Good day and welcome to the BlackBerry second quarter FY '16 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Del Callar. Please go ahead, sir.

Thank you, operator. With me on the call today are Executive Chairman and CEO, 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 a 30-minute Q&A session. 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 in the investor relations section at BlackBerry.com. A replay will also be available on the BlackBerry.com website. Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of applicable U.S. and Canadian securities laws. We will indicate forward-looking statements by using words such as "expect", "will", "should", "model", "intend", "believe" 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 relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements, including the risk factors that are discussed in the company's annual information form, which is included in our annual report on Form 40F and in our MD&A. 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 except as required by law. I will now turn the call over to John.

Thank you, good morning, everybody, and welcome. I will take you through the summary of the Q2 results and highlights and where we are making progress on our strategy and then I will discuss the key development and area of focus we're driving towards near term and long term objectives. So first, a summary of the quarter's results. Everything, by the way, I cover here will be non-GAAP based. James will then cover the detailed financials later. Total revenue was 491 million, with an EPS loss of $0.13. We generated positive cash flow of 100 million, and positive EBITDA of 68 million. This was a sixth consecutive quarter of the positive free cash flow and seven consecutive quarters of the positive EBITDA. The total cash balance now increased to 3.35 billion, from 3.32 billion last quarter. The net increase of 37 million takes into account already the 47 million of cash used for the stock buyback last quarter. Excluding IP licensing, our overall software business continues to expand, up 19% year over year and 9% quarter over quarter. Software license revenue grew 33% year over year, and 14% quarter over quarter. This represents the fourth consecutive quarter of double digit year over year growth in software licensing. BES 12 software and QNX were the largest contributors to the growth in the quarter. We booked a total of 2,400 software transactions in Q2. The notable customers include Airbus, Berenberg Bank, TD bank, Peugeot, Herbalife, Nippon Express, Siemens, Vitseon and LG electronics. We made good progress moving our software business from perpetual to subscription with AtHoc, which recently closed, I think this week, and Good Technology which is pending closure. We will increasingly shift our revenue mix in this direction. I am encouraged that we continue to deliver positive free cash flow,…

Thank you, John. And good morning, everyone. Today, we reported Q2 GAAP revenue of 490 million and non-GAAP revenue of 491 million, with GAAP EPS of 10-cents and the non-GAAP loss per share of $0.13. Before I dive into our details, as you probably noticed, we are changing our non-GAAP income statement presentation to exclude purchase accounting deferred revenue write-down, stock based compensation expense, and amortization of purchased or acquired intangibles as part of the M&A transactions. This presentation is consistent with the predominant practice in the software industry. We also believe this methodology is appropriate because our increased emphasis on software and our acquisitions of software firms with material recurring revenue streams. With this in mind, my comments on our financial performance for the quarter will be in non-GAAP terms unless otherwise specified. For reconciliation between GAAP and non-GAAP numbers please see the earnings release and the supplement published earlier today. Now, let me begin with the income statement. Our total revenue for the second quarter of $491 million excludes the impact of a 1.3 million purchase accounting deferred revenue write-down for WatchDox. Software and Services represents 15% of revenue and grew 19% on a year over year basis. Service access fees for SAF were 43% of revenue. The SAF decline was in line with our expectations for roughly 15% quarter over quarter decline. And we continue to model a decline of approximately 15%, for the next quarter. Lastly, our hardware business represented 41% of revenue. We recognize revenue on approximately 800,000 units. ASP was approximately $240, roughly in line with last quarter. Turning to margins, gross margin was 40.9%, compared to 47.5% in the same prior year quarter, and in line with our expectations. Gross margin was negatively impacted by low hardware volumes and the continued decline of…

All right, thank you. Operator, we are ready for Q&A, please.

Thank you. [Operator Instructions] We'll go first to Daniel Chan with Scotia bank.

Hi, good morning, thanks for taking my question. John, BB10 has been out for nearly three years now and you've launched a number of new products like the Passport and the Classic recently. But that business continues to lose market share, device volumes continue to decline and with only 800,000 devices in the last quarter, when do you throw in the towel on BB10 and just say I'm going to focus on Android?

Well, first of all, we'll have to make sure that Android is successful first. That's a good question. There is a very loyal base in the BB10, especially the government and some highly regulated industry customers. So we will have to see whether we can make money off that base, but in addition to that, if our plan of doing the BlackBerry Android type of implementation works well and the security side of the equation is well accepted by the governments and this base, of course we could then replace them or merge them into it.

So then as a follow-up you say you're going to be securing Android on your own. Is that going to be your own security solution or is that going to be using Samsung KNOX?

No, no, it's not Samsung KNOX. We're actually working with Google on this.

Okay. Thank you.

Sure.

We will go next to Mark Sue with RBC Capital.

Hey, Mark.

Morning, Mark.

Oh, thank you. It's actually Paul Treiber at RBC. Mark is unfortunately traveling at the moment. Just, what's the magnitude of the investment needed to bring the Android device to market in comparison to supporting the BlackBerry 10 device? Or, in other words, is it more cost effective to bring the Android device to market than the BlackBerry 10 device?

Absolutely. Because a lot of the drivers for the all the chipset are already in place, I don't have to spend any time managing money for drivers. I also don't have to do anything regarding the apps ecosystem or the API surrounding that. So all I need to do is to concentrate on security and the privacy features and add it to that ecosystem.

And then is there a similar relationship that you have with your contract manufacturers where they're taking on some of the inventory management or are you taking that on in the reference?

Oh, yes, we have both. So to clarify that, we have both arrangements. We have ones that we will take inventory, or at least parts -- I call it the unique parts exposure. Then we have one that we don't, as you well know. So this, of course, will continue, whether it's an Android device or a BlackBerry 10 device. So there's no difference here.

Okay, good to understand. One last one from me. Just in regards to the 33% growth in software license revenue, what's the organic growth excluding recent acquisitions?

OCR organic. You can see the difference between the WatchDox non-GAAP, GAAP, it's like 1 point some million. And we just finished AtHoc and we haven't finished Good yet. So they are all mostly organic.

Okay. Thank you.

Sure.

We will go next to Maynard Um with Wells Fargo.

Hi, Maynard.

Hi, good morning. Thank you. Can you just clarify if your guidance includes the Good Technology acquisition? Because you noted before that it would be accretive within the first year, but I'm curious if you can talk about immediately after close, will you still have non-GAAP profitability and continued positive free cash flow?

Yes. First of all, continued free cash flow taken into everything, including the Good Technology acquisitions, and the integration of that. You are talking about the non-GAAP profitability in Q4, correct?

Correct, yes.

That also includes all the acquisition.

Okay. It is inclusive of the acquisition. So how do we think about then the -- well, I guess you gave the cell phone number. The other question I had, it just seems like on the revenue growth is partially predicated on the new Priv handset, but can you just talk about your plans for distribution? Because if I look at the Android market, it's very highly competitive. So I'm just curious, one, how you distribute it? Two, what the ASPs look like, and then more importantly, the gross margin profile of the device?

Yeah, we have not released the ASP, the gross margin part. You'll have to wait for a little bit on that one. The reason why I kind of "jumped the gun" to make the announcement today is because it's leaking everywhere and I didn't think that it makes total logical sense for us to have this conversation when it's leaking everywhere and I won't talk about it. So we're confirming the fact that we are bringing our security know-how onto the Android ecosystem and we built a phone with the help of a lot of people, including working with Google, which tie up to also the Android for Work in the BES12 strategy. So everything kind of comes together. We've been working on this strategy for a long time, unfortunately it leaked, so I think it's best to let everybody know. And then so we have a much more sensible discussion. As far as pricing, we have a pricing. We are working with literally all the major carriers. The distribution strategy, you have to wait a little bit on that because we do have some choices.

Okay. And should we expect any BB10 devices, as well, through this calendar year?

For another new phone you mean?

Yes.

No, we don't have a plan for another BB10 device for this year.

Okay. Thank you.

Sure.

We will take our next question from Steven Li with Raymond James.

Great, thanks. John, if I recall, EZ Pass had until July to deploy their traded-in licenses. How much of EZ Pass has now converted? And if they have not deployed, does that mean they plan to use something else? Thanks.

I don't actually know. I haven't tracked that number. So, I'm sorry for that. But we will be able to tell you later, and we'll find out. But, I haven't really focused on the EZ Pass right now, because we kind of took a little different direction. We are driving a lot of their license into subscription. And so it wasn't really focusing on converting that base. We are obviously focusing on converting the base, but we're not focusing on moving the EZ Pass.

So, the [23%] [ph] growth year over year in software licensing, earlier you mentioned BES12 is a driver. So, this is not EZ Pass driving that growth?

No, this is not-- Well, it may have motivated by EZ Pass as a conversation, to start, with the account, but no, it is not. And we are driving very hard on subscription. So it's been -- it's been moving up quite a bit.

All right. Great. Thanks.

Sure. Absolutely.

We will go next to Richard Tse with Cormark Securities.

Hey, how you doing? Quick question here. Our math, basically, when you look at the pricing of the software, it seems like you guys have priced this fairly aggressively, based on how we back into the gross margins. Is that the case here or are we missing something in terms of that calculation?

Well, aggressively-- I would say that, yeah, we -- we believe we priced it at market. And, our competitors are giving very large discount. We don't normally give those large discount at all. So that's probably the best way to think about it.

Yeah, and -- Richard, it's James. Just one thing to add with that. Remember, John said that there is kind of a movement towards subscription. So, depending on what it is your math is doing, that may be skewing it as well, but --

That's true. That's a good point.

We can take that one offline.

That's a good point, yeah.

Okay. Thank you for clarifying.

Sure.

And we'll go next to Amitabh Passi with UBS.

Morning, Amitabh.

Good morning. Hi, guys. I had a couple questions for you. I might be mistaken, but I think this is the first time you disclosed the acquisition price for AtHoc. So, given the $250 million you're paying for the company, I'm just curious, should we expect something like $40 million, $50 million contribution to revenues next quarter from AtHoc or is that number too high?

Not next quarter. If it's next quarter, my friend, you send me those [indiscernible] all day long! I think that's a good representation.

Okay.

You are in the ballpark.

Okay. Thank you. Because I know some of these software multiples have been all over the place. So, I just wanted to clarify --

Yeah, we don't pay that high. We pay strategically. We don't pay that high.

Got it. And then, I guess, James, just on the OpEx, that's a lever you guys have continued to flex quite nicely. I'm just curious, as we look over the next two-three quarters, four quarters, from the 285 million, how should we be thinking about OpEx going ahead?

Well, we've got a number of things going on to kind of add to the complexity, Amitabh. Because, as John kind of said, and as I have said, the trend has been down and we have done some things that we only had partial impact of Q2, which you would continue to think you get the full quarter in Q3. So, the trend for our -- let's call it regular business would be down or our legacy business, if you want to call it that. We will go up because of AtHoc and OpEx will go up because of the Good transaction, once that closes and we get clearance there. But, remember, we will get revenue and margin contributions from that too. So, f you sum it all up, it's probably flattish, I would say, maybe even slightly up, once we are done with all of that. But, it's important to recognize in that comment what we're going to get on the top line as well.

Yeah. Actually, let me add one thing. That's a good point, James. Remember, we all said about a year ago, we were talking about stabilizing the company, the business, and focusing on cash flow from operation. I think we have accomplished that. This year, as we said, we're going to stabilize the revenue, and unfortunately, we have a really low point here. But we do expect Q3 to level up and maybe even up a little bit, and then Q4 to go up from that level, and as I pointed out, I think we are all very focused on one key psychological win which is our software revenue eventually will cover these -- the growth will cover the decline of the SAF and those two equations will converge, maybe that's a way to put it. And that we expect in Q4. So we are now -- we do have to invest a little bit in growth, but as James pointed out, that growth will come with some revenue, and it will come with some revenue with good margin.

Okay. All right. Thanks, guys.

We will go next to Todd Coupland with CIBC.

Good morning, everybody. I just wanted to clarify your expense expectations on Good. I think you said you'd get a 30% reduction immediately or early on. Could you just ballpark the base you are starting from on Good? Is that at 250 --

Well, so, if you think about -- we are expecting 160 million GAAP revenue for the next 12 months -- I mean, 12 months after we close, sorry. 12 months after we close, so it's November until November, I suppose, if we close it in November. And in one year, we will be accretive, both cash flow and profitability, and then you know that we will not be able to spend 160 million. That's not the path, right? So I think initially, we could take 30% out of that cost infrastructure, and then you will continue to take down in expenses until we reach that point in Q4. So I don't -- we don't really disclose the actual number of Good, because I don't think that's appropriate for me to do that. You have to dig around that a little bit because they are not part of us yet.

Okay. Okay. I thought I had seen a number out there of 240 million. That was in their filing, but -- and --

Maybe. Maybe.

Definitely not from us, Todd.

Not from us.

And then just to clarify James' recent statement on total OpEx: so are you saying by Q4, with all the puts and takes, the two acquisitions and the reduction in SAF costs, that total OpEx will still be at 285, including Good?

Yes, I think that's a fair comment, Todd.

Okay. Great. Thanks very much, guys.

Absolutely.

We will go next to Rod Hall, JPMorgan.

Hi, good morning, Rod.

Good morning, guys, thanks for the question. I guess I'm going to back up and ask a bigger picture question. It seems like you've maybe accelerated your acquisition strategy a little bit or increased it a little bit. I'm just curious if you could maybe walk us through what your strategic thinking is on the turnaround? Did you -- have you changed your point of view given numbers really haven't come through quite as well as you thought they would, or is this sort of still plan A? So I wonder if you could comment on that and then I'm going to follow up.

Good question. I think Q2, the numbers are lower than I expected and like -- and are -- but that set us up for reasonable trend up in Q3 and 4. So I would say that I'm still at where I started with the so-called plan A. I think those acquisitions that we made will help a lot -- go a long way. We have some very exciting products that we are developing in house here. We haven't seen the full impact of our IoT investment and that will come. So yes, I'm still on my plan.

Okay. Thanks for that. And then the follow-up, I just wondered if you guys -- I don't know if you mentioned it, it I don't think so, the proportion of the units coming out of Fox Con, can you update us on how that deal is going and what unit proportion looks like.

The deal is going fine. I just need more volume. The deal is fine. The relationship is great. They have been helpful and nothing is wrong there.

Can you give us any -- can you quantify the proportion or --

No. No. I don't think I should split out that.

Okay.

Sorry, I don't think we should spit out that. But as far as the relationship and the handshake and all the working things, it's all working as planned.

Okay. Great thank you.

Sure.

And we'll go next to Michael Kim with Imperial Capital.

Good morning, guys.

Good morning.

So can you talk a little bit about BBM and where you're seeing the strongest reception with its meeting the protectors and the bundles and where you might need to see more work or education to customer base and general comments on how that's progressing?

Okay. BBM, the contribution of BBM is still below our expectation on revenue, but if you only look at kind of the year-over-year growth is almost infinity because of that. Everybody is laughing here, by the way. So ignore that comment, please. So we do have a trend up in revenue. Mostly the receptivity areas are really more in Asia, particularly Indonesia. Our BBM MAU has been rather stable. It's about 91 million MAU. And we're pursuing a lot of plans and partnerships to drive that up. BBM protected is starting to see pipeline and we need to close some of those. That's the only thing that we have to do. But the interests are definitely out there. We have closed a few very big accounts, but we need to close more of them.

Got it. And then earlier in your prepared comments you talked about QNX as a growth driver in the quarter. Was that an automotive vertical or were there other use cases that are starting to gain more momentum as IoT and how are you seeing that maybe cross leverage?

Mainly automotive. On the IoT side, we just finished our cloud about a quarter ago and we're putting a little bit of a finishing touch around some of the products and so we really haven't really completely "rolled out and delivered" into the customer's hands. We are still in kind of the early stage of that. We are building both professional services organizations, as well as sales organizations around it. That's the new investment that we have been making in Q2 and we have been making all along, but we also made it in Q2 and we will make more of that in Q3. And when the go-to-market team is ready, you will see IoT revenue, or we should expect to see IoT revenue. But so far, it's still very skewed to automotive.

Okay. Great. Thank you.

We won a couple of big ones. [indiscernible] is tied to that.

Got it. Great. Thank you much.

Sure.

We'll take our next question with Tim Long with BMO Capital Markets.

Good morning, Tim.

Hi, Tim.

Good morning. Thank you. Two, if I could. First, just getting back to the device gross margin. It looked like we were back firmly in positive territory. James, I know you said volume, was there anything else on the sell in, sell through or any of the other dynamics that caused that to be more deeply negative there than what we've seen in the last few quarters? And then, back to the integration with Good, I think, John, you said it'll start day one. I'm just curious. BlackBerry, historically with the migrations through BES, there's often been some backward compatibility challenges. How do you think that's going to work with Good? So you'll have multiple platforms, not just one that's been fully internally developed. So how do you think customers will feel about the ability to leverage their existing architectures? Thank you.

Sure, Tim, back to your first question, can you clarify what you said around devices margins, what your model is showing?

Yeah. It looks to us if software margins were stable, we were down in the deep negative teens for hardware gross margins. So, I'm just curious after a few quarters of break even or slightly positive, why that went much more negative.

Yeah. And it is back to my prepared remarks, and thanks for clarifying that. It is mostly a volume case. There's nothing sell in, sell through, accounting or anything else really going on there. As you know, we still have a big pocket of fixed costs that are related to devices and if we are not getting the volume contribution, that's really going to weigh on margins and overall device profitability. So nothing else going on there.

Okay.

Okay. On the BES, Tim, and the integration, I can only tell you really limited, and we will be ready to tell the market on the first day when we get approval. I just wanted to remind everybody we are in the process of getting HSR, the antitrust approvals, so all of my remarks have to be extremely careful not to skew any of the decision or the directions. So I have not made any public comment regarding this. So the only thing you need to know is, because of the -- we thought about it long and hard, and decided on Good Technology because of the fact, that our MDM solutions is more modern and robust, maybe I'd say that, and their application management layers are a lot better than ours, which we were starting to build our own. So there is some natural synergy there and the customer actually sees it. And the customer likes our support infrastructures and that's come through loud and clear. I think the customer will all -- once they see our plans and roadmap, I think they will be very comfortable. I've already got some very strong customer endorsements. I just couldn't engage with them at this point

Okay. Thank you.

We will go next to Deepak Kaushal with GMP Securities.

Hi guys, thanks for taking my questions. I've got one admin one and then a follow-up, a bigger picture, if I may. I guess you've you given us a sense of Good and AtHoc revenues and WatchDox. What kind of revenue contribution did you -- have you been getting from Secusmart and Movirtu acquisitions?

Well, those vary. Movirtu is virtually none, because right now, it's being tested at Vodafone in Germany and in the UK. I think there's final testing going through, and they were supposed to roll out sometime in the second half of this year. So somewhere between Q3, Q4, it will be rolling out to the market. So Movirtu is very early, and when we acquired Movirtu they didn't have any revenue. I think they had one salesperson. That was it. So zero on that. Secumart -- our levels are low, very single digit type million. It's mainly primarily because of the great relationship we then have with the German governments, and a lot of different governments around the world. So it will start growing. There's a new product and it's called SecuVoice which is a software phase product of the Secusmart SD card version. That will be a lot more easier to implement with enterprises, rather than -- because SD card version are mainly a very government-oriented. So we should see some of those -- We have not really gotten a lot of M&A oriented revenue but it was planned as such, anyway.

Okay, great. Thanks. That's very helpful. And then when you look at your cash balance, your war chest for acquisitions, you talked about tuck-in acquisitions, but I wanted to ask you, John. Most of your acquisitions so far have been around EMM or device security. What about the broader enterprise security market? Do you see opportunities to do acquisitions in that front or are you just content to consolidate the device management market or grow new technology in that market?

Well so far our strategy is really -- all the acquisition strategies surrounding different modes of communications in mobile. So Secusmart is voice and text. Movirtue is personalization containers. Two numbers. Good, of course, is EMM. WatchDox is file sharing collaborations, mobile based, obviously. And AtHoc is emergency messaging, secure messaging transport. So if you could think about it, you could write it on a piece of paper, you will figure out very soon, quickly that it is about mobile communications and everything we do from data to voice, to text, and messaging. And it fits well with our current BES12 strategy, and it fits well with the BBM strategy. And so that's why -- that's been focusing on that. I'm not kind of wandering onto a different space at this time, because I think it's important for us to be very focused and win a segment of the market, but that's not to say that in the future we won't be interested. We've got to rebase ourselves and start growing consistently first. Does that make sense to you?

Yes, it makes a lot of sense. Thanks. I appreciate that very much. I'll pass the line.

Sure.

And we'll go to our last question from Anil Doradla with William Blair and Company.

Good morning, Anil.

Good morning.

A big question. You know, when I look at the enterprise mobility management market, when I look at your competitor, such as MobileIron and look at you guys, I think the bigger question I have is this: Are we dealing within a business model where the pricing is depressed? Because, when I looked at this whole Good Technologies and MobileIron, the belief was that this is a high growth area. But we're not seeing that. So, I'm trying to understand what is going on in this market.

Yeah. I have two views on this. First of all, the reason why everybody expects it to be high growth is, I think the market -- the number of licenses combined in all the players are about 10% of the available mobile devices out there. So there is 90% of this open space that we could tap into, and everybody is this thinking about it that way. Now, I think about it a little differently. I think about managing endpoints. I think about managing IoT. I don't really think about managing only EMM. But, EMM just happens to be the next monetizable space. One of these days we should sit down and talk about that. This is why we're spending so much money on the IoT side and the embedded side. Because of that, if it's only doing EMM, I'm afraid that one of these days we all wake up and then these EMM are given away for free. So, there are two things that we have been doing and number one, it's to focusing on making a much broader strategy than just EMM, with our BES. And this is where the IoT and the embedded space and QNX comes in. And the other part of the strategy is the value added services. This is the reason why we are so focused on having WatchDox and AtHoc and all of that is because we believe the customers will probably pay very little for the base platform, which is the EMM platform, but they will pay a lot for the applications that runs on the base platform, which is, of course, my file sharing, sync, and my alert messaging systems. It really is a horizontal apps to them. And I don't know whether that makes sense to you, but it is our plan. We know-- we agree with you that just based on EMM strategy, it's not going to be -- it may be okay for a little while, but it's not going to be a very long term thing.

Great. Thanks a lot.

of course.

Okay. I should wrap up. Let's see, I have prepared notes for that, probably. Okay. Well, actually I don't have any notes. Okay. Well, thank you for joining our call today. And I will look forward to talking to you guys throughout the quarter and definitely next quarter. And where we should see an uptick in revenue. Thank you and have a good day.

That concludes today's conference call. Thank you for your participation.