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Edited Transcript of BB.TO earnings conference call or presentation 31-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 BlackBerry Ltd Earnings Call

WATERLOO Mar 31, 2017 (Thomson StreetEvents) -- Edited Transcript of BlackBerry Ltd earnings conference call or presentation Friday, March 31, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charlie Chen

* John S. Chen

BlackBerry Limited - Executive Chairman and CEO

* Steven M. Capelli

BlackBerry Limited - CFO

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Conference Call Participants

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* Anil K. Doradla

William Blair & Company L.L.C., Research Division - Analyst

* Gus Papageorgiou

Macquarie Research - Research Analyst

* Kulbinder S. Garcha

Crédit Suisse AG, Research Division - MD

* Maynard Joseph Um

Wells Fargo Securities, LLC, Research Division - MD and Senior Technology Analyst

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Michael Wonchoon Kim

Imperial Capital, LLC, Research Division - SVP

* Paul Steep

Scotiabank Global Banking and Markets, Research Division - Analyst

* Paul Treiber

RBC Capital Markets, LLC, Research Division - Associate

* Simona Kiritsov Jankowski

Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst

* Steven Li

Raymond James Ltd., Research Division - SVP

* Timothy Patrick Long

BMO Capital Markets Equity Research - Senior Equity Analyst

* Todd Adair Coupland

CIBC World Markets Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to BlackBerry's Fiscal 2017 Year-end and Fourth Quarter Conference Call. (Operator Instructions) I will turn the call over to Charlie Chen, Vice President of Investor Relations for BlackBerry.

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Charlie Chen, [2]

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Thank you, operator. Welcome to BlackBerry's Fiscal 2017 Year-end and Fourth Quarter Results Conference Call. With me on the call today are Executive Chairman and Chief Executive Officer, John Chen; and Chief Financial Officer, Steve Capelli.

After I read our cautionary note regarding forward-looking statements, John will provide a business update and Steve will then review the fourth quarter results. We will then open up the call for a 30-minute Q&A session. (Operator Instructions) 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 40-F 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.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [3]

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Thank you, Charlie. Good morning, everybody, and welcome to our fiscal 2017 fourth quarter results conference call. As is customary, I will reference non-GAAP numbers in my summary of our quarterly results. There is a reconciliation table of GAAP to non-GAAP results in the press release.

I am pleased to report that our Q4 results came in at or above forecast in all major metrics. Let me run through a high-level summary of that. Revenue came in at $297 million, a noteworthy accomplishment. A stellar growth in Software & Services exceed the decline in SAF and almost nearly offset the decline in hardware and SAF combined.

Total company Software & Services revenue came in at $193 million. This represent an increase of 25% year-over-year and 12% quarter-over-quarter. We achieved our full year target of 30% growth with total Software & Services of $687 million -- that's $687 million. Of course, I'm very pleased with that accomplishment.

Gross margin for the quarter came in at 65%. Operating income was $13 million and EPS was positive $0.04. Note that we achieved the last breakeven of positive -- at least breakeven or positive EPS each quarter in FY '17. For the quarter, we were able to return to positive free cash flow at $16 million. For ending cash, our ending cash came in at $1.7 billion, up $89 million from last quarter.

In our strategic area of focus, we are executing well and winning important opportunities. As a reminder, our end-to-end secure platform consists of 4 main components: one, the unified endpoint management, we call it UEM; two, horizontal and vertical mobile apps; three, embedded software enabling mobile endpoints, such as connected cars; and last but not least, four, the IoT appliances, such as BlackBerry Radar.

Each of the above areas give us good opportunity for growth and there are synergies across all these areas. In addition, our licensing programs are seeing good traction. We have a growing pipeline of opportunity in mobile and security software: CPaaS in secure software, CPaaS, which I'm going to cover a little bit later; Communication Platform as a Service; and IP licensing.

So now let me provide you some color on some of the key accomplishments. In enterprise, we saw good win rates and had one of our strongest-ever billing quarters. And please don't ask me what the number is. We processed 3,532 customer orders in Q4, an increase of 16% from last quarter. Notably, we had several large wins with customer in nonregulated industry, indicating that our security offering is beginning to resonate in the broader enterprise market. We also saw good performance across the major geographies. Some high-profile wins included the Deutsche Post DHL, Nationwide Mutual Insurance, Southern Health, Mitsubishi UFJ Financial Group, Queensland Investment Corporation, Idaho Power, Parliamentary Services in Australia.

We're also seeing traction expanding in our partner reach. I have 2 success stories to share with you. One, in our partnership with China Mobile, we won a 10,000-seat pilot with China Co-op Group. We're excited about this significant partner win as well as the potential to expand our business in China. Earlier this month, Vodafone Germany announced it is the first carrier to offer the full BlackBerry Enterprise Mobility Suite through the SIM-based licensing. Vodafone is offering all tiers and capabilities of our Secure suite for managing endpoints, mobile apps, secure messaging, identity management as well as content.

You will recall that last quarter, we launched our Federal Cybersecurity Operations Center focused on achieving FedRAMP certification for the U.S. government. After the quarter, our crisis management platform achieved a FedRAMP and Authority to Operate certificates. We intend to take most of our enterprise products through the certification process. Also on the cybersecurity front, Giuliani Partners selected BlackBerry Secure as their underlying software platform to support its consulting practice for government and enterprise customer. This is a great start in our security services business. And you should expect more of these types of partnerships in the future.

In embedded software, we're showcasing our capability to enable the connected cars of the future. Early this year at CES, we announced our most advanced and secure embedded offering for autonomous drive and connected cars, the QNX Software Development Platform 7.0. A key feature of that is a 64-bit operating system, which enables high performance for more powerful domain controllers inside vehicles. Also included are enhanced kernel-level security protecting [ games ] to malfunction, malware and cyber attack. The 7.0 release works with ARMv8 and Intel x86-64 bit architecture. 62 partners has already signed up as beta users on the platform. These partners are in 4 main groups: in automotive, chipmakers, general embedded and other applications, including ISVs.

We demonstrated a Level 4 self-driving scenario on a test track with a Lincoln MKZ powered by the BlackBerry software and Renesas hardware. And that's also at CES, sorry. We also demonstrated at CES a prototype of a vehicle management portal. With over 100 million lines of code now, software code in some of today's vehicle, there's a growing risk of security breaches and failures. This portal will be targeted for automotive makers and Tier 1 suppliers. It allows users to scan software code, identify vulnerabilities or exposure and view key parameters and attributes in a dashboard view. We received extremely positive feedback from the CES attendees. And we expect to launch this offering later in the fiscal year.

In the IoT appliances, we continue to win new business and we are building our proof of concept pipeline. I'm pleased to announce Trailer Wizards selected Radar in Q4. Trailer Wizards is Canadians' largest commercial trailer rental and storage companies with 25,000 trailers. Our pipeline is progressing in this area with higher POCs and advancing to older states and new POC entering the funnel, including we added 6 of them in Q4.

Finally, our licensing programs are seeing good traction on multiple fronts. In the quarter, we entered into a long-term software licensing agreement with Optiemus, Optiemus Infracom, the official name, to design, manufacturer, sell and support BlackBerry brand mobile devices in the country of India, Sri Lanka, Nepal and Bangladesh. This is the third major device software licensing agreement that we have signed. And we now cover the globe through our agreements, which also included BB Merah Putih, which is the Indonesian outfit, and TCL in China.

The first 2 devices were already launched -- were recently launched. The KEYone, that's the name, not key one like the most important one. That might be the reason. The KEYone was launched by TCL at Mobile World Congress last month. There were 400 attendees at the launch event and the device won 10 Mobile World Congress Best of Show awards. Earlier this month, the BlackBerry Aurora was launched in Indonesia with participation from the Indonesian Ministers of Communication and the Canadian ambassador. There were also 300-plus dealers and 100-plus BlackBerry retail trainers in attendance.

We are now expanding to the next phase of our licensing program. This will focus on a broader set of endpoints. What this might mean, and I make no promise, is that you may soon see a BlackBerry tablet. And it will also extend it to co-branded handsets with IoT and enterprise of things, the EoT devices. These endpoints will run our software and security features and be co-branded Secure by BlackBerry. We recently released our latest secure handset software from Android. The codename for our product -- the codename for our internal project is by the name of [ Black Widow ]. This release has significant enhancements in enterprise management capabilities, which will support our expanding licensing program.

I spoke earlier about the Communication Platform as a Service or CPaaS. The market is a new market opportunity under our licensing efforts also. We launched the BBM Enterprise SDK to address this opportunity. This capability allows partners and developers to integrate secure messaging, voice and video into their application and services. Since the launch, we have seen great receptivity to this release. The offering became available in early February. And 15 ISVs have already signed up to start development on with the SDK. We're seeing solid interest in our offering and specifically in the security features and the Internet protocol delivery.

We are expecting the first partner apps to be available in Q2. This is again the reason significant to us is we will get royalty as the partners are shipping applications. Going forward, we'll continue to shift resources into all these growth areas I just covered. We're also investing in partnership and opportunity to expand our global footprint.

I will now turn the call over to Steve for a much more detailed look at our financials. Steve?

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Steven M. Capelli, BlackBerry Limited - CFO [4]

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Thank you, John. Today, we reported Q4 GAAP revenue of $286 million and non-GAAP revenue of $297 million with a GAAP EPS loss of $0.09. Non-GAAP EPS was a positive $0.04. Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, debenture fair value adjustment, stock comp expense, restructuring program charges, inventory write-down, amortization of purchased intangibles and business acquisition and integration charges.

My comments on our financial performance for the quarter will be in non-GAAP terms unless specified otherwise. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release and supplement published earlier today. I will begin with a consolidated review of our Q4 FY '17 income statement results and move on to the individual segments thereafter. Now let me begin with the consolidated income statement results.

Our total revenue for the fourth quarter was $297 million. Our consolidated gross margin was 65% compared to 49% a year ago. Our non-GAAP gross margin excludes restructuring program charges of $6 million, inventory impairment of $4 million and stock comp expense of $1 million. The gross margin improvement of 1,600 basis points over a year ago is attributed to growth of Software & Services and more favorable revenue mix. As a result, we are increasing our outlook for consolidated gross margin to approximately 70% for FY '18, an 800 basis point improvement from 62% for all of FY '17. Operating expenses were $181 million, down from $198 million last quarter. As John mentioned earlier, we are shifting resources with a focus on channels and customer-facing areas. And we will be investing in growth initiatives in FY '18.

GAAP net loss for the quarter was $47 million. Our non-GAAP operating expenses excluding $28 million in amortization of acquired intangibles, $19 million in restructuring charges, $14 million in stock comp expense, $3 million in business acquisition and integration charges and a benefit of $16 million of fair value adjustment related to the debentures. Non-GAAP operating income was a positive $13 million and non-GAAP income was $23 million. Our adjusted EBITDA was approximately $42 million this quarter excluding the non-GAAP adjustments previously mentioned.

I will now provide a breakdown of our revenue. Total company Software & Services was $193 million, representing 65% of total revenue. Roughly 80% of Software & Services segment revenue, excluding IP licensing and professional services, was recurring in nature. Device revenue was $55 million, representing 19% of revenue. Total SAF revenue for the fourth quarter was $49 million, representing 16% of revenue. SAF revenue was down 26% quarter-over-quarter. We continue to model a sequential decline in SAF revenue of roughly 25% next quarter. All of our business segments were profitable in Q4 on an operating basis.

Now moving to our balance sheet and working capital performance. Total cash, cash equivalents and investments increased to $1.7 billion, up $89 million from $1.6 billion last quarter. Our net cash position was approximately $1.1 billion at the end of the quarter. Aggregate contractual obligations, which includes purchase obligations, operating lease obligations, interest payments and other goods and services utilized in operations, was approximately $398 million at the end of Q4. This is down from $860 million a year ago. There were no purchase orders with contract manufacturers at the end of Q4. This is down from $162 million a year ago and $35 million at the end of Q3.

Moving to the cash flow statement. Free cash flow was a positive $16 million in the fourth quarter, which consisted of cash flow from operations of a positive $19 million and capital expenditures of $3 million. Looking forward, we expect positive free cash flow and EBITDA for the full 2018 fiscal year.

That concludes my comments. I'll now turn the call back to John.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [5]

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Thank you, Steve. Let me now comment on the fiscal year 2018. With our focus and shift towards a software model, we have consolidated our software business to enable tighter product and go-to-market integration. This will make our sales channel more efficient, which allow us to deliver higher value to our customers.

With these related changes in our organizational structure, we are addressing the need to revise our segment reporting beginning next quarter. While we work through the appropriate disclosure requirements, we expect to continue to provide information broken down by Software & Services, hardware and SAF. We are now taking -- we also are taking into account that many of our shareholders have requested better revenue visibility of our Software & Services business.

Now on to our outlook for FY '18. In our Software & Services business, we expect to grow at or above the overall market. After completing our planning process and based on our portfolio breakdown, we see market growth of roughly about 10% to 15% on average. We are now targeting the higher end of the range, so somewhere between 13% to 15%. We also expect to be profitable on a non-GAAP basis and free cash flow-positive for the full year. With these expectations in mind and looking at the analyst models, I'm generally comfortable with the current consensus for revenue and EPS for Q1 as well as the full year.

Now I will open the call up for Q&A. Operator, will you please administrate that?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Steven Li of Raymond James.

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Steven Li, Raymond James Ltd., Research Division - SVP [2]

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John, a couple of quarters ago, you talk about continuing to harden the BlackBerry software and achieve DoD certifications. Can you give us an update on that?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [3]

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Yes, I -- let's see. We have NIAP certification a quarter ago, so that's done. I mean, that's done for the 10.3.3. We released that. So that's the latest and greatest. We have a further hardening of the products in the Android side, which I just spoke about, we released that also, codename [ Black Widow]. And we continue to spend a lot of time and resources on further doing more certification and more hardening. But the immediate task has been done.

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Steven Li, Raymond James Ltd., Research Division - SVP [4]

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Great. And do you expect both certifications to drive some licensing revenues for you in Mobility Solutions? Or do you see them mostly as upside, potential upside?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [5]

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I think, first of all, the NIAP certification and then also the FedRAMP certification is required to do business in the more -- in the critical arena with the -- at least for the United States government, and I think it's acceptable to a lot of governments around the world after we pass in the U.S. standards. So we have achieved all that. So it is anchored to our federal business as a whole, both in the UEM side of the equation as well as the AtHoc side of the equation. So yes, it's both. The answer to your question is really both. It's baked into support our current businesses or growing our current businesses as well as winning new projects. We will also license it, but where it's applicable by law.

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Operator [6]

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Our next question is from Paul Steep of Scotia Capital.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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John, could you talk a little bit and maybe as well, Steven, with SAF coming down, can you, John, on the NOC side, talk about how you think about repurposing this infrastructure? Obviously, huge investment, it's critical. And then Steve, sort of tying into John's response, how should we think about managing the cost down on that significant infrastructure?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [8]

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Good question. This is one that we work on continuously. First of all, we're very proud of our infrastructures in NOCs. And many component of NOCs, some of them has to do with security and some of them has to do with relay forwarding. So where we make sense of the cost structure and how we spend the money, we will repurpose it. We have a number of ideas. I think it's too premature for me to comment on it. But I would just confirm the fact that we will keep it for our customers because a lot of consumers in their critical infrastructure relied on it. It is a value add that only BlackBerry could bring to the market and -- but we will also repurpose it as the capacity of the SAF requirements start coming down. So you had the right question. I can't provide you a more detailed answer because still work in progress.

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Steven M. Capelli, BlackBerry Limited - CFO [9]

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From a cost structure perspective, we have done some stairstep measures over the past 12 to 18 months. And the current position that we're in can still come down but at small levels. With our plans to repurpose, we don't feel at this point in time there's a need to dramatically change the cost structure for SAF. Obviously, we will review that, should that become necessary.

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Operator [10]

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Our next question is from Maynard Um of Wells Fargo.

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Maynard Joseph Um, Wells Fargo Securities, LLC, Research Division - MD and Senior Technology Analyst [11]

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So if I look -- if I grow your software business at a 13% to 15% pace, and I think you said your gross margin guidance was 70% for fiscal '18, does that imply that you're seeing a decline in your software gross margins in fiscal '18? Or maybe just walk through where you're seeing the biggest gross margin impact because I think it implies that you're seeing some decline somewhere.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [12]

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No, I think it's a balance of the portfolio. I think Steve said the 70% is where the company is. And we're now centering without kind of one-time thing. You remember that a quarter ago, we were at 70%, but that was a benefit of the warranty side of the equation on devices when we get out of devices. So that's a one-time thing. The normalized margin is in the mid-50% -- mid-60%. So I think the 65% is a really good number for where we are in the portfolio and the percentage of the portfolio. And what Steve is talking about was we're going to bring it up to 70%, we're going to work ourselves improving. So think about it, there are 500 basis point improvement overall in the company that we're expecting in FY '18. So it's not a decline of any sort.

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Steven M. Capelli, BlackBerry Limited - CFO [13]

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And as you look at our Software & Services businesses as it is today, those margins are 80%. And we expect obviously that same construction of revenue to still have roughly 80% as well. But the combination of all the factors would get us to about 70% for the entire year.

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Maynard Joseph Um, Wells Fargo Securities, LLC, Research Division - MD and Senior Technology Analyst [14]

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Okay. And then can you just talk about the key drivers of that 13% to 15% growth? I think your core MDM and your QNX businesses are your 2 largest segments. I'm just curious whether you think you can grow those at or closer to those rates.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [15]

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Yes, I think the -- depending on who you look at, I mean, I look at some IDC numbers and Gartner and all that for the UEM space. And UEM space is broader than just the EMM space. When you look at that number next year that people is kind of looking at it at about 10% to 12.5%, depending on who you look at. We think we could do better than that. That's one component of that or Carl thinks he could do better than that. I think it doesn't matter. Sandeep has a pretty good plan in QNX and in particularly going Radar, and that's -- and I spoke about some of the new ideas, like the vehicle portal. Vehicle portals are charged on per month basis per vehicle. So they're another recurring revenue I hope we could build up. So there's a combination of some current existing product, which we are very proud of and some of the new stuff that's coming in online. Not everything will work, as you all know. But I think we'll got enough iron in the fire that the combination of that makes us feel comfortable we could grow that numbers.

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Operator [16]

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Our next question is from Tim Long of BMO Capital Markets.

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Timothy Patrick Long, BMO Capital Markets Equity Research - Senior Equity Analyst [17]

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Just a clarification and a question. Just trying to get to the software numbers for the quarter. Could you -- it looks like maybe $27 million was reallocated from the traditional reporting. Maybe it moved from Mobility Solutions to software. So you see the $166 million in there in one of the tables. Can you just clarify what that is? And on the -- then maybe answer that, then I'll come back with another.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [18]

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Answer?

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Steven M. Capelli, BlackBerry Limited - CFO [19]

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He said answer that, maybe I'll come back with another.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [20]

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I thought we have one question. But okay, I got it. So that is professional services revenue that apply to helping customers to deploy some of their applications and building some of the applications. So those are engineers in the mobility group. That's why the revenue is being reported in the mobility group because the cost is also being reported in the mobility group. But these are services and software.

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Timothy Patrick Long, BMO Capital Markets Equity Research - Senior Equity Analyst [21]

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Okay. So this is a recurring business, this isn't just something that happened in the quarter?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [22]

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We hope so. We hope we will recur it. It's closer (inaudible) that it ties to task and project and assignments. So we do hope so.

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Timothy Patrick Long, BMO Capital Markets Equity Research - Senior Equity Analyst [23]

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Okay. And secondly, on the mobility and the device side, a decent quarter there. Could you just walk us through again the timing of when you think the licensing piece will have a material impact both on revenues and what it will mean for gross margins for that business?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [24]

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Yes, it's a little bit of -- it kind of depends on how you and I define material. But let me put it in the following way. We just launched 2 phones or our partners -- we helped our partners launched 2 phones. One in Indonesia, and that one is shipping already. The second one that TCL announced at the Mobile World Congress, which is the physical keyboard on an Android, that one is not going to be slated to ship until probably May time frame. I think the first production, manufacturing production run is the end of April. So the product looks pretty good. But the worldwide visibility is going to be later than May. We get it obviously on a quarterly basis on reported ship per unit. So you could kind of think about that and model that and calculate that. So from the Indonesia one, we should be starting to see some revenue this quarter and start ramping up. And that's our general idea is to pipeline these, and then keep growing the numbers. So I'd say probably towards the end of the year that you could see some numbers that are significant enough, but I think -- but you're going to start seeing some level of ramp-up or we should start to see some level of ramp.

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Operator [25]

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Our next question is from Gus Papageorgiou of Macquarie.

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Gus Papageorgiou, Macquarie Research - Research Analyst [26]

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Just on Radar, I'm wondering if you can give us kind a bit of an update there. How many trailers? Or can you give us indication how many trailers you currently have on that platform? And what's your goal for the year?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [27]

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I don't have how many trailers. Do you guys have how many trailers? In the thousands, right?

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Steven M. Capelli, BlackBerry Limited - CFO [28]

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Yes.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [29]

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I'm sorry. I didn't add up how many trailers. We were -- my focus had always been the proof of concept and the win. And the reason is everybody will order 500, 1,000, 2,000, those kind of numbers to start, even if they have 25,000 trailers, which in this case that we won, a Trailer Wizards, they have 25,000 trailers and containers. So I would say what I focus in on -- in the early orders, the initial orders are usually much more modest, then they -- once they start rolling it out, they literally going to then kind of order just in time. So to me, it's really not so much as how many do we have right now, but it's how many are we winning.

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Gus Papageorgiou, Macquarie Research - Research Analyst [30]

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When do you think Radar will be material for your revenues? Like will it be sometime this year, in a quarter this year?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [31]

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Yes, absolutely. This is a reasonably big piece of our growth plan of the company that Sandeep is driving. Yes, the answer to the question is yes.

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Operator [32]

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Our next question is from Anil Doradla of William Blair.

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Anil K. Doradla, William Blair & Company L.L.C., Research Division - Analyst [33]

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So John, just a clarification here. You talk about 13% to 15%. Is that based on when you look at the Software & Services revenue, is that based on the $166 million, which is purely software or some of the reallocations, which is going on, the $20-plus million, so that's like $194 million? So what are you basing that 15%, 13% to 15% growth?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [34]

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I based it on the whole thing. So you guys keep thinking about reallocation. It is not reallocation. It's the people in that group doing Software & Services. This is why I have to redo the reporting because I think it's misleading to you all. You all think about Mobility Solutions. When we first put out Mobility Solutions, we used the word Mobility Solutions, we didn't use the word device, okay? Because I knew this is our plan. Our plan is to get into licensing and get into services because we have a lot of great engineers. And so to remind everybody, these engineers are all QNX-based engineers. The reason is our BB10 was QNX-based. So it's not a reallocation, repurpose, whatever it is. It is growing a software business with our device business, if that makes sense to people. And so yes, when I talk about 13% to 15%, I talk about as the whole of the software, including that piece.

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Anil K. Doradla, William Blair & Company L.L.C., Research Division - Analyst [35]

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Very good. And as a follow-up, we saw good drop-off in R&D. Can you explain and give some a little bit more color, was it personnel-driven, tools, technology-driven? And how should we be looking at the prioritization in fiscal '18 on the R&D front?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [36]

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I didn't -- could you please repeat that quickly?

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Steven M. Capelli, BlackBerry Limited - CFO [37]

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A drop in R&D expense, and they wanted to know really what was behind that.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [38]

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There are many components. And I think in some areas, we were a little too heavy. Some of the -- we no longer design the hardware, antennas and keyboards and power supply and all that. We don't do those anymore. We no longer need engineers in the factories helping the devices -- building devices. So that's the basic part of it. We also have consolidated some locations. And we also have been using some of our overseas locations. So there's a combination of things to drive down the cost as a percentage spend on revenue. And so we're very focused on getting ourselves into a good model.

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Steven M. Capelli, BlackBerry Limited - CFO [39]

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I also want to add that if you're looking at our Mobility Solutions group, you see quite a large decline in that OpEx. And that's really related to the fact that many of those people providing the services that John just spoke about and that their cost would be resting in COGS associated with the revenue as opposed to just an operating expense.

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Anil K. Doradla, William Blair & Company L.L.C., Research Division - Analyst [40]

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Great. And if I could squeeze one final thing, John, you're talking about this new reporting structure to clarify some of this misunderstanding. So is this just more of a front-end investor kind of presentation? Or in the back end, are you reorganizing the company to support this kind of new reporting structure?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [41]

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We reorganized the company.

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Operator [42]

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Our next question is from James Faucette of Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [43]

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This is Meta for James. Just a question on the Ford and QNX announcement yesterday about them hiring some of the QNX employees from BlackBerry. And so just wanted to get a sense of should that change how we think of the OpEx of BlackBerry going forward? And does this just reinforce the relationship just a little bit about that announcement from yesterday?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [44]

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Well, first of all, they did not hire QNX engineers. There are some engineers that was hired from our mobility group, and so -- but the details, I'm not going to comment on, on that particular report. All our numbers that we just provided have factored in everything. So please don't take the expense down further because, like I have mentioned and I think Steven has mentioned, we actually have a headcount growth plan in mind. But that also is already factored in what we guided, which fits to The Street models on a consensus basis.

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Operator [45]

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Our next question is from Paul Treiber of RBC Capital Markets.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [46]

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Just in regards to the professional services in Mobility Solutions, could you elaborate on the type of work that they're doing, and then how that may lead to future software revenue? Or is it solely one-time without the potential for future software revenue?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [47]

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No, we are not a -- it's great question. Thank you because gave me a chance to clarify. All the work being done are aimed at selling licenses or to create royalty revenue for the future. So we are not a body shop of any kind.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [48]

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Okay. In regards to the agreement with Ford that the press release you put out last year and in regards to the employees, generally speaking, what's the opportunity for BlackBerry if an automaker makes a significant investment, like Ford's doing in QNX? And then is it more than just the ASP of the basic OS?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [49]

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Oh, yes. See, this is where -- first of all, a car is really a computer on the road or a mobile computer on the road. And so each component in it, if you remember, the company that BlackBerry started with a pretty dominant position in infotainment. So if anyone of you have a 2016 model Ford or a Jaguar or a number of different cars, you are using BlackBerry software. So the Ford 2016 model has our Sync 3. It's on BlackBerry. And this is a public statement on both companies. So I'm not giving you any proprietary information. So Ford has decided and worked so well with us that they have decided to expand using of our software. And then there are areas of telematics, there are areas of safety, ADAS, all that, BlackBerry actually has and have an offer in the market. And we continue to build new products and new modules and new ideas of like, for example, on the cybersecurity side, I mentioned the portal management, vehicle portal management. We hope Ford would take a very, very serious look at it. And with that, we could start having recurring revenue for ourselves and for Ford. We also have over-the-air technology that Ford is very interested in. So it's a much more bigger than just the basic OS. It's horizontal application. It's how cars put together and how cars modules talk to each other. Future car is basically one huge program. So I am very bullish. And this is only with Ford and it is nonexclusive. So if I could do more with others, other car manufacturers around the world, Europe, Asia that will be even better.

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Paul Treiber, RBC Capital Markets, LLC, Research Division - Associate [50]

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Just one follow-up to that. In regards to other automakers, I mean, what do you think the likelihood of winning agreements of a similar magnitude of Ford?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [51]

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Likely. We just need a little bit of time. We are pretty -- we are a recognized leader in this whole world both in the QNX embedded software as well as in cybersecurity.

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Operator [52]

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(Operator Instructions) Our next question is from Todd Coupland of CIBC.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [53]

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Just a clarification on OpEx, and then I had a QNX question. So are you saying on OpEx that the $190 million, plus or minus, is the baseline and that will grow some, but revenue and margins will grow faster, which gets you the operating leverage in '18? Is that the takeaway?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [54]

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Yes, that's pretty much our model, yes.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [55]

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Okay. So my question on QNX and just the automotive opportunity, so with respect to that last question, John, I get like all those pieces you're working on. The one thing we're struggling with is if you sort of stack all that up without giving us individual pricing on each one of those areas, when you think about sort of a per car opportunity for your business, how are you thinking about that? Is that over time $10 per car, $50 per car? How are you thinking about it?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [56]

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Yes, well, I think about it. So I'll give you the current -- I'm not giving you the pricing of that. But if you look at our current infotainment systems, I think The Street price is about $3 to $5 a car. That's The Street price. So my competitors and myself and everybody's in that neighborhood. And if you stack these modules together, the ARPU should be 4, 5x of that number. Now of course, now you have to do discounted, and then you've got the volume listed(inaudible), and then the new product that's got coming out. It's just a normal type of business, where you continue to enhance the offering and each of the offering is a module. And you get royalty on that, and then -- and one of the things that I think is exciting for us is not that we're done there, by the way. I just want to make sure that everybody understands. When I talk about a portal, a vehicle portal management, it's kind of the next things that we are focusing on is to generate recurring monthly revenue. And out from these kind of the world of connected cars and the need to have enhanced security or constant monitoring of security and antihacking and malware, so all the stuff that I talk about, all have a common theme in how we grow our business and our revenue. So rather than getting a set amount of dollars per car when it's rolled out the manufacturing line, we want that, too. We want that and we want a higher ARPU of that. And we want a service component of that on a monthly basis.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [57]

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And when you think about this business over the next, let's say, 3 years, auto market globally is 100 million units. What's a realistic market share for QNX?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [58]

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That's a great question. I would tell you this, infotainment, we own over half the market today, 60 million cars. So I hope that give us some leverage and continue R&D. And this is why we created the autonomous driving car centers, innovation centers in Ottawa a quarter-plus ago because we want to attract partners with us to build application on our platform. People often asked me whether I'm going to build an autonomous car. No, I'm not. I'm not building an autonomous car. I don't want to compete with my customer nor do I want to compete with very, very big names that wanted to spend hundreds of millions, if not billions in there. I'm not building any autonomous car. I am building the component that enable other people to build their autonomous car. And we created a platform in Ottawa. We welcome anybody who come in, and we have a lot of partners that come in and test out on our platform, and so they could work on their autonomous part of the car. Today, the connected car is a huge market, as you all know. The autonomous car is probably going to be post-2020 and so forth and so forth. I mean, I'm getting too much into it. But we certainly are very excited about this market.

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Operator [59]

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Our next question is from Kulbinder Garcha of Crédit Suisse.

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Kulbinder S. Garcha, Crédit Suisse AG, Research Division - MD [60]

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Just one clarification and one question. On the clarification, in the quarter, were there any major IP or patent sales one-time in nature or otherwise?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [61]

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No, our IP numbers were very small in the quarter.

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Kulbinder S. Garcha, Crédit Suisse AG, Research Division - MD [62]

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And then basically for the full year then in '18, what you guys it sounds like you're saying is Software & Services growth in that double-digit range of 13% to 15%, maybe gross margin at 70% and you should have -- is OpEx from this run rate exiting the year going to been down? Or is it going to grow? Actually, I missed that point. Could you clarify that part?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [63]

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Yes. As I said, I mean, I don't want to make a singular statement on one area because I think that when we review the consensus model that you all have for Q1 and for the year, it looks quite reasonable. Interestingly enough, when we roll out our numbers, it's very close to your numbers, so that's good. That's goodness. So we are going to grow our expenses because we have many areas that we would like to invest in. However, we are also going to reduce some of the areas. So I think, by and large, the growth in expenses will be relatively modest throughout the year because we're going to be taking some of the cost structure out and we're going to try to find ways to do things in a much more efficient way and effective way, and then invest the dollars. And in fact, you folks may or may not know this, but I'll give you one fact. We actually have hired 1,000 people last year. And I know everybody is going to ask me about that, right? But we have a pretty big field now reach to the market. And we cover almost all the financial institutions in the G7 world, so to speak, and the governments. So we have a pretty good execution in the field now. We have a very big customer support team that is more customer-facing than in the professional Services thing -- but in the meantime, we have shifted away, our G&A came down quite a bit and headcount. So it's just that way of us rationalizing where we put our money in and where the number is. So if you go back to the model that is now consensus, it's actually reasonable in a ballpark.

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Operator [64]

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Our next question is from Michael Kim of Imperial Capital.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [65]

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With regards to the device business and clearly the partnerships that you've established, how should we think about per unit royalties trending as volumes scale? And then just in terms of total volume, do you see it returning closer to historical levels around, say, 2 million units annually or closer to 1 million?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [66]

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I could answer the second, I cannot answer the first because the first question, first of all, it's different with all 3. And we have a different pricing, tiering model for the mix set. But I'm glad you mentioned something here. I want to clarify one point that I sneak into my script that now everybody is going crazy on around me, you don't know what -- by the way, this is one of those like, what is that, kind of like the TV studio. While I'm talking to you, there's a bunch of activities around me starting to distract me. And apparently, one statement I make regarding tablets was people got very excited and wanted to know whether this is a PlayBook again or something. Absolutely not. I'm not building any hardware. Other than Radar, I'm not building a piece of hardware. One of our partners gets very excited to build a tablet, which based on Android, right? And so -- and they wanted us to give them the portfolio rights to do that. And I'm interested in that because I'm going to get royalty for every piece of tablet they ship. So I would just leave it at that. And it's not even -- we have to QA it. We have to do a lot of things with it. So it's not 100% committed thing. But it's going to come from our partners. And BlackBerry will only receive royalty. But it's using our software and we do the QA in the portfolio management. So I hope that clarifies that point. So in terms of unit count, I've got 3 groups of people taking it worldwide, in the India market and definitely in the China market, in the Indonesian market. If you get up all that and price across all the world, I will be -- personally, I'd be disappointed with 1 million units. I would think that I will help them to do more marketing on that. So I really do believe that this is a multimillion unit a year situation.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [67]

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Great, that's very helpful. And then just on Radar, I know you continue to ramp your go to market with 6 customer pilots, I think you mentioned, for this fourth quarter and 6 in the previous quarter. Can you talk about how long the POCs are running, and then kind of your sense on conversions?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [68]

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Yes, usually it's 3 to 6 months, the POC. And then it's about 3 months of the kind of contract negotiations and getting the orders and shipping. So this is a 6 months' to a 9 months' win or conversion into revenue.

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Operator [69]

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Our last question is from Simona Jankowski of Goldman Sachs.

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Simona Kiritsov Jankowski, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [70]

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I just wanted to clarify one more time in terms of the as-reported Software & Services segment, which includes the UEM and QNX revenues. Can you just comment on since that was relatively flat sequentially, how both of those components trended on a sequential basis, QNX and UEM? Were they up or down?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [71]

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Sequentially flat? They're not sequentially flat at all. I know UEM had gained quite a bit, so...

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Steven M. Capelli, BlackBerry Limited - CFO [72]

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The overall number, I'm trying to go back to...

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Simona Kiritsov Jankowski, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [73]

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I was just talking about the as-reported segment numbers, so not including that professional services piece out of the Mobility Solutions business.

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Steven M. Capelli, BlackBerry Limited - CFO [74]

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In terms of relatively flat, I mean, your point's well taken. I would attribute part of that to John made a reference to our billings were larger.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [75]

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On the deferred? I mean, not the deferred subscription?

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Steven M. Capelli, BlackBerry Limited - CFO [76]

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On the subscription revenue. So we had an increase in the subscription that, had that not taken place, you'd have seen a different set of numbers.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [77]

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Simona, I'm more focused on billings. Just like on the Radar, I'm more focused on the POC win because I know that's future revenue. And so sorry that I didn't know what you exactly meant, it was on the revenue number that you focused on.

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Simona Kiritsov Jankowski, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [78]

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Yes, just wanted to clarify that. And then the 13% to 15%, you commented that the base that you're trending to grow that also includes that professional services fees that you just had in Mobility Solutions. Just so we know the full base for the full year, were there any other meaningful similar amounts in the full fiscal '17 base that we should be aware of just as we think about that growth rate?

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [79]

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No, that -- as I said, the 13% to 15% is our overall number, that $687 million, right? No, there is no other significant amount that you should think about.

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Steven M. Capelli, BlackBerry Limited - CFO [80]

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And on the services side, we said that, that would be included. And you may recall there was a smaller number than that in Q3. But as John pointed out, we're looking at that total Software & Services number.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [81]

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Simona, I never learned. I gave you guys 30% last time I did it. And now I gave you another number. It's really -- I think at this time, I'm going to poke myself in the eye. I'm going to stop giving any numbers in the future.

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Simona Kiritsov Jankowski, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [82]

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Well, I think it'll get clear with the new segments.

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John S. Chen, BlackBerry Limited - Executive Chairman and CEO [83]

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Okay, all right then. Thank you for all for joining us. I'm sorry we ran out of time because I have to go do our own town hall meeting. I appreciate you dialing in, and have a great day.

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Operator [84]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.