Net Income increased grows 55%

GAAP net income for the quarter was $111.1 million, or 56 cents per share, as compared with net income of $70.6 million, or 36 cents per share, in the same period last year. Excluding a provision of $6.2 million for an inventory write-down and incremental warranty item, as well as an additional NTP-related litigation expense of $6.6 million following the August 2, 2005 Appeals Court ruling, adjusted net income was $120.2 million, or 61 cents per share. This was within the expected range for earnings per share of 57 to 63 cents.

The tax rate for the quarter was approximately 29%, slightly lower than the forecasted 30%.

EPS and Shares Outstanding

Weighted average diluted shares used in the GAAP earnings per share calculation for Q2 were $198 million. Actual shares outstanding at August 27th were 191 million, and total options outstanding on August 27th were 10.2 million.

Strong balance sheet

The company’s balance sheet continues to be strong with substantial cash reserves, appropriate working capital balances, and negligible debt. At the end of Q2, the company had $1.9 billion in cash, cash equivalents, and investments. This was up $116 million from the prior quarter and was higher than expected due to changes in working capital balances.

The $450 million resolution amount has not yet been remitted and is included in the litigation provision in the liability section of the company’s balance sheet. The company’s cash position net of the resolution amount is approximately $1.61 billion as approximately $163 million of the $450 million liability is already in escrow, which was reported as restricted cash on the company's balance sheet, therefore not included in the cash balance.

Balance sheet details

- Trade receivables were approximately flat with the prior quarter at $233 million.
- DSOs in Q2 were slightly lower at 43 days compared to 44 days in Q1.
- Inventory increased slightly to $84 million in the current quarter from $80 million in the prior quarter.
- Net capital assets increased to $270 million, up from $229 million in the prior quarter.

The company is increasing revenue guidance for Q3 of fiscal 2006, ending November 26, 2005.

- The company raised its Q3 revenue guidance to the range of $540-$570 million from the earlier forecasted range of $525 - $550 million.
- Earnings per share for Q3 continue to be expected in the range of 62-68 cents per share.

New subscriber additions in Q3 are expected to be flat.

New subscriber additions in Q3 are expected in the range of 680,000-710,000. This guidance reflects the company’s expectation that channel inventory will remain relatively constant in Q3 and Q4 with Q2 levels in terms of weeks of inventory.

The main reason why this range isn't higher for Q3 is that most of the new product launches in North America are scheduled mid to late in the quarter, with European launches mainly scheduled for Q4. Therefore, a portion of the anticipated lift is expected to hit in Q3, with the remainder impacting Q4. BlackBerry Connect continues to grow well but is still expected to be a relatively small contributor to subscriber growth in Q3. The company is looking for BB Connect to begin contributing more in Q4 and beyond and have factored conservative forecasts into guidance.

During the remainder of Q3, the company expects to launch many new handsets for different networks around the world. In addition to the fall being a seasonally strong time for BlackBerry sales, the company expects these new handsets to both drive continued new subscriber growth as well as compel many existing BlackBerry users to upgrade their current handsets. The company projects a faster upgrade cycle and expects this to continue as a trend.

Company guides higher revenue for Q4 of 2006

The company forecasts Q4 revenue to be higher than Q3, in the range of $590 to $620 million. The company expects revenue for the year to exceed $2 billion. A substantial increase in subscriber additions for Q4 is targeted in the range of 775,000 to 825,000, which is expected to take the company through the 5 million subscriber milestone in February.

Gross Margin Guidance

Due to the increase in expected hardware revenue in Q3, the shift in sales mix will result in the company’s expected gross margin being at the low end of the previously guided 55% to 57% range.