RIM Management Discusses Q1 2013 Results – Earnings Call Presentation
Thorsten Gerhard Heins – Chief Executive Officer, President, Non-Independent Director, Member of Innovation Committee and Member of Strategic Planning Committee
Brian Bidulka – Chief Financial Officer
Mark Sue – RBC Capital Markets, LLC, Research Division
Kulbinder Garcha – Crédit Suisse AG, Research Division
Jim Suva – Citigroup Inc, Research Division
Amitabh Passi – UBS Investment Bank, Research Division
Rod B. Hall – JP Morgan Chase & Co, Research Division
Simona Jankowski – Goldman Sachs Group Inc., Research Division
Scott P. Sutherland – Wedbush Securities Inc., Research Division
Tal Liani – BofA Merrill Lynch, Research Division
Kevin Smithen – Macquarie Research
Daniel Ernst – Hudson Square Research, Inc.
Scott Thompson – FBR Capital Markets & Co., Research Division
Mark McKechnie – ThinkEquity LLC, Research Division
Research In Motion Limited Q1 2013 Earnings Call June 28, 2012 5:00 PM ET
Ladies and gentlemen, thank you for standing by. Welcome to Research In Motion’s First Quarter Fiscal 2013 Results Conference Call. [Operator Instructions] I would like to remind everyone this conference is being recorded today, Thursday, June 28, 2012, at 5:00 p.m. Eastern Time. And I would now like to turn the conference over to Mr. Paul Carpino, Vice President, Investor Relations. Please go ahead, sir.
Okay. Thank you, Luke. Welcome to RIM’s Fiscal 2013 First Quarter Results 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 and strategic update. Brian will then review the first 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 in the Investor Relations section at rim.com. The webcast includes supporting slides that can be viewed through your personal computer or your BlackBerry PlayBook tablet. A replay of the webcast will be available on the rim.com website. We plan to wrap up the call around 6:00 p.m. Eastern this evening in order to let as many people as possible ask questions. [Operator Instructions]
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 and objectives and the anticipated challenges and opportunities in the coming quarters, our expectations with respect to product shipments, revenue, gross margin, operating expenses, our anticipated operating loss in Q2, net subscribers, ARPU and our cash position, our product development and marketing initiatives and timing, including our expectations relating to the launch of our BlackBerry 10 smartphone, plans and expectations relating to our CORE program and other statements regarding our plans, objectives and expectations.
We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intend, believe, continue and similar expressions. All forward-looking statements reflect our current view with respect to future events and are subject to risks and uncertainties and assumptions we have made.
Many risk factors could cause our actual results, performance or achievements to be materially different from those expressed or implied in our forward-looking statements, including our ability to enhance our current products and develop new products and services; risks related to further delays in new product introductions; risks related to intense competition, both in North America and internationally; our ability to maintain and grow our service revenue; our reliance on carrier partners and distributors; security risks and risks related to the collection, storage, transmission, use and disclosure of personal information; risks relating to network disruptions and other business interruptions; our ability to maintain or increase our cash balance in light of the challenge we face; our ability to implement and realize the benefits of our CORE program; our ability to retain and attract key personnel; our ability to maintain and enhance the BlackBerry brand; risks associated with our international operations; intellectual property risks; difficulties in forecasting financial results given the rapid technological changes, evolving industry standards, intense competition and short product life cycles that characterize our industry; and other factors set forth in the Risk Factors and MD&A sections of RIM’s filings with the SEC and Canadian securities regulators. We base our forward-looking statements on information currently available to us, and we do not assume any obligation to update them except as required by law.
I will now turn the call over to Thorsten.
Thorsten Gerhard Heins
Thank you, Paul, and thank you all for joining the call today. I will let Brian talk about the specifics from the quarter, so I can address some of the challenges and actions that we’re taking.
As discussed over the past few months, our first quarter results reflect the platform and products and vision we are going through, ongoing market challenges and the competitive dynamics we have seen across many of our markets. This was a challenging quarter for the company on many fronts, and I’m not satisfied with the financial performance we are reporting today. I want to assure you that we’re not standing still and that we are continuing to accelerate our focus on our key initiatives.
I would like to address 4 key areas on this call, including Q1 sales, the updated timetable for our first BlackBerry 10 device, our outlook for the next couple of quarters and update on our operational and strategic review. So let me get started with Q1 sales.
In the U.S., revenue has stabilized, showing only modest declines, but churn has remained high. We are aggressively working with our carrier partners in this region to upgrade customers to BlackBerry 7, and we have had particular success with the BlackBerry Bold product. We’re also working closely with our enterprise customers to maintain our enterprise subscriber base and upgrade these customers to BlackBerry 7.
In the international market, revenue has declined in the first quarter, reflecting pricing pressure due to competitive market dynamics and the age of our end market product portfolio. However, we have begun to refresh the portfolio with new BlackBerry Curve product in the U.K., Middle East and Asia Pac in the first quarter, and we’ll continue to drive these new devices into our global carrier and distribution channels in Q2. Initial results from these launches are positive, and we believe these products and other programs can help to reinvigorate sales in these regions.
Despite challenges in the quarter, we grew our global subscriber base sequentially in Lat-Am, [ph] Asia Pacific and the Europe-Middle East-Africa market. The overall BlackBerry subscriber base grew in the quarter and now stands at approximately 78 million users. We have shipped approximately 260,000 PlayBooks and have sold out of the 16-gig model. We continue to sell the 32- and 64-gigabyte models. And new LTE PlayBooks are in the final stages of testing with certain carrier partners, and we expect to launch these in the near future.
The second item I’d like to discuss is the updated timetable for BlackBerry 10 that we announced today. The successful launch of the BlackBerry 10 platform and the delivery of high-quality, full-featured BlackBerry 10 smartphones remains the number — remains the company’s #1 priority. Over the past several weeks, RIM’s software development teams have been very successful in the development of substantial features for the BlackBerry 10 platform. However, with the long and strong inflow of the integration — of those hitches into the integration process into the platform, this has proven to be more challenging and time consuming than anticipated. I want to make clear that these issues are not related to the quality of functionality of the features in the software but rather to the time required to manage the integration of such a large volume of incoming code and to prepare it for commercial use globally.
Based on the current status of the software integration, it has become clear that the schedule we were working towards, which would have the first BlackBerry 10 smartphones in market this calendar year, is no longer realistic. We now expect the first BlackBerry 10 commercial launches to occur in the first quarter of calendar 2013 on a global scale.
RIM’s development teams are relentlessly focused on ensuring the quality and reliability of this platform. I will not deliver a product to the market that is not ready to meet the needs of our customers or provide anything less than an outstanding user experience with the quality I expect a BlackBerry product to have. There will be no compromise on this issue.
In discussions with some of our global carrier partners on the launch plans [ph] of BlackBerry 10, many actually prefer a Q1 launch as many of their new global LTE networks will be getting in place by this time. We expect customers will be delighted by the quality, variety and quantity of applications on the BlackBerry 10 platform when it is launched.
We plan to have a broad spectrum of applications available from every category, including games, multimedia, productivity, enterprise and social media applications. Developers have already submitted over 25,000 PlayBook applications to BlackBerry App World, many of which will run on BlackBerry 10, and we’re expecting tens of thousands more, including applications built specifically for BlackBerry 10 by launch.
We’re extremely encouraged and excited by the traction that the BlackBerry 10 platform is gaining with application developers and content partners following the successful BlackBerry Jam session for developers we held at BlackBerry World and the ongoing 12-week, 23-city BlackBerry 10 Jam World Tour that has sold out in London, Barcelona, Berlin, Toronto, Montréal, New York, Santa Clara and Singapore.
BlackBerry World was a major success for the company with more than 5,000 attendees. We provided a sneak preview of BlackBerry 10 and seeded [ph] developers with the first BlackBerry 10 Dev Alpha device. Developers are excited by the Dev Alpha form factor, high-resolution display and the horsepower, which allows for fast and powerful apps that can stream content quickly and easily. And developers have already embraced the BlackBerry 10 platform, showcasing apps at BlackBerry World in May, the camera integration, our first-in-class HTML 5 browser and social ability for apps beyond anything we’ve seen on a BlackBerry before.
More than 20 partners demo-ed working BlackBerry 10 apps at the show after having the tool for less than 2 weeks. BlackBerry 10 is a platform that truly lets people share and create content and communications in all forms, whether video, photo, music, graphics, voice or messaging.
In terms of our outlook, we are expecting the next several quarters to be very challenging. We are in the midst of a platform and company transition, and we face an increasingly competitive environment. We plan to continue to aggressively drive sales of BlackBerry 7 handheld devices through the implementation of programs to both drive upgrades from older BlackBerry products to BlackBerry 7 handheld devices and attract first-time smartphone buyers to BlackBerry.
While these dynamics are expected to result in an operating loss in the second quarter, we have a plan to dramatically adjust our cost structure going forward to make RIM more efficient and to better align resources with our future opportunities. In addition, we have a strong balance sheet, which we are committed to maintaining.
I know I have delivered a lot of tough news today, but I want to highlight what we’re doing now to concurrently address all these issues and commit to you that we’re focused on driving long-term value for our stakeholders.
Let me update you on our operational and strategic review. First of all, I would like to discuss the 5,000-person workforce reduction we announced today and the CORE cost reduction program, which Brian will discuss in more detail later.
I understand, this is an incredibly difficult message to deliver, but it is necessary. In order to align our cost structure to help us move effectively through our transition and deliver on long-term stakeholder value, it is necessary to change the scale and refocus the company on the areas of highest opportunities. When we come out of this transition period, we want to move forward with a lean and nimble organization that can act quickly and is aligned with our growth opportunity. We’re also committed to ensuring that the reductions we make do not impact key programs such as BlackBerry 10, customer support or BlackBerry service level.
I fully understand the impact of workforce reduction of this size has on our employees and the communities in which we operate. I assure you that we wouldn’t move forward with a change of this size if we didn’t think it was critical for our future. It is our intent to move forward with these reductions as swiftly as possible to minimize interruption and uncertainty within our teams. These reductions will occur over the remaining 3 quarters in this fiscal year. However, we intend to notify those affected as quickly as possible.
And we’re also bringing in additional team management to help RIM through the transition and to help drive success of BlackBerry 10 once it’s launched. New additions to the executive team include a new Chief Operating Officer, Kristian Tear, and a new Chief Marketing Officer Frank Boulben. Kristian and Frank are industry veterans and bring extensive knowledge of the rapidly changing wireless global market.
I am also very pleased to announce that we have further strengthened the executive team with the hiring of Steve Zipperstein as RIM’s new General Counsel and Chief Legal Officer, who’s joining RIM from Verizon, and Ed Bourne as Executive Vice President of Organization Development, who comes to us from his own HR consulting firm and, prior to that, from Philips where he served for 11 years in various human resource leadership positions.
In addition, we have promoted Rick Costanzo as the Executive Vice President, Global Sales. Rick previously served as Senior Vice President and Regional Managing Director, America, for RIM and managed the strategy for all operations in Canada, Latin America and the United States. Prior to this, Rick was responsible for sales in Latin America and helped BlackBerry become the #1 selling smartphone position in the region. I am excited with the new leadership team that has been assembled and their readiness to take on the challenges ahead of us.
We also recently announced a comprehensive review of RIM’s strategic opportunities, including partnerships and joint ventures, licensing and other ways to leverage RIM’s assets in an attempt to increase value for our stakeholders. To ensure we have all the necessary expertise and resources to complete a thorough assessment of this option, we have hired JPMorgan and RBC Capital to help with the process and are actively working with them on this evaluation.
We are convinced that BlackBerry 10 deliver value as an integrated hardware, software and services offering and very excited at the potential for BlackBerry 10 to take this value proposition into the future of mobile computing. We believe the BlackBerry 10 platform has the potential to offer growth opportunities for the company across multiple segments, including smartphones, tablets, software, services and solutions, enterprise, automotive and embedded and machine-to-machine type applications.
There are 4 specific areas we are focusing our business on going forward. First, RIM’s product and service development focus will remain on specific consumer segments only: enterprise and BYOD. As we know, the consumer and enterprise market is becoming more integrated through BYOD. And BYOD, through our BlackBerry 10 platform, will be an important part of the RIM strategy to strengthen its positioning in the consumer market and support their leading position in the enterprise market.
Mobile device management tools are an important element of the IT infrastructure for our enterprise customers, and we intend to support these customers with a solid MDM offering. On top of this, we plan to build services that are value added for our customers and generate incremental revenue for the company.
There are also specific vertical markets where we have a relative competitive advantage that we plan to pursue with our enterprise offering. We’re actively engaging with our enterprise customers to ensure they are aware of our new offerings, including BlackBerry Balance and our mobile device management solution, and to work with them to deliver the types of enterprise services they want and expect from BlackBerry. We will also continue to invest in our strong automotive business as it has great potential for BlackBerry 10 platform in the future.
Second, we also plan to streamline the BlackBerry smartphone product portfolio to offer a fewer number of devices in market at any given time. The focus of the initial BlackBerry 10 launch is primarily on the premium smartphone segment in both touch and full QWERTY. To be clear, we fully intend to lead in the full QWERTY segment with BlackBerry 10 and expect the BlackBerry 10 QWERTY version to launch in close proximity to the initial full-test BlackBerry 10 smartphone. The BlackBerry 7 product portfolio will continue to address the entry level and mid-segment of the market until we launch the full BlackBerry 10 portfolio. We expect to streamline smartphone portfolio to reduce total R&D costs, increase economies of scale for device, reduce marketing and sales complexity and provide a distinct offering for each targeted market segment.
Third, we plan to evaluate opportunities to license the BlackBerry 10 platform. We are evaluating partnerships and business models to license the BlackBerry 10 platform to expand the subscriber base of the ecosystem, not just in smartphones but potentially in other segments as well.
Finally, we intend to aggressively build on our 78 million customer base around the world as we transition to BlackBerry 10 and focus on growing, developing and executing on a consumer services model to augment the decline in ARPU we expect over the coming quarters. We plan to build this consumer services business based on the unique strength of the BBM platform, which has 56 million customers, and through partnerships with industry-leading consumer services companies. We also plan to pursue partnerships to develop and deliver these services, and intensive discussions are under way with a number of potential partners.
I have provided you with a lot of information here that I will be happy to discuss in our Q&A, but let me now turn the call over to Brian, who will take you through more detail on the quarter.
Brian, over to you.
Thank you, Thorsten. Revenue for the first quarter of fiscal 2013 was $2.8 billion, a 33% decrease from the fourth quarter of fiscal 2012 primarily as a result of decreased BlackBerry smartphone shipments, greater proportion of entry-level products with lower average selling prices and pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices. Sales outside the United States, United Kingdom and Canada represented approximately 62% of total revenue compared to 68% in Q4. Some of the larger markets comprising the other segment in the quarter were Indonesia, South Africa and Venezuela. The decrease in other markets was primarily as a result of a less favorable product mix with lower ASPs.
U.S. sales represented 25% of total consolidated revenue compared to 17% in the fourth quarter. On an absolute basis, U.S. revenue was down slightly as we aggressively implemented pricing initiatives that reduced churn in the United States. Sales in the U.K. in the first quarter represented approximately 9% compared to 10% last quarter, and Canada represented the remainder.
RIM shipped 7.8 million smartphones in the first quarter. Estimated sell-through in the quarter was approximately 10.5 million units, including phone-only sales. Channel inventory is down on an absolute basis. However, the trends in certain markets is such that our partners are not carrying as much inventory, they’re not replenishing their inventory at the same pace as they have historically.
In the first quarter, we shipped approximately 260,000 PlayBook tablets, and sell-through to end customers based on our internal data was higher than this.
Hardware revenue was approximately $1.7 billion, or 59% of sales, compared to $2.9 billion or 68% of sales in the fourth quarter. The decrease in hardware sales is primarily attributable to the lower unit volumes, a less favorable product mix with lower average selling prices and the adoption of new pricing initiatives to drive sell-through and sell-in for BlackBerry 7 handheld devices.
Service revenue was approximately $1 billion, or 36% of sales, down approximately 12%, reflecting the 14th week in the previous quarter as well as the change in mix of our subscriber base from higher-tier, unlimited plans to prepaid and lower-tiered plans, which reduced ARPU. Software revenue was approximately $69 million.
Gross margin was approximately 28% in the quarter, which was substantially lower than the adjusted gross margin of approximately 39.8%, which included the inventory provision in Q4. This decrease was primarily as a result of certain fixed costs being allocated to lower volumes and greater proportion of entry-level products with lower average selling prices and the adoption of new pricing initiatives to drive sell-through and sell-in of BlackBerry 7 handheld devices. This is partially offset by an increase in service revenue as a percent of total revenue.
Operating expenses decreased from the fourth quarter primarily as a result of a reallocation of expenses affecting gross margin and reduced levels of discretionary marketing spend and reduced foreign exchange losses. The reallocation of expenses had a $50 million impact on OpEx and a slight impact on gross margin as well.
The tax rate in Q1 was approximately 19% on a GAAP basis, reflecting the nondeductible write-down and goodwill. Excluding the impact of the goodwill charge, the income tax recovery was approximately 37%.
GAAP net loss for the first quarter of fiscal 2013 was $518, or $0.99 per share, diluted, versus net loss of $125 million or 24% — $0.24 per share in Q4. Excluding the impairment of goodwill, the adjusted net loss was $192 million or $0.37 per share, diluted. The earnings press release issued this afternoon contains a reconciliation of our GAAP net loss and diluted loss per share to adjusted net loss and adjusted diluted loss per share.
RIM generated approximately $710 million in cash flow from operations in the quarter. Uses of cash included CapEx of approximately $155 million, intangible asset additions of approximately $285 million as a result of prepaid license agreements and patent acquisitions, as well as a business acquisition of approximately $100 million. Cash, cash equivalents, short- and long-term investments increased by approximately $100 million to $2.2 billion at the end of the quarter.
Given the current business conditions and the decline of the company’s market capitalization, the company concluded that goodwill impairment indicators existed as of the end of Q1. Consequently, the company recorded a pretax, noncash goodwill impairment charge of $335 million, which eliminates the remaining book value of goodwill.
Despite all of the challenges from an operational and financial perspective, we continue to make significant progress with some of the initiatives that we are intended — that are intended to help us reach our $1 billion cost savings goals. With the changes executed to-date, we expect to realize savings of $300 million in fiscal 2013. We plan to streamline the BlackBerry smartphone product portfolio to offer a fewer number of devices in market at any given time. The new portfolio will continue to offer both the iconic BlackBerry keyboard and touchscreen devices. Manufacturing supply chain is one of the focus areas of our CORE program, and in Q1, we began to implement changes that will drive savings throughout fiscal 2013. We’ve started the process to outsource our Global Repair Services, and we expect the transition to be complete in the third quarter of this fiscal year.
As mentioned on the last conference call, we are optimizing our global EMS manufacturing footprint to reduce complexity and improve delivery performance. This process is under way, and we expect to move from a manufacturing network of 10 EMS sites to 3 EMS sites by the end of the calendar year. We will also include an in-region fulfillment model for closer proximity to our customers. Additionally, we recently met with our suppliers to discuss further ways to reduce costs and meet our target savings for the end of fiscal 2013.
We’ve realigned our quality organization by centralizing resources to streamline and improve execution, reduce complexity and focus on value add. We’ll move forward by providing suppliers with clear quality standards and accountability to drive additional savings. We’re aligning our sales and marketing teams to provide — to prioritize their marketing efforts and spend in regions that offer the highest opportunity and return while scaling back activities or exiting in regions that don’t meet our criteria. Through this targeted use of resources and more effectively leveraging our marketing windows, we have been able to reduce the budget for fiscal 2013.
In addition to the above efforts, we will see organizational efficiency — where we see — we will see organizational efficiency. We plan on driving further efficiency through a reduction in the number of layers of management, to drive accelerated execution and decision making, improved performance and more transparent accountability.
We expect further outsourcing of noncore functions identified by the CORE program will also contribute to the restructuring. As Thorsten mentioned, it is always difficult to include headcount when making decisions to cut costs. However, it is necessary that we make these organizational changes in order to improve the company’s performance in the long run. We expect the restructuring, which has already begun, will affect approximately 5,000 positions by the end of the fiscal year. Company expects to incur restructuring-related charges of approximately $350 million by the end of fiscal 2013 primarily associated with the global workforce reduction. Other charges and cash costs may occur during this process, and the company intends to share more details throughout the year regarding our progress as programs are implemented or changes are completed.
Company expects the next several quarters to continue to be very challenging for its business based on the increasing competitive environment, lower handset volumes, potential financial impacts and other impacts from the timing of the BlackBerry 10 launch, pressure on RIM to reduce their monthly infrastructure access fees, a higher mix of entry-level products and plans to continually — to continue to aggressively drive sales of BlackBerry 7 handhelds as our portfolio of higher-ASP products begins to age before the launch of our new BlackBerry 10 devices. These factors will have an impact on both revenue and gross margin.
As a result, the company currently expects to report an operating loss in the second quarter of fiscal 2013 as we continue to invest in targeted marketing and sales programs and continue to work through the transition to BlackBerry 10, as well as the impact of certain of the company’s fixed costs being spread over a lower volume of handhelds.
We expect the downward pressure on operating results to continue for the remainder of the fiscal year based on the market dynamics I mentioned as well as the timing of the BlackBerry 10 launch. This outlook excludes the impact of the charges related to the CORE program. The CORE team is looking at all opportunities to accelerate the implementation of cost-saving initiatives earlier in the fiscal year. We intend to provide quarterly updates as significant milestones are achieved.
BlackBerry subscriber base grew to approximately 78 million in Q1. However, we expect net subscribers in the United States to remain under pressure, and we’ll be looking to international markets to help maintain and grow the base. However, given the anticipated change in the mix of our subscriber base, reflecting growth in lower-tiered plans and continued pressure in the U.S. market, we expect the ARPU will continue to decline in the second quarter.
As I mentioned above, RIM has $2.2 billion cash position at the end of Q1, and we’re focused on maintaining a strong cash position throughout — through prudent working capital management and reduced levels of capital investments as part of our CORE program.
That concludes our call, and I will now ask the operator to start polling for questions.