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

Thank you, operator. Good morning, and welcome to Blackberry’s fiscal 2013 fourth quarter conference call. With me on the call today are Thorsten Heins, our chief executive officer; and Brian Bidulka, our chief financial officer. After I read our cautionary note regarding forward-looking statements, Thorsten will provide a business update, and Brian will then review the third quarter results and our outlook. We will then open up the call for questions. This call is available to the general public via call-in numbers and via webcast on the Investor Relations section of blackberry.com. The webcast can be accessed through your Blackberry 10 smartphone, your personal computer, or your BlackBerry PlayBook tablet. A replay of the webcast will be available on the blackberry.com website. We plan to wrap up the call around 9:00 p.m. Eastern this evening. In order to let as many people as possible ask questions, please limit yourself to one question. Some of the statements we will be making today constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. These include statements about our plans, strategies, objectives, and expectations, and the anticipated opportunities and challenges fiscal 2014; our plans and expectations relating the BlackBerry 10 platform and its impact on our business; our vision regarding the new world of mobile computing, our plans and expectations regarding Blackberry World; our ability to leverage the changes made over the past year and to realize the benefits of our exciting new platform and more efficient business model; our product development and marketing initiatives and timing; our plans regarding new service offerings and assumptions regarding our new service revenue model; our anticipated financial results for Q1; working capital management and our anticipated cash position; and other statements regarding our plans,…

Thank you, Paul, and good morning everybody. Before I start the call, I just wanted to make a few comments on the announcement you saw this morning that Mike Lazaridis has decided to retire as vice chair and director of Blackberry. Mike cofounded Blackberry nearly 30 years ago, and served as the co-CEO of the company until last year when he was elected vice chair of the board. He revolutionized the mobile communications industry when he invented the Blackberry, and he is widely recognized as one of Canada’s greatest innovators. Mike has played a pivotal role for the past 15 months in helping with the leadership transition and the successful launch of Blackberry 10. I deeply respect and appreciate Mike’s desire to devote his full time efforts to his newly launched venture, Quantum Valley Investment. And on a personal level, I’m grateful to Mike for his help, guidance, and advice during my first 15 months as CEO of Blackberry, and I wish him all the best. From everyone at Blackberry, thank you, Mike, for your commitment and passion to the community and to the company. Having said this, now let’s go back to our results. Blackberry has gone through a major and exciting transformation this year, and it has been exciting. It was a year for change and we delivered significant positive change. So let me recap what we have accomplished in the first days of our transition, which has enabled us to return to an operating profit this quarter and given us great momentum as we go into fiscal ’14. Starting from the top, we implemented significant changes at the board level, adding three outside board members with extensive mobile communications industry and international business experience. We also made multiple senior management changes. In addition to my appointment as…

Thank you, Thorsten. Before I discuss our GAAP and adjusted results, please note my comments relating to our fourth quarter results and their comparisons to prior quarters are primarily focused on continuing operations. Please also note that a reconciliation of our adjusted results to our GAAP results is included in the press release today. Revenue for the fourth quarter of fiscal 2013 was $2.7 billion, virtually unchanged from the third quarter. We shipped 6 million smartphones in the fourth quarter, compared to 6.9 million smartphones in the third quarter. Higher ASPs helped maintain relatively flat revenue, despite the decline in units. Starting this quarter, we will be presenting our geographic revenue breakdown in four categories: North America, which is U.S. and Canada only; Latin America, or LatAm; Europe, Middle East, Africa, or EMEA; and Asia-Pacific, or APac. An annual and quarterly revenue split on this segmentation is also available in today’s press release. EMEA grew this quarter, and was 46% of revenue compared to 43% in the third quarter. The U.K. grew 13% from the third quarter, and represented 13% of sales. Revenue in the EMEA region included sales of Blackberry 10 devices in the U.K. and U.A.E. late in the quarter. North America was 22% of revenue, compared to 24% in the third quarter. U.S. market declined, and represented 14% of sales, while Canada benefitted from the launch of Blackberry 10 and grew 62% sequentially, and represented 8% of sales. LatAm was 18% of revenue compared to 20% in the third quarter. And finally, APac represented 14% of revenue, unchanged from the third quarter. Estimated sell-through in the quarter was approximately 7.9 million units, including phone-only sales, and channel inventory declined. Looking at our revenue mix, hardware revenue was approximately $1.6 billion, or 61% of revenue, compared to 60%…

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

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

I’ll take the first one on the cash flow. Your logic is roughly correct, although I wasn’t entirely sure on one of your points. But we are planning to invest in the launch, and that’s one of the big cash drivers in the quarter. But also, just in an inventory buildout and just our whole cash flow conversion cycle is where we’re expecting to see some impact on our cash position. But as I mentioned, we continue to believe we’re going to maintain that strong cash position throughout Q1.

A lot of questions. Let’s try to address them really briefly. On the marketing side, I mean, no doubt that we have to market Blackberry 10 strong, and that’s what we will be doing. So I think this is a very meaningful investment of ours to bring Blackberry 10 to market. And we’re actually fully supportive of those expenses, and we see good feedback on that one. On the enterprise, where is the 3 million subscribers coming from, our data show that it’s actually mostly coming out of what we call the pre-paid segment. We see strong interest from our corporate customers in maintaining the BES installed base, because it means something to them. It means security, it means reliability. It is a network connection. And I think the numbers are reported in terms of customers signing up for the BES 10 and BB10 Get Ready program is testament them supporting us in the corporate domain.

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

First of all, Brian, if you could go back over the taxes this quarter. I didn’t quite get it. Last quarter you actually called out the income tax benefit you got of $166 million. This quarter you had $112 million of positive on the tax line, and I just wanted to understand, is it all R&D tax credit? So just kind of a clarification there. And is there any way we can kind of normalize that as to what it otherwise would have been? And then back to the subscribers, EMEA subs fell. I was under the impression that was a decent part of the Blackberry 10 launch and just want to understand what the trend is over there. Are there prepaid markets that are falling despite the BB10 launch? I would have thought we would have seen a little bit more of a stable platform over there. And then Latin and EMEA on the same thing. Those were going up. And are they going up for Blackberry, because of Blackberry 10, or are they going up because we’re still [unintelligible] in Blackberry 7 or maybe Blackberry 6 units into those markets? And if you could just give us of the health of the Blackberry 6 or Blackberry 7 shipments into those markets, that would be great.

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

On the question regarding the subscriber number, one general comment I would like to make here is we’ve reported subscriber numbers for quite some time. I think actually what’s really important for all of us to understand is what’s the dollar value that we generate out of that subscriber base. And I talked in my speech about moving to a different business model on the services. And we’re innovating and developing new services as we speak. So I just want everybody to have that in mind. At the end of the day, it’s about the dollar number that’s being created. So the Blackberry 10 introduction is very successful in those markets, but I think we discussed that in prior earnings calls, that there is a different business model for service revenue fees with Blackberry 10 than it was for BB7. So the uptake is, in LatAm and other regions, on subscribers, it is actually really attributed mostly to the Blackberry 7, so still selling strong in those regions. And on the BB10 side, you know, we see strong uptake both in consumers and in enterprises. But the split between what is registered as a subscriber or not is changing, and we know it’s changing, and that’s why we are adapting our business model. But I also said in my speech that we are managing that service’s gradual decline very, very thoughtfully with our carrier partners. That’s why we only had a reduction of 2% in this quarter and we’re expecting a decline of a maximum single digit [unintelligible] number in the coming quarter.

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

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

First, we are, as you can imagine, pretty excited by the stats that we’re getting so far from the market that we’re winning more than 50% from other platforms. So I think that’s strong testament to the strength of the product and also the different [unintelligible] elements, like the [unintelligible] user interface that this product shows. So I think this is a very, very good start. Now, I think you’re making a good point. We are going into the installed base. If you kind of recall the segmentation of Blackberry, as far as QWERTYs versus full touch devices, we are very, very strong in QWERTY. That’s why we’re excited to have already more than 40 carriers testing the Q10, which then actually will grow strongly into that existing Blackberry base. So we are all looking forward to launch the Q10 globally and to addressing that market segment even stronger. And I think this will just yield another good opportunity for us to increase numbers of units and revenues.

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

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

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

I just kind of want to follow up on Todd’s question. I wonder if you could just kind of characterize the initial Z10 sales, or how much of it is consumer, how much of it is enterprise? And within the enterprise, are they waiting for the Q10 or the BES10 certification to get finalized before they start strong adoption? Just wondered if you could provide a little color on that. And then just Brian, for you, this is, I think, the fourth or fifth quarter where you sell through more devices than you’ve shipped in. At what stage do you think you start to get in balance there or perhaps start to fill the channels to support the Blackberry 10 launch?

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

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

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

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

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

And just to comment on the gross margins, so we continue to expect to have solid gross margins in Q1, driven by the improved hardware margins of the launch of BB10 and leveraging our cost base with all the cost improvements we’ve laid out in our remarks earlier. And that would help offset the gradual decline that we’re seeing in our service business that Thorsten mentioned on the single digit decline.

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

You guys talked about 223 carriers taking technical acceptance. Can you break down from a unit perspective what sort of markets these are going into? You sort of broke down earlier that you’ve got a new geographic segmentation. So just to get a better feel for that?

We’ve got 223 carriers, yes, that’s correct. They’re all [NTA], as I said. They’re all rolling out. So right now, given where we are, I think it’s too early to really kind of break this down by market or even by country. We talked about Canada being strong, U.K. being strong. We’re very strong in the Middle East, Africa region. We have seen tremendous uptake actually in India on the Z10, so we have data points, but allow me to just say right now, just being a few weeks out there, breaking it down by region of a country is not meaningful. We will do this when we have more information in Q1 when we basically have launched Z10 in all markets and when we also have some data around the q10.

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

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

Sure, so on the change in our definition of subscriber, when we made that change, there was no impact on the numbers we were reporting. And this quarter, in our numbers, we would be including the BB10 subscribers as well. And as it relates to the marketing, the 50% increase on the baseline, it won’t necessarily all be in SG&A, but the large portion of it will show up on the SG&A line.

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

Yeah, we won’t get into that detail. I think we’re just trying to indicate the level of increased activity relating to our marketing programs in Q1 to support the global launch.

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

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

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

I’m trying to get a sense of how the split between the carriers and Blackberry all trend over the next several quarters as you move on to this global launch. Because clearly it seems that Blackberry has shouldered the bulk of the early expenses. And we’re not seeing a lot of commitment thus far in some of the important markets in the U.S. in terms of carriers’ commitment to spend. So maybe your sense of what they might be waiting for or how that trend might look in the upcoming quarters, considering they have a lot of choices in terms of [unintelligible]. But we’re trying to see how they shift expense in some of the Apple products, [unintelligible] products, to BB10.

We are running a global rollout here, with Blackberry 10, so we see strong carrier support, you know, collateral marketing activities with carriers all over the place. And it varies from promotion to promotion, so there’s not just one size fits all kind of an approach. We are still in early days in the U.S. We just launched with AT&T, now Verizon and T-Mobile are coming on board. We see strong marketing support from them. It is really too early to talk about what kind of promotions are we going to run in the future, because we’re going to stop in this quarter. We’re going to move on. That’s why we also have a 50% increase in our own marketing spend. But we will do it together, with the carriers, part on our own. So I think we have a very sound go-to-market plan in terms of marketing activities, in terms of promotions with the carriers. And we will execute on them in Q1.

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

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

I was hoping on this sell-through, could you just give us an indication of how the Z10 sell-through was in the quarter? Obviously it was only a few markets that were shipping, so just wanted to get a sense of how much of the approximately 1 million actually sold through already.

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

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

I think that number is, as I said, that number is actually converging to what we sell in, already sell through pretty quickly. That’s why we have the ramp of our production capability for the logistics and supply chains are working at high speed at the moment.

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

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

Yeah, kind of.

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

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

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

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

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

I had mentioned earlier we continue to expect - and more in Q1, we don’t really provide a lot of color beyond Q1, which we’re currently focused on in terms of gross margin - but we continue to expect to see solid gross margin in Q1, driven by the improvement in our hardware margin [unintelligible], plus a lot of benefits that we go through our CORE program, as I mentioned. And then the one factor to consider, also, is just the offset that we see coming and the gradual decline on services revenue, which we signal as the single digit percentage decline in service revenue in Q1.

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

It’s not a couple of platforms, it’s two, right? It’s Blackberry OS, and then it’s Blackberry 10. I’m saying that to just make sure everybody understands, we’re not fragmenting our efforts here. BB7 is still very successful in various markets. We all know this, like the Asia-Pac, EMEA markets, South Africa, LatAm. And that’s like we always said, we’re planning to launch BB7 products to really serve that market segmentation in those countries. So expect something to come from there. We’re not just sort of cutting and then we’re out of it. And the good news around the BB7 product that we’re intending to launch is it carries service revenue. So again, that’s [half] the gradual decline, and the sound management of our service revenue fees. BB10, I think I’m repeating myself, we’re building a full portfolio. BB10, from a technology performance, is starting in the high end. We bring it into the mid tier by the middle of the fiscal year. And then we are working toward, you know, what can we do in the what we call typically the Blackberry entry level. Stay tuned on that one. There’s work going on there as well.