Debbie W. Tuck - VP of Finance and Head of IR John Chen - Executive Chairman and CEO James Yersh - CFO

Daniel Chan - TD Securities Tim Long - BMO Capital Markets Maynard Um - Wells Fargo Securities Paul Steep - Scotia Capital Richard Tse - Cormark Securities Ben Bollin - Cleveland Research Douglas Clark - Goldman Sachs Michael Kim - Imperial Capital Deepak Kaushal - GMP Securities Paul Treiber - RBC Capital Markets Anil Doradla - William Blair & Company

Welcome to the BlackBerry’s Fiscal 2017 First Quarter Conference Call. Please note that all participants have been placed in a listen-only mode. I will turn the call over to Debbie Tuck, Vice President, Finance and Head of Investor Relations for BlackBerry. Debbie W. Tuck: Thank you, operator. Welcome to BlackBerry’s fiscal 2017 first quarter results conference call. With me on the call today are Executive Chairman and Chief Executive Officer, 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 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 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.

Thank you. Thank you, Debbie. Good morning everybody and welcome. I will take you through -- this morning I'll take you through the summary of our Q1 results. Then I will provide some detail on our key business segments. As I mentioned last quarter, we're starting business -- segment reporting this quarter. This is beneficial for two key reasons. First, we're focusing on making each line of business profitable and maximizing the return on invested capitals. To enable this I have started to look at the business -- each of the business on the full P&L basis which means we are now required to report results based on our operating segments. Secondly, it provides, I hope you agree that it provides increased transparency to our shareholders and the market as well as our internal stakeholders. Moving to our results, I'm pleased to report positive non-GAAP operating income of $14 million, with our Q1 results that signal that we're on the right track. A few key takeaways for the quarter, number one we made good progress in reducing the loss of our device business. I know this is a major concern of a lot of people. We created a new business unit named Mobility Solutions. This unit will manage most of BlackBerry smartphone business and will also start focusing on developing a device software licensing program. In Software and Service, we continued to deliver very robust goals, as you can see and we achieved the highest quarterly revenue in the company's history, and I'll get through that more in detail later. Our financial foundation is strong and we are definitely investing in growth. Now a summary of our Q1 results. I'm referencing everything with non-GAAP numbers. So revenue came in at $424 million. The color here, device revenue was below our expectations. We're still seeing a softness of the high end of the market, but we have a plan and a roadmap to drive profitable revenue growth later in the year. In software we performed well, as I mentioned early and continue to deliver the robust growth. Excluding IT licensing, software and services grew 131% year-over-year. This is the second consecutive quarter we more than doubled our Software and Services revenue. Including IT, total Software and Services revenue was $166 million, up 21% year-over-year. This was the highest quarterly revenue for Software and Services in the company history. SAF was about in line with expectation, after taking into account for the FX as well as the one time effect that James is going to explain in a little bit more detail, that came in, in Q4 of a quarter ago. Gross margin was strong. This is probably a very good indicator. It came in at 53% from 49% last quarter and 50% a year ago. It is also the highest level gross margin number since 2007. Operating income, as I mentioned earlier, was a positive $14 million. We also achieved our 10th quarter of positive EBITDA, which came in at $58 million in the quarter. With the impact of the interest expense from our convertible debt the EPS was breakeven. The convert becomes callable in November of this year and I am working with the board on a plan to reduce this expense. Ending Q1 cash balance was $2.53 billion. Now let me provide various details on our key business segments. Let me start with Software and Services. We’re obviously very pleased with the momentum. Our software business continues to achieve scale and traction, resulting in robust growth and increasing market share. In the quarter our growth in software was driven by strong performance in three different categories, EMM, secure messaging as well as QNX. The mix of revenue of recurring revenue came in at 74% compared with 70% last quarter. We had about 3,300 customer orders in Q1. This includes 526 customer purchasing our suite, and for those who follow us that’s our new EMM go-to-market approach. This was up from 90 in the first 60 days after the launch in fiscal Q4 of last year. Let me mention some of the recent high profile wins. Government of Canada purchased multiple enterprise software products, including the EMM, the BBM Protected and the Secure Voice. This really demonstrates the differentiation of our broad software portfolio over a lot of our competitors. AtHoc Services which is among our secure messaging offerings had wins in multiple verticals. In the education with Macquarie University, in transportation with Great Western Railways and Salt Lake City Airport, and in government with the U.S. Senate, The Pentagon Force Protection Agency, The California Department of Justice and the United States Coastguard, that's just to name a few. Our strength in security and privacy continues to play well in the legal industry, highlighted by some really big wins in Reed Smith, Solothurn and Cromwell [ph] and Clifford Chance. Some additional enterprise wins including Buckeye Partners, one of the largest independent liquid petroleum operator in the United States, and Intercontinental Exchange, the leading network of regulated, a regulate exchange and clearing house for financial and commodity markets. As previously communicated we are ramping up channel expansion effort to drive continued growth. In Q1 we brought in new seasoned leadership and launched a new global partner program, or I guess re-launching the new global partner program. In the quarter we signed 107 new partners, representing a 10% increase in our global partner count. This includes a major software distribution agreement with HCL in India. It’s obviously still early but the initial traction is encouraging. Earlier in Q1, now I am switch over to IoT side, earlier in Q1 we announced BlackBerry Radar, our SS tracking services at the Mid-Atlantic Trucking Show. This solution is designed to track freight and cargo using a cloud-based IoT platform. Customer in trucking and logistic will benefit from the higher utilization of assets, improved efficiencies and enhanced return on investments. Of course our platform is based on the BlackBerry level security and there are also anti-theft features built in as well. To-date we have conducted two successful proof-of-concept trials, and are launching it commercially in mid-July, which is obviously next month. Our initial target market is North America, followed by Europe and then we will expand to the rest of the world. QNX has a great footprint in auto, now I am switch over to QNX, which give us good leverage into the connected car opportunity. We’ve built and operate a secure end-to-end system to deliver over-the-air software updates to cars, to automotive, automobile. This technology is a growing imperative for automotive OEMs, with the average vehicle nowadays using about 60 million to 100 million lines of software code. Our solution will help the auto industry provide proactive maintenance update, without time consuming visit to the repair shop. This solution has been derived from our technology for updating 50 million mobile phones in over 100 countries. So our solution is definitely secure and it definitely scales. As an example of a win Carmel Automotive chose this solution, in addition to a number of our other QNX connected car products. We have a very strong pipeline in this area and some very notable industry players. So to summarize it, looking forward we feel very good about our six growth engines driving our software business. They are EMM, secure messaging, IoT, embedded software in connected cars, cyber security services and of course IP licensing. Moving on to the Mobility Solutions, we continue to make good progress on driving towards profitability in this segment, which includes our device business. In a quarter they were both organization and operational activities from the past quarter, and I would like to highlight some of them. We named a new general manager to the Mobility Solutions Group, Ralph Pini and a new sales leader, Alex Thurber. Both are experienced leaders bringing technologies and channel sales experience. The new leadership will focus on a lean and agile development approach, and in opening up new distribution channels to augment the traditional carrier channels. The new team is also focusing on developing a device software license model, which will contribute to both growth and profitability in this segment. We have also made operational improvement in Q1 with this segment, including entering into new and more favorable agreements with manufacturing partners. This helped us further de-risk our balance sheets in area where such as reducing inventory exposure, shortening order lead time as well as better cash management. On the overall mobility solution roadmap we deliver our Android Marshmallow release on schedule. We are the only vendor that has kept pace with Google in delivering timely Android security patches at the start of every month. And our releases have been ahead of Samsung, HTC, LG, Sony and other Android-based players. This means that BlackBerry Android users enjoy the highest level of protection from cyber security threat among all Android devices. On to the BB10, our BB10.3.3 releases is undergoing the NAIP certification by a third party, which we expect to obtain by the end of this month. The software will then obviously be available shortly after that. In Q1 we recognized revenue on over 500,000 device, at an average ASP of about $290. We improved our gross margin by the way in the segment from to 8% from 1% last quarter. I'll now turn the call over to James for a detailed look of our financials.

Thank you, John. Today we reported Q1 GAAP revenue of $400 million and non-GAAP revenue of $424 million with a GAAP loss per share of a $1.28. Non-GAAP EPS was breakeven as John mentioned. Our non-GAAP income statement presentation excludes purchase accounting deferred revenue write-down, deferred debenture fair value adjustment, stock comp expense, restructuring program charges, inventory write-down, amortization of purchased intangibles and business acquisition and integration charges. For this quarter it also excludes the non-cash good will impairments, and along with the asset impairment charge which I will discuss later. My comments in our financial performance for the quarter will be based on non-GAAP terms unless or otherwise specified. For reconciliation between our GAAP and non-GAAP numbers please see the earnings press release and supplement published earlier today, including corporate overhead not included in the multiple operating segments. As John mentioned, and as we previously discussed to provide transparency in our path to profitability this will be the first quarter that we are reporting on multiple business segments. We will provide comparative reporting for revenue and gross margin only. I will begin with the consolidated review of our Q1 F17 income statement results and move on to the individual segments thereafter. Now let me being with the consolidated income statement results. Our total revenue for the first quarter was $424 million. Our consolidated gross margin for the first quarter was 53.3%, up from 48.7% last quarter. Our non-GAAP gross margin excludes a non-cash inventory impairment of $41 million. Gross margin increased sequentially due to strong performance in Software and Services. Our model reflects gross margin around 50% for the next quarter. Operating expenses were $212 million, down from $258 million last quarter. Our non-GAAP operating expenses exclude $16 million in restructuring charges, $7 million in acquisition costs, $28 million in amortization of acquired intangibles, $12 million in stock comp expense, $57 million in non-cash goodwill impairment charges, and $501 million in non-cash long lived asset impairment charges, which primarily relate to the mobility solutions unit and I'll go through that when I talk about that segment. Our non-GAAP OpEx also excludes a non-cash credit of $24 million for our convertible debt. As a reminder this non-cash adjustment has no impact on the face value of our debt on our liquidity or on our operations and cash flow. Non-GAAP operating income was a positive $14 million. Our adjusted EBITDA was approximately $58 million this quarter excluding the non-GAAP adjustments previously mentioned. Given our move to segment reporting this quarter, the accounting rules require us to assess whether any of the non-current assets and goodwill associated with the individual segments could be potentially impaired. We conducted our analysis in accordance with the requirements of the accounting rules and concluded that the intangible assets related to hardware required a reduction in their carrying value. The results of the exercise was a $57 million reduction or write-down of goodwill and a $501 million write-down of hardware related intangible assets, including historical fixed royalty agreements. I will now breakdown the three business segments. First is Software and Services. Our Software and Services revenue represented 39% of total revenue. Total Software and Services revenue for the first quarter was $166 million, up 21% year-over-year and up 8% quarter-over-quarter, including IP. Roughly 74% of the total Software and Services revenue was recurring in nature. Our total Software and Services gross margin for the first quarter was 80.7%. Our total Software and Services operating expenses were $97 million. Software and Services direct operating expenses consist primarily of headcount and third-party costs relating to our enterprise solutions and services, Blackberry Technology Solutions, AtHoc, [indiscernible] BBM and professional cyber security services businesses. Operating profit in Software and Services was $37 million or approximately 22%. Next is our SAF business. Service Access Fee revenue represented 25% of consolidated revenue. Total SAF revenue for the first quarter was $106 million, down 26% quarter-over-quarter. The sequential SAF decline was slightly higher than our expectations due to the recognition of a benefit in the prior quarter that did not recur in Q1, the negative impact of FX, and the change in the timing of recognition of revenue for certain customers. We modeled a sequential decline in SAF revenue of roughly 20% next quarter. Our total SAF gross margin for the first quarter was 75.5%. Lastly, I will discuss the results of our hardware and other business which John mentioned will now be called Mobility Solutions. Our Mobility Solutions revenue represented 36% of revenue. Total Mobility Solutions revenue for the first quarter was $152 million. We recognized revenue on roughly 500,000 units and ASP was approximately $290. Our total Mobility Solutions gross margin for the first quarter was 7.9% and includes the benefit relating to a reduction of fixed loyalty cost from the long lived asset impairment which I described previously. Without the impact of the reduced fixed royalty's reduction, Mobility Solution's gross margins would still have been positive for the quarter. Prior to the impairment charges, we were carrying onerous fixed IP costs relating to legacy inbound licenses or prepaid deals. This made our margins lower than our peers as our royalty burden was much higher. The impairment brings the balance sheet more in line with the size of our devices business and adjusts our cost base and royalty cost to be more comparable with the industry. Total Mobility Solutions operating expenses were $33 million. Mobility Solutions direct operating expenses consists primarily of headcount cost associated with the development, manufacturing and sale of devices. Mobility Solutions operating loss was $21 million for the quarter. Now moving on to our balance sheet and working capital performance, total cash, cash equivalents and investments ended at $2.5 billion. This reflects $61 million of net operating cash used during the quarter. Cash flow from operations before working capital adjustments was negatively impacted by restructuring charges in payments and the non-cash inventory impairments. Excluding these items cash flow from operations before working cap adjustments would have been positive. Working capital was also negatively impacted by the recognition of income tax receivables that the company will collect in the back half of this fiscal year. Our net cash position is approximately $1.3 billion. Aggregate contractual obligations, which includes purchase orders, operating lease obligations, interest payments and other goods and services utilized in operations, amounted to approximately $885 million, down from $1.2 billion in the same year ago period. Purchase orders with contract manufacturers represented approximately $150 million of the total, down from $238 million in the same year ago period and $162 million in the prior quarter. We have also shortened our lead times for ordering hardware which allows us to manage our commitments more effectively. As John mentioned with our new contract terms the inventory risk has shifted to our ODM partners, thus protecting our balance sheet. Moving to the cash flow statement, use of free cash was $65 million in the first quarter which consisted of net cash used in operating expenses of $61 million, minus the capital expenditures of $4 million. Looking forward we expect to maintain our positive cash flow and positive EBITDA for the full 2017 fiscal year. That concludes my comments and I’ll turn it back over to John.

Thank you, James. Before we go to the Q&A, I will share some thoughts of our outlook for 2017 or FY17. I'd like to reiterate our expectation for software growth of around 30%. For the full fiscal year I continue to expect quarterly software and service growth to offset the decline on SAF cumulatively for the year. Our objective is to achieve operating profitability in Mobility Solutions in Q3 of the current fiscal year. Based on our overall margin strength in Q1, and a much more efficient financial model some of the stuff that James has spoken about we currently expect our full year EPS to be around a loss of $0.15, minus 15 that is, this compares to a current consensus of a $0.33 loss. I also expect to be free cash flow positive for the full year. So now I am ready for the Q&A session, and operator could you please manage the logistics.

Certainly. [Operator Instructions] Thank you. And our first question comes from the line of Daniel Chan of TD Securities. Your line is now open.

Hi, good morning guys.

Good morning.

I just wanted to talk about Radar for a little bit. You had it in trial for a few months now. Can you give us a sense of early customer feedback and how many customers you've signed up so far?

We have not -- we did a trial with two and we are still currently on trial with three. Feedback's been very strong for the first two trials that was finished, and so and that will -- we will start shipping that in middle of July. So I don’t have the details of the entire pipeline but seems like that everything comes back has been [ph] very strong.

And have you guys built any Radar sales into your fiscal year 2017 assumptions?

Not much.

Okay. And then the software can you give us an idea of our organic growth rate for the quarter?

We don’t really have organic growth rate anymore, and the reason is that we have to actually combine both sales force and a lot of the accounts that actually have both BlackBerry and the legacy good. So it’s very hard to separate out the two now.

Thank you.

Yeah.

Thank you. And our next question comes from Tim Long of BMO. Your line is now open.

Thank you. Could you talk a little bit about in the software business, what you've been seeing from the bundling of all the different solutions. Are you starting to see some traction there? And then I just had a follow up on the device business.

Yes, as I reported earlier, we went from 90 to 560 some customers in the span of 90 days. It's been extremely well received. And it also by the way it gives us an opportunity to upsell to our customer, because they come in with one or two other suites. We have five of them with five components on the entire suite or platform. So this is very efficient for us and very efficient for the customer also. So I see the receptivity be huge, because most of the customer doesn't want to deal with the complexity of about 20 different features for example. And so our point [ph] product, this is a good thing for both of us.

Okay. And then just on the Mobility Services Solutions business, the device software licensing, could you explain what that is, it sounds like it's zero now or how is that going to be different than IPR revenues? How do you split what goes into software and what goes into the Mobility Solutions business, that will be helpful to understand, thanks.

Okay, excellent. So there is zero revenue. But the reason of us putting that unit together with device is so that I could start shifting some of our business focus on to software. And this is like licensing our hub. A lot of the good stuff that we do in devices like the BlackBerry Hub, some of our Antenna technology, power management technology and the software, the list goes on, those that I'm willing to license to other OEMs, phone manufacturers, device manufacturers, even equipment people, and so this is different from giving you a patent, right. Is that making sense?

Yes.

It's like, you can use my hub and you might pay me a dollar a phone or whatever it might be or annual fee for using the hub, but you don't have the IP rights, to hub [ph] there or the underlying patent that supported the hub.

Okay. So this would be to device manufacturers or ODMs or whoever is making the phones?

Making phones or making the equipment.

Phone or device. Okay, alright thank you.

Sure.

Thank you. And our next question comes from Maynard Um of Wells Fargo. Your line is now open.

Hi, thanks. Good morning. So I just wanted to clarify, where are the cost of running the NOC? The SAF operating ones seem very high, so I'm wondering if it's in corporate unallocated. And then separately John, I'm curious why you think it's important to be in the hardware business. I mean I presume if you're out of it to provide better visibility of the business. You've at least gotten out the risk of inventory off the balance sheet. But you'd also presumably get a higher multiple on the remaining business. And it wouldn't seem like you would need the hardware business for your new device software licensing business. So I'm curious are we missing something or not seeing something that you think will drive the hardware success, that's sort to driving the decision to stay in the hardware business?

Okay, great question. I'll let James answer the first question, I'll answer the second.

Hey, Maynard. So your question on the NOC infrastructure, the short answer is there is nothing that's left in corporate. All of the infrastructure cost are either -- they were allocated to one of the three business units. So -- and basically we've got a basis to do that, but all three of the segments effectively use that and the whole NOC is there for go-to-market. So there is no even conceptual reason to leave anything in corporate which would kind of be what's left to support the entire business. So it's allocated across all of mobility solution software and services and SAF.

So James, just so the maintenance of that, so your fixed infrastructure, I presume the SAF business is the one that uses the network the most.

Correct, that’s right.

Okay. So the incremental cost of this -- of running the network is very small then?

Correct.

Okay thanks.

Okay. As far as the hardware is concerned, a couple of reasons. Number, it's a customer reason. The customers, many customers especially in the government world, they're still relying on us to provide a secure handset for them. That's number one. Number two, I really, really believe that we could make money out of it of our device business. And to make sure to augment that so we don't put too much emphasis on that, we started the software business, start licensing our technology which we spoke about earlier. So let's see how we could develop this. As I told everybody I think within a couple of quarters we will be making profit in the whole Mobility Solution Group and definitely device losses has been pared down quite a bit. As you pointed out we de-risked a lot of stuff already. I was pretty much burdened by the fact that we have not only the infantry but the legacy IP, I guess James used the word in-bound royalty, some of the contracts and stuffs, we either written it off or renegotiated a lot of those. So we are at the point that where our business are extremely efficient and we no longer really making any hardware. We are really a hardware design house. I do design, I don't really make hardware, I do design hardware and as I pointed out earlier and with the new manufacturing arrangement, that we made we don't really carry too much of the risk to our balance sheet. And then we just have to manage the bottom line from the expense side of the equation. So let's see whether we can make a run of it. It is not then then we already started our software part of that business and maybe that transition will be smoother.

Okay, thanks, and James sorry, just to clarify the income tax, did I hear you say that there is a benefit in the back half or how should we think about income taxes on the P&L? Thanks.

Basically it would be from the P&L Maynard, it would be zero to very small headwind in terms of cash taxes. My comment by the way was just in terms of working capital if you look at the balance sheet we kind of went from zero at year end to a $25 million receivable. So my comment was that $25 million will unwind itself in the back half of the fiscal year was more cash taxes in our P&L per se.

Great, thanks.

Thank you. And our next question comes from Rod Hall of JPMorgan. Your line is now open.

Good morning Rod.

Hi, good morning. This is [indiscernible] for Rod. Thanks for taking my question. I got one question and one follow-up if I may. So could you talk about your pipeline in the smartphone segment? I think you earlier talked about launching a mid-range Android phone. Could you talk about your plans over there?

Pipeline, not quite sure how -- oh, the phone itself. Yeah, I'm not really prepared -- obviously I had one, I'm not really prepared to unveil that. I guess, I was thinking about doing that more in July timeframe. I have spoken about having two of them in between now and the end of this fiscal year, and they usually they both of them more in the mid range and mid to high, not going to be a high end phone. So that's all I prepared to discuss today.

All right. Could you also talk about your expectations for IP licensing revenue? I know you talked about generating maybe a little less than last year in the previous earnings call. Do you have any update of that?

We have very, very small, almost none.

But what are your expectations for the fiscal 2017, the whole year?

We will have some expectation, we really haven't broken it out, and IP is one of those that it takes a long time. We have a long pipeline of that, because you probably know the fact that we have probably 38,000 patents. They are very, very current and so we are very interested in licensing to everybody for that matter. But it's not something that we are forcing it, it's not something, we like to get it on more of the recurring basis, which of course make it a bit harder to negotiate. So there are lots of them going on over the world. But I'm not really counting, like I'm counting them to have some effect to our bottom line this year, but not really counting a big implement [ph].

All right and one final question if I may, could you talk about the timing of what your expectations for seeing revenue on device software licensing?

Probably we just started. I mean literally we started about a month ago. We need to assemble the pipeline. I would say six months.

All right. Thanks.

Thank you, and our next question comes from Paul Steep of Scotia Capital. Your line is now open.

Great, thanks. John, just on EMM suite, could you talk a little bit about the wins, you obviously got a big ramp in new customers this quarter. What's been the ability to win in non-BlackBerry accounts and maybe talk a little bit about the quota carrying reps how you have allocated the software sales force?

Very good, excellent, thank you. So we actually won quite a number of competitive win. I think I'm not going to name of competitors but as you know there has a lot of -- many of the point of solution competitors I think they are financially quite weak and we have taken many accounts from them. And also many of them are under POC. So this is one of those areas that is really the most, the best areas that we have today. That and the AtHoc secure messaging business, those two have lots of momentum growing very well, competitors we are extremely competitive, we replacing competitors. So we have quite a force. I mean as you probably know we now owned about 19% to 20% of the market, and in the last year to this year we have increased our feet on the street and software by roughly about 29% in headcount. And those are -- actually I was just talking to Carl [ph], the other day, we now have people that we now train up, is now getting into the pipeline and generating businesses for us. So I feel pretty good about the whole thing at this point. So it’s competitive, we are replacing competitors in many places.

Great. Just two, one clarification, one other question. One would be for you John in terms of your M&A strategy how you are thinking about it. What’s your willingness to go in the market and buy like-for-like functionality let’s call it sort of almost a financial arbitrage, there is a number of struggling vendors out there that are clearly trading cheap on historic software multiple versus your preference to go and add new IP, and new functionality into the product platform? And then the clarification is just around your comments around mobile profitability what is your assumption behind that to get to sustainable profitability in that? Thank you.

Okay. You are talking about the mobile profitability, you are talking about the device global side, the mobile solution.

Yeah.

Okay, thank you. So on M&A question this is great question, my preference is to get into the new market, new IP and new space. I don’t think just go consolidate is the right use of our assets personally and there are a couple of reasons; A, I am competitive. So I could actually go in and replace them anyway in many cases and secondly then I will get inherited with a whole bunch of technology and solutions that overlap, and since we have to support the customers so there is really very little synergy there. So I just added a lot of cost, yes I may had added some new accounts but I don’t think that’s very efficient use of our resources and I'd rather see us grow in a new area, that is augmentation, amend it to our current strategy or offerings. So that’s the answer to that question. Second, the answer to the Mobility Solution Group question, we lost $21 million from operations in the quarter in Q1. I definitely believe that the number in Q2 on a loss basis will be much smaller than that number. Significantly you can appreciate. That means it’s going to be 20 it’s going to be lot less than that. And I do believe that in our Q3 timeframe we will either breakeven or have a slight profit. And from that point it’s up to the new product rollout and as well as the traction of our software sale, our licensing program in handset to see whether we could -- if our software licensing program is successful then I could tell you that the sustainability or profitability is very, very high because that obviously the margins will be quite different.

Perfect, thank you very much.

Absolutely.

Thank you. Our next question comes from Richard Tse of Cormark Securities. Your line is now open.

Yes thanks. John sort of related to Paul’s question, when it comes to the software services growth target of 30% this year, is that organic or does that include potential acquisitions?

No, I don’t have any -- I mean if there is any acquisition it will be extremely small and it’s not a acquisition based target.

Okay. And then when it comes to the software services portfolio, is it essentially complete? And perhaps you can give us the color on what you may be missing when it does come to M&A?

Yes, it is complete. I can't really tell you about -- it is very, very complete. And I'm comfortable with it, I could run with it right now, we're going to generate the growth, and the customers are responding well. And I'm sure that you guys do channel checks. A lot of all the names that you folks all represent are customers of hours. And you could probably call your IT department and ask the question. So if they say no by the way, please call me or email me. And then I'll make sure that I get my rep to go in there. But it's extremely complete. And there are areas that I could add on to, is probably more of a newer area in the market. And I'll just leave it at that because once I tell you that it would jack up my price. These are smaller companies.

All right thank you.

Sure.

Thank you. Our next question comes from Ben Bollin of Cleveland Research. Your line is now open.

Hi Ben.

Good morning, Ben.

Good morning, everyone. Thanks for taking my question. The first one, I wanted to talk a little bit going back to this Mobility Solutions profitability. Sorry, that to belabor [ph] that, John, but when you talk lessening the operating loss in that segment into the next several quarters, how much of that is incremental cost reductions or plans that are already in place versus revenue drivers that can get that business to scale. How do you get there. And then a follow up question for James related to the new reporting structure, thanks.

Yes. For the next couple of quarters, I'm very focused on efficiency. Where meaning that our cost base, we've done already a number of things to cut down our cost base both on the operating expense side, as well as the gross margin side or costs of goods sold. Some of the stuff we're going to get some benefits from the IP stuff reduction that James has referred to. And some of them are steps already taken that will reduce our cost -- pretty much the cost support in that business. So I think we're getting to a pretty lean and mean position. And then maybe I should say that, and quite efficient. So again a lot of them in the future depends on us going our software licensing revenue, device software licensing revenue as well as some growth from the revenue growth on the new product that's come in. And that will pick our financial model or our business model quite efficient.

Okay, thank you. And James, when we look at the new reconciliation to the new structure. Are you're going to provide any backward look into that, where that's been, maybe in the past 12 months? And if not, could you give us an idea on how that corporate unallocated amount has trended over the last several quarters?

Sure. In terms of the comparative spend, like I said we'll just do it down to margin for at least this quarter. Part of the reason is we haven unnecessarily tracked these costs, the way that we're presenting them for the comparable periods last year. So during the year, we did move to that. So I think you will see us as we get into the back half of the fiscal year, we might be able to provide some comparatives. But for the most part, you can imagine that a big part of our efficiency in taking the cost base down has been focused on these things. So that the trend definitely overtime over last couple of years I would say has definitely been down here.

Thank you.

Thank you. And our next question comes from Simona Jankowski of Goldman Sachs. Your line is now open.

Hi, Simona.

Hi, this is actually Doug Clark on behalf of Simona. A few questions, I guess the first one on the SAF revenues. You mentioned it was impacted by FX and one-time items. But on the go forward guide it looks like you're looking for another 20% sequential decline. I believe that's a bit above what we've been seeing. So it does seem like we've taken a bit of a step function lower wondering if you can address that. And then on OpEx in general I understand looking at continuing to take out cost efficiencies in the Mobility Services segment on a corporate average basis. Should OpEx stabilize from here or are there additional areas for cost savings?

So on the SAF piece, Doug you are absolutely right. We had a few factors impacting, the one you didn't mention was just the timing of recognition for certain customers. I think we've been through this before where we either recognize when we invoice or when that customer actually pays us. So invoicing is of course something that we can control and is based on time, the timing of payments kind of slides in one quarter versus another. So that had -- was one of the reasons that I mentioned that you didn't. In terms of managing this like we've said many times that we will give you an idea what we think it's going to do going forward. Ultimately we have confidence that the 20% in terms of our model based on the trends. So we'll continue to update as we get more clarity in that on a quarterly basis. The second part of your question in terms of corporate expenses are you talking about just the unallocated piece or just OpEx overall?

OpEx overall.

OpEx overall somewhere modest increase from the levels of where we are now to continue to support that growth, I think would be the right way to think about it.

Okay. That's really helpful and then if I can squeeze in one additional one on the Mobility Solutions side again. You mentioned new manufacturing agreements to kind of help lower inventory levels. I'm wondering how these are different from what the company had put in place with Foxconn a year or so ago.

A little bit more efficient then Foxconn. The Foxconn model was actually were quite good and it's really based on the Foxconn model. So a little more efficient than the Foxconn model and that's pretty much it. I mean we have about three different ODM, or original design manufacturers that work with us and now two of the three is gone to a model that is more related to the more like the Foxconn model.

Okay, great. Thanks very much.

Thank you. Our next question comes from Michael Kim from Imperial Capital. Your line is now open.

Hi, good morning guys. Could you talk a little bit more about the re-launch of the enterprise partner programs and some of the early progress I think you mentioned a number of new channel partners signed and any color on your registrations and expansion the channel fields? Thanks.

Okay, so it's great. One of the big item for me was to make our go-to-market a lot more efficient. I think I mentioned about two quarters ago, and this is one of those tangible thing that we could point to. We look at our pricing model the margin strategy with the channel partners and the view from the partner themselves. The marketing program supporting them on a around the world -- and more of a global footprint. So we don't really concentrate just on a few places. So those are all aspects of it, and so there are lots of views [ph] help that, maybe I shouldn't probably use that word. And the new group of people focusing on it and which we increase the headcount to, and a leader that we recruited, actually we recruit from Cisco. So those are all very positive things. We will have more energy to it, and as I pointed out we have 107 new partners in the quarter, that number will continue to grow. We don't want to give you a number that we expected, but you would expect that year-over-year growth we expect pretty high numbers.

Great, and then just on the Software and Service segment as the recurring component's gotten pretty sizeable proportion. Any color around recurring billings and how that's trended over the last couple of quarters?

Pretty steady, I would say in the quarter. Pretty much as we expected, always could be better obviously. But it's pretty steady.

Okay, great. Thank you very much.

Sure.

Thank you. Our next question comes from Deepak Kaushal of GMP Securities. Your line is now open.

Hi, guys. Hi, can you hear me?

Yes.

Thanks for taking my question. Most of them have been asked. But I'll try and dig a little bit more on the Mobility and Solutions business. Following on the answers, with respect to change with the OEM partners, when I look at the business you are targeting to be profitable, how do you avoid inventory write downs in the future on your new hardware products? Like the ones that you are seeing now and then just to follow on the software side, my understanding correctly that another Samsung or an HTC can license your hub. And then have effectively the same security as a BlackBerry device. Is that correct in the assumption and then the only differentiation then being the keyboard?

Well, so let me go to that one first. The hub are the way that we managed messaging, email, different email account system. So it's not a security-based thing. However, yes the answer to your question is yes, more than happy to license it to Samsung and HTC, but not the security side. The security side, our component mobile and software, and if they want to license it we haven't really crossed that bridge on whether we will or not. I think there is always a deal somewhere to be found. But we haven't really put that on the list. The other thing about security you need to understand about our devices, there are a lot of hardware based security built into the routing, into the chips and so forth. So it's a little bit more than just using my security software and somehow be mysteriously become the same level of the BlackBerry Security. So it's a combination of both hardware software as well as the server. The customer uses our server to manage all device, and the combination of that are the most secure situation. So and as far as the inventory part of the equation is concerned it's really to the limitation of what -- when is the liability start at BlackBerry and when is the liability start at the ODM side. So we negotiate that window to be quite favorable let's say.

And Deepak, it's James. If I take what John said and put a fine point on it, one of the key things is how far in advance you need to place orders. In my prepared remarks, I talked about really shortening that lead time. So you have a lot more certainty on demand if you will as that window become shorter. And as John said, if you're partnering with somebody and they're doing a lot of the heavy lifting on engineering, conceptually they would use rework and be able to reuse those parts for others if BlackBerry didn't place the device. So the more common we are the more flexibility we have to take that -- to allow them to take on that liability earlier.

Okay. So are you effectively getting to a point where you will only build the hardware devices when you have an order from an enterprise or from a carrier?

They can't do it at -- see the order and do that yet. But it's -- within a small number of weeks window.

Okay, okay, that's helpful color as far as my questions went, very clear and detailed.

Okay. And we probably have to cut off and two more -- and let's take the last two because I have a 9 o'clock office [ph].

And our next question comes from Paul Treiber of RBC Capital Markets. Your line is now open.

Hi, thanks very much. Just hoping, could you speak to what you've been seeing in terms of enterprise qualification of the PRIV? And then how do you anticipate that qualification of future Android devices, would that happen at a faster pace because of the PRIV?

Well, the PRIV is really a great engineering product. And it's done well for people who bought it. But it's too expensive for enterprise. And so we're little bit on the higher -- too much of a higher end. So this is why the enterprise have been asking as well as the carrier who represent the enterprise, when they -- and the B2B group has been asking for a more of a mid-range. They like everything BlackBerry represents in terms of security and the ability to run our software with the Android operating systems. But unfortunately the PRIV itself, only kind of are being affordable by the executive or the higher entity of the organization. So this is why, that is why I believe that we should really build or get to produce a mid-range product with our level of security and the software.

So in terms of the IT department though, certifying the device in future Android devices, because the PRIV is already in the market, should that help accelerate?

Yes, it does. Sorry I didn't catch the essence of your questions earlier. It does, because they are now already well aware and have been able to test the BlackBerry Android implementation.

Okay. Just focusing on deferred revenue decline quarter-over-quarter, did you speak to some of the moving parts, and particularly in regards to how the new software business flows to deferred revenues?

Well, there is other elements in there Paul, first of all than just the software piece, because we do recognize hardware for example on sell-through basis which would impact that. We talked about the uptick in recurring revenue quarter-over-quarter from 70% to 74%. So obviously we are heading in the right direction there. But ultimately it's not just the software story, software for recurring revenues as I said is going the right way there.

Okay. Thanks very much. I'll pass the line.

Absolutely.

Thank you and our final question will come from Anil Doradla of William Blair. Your line is now open.

Hi, guys. Thanks for squeezing me in. John, couple of questions. So if you were to discontinue your hardware business say tomorrow, how much of the revenues in your software will be impacted?

You are talking about the software stuff that sits on EMM?

Yes and all those six segments that you talked about.

I would say some, but very little.

Okay, and you have been selling patents. Over the years BlackBerry has accumulated tons of these. So where would you say -- what innings are you in terms of the total sale of your patents, is there still a long way to go or you somewhere in the middle of it in terms of their sale?

First of all inning we are still in the -- if you want to go in inning we are probably in the first inning and I'm not really interested in just selling my patent. I'm interested in licensing our patent. If we want to sell our patent then we could get a very events innings in a very short time. Many people have wanted to buy the patents. But I'm not really in a patent selling mode, I'm in a patent licensing mode.

So from a licensing point of view you feel that you are still in the initial innings.

Absolutely.

Very good. Thank you very much.

Absolutely. Thank you. All right. Let me provide some closing comments. The only thing I have actually in closing thank you all by the way for the strong interest. I'm sorry we don't have more time, we could take questions I know there is some pending questions coming and I'm sure you could contact us, to James and myself if you need to. So before I close the call here I would like to give you a pitch on one of our upcoming event is our Annual Security Summit planned to be on July 19 in New York City. We'll highlight the unique value proposition of our end-to-end platform and all the software technology we talk about that you heard. This will involve feeling how we help enterprise mobilize the infrastructure to accomplish more everything in the most secure manner. It will also be a great opportunity to hear directly from our customers and strategic partners that they will be coming and supporting us. I promise that we are very informative and although it's the same by the way it's the same week of the Republican National Convention in Cleveland. So it probably a good place to go to instead of Cleveland. I look forward to see many of you there in person. Thank you for joining the call today. See you next time.

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