberry 10 portfolio you would expect price erosion over time, so put those two things together you really get that as the two major factors with that.

Now flipping to the margin side that part of it is — we’re really helped by volume there and the incremental half a million units that we recognized. We do have some products that have positive margin left in them and of course anything above zero times a bigger volume base will get you improvements in margin. And I don’t want to underplay the work that we’ve done on cost that both John and I talked about but that’s another factor as well.

John Chen: And from an ASP perspective now that Passport has a reasonable receptivity, we just released it. We sold it out in many places already, so that of course carry a much higher ASP.

Simona Jankowski – Analyst, Goldman Sachs

Great and did you guys have any meaningful shipments of the Bold? I know you talked about running that again and is that kind of done or is that going to continue to run in small volumes?

James Yersh: No. we’re pretty much done.

Operator: And we’ll take our next question from Daniel Chang with Scotia Bank – with Mark Sue with RBC Capital Markets. I apologize.

Mark Sue – Analyst, RBC Capital Markets

It’s Mark Sue. Good morning, gentlemen. If we look at the uptick in your software revenues, EZ Pass, BBM, et cetera. Can you give us a sense of where and the nature of your share gains from some of the competitors in mobile management, mobile device management, they have had an earlier start from you. I’m just wondering how you’re able to convince some of your customers to move away from them and into Blackberry?

John Chen: Well, I think this is about the company stability. The product is better and more broader, deeper, and has much more history and experience with most of our customers. So I think the last couple of years we had some turmoils, that is now behind us. While we’ve gone and reached out to customer, I spoke to many of our executives, I mean across the board has been visiting a lot of customers. People are very interested in working with us. Obviously our technology works and works well. They all know that. The government uses it. Major banks uses it. So wining back, knock on wood I don’t want to jinx myself, but winning back, we’re starting to see that in many, many places, especially with the very big company.

So I feel that — I don’t know what the market share is. I really — because I don’t track that personally, because I only track the license counts. So as I said, we have over 800 win back or conversion from maybe they even never been BlackBerry customers before in that mix. But I have assumed that many of them have been BlackBerry customers and they have found that our competitive solutions definitely not as good as ours. And therefore, now they know that we have commitment and the company is stabilized and we have good cash position, good technology and roadmap and we’re starting to win those back and plus some more.

Mark Sue – Analyst, RBC Capital Markets

I see. So it’s not just a comfort level of your stability of the organization, but it’s — you feel better about the technology migration?

John Chen: Yeah, it’s broader or deeper, I think, while most of the industry analysts also confirm that. So I’m…

Mark Sue – Analyst, RBC Capital Markets

That’s helpful. And John, as we move on to new revenues and services, is there a way to slow the rate of decline in legacy services? Is there a way to manage to kind of close the door behind us a little bit slower or is that just — we just have to model that traditional base to drop?

John Chen: I don’t – I currently don’t see a way as they convert but I’m working on it. There might be but I don’t see in obvious way as we go on, moving on to everybody to BB 10, but I wouldn’t be overly pessimistic about no way. Besides the basis now is extremely loyal customers, the good news about is that lot of them switches to BB 10. And the bad news is of course you see rate comes down – I mean, the numbers come down. But the good news is get to BB 10, and to get the BB 10 and there are other methods and other value that we could provide customers to enhance the software on handset as revenue source.

Operator: And now we’ll move to Daniel Chan, Scotiabank.

Daniel Chan – Analyst, Scotiabank

When do you expect to see some of these value added service such as Blend and BM Protected make a meaningful contribution to your revenue? And then, can you give us an update on the sub count and the proportion of BES subs?

John Chen: I’ll take the first one. And it’s going to be – my plan is FY16.

James Yersh: And on the sub-count, Mark, sorry Daniel, we were down a little bit. I think the rate of decline has slowed. We were 50 last quarter. We’re definitely less than 10% down I would say. But in terms of the ratio, I think the 80% of business that John and I have always talked about we’re still in that.

Daniel Chan – Analyst, Scotiabank

Is it – so these value added services that you have such as Blend and BM Protected, those are only available on BES subscribers, is that right or can that also be used by I guess guys using a cloud?

John Chen: Yes. People can use the cloud. Blend is both – actually both services are cloud-based, all plan is based depending on the customers. But we like to see it more on a cloud based. And it’s not only on BlackBerry, it’s across the board on all other devices but it will work with a lot of the other people’s MDM. You know that we have opened up our API to many of our peers in the industry, our competitors in the industry on MDM. So it’s more than just BlackBerry server.

Operator: And we’ll take our next question from Amitabh Passi with UBS.

Unidentified Analyst

This is [Evelyn] for Amitabh. Can I just ask you question more on your – you’ve been rationalizing your OpEx and it’s been down R&D $10 million and SG&A another $30 million plus. At some point do you guys need to reinvest in OpEx to support Passport and other devices launch?

John Chen: Right. We are already at that point. We believe that this expense line very reasonable. If there is any uptick, it will not be a huge uptick. We’re managing it very carefully. I use the word judiciously. That’s exactly what it meant. We are aligning a lot of the resources a little differently to focus on key drivers like the BES 12, the value-added services, the BlackBerry Technology Solutions.

So, a little bit more alignment in the company on a few very major initiatives. So, we are comfortable where we are with the expense number. There’s always opportunity, but we are actually hiring people in selected areas and expanding the company.

James Yersh: And just add to John’s comment, some of the reduction that you’re seeing in this quarter was definitely due to timing. For example, if we did — as part of our restructuring program — let employees go mid quarter, we wouldn’t have seen the full benefit, whereas with the restructuring program being done and behind us effectively you’re seeing the savings, if you will, catch up to full quarter impact.

Unidentified Analyst

So, does that mean we should be expecting OpEx to sort of stabilize at this current level?

John Chen: Yes. Stabilize — if there’s uptick it will be covered by margin improvement.

Operator: And we’ll take our next question from Richard Tse with Cormark Securities.

Richard Tse – Analyst, Cormark Securities

Just a quick one on BTS. Can you sort of rank the areas of priority in that division? Is it QNX first going after patents and I guess related question, what are you guys doing around IoT? Thanks.

John Chen: Okay. Great questions. QNX and IoT — QNX is a major component to drive our IoT strategy. So, is that, that is the number one mandates for the group. And then, of course, we’re going to – we generate a lot of the research activities around Certicom and Paratek. And so – and then last but not least, but last, it’s about licensing, so it’s in that order. Hello.

Operator: And we’ll take our next question from Rod Hall with JPMorgan.

Ashwin Kesireddy – Analyst, JPMorgan

Hi, guys. This is Ashwin Kesireddy on behalf of Rod. I was hoping you could give some commentary around the improvement in North American revenue and how should we think about that going forward? Also if you could comment on how big a portion was North America in terms of helping your gross margin during quarter and how should we think about it moving forward that will also be helpful? And also, quickly on the licensing portion of BTS, I was trying to understand what exactly are you trying to license here and how should we think about on the monetization opportunities there?

John Chen: Okay. What was the first – I missed the first question.

James Yersh: North American revenue, I can take that. So the North American increase was actually mostly on the backs of devices. SAF did stabilize a little within North America to help, but really the uptick in revenue can be attributed to devices.

John Chen: Okay. Regarding the licensing we’re just starting to explore these opportunities. So, we really don’t have any numbers tied to it, but I think there are certainly opportunities there. We won’t see that in a very short term. And because we believe that we have a lot of technology that we definitely could be beneficial to, some of the other people that want to use that technology. So, we’re not against licensing it. But there is no concrete numbers.

We just started the whole process thinking about it. We spoke about this or I have spoken about this a number of months ago, thinking about, hey, this is an area of revenue and value that we could realize for our shareholders. And so that’s all it is. And Sandeep is such an industry veteran. He knows a lot of the players both in our space and in adjacent space and think that he will be a good ambassador of that.

Ashwin Kesireddy – Analyst, JPMorgan

Okay. So, John, is the idea that you’ll probably try to build a patent portfolio and go around the industry trying to see if you can monetize that? Is that what you’re thinking?

John Chen: No. I’m not selling anything. I’m literally offering as licensing. But again, I don’t want to go over playing this at this point. Let’s accumulate some experience. Have some time first. And maybe in the future I could speak a little bit more about it.

Ashwin Kesireddy – Analyst, JPMorgan

Just quickly on BlackBerry 10. Is there any shipment number that you can provide or that’s current?

James Yersh: I think we’re up slightly quarter-over-quarter; the shipments were about 70% to the volume this quarter.

Operator: And we’ll take our next question from James Faucette with Morgan Stanley.

James Faucette – Analyst, Morgan Stanley

Just a couple of quick questions. First, John, on the software revenue objectives that you’ve laid out, how does that compare or how do we factor in the target that you laid out last quarter on 100 million and BBM related revenue? Are those two tied together or is one part of the other et cetera?

And then on the EZ Pass what – where we are in terms of getting EZ Pass users to subscribe or commit to T-support and beginning to be able to book at least the deferred revenues from those customers? Thank you very much.

John Chen: Okay sure, James. Great question. I was hoping nobody asked me that question. Now you remember both earnings call. They are different. I do expect from the MDM side and the value-added service side, when I first made the comments about doubling the software revenue. It’s really made basically from those buckets. And then BBM, I’m still believing that BBM could bring in $100 million in revenue. This is separate, though they are additive. That’s number one.

And your EZ Pass, we cannot book it on deferred, because the deal that we structured with the EZ Pass is you sign on, you trade in the licenses whether it’s BlackBerry licenses or competitors licenses and then you get the silver, which will provide us an ability to up-sell to gold and the T-support commitment starts February of next year.

James Faucette – Analyst, Morgan Stanley

So starting in February or after really next fiscal year then is when we should expect to start to see what levels of T-Support attach you’ll have on those EZ Pass users et cetera and then that would start to impact deferred revenues; am I understanding that correctly?

John Chen: Yes. You understand that correctly, exactly. And those by the way – that T-Support is part of my doubling sub revenue. So it’s not separate.

Operator: And we’ll move on to our next question from Deepak Kaushal with GMP Securities.

Deepak Kaushal – Analyst, GMP Securities

Hi, good. You can hear me. Maybe a minor follow up to the previous question and then another question on sales and marketing plans for BES 12. First, on the BES services that you guys have installed to date, can you give us any sense of a split between BlackBerry versus none-BlackBerry devices that you’re managing and what the trend is in terms of uptick for managing non-BlackBerry devices through BES?

John Chen: We’re going to have to find that. I don’t have the number. Do you guys have the number? Let my colleagues start looking for numbers. If we don’t have the number I’ll prepare to speak to that on November 13. But I really don’t have the spread in front of me. So that’s…

Deepak Kaushal – Analyst, GMP Securities

That’s fine. That’s something I’ll be watching. So I’ll ask again next quarter, if I have to.

John Chen: And then what is the second question on?

Deepak Kaushal – Analyst, GMP Securities

The second question is really on sales and marketing. I know you guys have put in some structural changes. I wanted to know if you could elaborate on the progress of that in terms of how you’re planning to sell BES services to enterprises. What kind mix will go through a carrier, how much dependence will you have on the carrier for that or how much are you going directly, maybe you can elaborate on that point?

John Chen: Okay. Good question. Right now the – in last quarter mostly of our BES sales are going to directly. There are some distributors using — distributing our BES and I would love to have the carrier carry it. So I’m working on that piece. And that’s another part of distribution that we’re going to be adding on. There has been a number of carriers that I have spoken with are extremely interested on carrying BES 12 and offering that to their customers. So, that kind of part of my factoring why I’m so bullish about doubling the software number.

Deepak Kaushal – Analyst, GMP Securities

Okay. And then, in terms of that sales — initial sales for BES 12. You mentioned OpEx at current level is what you would expect going forward, plus a minor uptick. Does this include a sales push for BES 12 or is there an investment for BES 12 on top of that?

John Chen: No, no, that’s already included. We are hiring selectively in a lot of places, enterprise software sales people, but again on this particular one the focus on distribution, expansions on both carriers and distributors around the world. So we actually have an infrastructure in place where we may add some more strength to it, but we don’t, it’s not from scratch.

Operator: And we’ll take our next question from Ehud Gelblum with Citi.

Ehud Gelblum – Analyst, Citigroup

Good seeing up there in Toronto. Question, I want to try and do some parsing on units that you sold. Can you give us a sense – I’ve got a bunch of questions in here, but they are all kind of getting at the same concept. If you can give us a sense how many Z3 was actually sold. And when you said, the Passports sold out, separate question. If you can give us a sense as to what that means, so we can get a contextually how many Passports you sold out. But on the Z3, I was doing some math on what, James, you said before. BB10 was 70% this quarter. You did 2.1 million units, so BB10 was about $1.4 million. That means BB7 was about 700,000 this quarter. But you did total units last quarter of 1.6 million, so it just appears that your BB7 units of 700,000 quarter are up a lot. If that’s true, why did BB7 units grow so much? They’re probably looking for BB10s.

The last part of this whole gestalt is, North America revenue, like you said, was up and you said that was due to devices, but there was no Z3 here. Asia was down, and Z3 went into Asia. So I guess all these things I’m trying to go at and trying to understand are, why was Asia down if the Z3 was there? Why was North America up? And why does it look like your BB7 devices were up very strongly to 700,000 this quarter for probably no more than 300,000, 400,000, 500,000 last quarter? Are they all related? Then, I have a follow up with something different. I appreciate it.

James Yersh: Okay. So I think at the end of it, Ehud, I like what you said last. I think they are all related, because I think your math on the units is right. And if you think about what’s popular in North America would be like 900 in Bold which would drive more BB7 type of units going through there as well. You’re right that the Z3 wasn’t there, but effectively I think all those stories hang together and drive in and around or explain the uptick in BB7 and some of the strength in devices for that.

Now in terms of numbers for both Z3 and for Passport, we’re not going to give those out. I think John’s commentary in terms of the experience we’ve had to date and the strong demand is what we’re comfortable in sharing right now.

John Chen: Right. I haven’t looked at that number, the device from the angle that you two have been discussing. But on the Passport, as I pointed out, we have – we entered in the launch day with 200,000 units already ordered. We received PO for those. And the first day, it sold out in many, many places, because literally, the real big shipment to everybody who signed up for distribution is actually seven days after that day, the next Wednesday I suppose. So we have a limited quantity supply, but it sold out very quickly.

Ehud Gelblum – Analyst, Citigroup

Okay. That’s helpful. One of the things the growth in software came up before. Is it possible, I think QNX is reported in software remind me if it’s not?

John Chen: Yes. It is.

Ehud Gelblum – Analyst, Citigroup

I don’t know exactly how that line item goes, if you can give us a sense as to how large QNX was within software? Was that a source of growth given, and again I don’t understand exactly the dynamics of that business, but given that we’re going at this time of year into a new car auto model year around September, does QNX naturally get larger in your August quarter and was that part of the growth in software?

John Chen: Well, we did have growth in QNX in the quarter. It does not explain the whole growth. We don’t really breakout every single pieces of this. And so, it’s the growth – that the majority – if you look at a percentage of growth it’s mostly come from the MDM side of the equation.

Ehud Gelblum – Analyst, Citigroup

Okay. So QNX was not as big a contributor.

John Chen: QNX grow pretty well, but it’s not the big component that drove our growth in software.

Ehud Gelblum – Analyst, Citigroup

Okay. One other discrepancy, if I can just get in there? Sub count, James, you said fell less than 10%, but your services revenue if you compensate for the $30 million Venezuela, was down 13% or so. So it would appear that revenue fell faster than the sub count fell. I understand there are averages involved, so it may not work out exactly like that. But does that appear that ARPU is falling faster and does that mean that your higher ARPU subscribers, which are generally enterprise, are falling faster than consumer subscribers? Is that the right way to understand that or are there other dynamics in play?

James Yersh: Well, there’s other dynamics in play. It’s not – remember, depending on how you’re modeling ARPU. We do have some higher biz-type fees as well that we charge that may be over and above what you are modeling ARPU as well. So it’s not just an enterprise story, I guess that we all answer that Ehud.

John Chen: And there have been – again, I add this to, because I know it’s helpful to the conversion. There has been a number of big accounts that moved to BB10.

Ehud Gelblum – Analyst, Citigroup

So I’m not saying you’re losing them entirely, you’re just losing the enterprise subscribers from the SAF?

John Chen: Right, right. So, yes.

Ehud Gelblum – Analyst, Citigroup

So, there’s a 10 side, but you’re losing them from the SAF side?

John Chen: That’s right. There’s has been there.

Operator: And we’ll take our question from Todd Coupland with CIBC.

Todd Coupland – Analyst, CIBC World Markets

Hi, good morning everyone. I wanted to ask about EZ Pass, if I could. How much of a factor is just the lower price of silver in getting guys to flip back to you?

John Chen: The EZ Pass, we charge silver at $19 per year, plus 20% on T-Support, but the EZ Pass, my definition, you don’t pay anything. So it’s not a price-based conversation.

Todd Coupland – Analyst, CIBC World Markets

But they know eventually they’re going to pay so…

John Chen: Yes. Well, on the people who trade it in, they don’t have to pay other than the T-Support, which is $3.19 or $3.40 I suppose, a year per license. And then when they buy more they have to pay. Or they upgrade it from the silver to gold then of course they have to pay the delta.

Todd Coupland – Analyst, CIBC World Markets

Just to follow on to that. BES 12 coming out in November. Do you think there is pent-up demand for other enterprises to flip to your MDM? Are they waiting for that?

John Chen: I like to think so. Yes. Demand has been – the conversation has been very strong. I was just in Singapore giving a speech this past weekend and I spoke to a lot of customers there and the demands are quite strong, very strong interest level on the BES 12.

Todd Coupland – Analyst, CIBC World Markets

Like is there any way to characterize the funnel once you get it out there, is it like 2x, 3x, 4x what you’ve seen so far?

John Chen: Oh no, no, no, in a software business, 2x, 3x, 4x are too low to convert. You know typically on software pipelining you’re going to have to be looking at more like 6x to 8x.

Todd Coupland – Analyst, CIBC World Markets

6 to 8 times what you’ve done so far?

John Chen: No, you have to look at 6 to 8 – if I’m going to have to bring in 100 million, I have to be working on 600 million to 800 million of pipeline in order to feel like that you could feel comfortable with 100 million.

Todd Coupland – Analyst, CIBC World Markets

That’s okay. Fair enough, so what’s that pipeline post BES 12 launch look like now?

John Chen: Well this is embedded into my doubling the software numbers the next year. And I shouldn’t be reporting on pipeline. That numbers sometimes are meaningful and sometimes are not as meaningful.

Operator: And that’s all the time we have for questions. I’d like to turn the conference back over to our speakers for any closing or additional remarks.

John Chen: Okay, great thank you. Well thank you everybody for staying on for the call. As you said, as we all talk about the all the operating metrics and I think one was particularly point to the fact that our margins are good, cash are good and the cash use has been much lower and that should be a good testimony that we will make our cash flow from operation, for normal operation breakeven or positive by the end of next quarter. So we have six more months of that and you should see progressively good trend going forward.

We spoke about some of the leadership decision, a lot of people are interested in the EZ Pass and the MDM and the value-added services. We look forward to continue to have a strong discussion on that. As far as doubling the software numbers I know that it peaks a lot of people interest, and we would love to give you a little bit more color on that on November 13 in San Francisco where we launch the BES 12 as well as the Analyst Day that follow that launch. So, I look forward to meeting you all and have that discussion. Thank you very much for joining us and have a great day.

Operator: And that concludes today’s conference call. We thank you for your participation.


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