John Chen - Chief Executive Officer James Yersh - Chief Financial Officer Joe del Callar - Head, Investor Relations

Mark Sue - RBC Capital Markets Maynard Um - Wells Fargo Steven Li - Raymond James Richard Tse - Cormark Securities Tim Long - BMO Capital Markets Michael Kim - Imperial Capital Amitabh Passi - UBS Daniel Chan - Scotiabank Rod Hall - JP Morgan

Good day and welcome to the BlackBerry Fiscal Year 2016 Q1 Earnings Call. Today’s call is being recorded. At this time I would like to turn the call over to Mr. Joe del Callar. Please go ahead, sir.

Thank you, operator. Good morning. Welcome to BlackBerry's fiscal 2016 first quarter results conference call. 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 first 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 Web site. Some of the statements we will be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws. We will indicate forward-looking statements by using words such as expect, plan, anticipate, estimate, may, will, should, forecast, intend, believe, continue and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the company believes are appropriate in the circumstances. Many factors could cause the company’s actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including the risk factors relating to the company that are discussed in the Risk Factors section of our annual information form, which is included in the company’s annual report on Form 40-F and the company’s MD&A, copies of which filings may be obtained at www.blackberry.com. These factors should be considered carefully and you should not place undue reliance on the company’s forward-looking statements. The company has no intention and undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. I will now turn the call over to John.

Okay. Good. Thank you, Joe, and good morning everybody and welcome. Let's start with some highlights for the quarter. So earlier today we announced revenue of $658 million for the quarter. Our software business turned in some good results and revenue of $137 million. We also reported strong free cash flow of $123 million and we are expecting to keep the business free cash flow positive throughout the year. We announced a loss per share of $0.05 on a non-GAAP basis compared to a loss of $0.11 same quarter last year. And those of you who know me know how I hate losing money, James certainly knows that. But as we have previewed in the last quarter, we are making investment on our software business, including but not limited to the customer facing area, the technology area and acquiring companies that we will continue to invest in. I believe these investments are prudent as we transition to growing a bigger software business. As a result our operating expenses were up $20 million compared to the last quarter. As I said earlier, these investments support our plans to attain solid software growth, to stabilize our revenue and to achieve profitability, a sustainable profitability starting in the second half of the year, or sometime in the second half of the year, what Joe will always point out to me. On the handset front, we are taking steps to get the business to profitability. A few key actions were taken in the quarter. Number one, we have reduced our spending in hardware through some level of reorganization. Number two, we moved some hardware resources to our software and our IoT efforts. And last but not least, in addition to our existing agreement with Foxconn, our handset manufacturers, we also expanded a joint development agreement, or you all call the JDM-ODM agreement, with Compal and Wistron. Both companies in Taiwan. In the quarter we announced a 12 million share buyback plan, pending the shareholder vote on our equity plans later today. Early indication came in as we probably would get that approved by the shareholders. So the 12 million shares buyback will start. This will enable us to offer equity programs to our employees to create a ownership mentality while being anti-dilutive to the investors. And thank you all of you who have supported, I have spoken to a number of you that have supported our plan there. So I would like to say a few words about security, as it related to cyber security and our mobile security software. In the quarter we made a lot of progress investing in the security strategy, starting with the acquisition of WatchDox. To put this acquisition in context, BlackBerry focuses to expand our leadership in mobile security connectivity and communications. WatchDox expands our portfolio, allows us to protect documents on any device at rest or in transit, even after they left the network. WatchDox is classified as a visionary leader in the Gartner's Magic Quadrant for the enterprise file share and sync market, also known as EFSS market. WatchDox joined encrypted voice leader Secusmart, which we acquired a quarter ago, in a ecosystem that includes BES 12, the EMM security leaders and our enterprise grade portfolio of security oriented value-added services. Looking ahead. To influence and to take advantage of future innovation in secure mobile computing, we also established in the quarter an organization called CHACE, [indiscernible], it stands for BlackBerry Center for High Assurance Computing Excellence. To date, CHACE has brought together five University with strong computer science programs, including UCSF, University of California San Francisco, as well as University of California, Santa Barbara, as well as University of Oxford, just to name a few, together with the industry group to create a state-of-the-art toolset to deal with the next generation mobile security threats. We believe all these investments in security and privacy and others have established our leadership position in secure connectivity and we are very well positioned to leverage -- to grow our business. Now let me provide you my view on the quarter before I turn the call over to James for financial details. So let's start with the software side. I'm obviously quite pleased with the quarter. We have some very good achievements. As I mentioned earlier, software and technology revenue were $137 million. This represents a 130% increase on year-over-year. The enterprise business which includes BES and VAS, value-added services and our QNX business, turned in double-digit growth year-over-year again. And it was two quarters in a row now. In addition, our technology licensing program made a significant contribution as well with two technology license deals. One with Cisco, I hope we have announced it -- in the press release there. And the other with another major technology provider whose name they would like to keep off the radar, I guess. During the quarter, on the enterprise front, during the quarter we had 2600 enterprise customer wins, both new and existing. including many competitive wins. This is an increase of 400 over a quarter ago. Around 45% of these licenses sold in these wins are cross-platform. I know this is the stack that people could keep asking me, so I will stop providing this. The healthcare vertical was especially strong. We had wins at -- bear with me, I will give you a whole bunch of names, Grand River Hospital, CarePartners, Chatham-Kent, ExtendCare, Garner Medicare, Trillium Health Care and many more. On to the financial vertical. This vertical was also very strong in the quarter. Key customer wins included ATB Financial, Blackstone, Broadridge, Waha Capital in the Middle East, MCube Financial, UniCredit in Russia, Farmers and Merchants Bank, Financial Technologies in India, Dragon Capital in Vietnam, and last but not least, the Royal Bank of Scotland, RBS. Since one of our competitors like to target us in their earnings call and said they are stealing our business, let me lob one their way, and hopefully I'll never do it again. I don't really want to get in the business of lobbing names around, especially these are good customers of ours. But in the RBS case, RBS is a competitive displacement of MobileIron and a few other casualties. The other people haven't lobbed anything to us so we won't payback. RBS is an important win for us as it established BES as the corporate standard for mobile management. This is a corporate wide effort including for all their BYOD policies across all platforms, such as iOS and Android, as well as BlackBerry. By the way I think a few of our analyst friends out there will need to broaden their channel check because I started reading some of the stuff a little bit more. We believe RBS chose us because of our superior cross-platform security. We actually have a few more other key customer wins, switching away from these competitors. But we have not obtained permission to use their names on the call publicly. Wrapping up on our customer wins. My team wants to make sure that I mention the following because we are very proud of winning their business. NCR, which I think most of you know. Clifford Chance, is one of the biggest law firm in the world, stationed out in U.K. Magna, which is the automotive parts provider in Canada, probably the largest. As well as WatchDox win at NTT DOCOMO in Japan. Now to update our progress in building software distribution. We have continued to build traction on this indirect channel. Up to date now 19 carriers have signed on to adopt our enhanced SIM-based licensing solution which allows bundling of BlackBerry solutions with their data plans for billings. 13 of the 19 of these carriers have already rolled out the solution to date. More recent adopters of our ESBL solution include TELUS, A1 in Australia, Telekom Hungary and SmarTone in Hong Kong. In addition Rogers, Bell, Orange, Cellcom, Maxis in Malaysia and Indonesia PTXL, have also agreed to resell our BES and value-added services solution bringing our total software resellers to date to over 120 partners. We have made progress as well on the product front. So obviously our newest acquisition WatchDox had added to our core vertical and a strong presence in the entertainment industry, a vertical with very high value documents -- requirements. We have two major releases coming up. One, the first one is with BBM Protected this month, featuring message archiving, and the second major release is the BES12 support of Android for work. That's actually next month. We're building a pipeline for BBM Protected and nearly all of our 120 software partners have now agreed to – and will be able to resell the BBM Protected. A word on our technology solution group, the BTS. Maybe I will highlight four or five major occurrences in the quarter, our major wins. First one, I mentioned earlier that the technology licensing program is off to a good start with Cisco core licensing agreement plus another major one. Number two, Intel in the quarter announced that it has chosen QNX on their next-generation digital cluster infotainment and advanced driver assistance, [ADAR] [ph] systems to work with us on there for the connected car. Number three, Certicom had won a deal to manage certificates for connected devices and we have began issuing certificates to secure 104 million smart meters in U.K. Number four, Paratek signed a new licensing agreement to provide ON Semi, I think ON Semi is in China, ON semi for the antenna tuning technology. Lastly, the number of smart cars now on the road using QNX solution is now over 60 million. And in the quarter we also released our features on over the air, the OTA, and I think this represents a very large opportunity for that product. To wrap up my software discussion. I recently took a look at the consensus, actually everybody forced me to take a look at the consensus, and I now realize the consensus is, our software expectation is around $490 million for FY '16. I am glad we are in the ballpark, we are in agreement. However, I see a lot of debates or concerns among analysts of how we will achieve our software targets. So maybe I will take you through the thinking behind the numbers, at least our thinking behind the numbers. First, we expect our core software business in enterprise and BTS, which brought us by the way $247 million in revenue last year, will be growing at 20% year-over-year as a continued base business. Then add on to that, our acquisition of Movirtu, Secusmart, and WatchDox will begin contributing later this year adding on top of that core growth that I mentioned. Then on top of that our licensing business which is somewhat variable, is off to a good start and will continue contribute meaningfully to the overall number . Here I have to say that we have a very deep pipeline but there are variabilities on when we could -- when the deal will be closed. We do expect it to be this year though, this fiscal year that is. We expect to make some more acquisitions in the future that will expand our portfolio and add to this growth. So you could see the layers of our thinking. And lastly, BBM will make a contribution. Although it's off to a slow start in my opinion, partly because enterprise has to get ready. BBM has taken a little longer to contribute. This however, in regard to the BBM, it does not change our $500 million target for the software-only number. So, overall, we have a robust pipeline that should give us a pep to get to that target. And thank you for the people here that believe that our model may have some credibility to it. Now let me turn to our handset business for a moment where the singular focus for the quarter and will be continued, are on profitability. Although our business gross margin was profitable for the fourth quarter in a row, we have continued to take steps necessary in our path to operating profitability. We announced today that we entered into a joint development relationship with Wistron and Compal to add to our existing relationship with Foxconn. In addition, we have reduced our investment in device, redeploying some of these resources to software, IoT and go to market efforts. We will continue, however, to execute the roadmap we introduced at Mobile World Congress in March. We achieved the initial launch of Leap in April. Today it is now available in 22 markets, countries, and the plan is to rollout to a total of 46. Our new products -- our other new products which you have seen at Mobile World Congress at least, will continue to build out -- I'm sorry, our new products will be released towards the end of the calendar year, of this year 2015. In addition, we will continue to build our handset distributor relationships. The other big news of the quarter was a renewal of our relationship with T-Mobile USA. The level of support we get from them is very very good. They have now launched our Classic in 400 stores. We plan to launch an exclusive Passport promotion with them on both, either of our e-commerce site, details to be worked out, in the U.S. and so please stay tuned for that to come. Now let me hand over the call to James for some details on our financials. James?

Thank you, John. First, a couple of financial highlights from the quarter. We had positive free cash flow of $123 million. We had a non-GAAP net loss of $28 million or approximately $0.05 per share. These results were largely attributable to disciplined management of expenses while investing in our growth initiatives, as John just took you through. Now let me discuss the income statement. Revenue for the first quarter was $615 million. Software and technology licensing represented 21% of revenue. Software and technology licensing grew 150% on a year-over-year basis. Hardware represented 40% of revenue. We recognized revenue related to approximately 1.1 million devices in the first quarter. Handset ASP was roughly $240 per unit, up from $210 last quarter. Service revenue was 38% of revenue. The soft decline is consistent with our expectations for roughly 15% quarter-over-quarter decline. We continue to model a decline of approximately 15% for the next quarter. Non-GAAP gross margin was 50.3% compared to 47.9% in the same prior year quarter. GAAP gross margin was 47.1%. Hardware gross margins were positive for the fourth quarter in a row. Non-GAAP operating expenses were $338 million, down from $504 million in the same prior year quarter. It will not surprise us to see a minor uptick in the coming quarters as we continue to invest in software. GAAP operating expenses were $221 million. Included in GAAP operating expenses were $61 million of restructuring charges as well as a non-cash income or gain of $157 million for our convertible debt. This non-cash income or gain has no impact on the face value of our debt, on our liquidity or on our operations and cash flow. The amortization and expense was $164 million in Q1 in the P&L. A few of you I have spoken to look at our business in EBITDA terms. As our amortization is relatively significant in our current scale, we believe this is a helpful metric for you to understand. Our adjusted EBITDA for this quarter which excludes the impact of restructuring charges and the debentures was $157 million, a 5% increase over the same year-ago period. The GAAP taxes in the quarter were $5 million. Basic GAAP net income which includes the impact of the debt revaluation and restructuring was $68 million or $0.13 per share. Now moving on to our balance sheet and working capital performance. Our cash balance increased by $50 million compared to last quarter. Total cash, cash equivalents and investments ended at $3.32 billion. Aggregate contractual obligations which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations, amounted to approximately $1.2 billion, down from $1.8 billion in the same year ago period. Purchase orders with contract manufacturers represented approximately $238 million of the total, down from $317 million in the same year ago period. With this, excluding the impact of foreign exchange, we achieved positive operating cash flow of $134 million and CapEx was $11 million. Looking forward, we expect to remain cash flow positive and continued to forecast sustainable non-GAAP income statement profitability sometime in FY '16. That concludes my comments and I will turn it back over to John.

All right. Thank you. Before we start the Q&A, I want to echo James, two points that he made. Positive cash flow -- free cash flow, sorry, positive free cash flow and sustainable profitability starting sometime in the second half of the year. Also we are very focused on stabilizing our revenue and investing in growth, particularly in software growth areas. So everything we do, we focus on these goals and we hope to be able to deliver and achieve all those. So, operator, we are now ready for questions.

[Operator Instructions] And we will take our first question from Mark Sue with RBC Capital Markets.

It's hard for us to model the licensing from some of your new partners. So maybe if you can give us a sense of how that might develop over these subsequent quarters. And then, so we get a sense of the basic business on BES. How we should think about the traction, the cadence of new customer wins? And, John, it does seem some of your competitors are bundling it with a larger suite of software solutions. How you might be effectively able to compete against someone that offers a broader suite? Thank you.

Okay. Thank you, Mark. So, yes, the licensing business is a little bit more, I hate to use the word lumpy, and part of this is because it takes a little longer time to make sure that, it's a longer sales cycle issue. But we believe that we have enough in the pipeline to deliver the results from the licensing side of the equation for the year and to help us to contribute to the $500 million that we talked about. So, sorry, if I hadn't really helped you there because in our case we are also looking at it from trying to figure out which quarter it will come in. We know it's going to come in because we both agree and then all the details need to be worked out and those are where they are hard to predict at this point. Regarding the bundling part of it, there is no doubt we are seeing bundling happening out there and it was starting to talk about bundle, I think it play to our strength . If you look at all our value-added services especially in security, so maybe I'll spend a minute on that. Thank you for teeing up the ball. One of the things that I kind of have the team and everybody to focus on is that we started the company with a lot of strong mobile data security technology. We obviously put that in the BES12 and expand that. Then with Secusmart, we got secure voice and secure text. We moved BBM to, by emphasizing BBM Protected and for the enterprise market we now have secure messaging. And then of course last but not least, we now have secure file sharing with WatchDox. So you could see if you just look at it from that, we could probably one day envision ourselves doing it all in one bundled platform and I don't think anybody could compete with us, whatsoever in that. Now we obviously will continue to add on to it. There are many things that one could do on the security side. And then on top of that you get the privacy side of the equation with Movirtu, two sand boxes. We think we could add value for the Samsung KNOX. There are lots of things, it plays to our strength if we want to approach the market in that way. And it is a good idea. I mean we have been thinking about that. We have been talking to customers about it. And obviously that will raise the ASP or the ARPU depending on whether it's perpetual or on subscription based. I'm sorry, the second question was...?

Cadence of new software wins. The 2,600 software wins.

The cadence of that?

Yes.

It's very good. The last quarter I particularly was paying attention to the product. A lot of them, the majority of them are on BES. I think the overwhelming majority of them are on BES and quite a big portion on the BES is on BES12. So I know that people were looking for that. And then I'm starting to see quite a number of co-licenses too. So things are trending correctly.

We will take our next question from Maynard Um with Wells Fargo.

I just wanted to get some deeper clarifications. I'm wondering if you can give us a sense of what the core business growth was excluding the IP licensing and the acquisitions. Because I just want to get a good sense of what the core business growth was? And then if you can talk about the linearity of the software revenue over the next couple of quarters? In particular, I am curious about whether the IP licensing is something one time in nature, or if there are kind of ongoing quarterly payments. And then whether you are seeing greater perpetual versus annual BES licenses, which obviously has some impact to linearity there as well. So if you could provide any color on how to think about the flow over the next two quarters that would be helpful. Thanks.

Very good. Thank you. First of all, I said earlier that our base core business which is BES, are growing at about 20% and we have seen that now two quarters in a row. Looking at the pipeline, there is no reason to believe that we would not be able to grow 20% year-over-year. And probably if things created more traction, it will probably be a little higher than that. But it's all in the, kind of the 23% -- 22%, 23%, 24% range. So that's question number one. Number two, it has very little value-added services in it because we are just starting to roll out Movirtu. And it's probably going to be more carrier-based on the Movirtu side of the equation. We start rolling out SecuVOICE in Europe and BBM Protected. So those three probably are going to start contributing as the year progresses. And then other value-added services stuff that will come in. So very little from acquisitions in the quarter, if at all, not much. Then let me see, what was the third question? Yes, linearity of software revenue. Well, Maynard, the issue just like we spoke to Mark a little earlier, the IP one, first of all the IP deal that we have done in the quarter, and the two of them, I am unable to provide you anymore detail contractually. So sorry for that. We have an agreement with Cisco that neither one of us will disclose any details. So in the IP pipeline, they actually come in both shape and form. Some of them are an upfront one-time payment. They are perpetual. Some of them are on a regular ongoing basis. Usually on an annual basis. So those are the -- not trying to be vague but I won't be able to provide any more color on that. It's just safe to say that I'm satisfied with the ability in the IP pipeline this fiscal year that will help us to reach our $500 million target.

Can I just try it a different way then? Since you've looked at the consensus Street numbers out there for the next couple quarters, do they look reasonable in terms of the linearity of how they are growing? Thank you.

Oh, I'm sorry, I did not look at the linearity. I'm sorry. I only looked at the numbers that they give me on what everybody thinks we do in software. But I would take a look at that.

Okay. Thank you.

I would take a look at that. I think it's obviously quite, to be safe, it's quite back-end loaded. Right. Just to be safe. As we build up our software team, we have a number of training programs going on all the same time. The carriers coming online. I mean I feel the direction and the momentum and so I will model it a little bit more slope going up type thing, not flat.

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

On the IP licensing, given the lumpiness and the contribution this quarter, could software be flat or down next quarter?

Software be flat or down, No. I think our base software will continue to grow. I just can't predict whether IP, some of the IP pipeline will come in on Q2 or Q3, or Q4 but as I said earlier I feel comfortable them coming in this fiscal year.

So, John, you would still expect your software and IP revenues next quarter to grow quarter-over-quarter?

No. No, I don't know that. I don't know -- I think that would be misleading to say yes or no on that one because I don't know what my expectation is. We are working hard at some of the IP deals. If the IP deals have moved to Q3, then Q2 the numbers will be lower. I am only focusing on delivering the entire year $500 million.

Okay, that helps. And John just for a clarification, the 2,600 customer wins, so are these predominantly 2,600 EZ Pass customers that are now paying customers?

No. I would say, from [what I’m] [ph] glancing, because I know you guys are going to ask this question. So when I glance at the whole list, by the way it's really hard to glance through 2600 names, but we have a printout of that. I would say half-and-half. I would say maybe 60:40. 60% based on the EZ Pass convert and 40% are brand new customers.

We will take our next question from Richard Tse with Cormark Securities.

So a quick question on the acquisitions. Are you still focused on pushing into more security markets or is there potential for a transformational deal outside of that market here?

I never would turn down a transformational deal but, no, I think this year our plan is to fill in the gap and expand what we offer. I don't expect a big deal but ones that come around I don't think we will shy away from it. But it has to be the right price and it has to be not only strategic operationally, we know how to take advantage of it. And then financially it still have to put us in a very solid footing. So probably not big bets, I don't believe. It's going to be more of extending what we have and then also in the IoT world.

And I guess on the IoT side, I recall at CES you guys had talked about rolling out the fleet management product. Can you give us an update on that product and where do you stand in IoT?

Yes, IoT. So we started, a couple of two three quarters ago we started our effort on the cloud. We made a very very small acquisitions. Very small, like a handful of people acquisition, to launch our cloud effort. That is being developed right now. Progress is very acceptable. Now we're building apps on it, services. So one of the area that we have made some traction is to marry that with Certicom and get some certificates out there. Earlier I spoke about a UK deal with the smart meters, utility meters. And then we provide all the certificate there from Certicom, over $100 million by the way, so it was a very sweet deal there for us. So we will continue to do that. So while we're building the product suite up, we will probably need some acquisition to help move that along, in addition to the organic part. But Sandeep and team are very very focused on winning customer and winning designs because that ultimately is the game. We have to win designs. And winning designs, like I said, Paratek have won designs with the semiconductors company ON Semi. We won Certicom designs. So I'm very comfortable and pleased with that. Although the revenue was not really huge but it set us up good for the future growth. So pretty good on the IoT front. And then on connected cars. I won't overemphasize it but it is an important win. We are working with Intel, because as you all know, Intel does have their own technology and the fact that they pick QNX speaks volume of some of our capabilities and obviously the team has done a good job.

We will take our next question from Tim Long with BMO Capital Markets.

Just, too, maybe they have been asked but I want to be, maybe a little more direct. If we look at last year's first quarter, we did $54 million in software revenues. If that was growing low 20s, that would imply that excluding the license fees, licenses revenues, that the core software business was flat or down sequentially. I want to make sure that is accurate math.

No, that is not accurate.

Okay. So then it had to grow much more than low 20s?

No. No. Wait, hold a second. We will get that number. Because I look at the number, we have grown rather solidly over the core business.

Okay. And then maybe just on the license fees. James, specifically, I understand you can't explain a lot of the details of the two transactions. But from an accounting treatment standpoint, are these just lump-sum payments? Are they -- do they have an ongoing royalty? Is it a lump-sum payment where it is amortized over the life of the deal which is pretty standard for license deals these days? So the accounting treatment of them would be helpful?

Well, effectively, Tim, what John said is we can't disclose which bucket that falls into. I think we're prepared in what account for them appropriately. If we have ongoing obligations, to your point, they would be amortized over whatever the license period and if we don't have the obligations and we meet all the criteria upfront, we would recognize them upfront.

Yes. This is particularly why we cannot disclose the details. We were only allowed -- and we agreed to, only allowed to use the name.

Okay. Thank you.

That number -- tell him...

25 and 23. So it's mid-20s.

Mid-20s.

Mid-20s.

So I don't know why -- maybe somebody get back to Tim and get...

We will get back to Tim.

And we will take our next question from Michael Kim with Imperial Capital.

Just talking on the hardware side of the business, maybe if you could provide a little more color on how some of the previous device launches like Passport and Classic have been ramping and also your expectations for Leap? I think there have been sort of mixed commentary on the feature set. But any color on if you see hardware stabilizing around this range?

Okay, thank you. So Passport is still selling rather steady, Classic is up ticking and Leap is a little too early to tell. You are right, there is a mixed commentary. Some people really really love it and some are not so crazy about it. I can understand it because kind of our audience base out there. Now having said that, one of the efforts on this particular, this current quarter, is to bring the awareness of these devices. I think that's something that we haven't done for a while and we decided to invest in that. So now that we have distribution out there you actually could walk into a retail store, at least a lot of the retail stores between let's just say in the United States and North America, the free Canadian Telephone Company, as well as AT&T stores and Verizon for Classic and AT&T for both Passport and Classic. T-Mobile for Classic. And we would do more online store sales for Passport. But we know that Passport is still, people still buy it. So receive it well. We just need to bring the awareness up. And so we are doing a few things on that. Not overly concerned of that but more of our focus of the company right now is on expanding the distribution for software. And I'm very focused on, especially selling software through enterprises, through carriers, with the ESBL technology that we have. I think once it's online, that had good leverage. And usually it takes a little longer because the billing system has to match up logistically. But it seems okay, everything seems to be trending correctly.

Got it. And to achieve your profitability expectations for sometime in the second half of the fiscal year, would your agreements with new partners like Wistron and Compal drive gross margins on the hardware side in the teens or north of 20? Or can you give, frame what your expectations would be for how gross margins stabilize in the hardware business?

Well, right now we have gross margins profitability and I'm working hard on making operating margin profitable. So we do need to remove in my opinion at least about $100 million to 200 million dollars over the year in spending in hardware and divert that into more software. And so, I don't have a number, the gross margin number in my head, but I would like to achieve that point.

And Michael maybe just to add some color to that. I don't think we're modeling something that's overly aggressive in order to kind of derisk us getting to the objective we need to be prudent. So it maybe towards a lower end of the range that you quoted there rather than something that's a little more aggressive.

We will take our next question from Amitabh Passi with UBS.

If you could also clarify the same question that Tim asked for us, that would be helpful. Because I think the math we're all doing is, taking the $54 million last year, and if we see 20%, 25% growth we get the base business revenues somewhere between $65 million and $67 million. So I think that's what we're just trying to figure out. Relative to last quarter, was the base business flat to maybe modestly down? So it will be helpful if you can, whenever you get a chance, clarify that as well?

Okay. We will clarify that. That is not the math. We did register growth quarter- to-quarter and quarter-over-quarter. So I have seen the numbers myself a number of times, so there must be something, classification that is not correct.

Got it. And then, John, can I just clarify. The $500 million for software revenue versus $600 million previously. Are you still keeping the BBM bucket separate at $100 million or are you saying $500 million is a more, sort of the right set of goal at this point versus the $600 million prior. I just wanted to clarify that.

No, BBM -- $500 million for software, $100 million for BBM. BBM, I still need to work on. The $500 million, I feel that is certainly quite doable. Well, I mean nobody could say for certain but I kept two buckets separate.

Okay. And then I guess my real question for you guys is, can you just give us an update of the 6.8 million licenses that opted into the EZ Pass program? I think we are coming up to the July 1 deadline and I am assuming you have a fairly good idea of what the conversion is like of the 6.8 million. So maybe you could just help us get a sense of conversion rates, silver versus gold tier, how that is sort of progressing?

Well, as I said, I think in the past quarter, maybe 60% are the people who converted that we benefited from doing the business. About 40% of the business are new customers that have not been associated with the EZ Pass. There may be existing customers but they were not associated with the EZ Pass. And the gold license is trending up, BES12 is the predominant one right now, which are all a good indicator of customers. The market is starting to embrace our technology there now.

So you think 60%...?

I don’t have a...

I was going to say, the 60% of the 6.8 million actually converted to roughly 4.8 million. Have opted...?

No, no. The 60% on the 2,600 deals that we won.

Okay.

Sorry. I didn't really -- I look at it more on -- you look at a quarter, you break it down to EZ Pass conversion and non-EZ Pass conversion by looking at the 2,600.

We will take our next question from Daniel Chan with Scotiabank.

Did I hear you correctly, you said the Certicom smart meter deal was over $100 million, and when was that--?

No, no, no, 100 million certificates.

Okay, okay. Got it.

Over 104 million certificates. And the good thing about that is, obviously that's not a lot of money but it's annual.

Okay. Thanks. And then on the hardware business, these new JDM agreements you have with Compal and Wistron. Are these similar to the same deals you had with Foxconn where they would be variable cost and they will take on the inventory risk as well?

Yes. Every one of them are slightly different but same principle, yes.

Okay. And then, my final question. Can you comment about your ranking in the recent Gartner review of the various EMM solutions?

Well, could I comment on it? Well, my colleagues have sent blog and stuff. We are rather -- well, we obviously respect their independent view. We respectfully disagree with their view. I mean I don't know what else to say. I think we have a lot more installations and licenses then a lot of the competitors supposed to be in the Magic Quadrant. We have much broader set of technologies and improvements. One of the reasons I mentioned RBS, it was important for RBS to grant us the permission to use the name publicly and they were willing to take reference call on BYOD and stuff. So what Gartner has been saying is that we weren't able to point to anybody that would speak on our behalf. A lot of our customers are in highly regulated industries that are not willing for us to use their name, especially in government agencies. And it's safe to say, most of all the Canadian government agency users are BES. But all these things are, unfortunately, I wasn't able to use. But I think with the RBS situation and other names that I have mentioned on the call, that Gartner should do their check and find out that we actually are quite competitive and are winning and in a lot of cases are winning against our competitors. So I can't comment more on that because as I said, I respect the fact they are an independent analytic agency. So, maybe we'll take one more question please.

We will take our final question from Rod Hall with JP Morgan.

I just wanted to ask, I guess two questions on the sequential growth. The North American revenue was up like $80 million quarter-over-quarter. Can you just comment on the makeup of that trajectory, I mean of the change. Was this all software revenue? Does all the software fall in North America? Just help us understand why that moved considering all the other regions were down. And then I don't know, John, whether you guys have done the math on this $54 million, etcetera. But just to put it really concisely, I'm getting like you've got to grow about 26% year-over-year to get to $68 million, which would be up $1 million sequentially on the last quarter for that underlying software revenue. So I think if you could just again come back to that and comment on whether we are talking about 25%-26% growth there, that would be helpful. Thanks.

When I look at the number, it would say 24% growth, right, year-over-year. I have to go back and relook at why that numbers have discrepancy. We will get back to each and every one of you, especially Tim and so forth, on that.

And, Rod, your comment on the U.S. revenue, if you think of the IP deal that we did announce, that would be classified as U.S. revenue.

And was the underlying, James, up as well or the underlying U.S. revenue ex that deal, down? Can you help us understand kind of what the underlying trajectory of North America looked like?

Well, some of it did come from North America so we are showing progress there. But if you just look at the client list that John kind of outlaid, with Bank of Scotland and some of the other ones, there was a global footprint to it. So some of it is growth in the underlying business, I would say, as well.

Okay. So sequential growth in the underlying North American business?

Yes.

Yes. We are scrambling to look for those numbers. I don't know why that is the case. But anyway.

But we will get on that.

Okay. All right. So let me wrap up. Thank you for -- you guys really want all the numbers. I've got to be careful in the future how to break that down. But thank you for joining us. While there is a lot of work to be done still in the next four to six quarters as we kind of enter into the second phase of our turnaround. We are definitely on solid financial footing. We are making very good progress and expanding our distributions. We are making good progress on our product portfolio and we are seeing some solid growth in our software business. And we are believing that remaining milestones in the strategic plan that we had laid out and the turnaround plans we had laid out, are achievable. So I'm sure that I would see a few of you at the AGM later today this morning and I look forward to seeing some of you and chatting about things in the upcoming Security Summit in New York which is scheduled to be on July 23. So with that I thank you all for joining our first quarter call and looking forward to chatting soon. Thank you. Have a good day.

And this does conclude today's conference call. Thank you all for your participation. You may now disconnect.