BlackBerry Ltd (BB) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Certicom corporation fiscal 2003 Q2 conference call.

At this time all participants are in a listen-only mode.

Following the presentation we will conduct a question and answer session for analysts and institutional investors.

Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time.

I would like to advise everyone that this conference call is being recorded and will now turn the conference over to Sara Borge Olivier, IR Representative, please go ahead.

Thank you, and good afternoon.

Thank you for joining us.

On the call today is Ian McKinnon, President and Chief Executive Officer who will discuss the company's operations for the second quarter of fiscal 2003.

Herve Seguin, Chief Financial Officer, will then review the company's financial performance.

Also with us today is Tony Rosati, Vice President of Marketing who will be able to answer questions during the question and answer session.

Please note that all dollar amounts are in U.S. dollars.

This conference call is also being web cast live on the company's web site at www.certicom.com.

During the course of this conference call management may make projections or other forward-looking statements regarding future events or the future financial performance of the company.

Such statements are predictions and actual events or results may differ materially.

Please refer to Certicom's most recent annual report and other documents the company files with the securities commissions in Canada which identify factors that could cause actual results to differ materially from forward-looking statements.

I would now like to turn the call over to Ian McKinnon.

Thank you, Sara and good afternoon everyone.

Thank you for joining us.

Please refer to slide four of our power point presentation which is found on our web site.

Today I'm going to give an overview of our second quarter results and operational highlights.

Herve Seguin will then give a financial overview and I'll conclude with Certicom's outlook and a brief summary.

Slide five.

Our revenues this quarter were affected by a challenging IT selling environment and general economic uncertainty, which is caused a number of our OEM customers to delay projects.

In particular, we experienced slower than expected sales of our traditional developer tool kit offerings along with a decrease in demand for professional consulting services as customers focus on conserving cash.

However, I am pleased to announce that our final Q2 results for FY '03 are in line with the revised guidance we issued on October 24th.

Although we're disappointed with our top line performance, we're not discouraged.

We have not lost any contracts to competitors, and additionally have significantly reduced the company's overall cost structure and maintained a strong cash position.

As a result, Certicom has a strong financial foundation for growth and is ready to act on opportunities as the economy recovers.

Slide 6, operationally, during the quarter we made solid progress.

We achieved wins with eight new customers, began working with Microsoft and extended our relationship with Palm.

We launched the Certicom partner network and finally we expanded our product offering.

I'll discuss these achievements in greater detail later, but at this point I'll turn the call over to Herve to give the Q2 FY '03 financial overview.

Good afternoon, everyone.

I'd like to refer you to slide number seven.

Certicom reported revenues of $2.6m dollars compared to $2.7m in the quarter -- in the same quarter of 2002.

Revised guidance for the quarter was $2.5m to $3m .

As Ian mentioned, revenues have been affected primarily by longer than expected sales cycles and generally conservative IT spending in the private sector.

Operating expenses including cost of sales and excluding depreciation and amortization totaled 3.4m during the quarter in line with revised guidance of 3.4 to $3.7m.

This compares with operating expenses of $10.7m in the same quarter a year ago, which is a decrease of 68%.

The EBITDA loss for the quarter was $900,000 compared with $8m in the same quarter last year.

A decrease of 89%.

The net loss for the quarter was $1.7m or five cents per share compared with a loss of 22.8m, or 73 cents per share in the same period last year.

Total cash, including restricted cash, totaled $12.4m , which exceeded our guidance of $11.7 to $12.2m .

At April 30th, 2002, cash totaled 17.1m.

We have significantly reduced Certicom's overall cost structure and maintain a strong cash balance, which demonstrates our disciplined operating approach and commitment to achieving profitability.

As a result, we do not expect to require additional financing in the foreseeable future.

If you would move to slide eight, please.

Turning to the first six months of fiscal '03 Certicom reported revenues of 5.9b, an increase of 12% from the $5.3m in the same period last year.

Operating expenses, including cost of sales and excluding depreciation and amortization, decreased 70.5% to $7.2m , from $24.4m a year ago.

The EBITDA loss for the period was $1.3m compared with 19.1m in the same period last year.

This represents a decrease of 93%.

The company posted a net loss of $2.7m or 9 cents per share compared with 53.6m, or $1.72 per share last year.

Slide nine, please.

Subsequent to quarter end, we announced the termination of our lease from our Hayward, California facility, which was effective November 30th, 2002.

Under the terms of the agreement, Certicom will pay a total of $1.5m payable in installments ending August 1st, 2003.

These payments will approximately be equal to the lease options that we would have otherwise incurred during the period.

As of October 31, 2002, the company had contractual obligations of $5.2m related to this lease, including 2.5m reported in the accrued restructuring charges at April 30th, 2002.

The financial benefits of this transaction include the reversal which will occur in our third quarter ended January 31, 2003, of a remaining $1m of restructuring provision which was reported at the end of last fiscal year.

We will also see the elimination of $2.7m of future unrecorded operating expenses relating to the lease which was scheduled to expire in 2007.

We will also see the elimination of $3.7m of future cash payments obligation for the period August 2002 to July 2007 and finally, we'll have a gradual reduction of two$2m of unrestricted cost to August 2003 which strengthens the company's unrestricted cash position.

In September we relocated our west coast sales organization to more modestly sized and priced facilities in San Mateo, ensuring we continue to have a strong sales presence in the Silicon Valley.

We're extremely pleased with the terms of this transaction which caps our exposure.

In addition, it significantly strengthens our balance sheet and improves our flexibility.

We're confident that we're taking the right steps to put Certicom on a profitable growth path.

I would like to now turn the meeting back to Ian.

Thanks Herve, we're now on slide ten – summarizes our go to market strategy.

Targets OEMs value added resellers, and specific high-growth vertical markets.

Slide 11.

In the second quarter, fiscal '03, we continued to advance the strategy in a number of ways.

We grew our customer base with eight new customer wins which represented one-third of our Q2 fiscal '03 revenue.

Most recently we announced that we were selected by [Scionteclogix] to integrate wireless security into its new net pad hand-held computer.

We expanded our product offering by launching our government security division otherwise known as GSE which is a wireless security suite of applications and tool kits that meet strict government standards.

And I should point out at this stage we're well ahead of our fiscal '03 US government plan and have received very positive response to date in terms of many of the initiatives that we have underway which bodes well certainly for our future activities with the U.S. government.

We also introduced Movian VPM 3.0, the industry’s first wireless VPN client to support the advanced encryption standard BES and digital certificates for authentication.

This product enables mobile users to protect sensitive information with the highest level of security, without compromising the speed and flexibility of wireless devices.

Certicom is now working with Microsoft to deliver Movian VPN support for the newly launched Windows powered Smart Phone operating system.

We also extended our relationship with Palm to provide Movian support for the Tungsten W hand-held part of Palm’s new Tungsten series of mobile professional and enterprise products.

In addition we advanced a key element of our growth strategy with the launch of the Certicom partner network, which simplifies the delivery of our complete security solutions to enterprises, governments and other markets.

This program enabled us to sign agreements with four new security-specific resellers in North America, the UK and Korea.including Boxing Orange, Comark, Refeg and Seoul Information Systems as well as previously announced Ameris and Onyx Networking.

This brings us to a total of 10 value-added reseller relationships to date in fiscal 2003.

Slide 12.

As Herve mentioned a minute ago we're confident that the company is taking the right steps to position Certicom for profitable growth.

However, the economic outlook is uncertain and the selling environment continues to be unpredictable.

As a result, we've decided to temporarily stop providing quarterly guidance for revenue and cash.

Although our sales opportunities are strong, many customers are postponing purchases until economic conditions improve.

We will, however, continue to provide guidance for operating expenses.

Third quarter operating expenses, including cost of sales, for fiscal 2003, are expected to range from $3.2 to $3.5m .

We will resume revenue and cash guidance as soon as we have more certain market visibility.

Slide 13.

Certicom has significant competitive strengths and a unique value proposition.

As a result, our outlook going forward remains strong.

The wireless security market is forecasted to grow rapidly over the next five years, and Certicom has not lost any contracts to competitors that we know of.

We have a strong cash position, with no anticipated financing required in the foreseeable future, and we are well positioned to win new business.

Finally, we're 100% focused on executing our go to market strategy.

So that ends our formal presentation at this point and we'd be pleased now to answer any questions that you might have.

Thank you.

One moment, please.

Ladies and gentlemen, we will now conduct a question and answer session.

Please be advised that the members of the media and general public will be in a listen-only mode for the duration of the question and answer session, Certicom will be pleased to arrange for any follow-up discussion or interviews of the senior management after the call has been completed.

To make these arrangements please contact Brendan Zeeolo at 613-254-9267.

If you have a question, press the star followed by the one on your touch tone phone.

You'll hear a three tone prompt acknowledging your request.

Your questions will be polled in the order they're received.

If you'd like to decline press star followed by 2.

Lift up the handset if you're using a speaker phone before pressing any keys.

Your first question comes from Joe Spiegel from Spinner.

I'm glad to see the Hayward lease finally resolved.

I was curious are there any outstanding contingencies from the California expansion that might crop up in the near future, or is this pretty much it?

Joe, thanks for the question.

There are no more obligations left from the California expansion.

That was it.

That was the only one that was still left to resolve.

Great.

Thank you.

Thanks, Joe

Your next question comes from Scott Preston from Research Capital.

Please go ahead.

: Good evening, guys.

It's [Joe Weissblatt], speaking on behalf of Scott Preston.

I have a two-part question.

I'd like to know what attributed to the decline in deferred revenue and to the decline in service revenues, if you could comment briefly on those two.

I think on those two, regarding the -- I guess your first one was it service revenue?

Deferred revenue.

The decrease in the deferred revenue really has again to do with the decrease in the revenue for the quarter.

Some of the revenue we -- some of the bookings and sales we make have a deferred component to it.

So that would normally go into the deferred revenue.

So part of it is the fact that we didn't sign as many deals as we were expecting.

Regarding the maintenance revenue, again, it's related to that.

We renew our maintenance agreements as they come due.

However, we also get new revenues that, new maintenance revenue as we get new licenses and that was affected again this quarter.

Okay.

When do you guys expect delayed deals to come back and what is the structure looking like?

Is pricing a component of these lost deals?

First of all, as we said in terms of the revenue guidance, we will be resuming revenue and cash guidance as soon as we have more certain market visibility, but I can tell you that the sales opportunities that we have are very qualified.

We're not seeing any loss to competition.

We're not finding any undue or abnormal pricing pressure, no pressure to significantly discount.

I can tell you that there are going to be deals and there have been deals that we have not done, because the downward pricing pressure was not appropriate, not in line with our profit requirements and profit margin guidelines.

So we're not going to get put in a corner at the end of a quarter, for example, and lassoed into doing a deal that doesn't make good business sense.

We're very comfortable with the qualification of our opportunities, the quantity of them.

And I can tell you that we're also making appropriate changes in our field sales force to ensure that we're raising the bar, frankly, in terms of the quality and caliber of the people who are representing us in the field.

It's one thing to make your numbers if you're a sales rep during a hot economy.

But it's another during times like this.

And frankly we're out trying to find people who understand our sector.

We're bringing a number on board.

But also folks who understand how to make their numbers whether the economy is good or whether it's not so good.

And I'm confident that we are making the appropriate changes on that front to get people who know how to close business.

Lastly, if you could comment on the Movian products how is Certicom faring on the market in terms of these products and are you seeing any smaller vendors participating in any deals.

I'll get Tony Rosati, our VP of Marketing to answer that..

The Movian product line is doing very well in the market.

We don't publish numbers on that at this point in time.

But the uptake on the product is wonderful.

And so lots of momentum in all the verticals, especially, as Ian mentioned, there's a lot of pilots going on now in the government vertical.

And so we're very pleased by the results there.

And as Ian said, it's ahead of schedule.

Thank you very much.

I think you had another question, as well.

No, that's all.

Thank you very much.

I can tell you this, we're also putting more of our development resources into the Movian product line, because there's just, as Tony said, a huge demand, huge up take of interest on that product, and there's some very, very exciting additional functionality and enhancements that we're bringing to market, plan to bringing to market over the next little while that we think will continue to accelerate its market acceptance.

Thank you very much, guys.

Thanks, Joe

Your next question comes from Doug Hopkins from Canaccord Capital.

Thank you my question has been answered.

Okay

Your next question comes from David Wright from BMO Nesbitt Burns .

Go ahead.

I was wondering if you could talk about your various sales channels, where are you with the VARs and are the VARs contributing the way you expected in this difficult environment and then sort of what you've done with the sales headcount and how many direct sales reps you have now.

Thanks for the questions.

It's Ian.

First of all, we're very, very pleased with VAR initiative.

We have really two initiatives for FY '03, one was the U.S. government focus, the second was our VAR business plan.

And both are well ahead of our plan and our expectations.

We have ten of VARs signed to date as part of our channel partner network that we announced earlier on.

They are essentially picking up the lead, the presales and lead generation and fulfillment component of our business.

We’re also providing them a lot of leads through our marketing organization.

They're essentially picking up a lot of that enterprise up front selling activity and order fulfillment and post sales support in terms of front line, first line support.

So we're very pleased with the VARs that have signed on and we have a significant number of qualified VARs candidates, quite large organizations globally that were in various stages of discussion with.

So we absolutely expect that network to continue to expand and grow globally.

And I should point out that we now have representation, as I said in my comments earlier, of VARs both in Europe, North America but also in Asia.

So we're very pleased there.

We're also making very strong head way with our systems integration partners, particularly in the area of the government organizations like Northrup Computer Sciences corporation and so on, firms that do a lot of prime contracting.

SI work to the U.S. government, where we would be a subcontractor providing embedded security solutions.

That's going very well.

I think it's indicative of our U.S. government penetration.

So overall very pleased.

And finally, the third phase of our channel strategy is working with OEMs, organizations who embed and resell to enterprises.

This is has been a traditional strength for us.

That's been one area that certainly on the one hand has gone a little slower Q2 with our tool kit sales, but the pipeline, the sales opportunities in that sector are very well qualified and we see that growing.

That partially leads to your second question in terms of sales head count.

We haven't publicly announced, Dave, the number of sales reps that we have.

I think what we have said is we have over ten and we've left it to that guidance.

But we are bringing in a number of people -- by the way, we have not reduced our sales and marketing budget.

Although we have brought expenses down in G and A and professional services.

We've left ourselves marketing budgets essentially flat in terms of headcount, but we are making some changes, bringing some expertise into the company who have, as I mentioned on my earlier comment, capability to raise the bar in terms of sales professionalism and expectations and individuals that know for example the semi conductor market well and will do very well in terms of the OEM aspect of our market.

So we're very pleased with the outlook of both the caliber and quality of our sales organization and the penetration that we're making in our channels business.

Great.

Two quick follow-ups, then.

What would be your sort of long-term goal of how much VARs will contribute to your overall organization..

We've stated before, I'll answer it in two ways.

First of all the evaluated resellers of ours should be over the next year or two getting into the range of 40 to 45% of total revenues.

And also we've said that U.S. government should be in the vicinity of anywhere from 30 to 50% of our total revenues.

Again, much of that comes through -- in fact all of that will come through VARs and systems integration partners.

So that's how we see our business unfolding over the next year two years.

In the balance OEM?

Yes.

That's great.

Could you provide an overall headcount?

Where are you now overall in the organization?

It's about 113 Dave at this stage.

I. Wanted to go back and correct one statement, when you say the rest of the revenues from OEM.

We have a plan that has about 30 to 35% total revenues coming from services.

With 65% from product.

So that will give you the numbers at the revenue mix.

Right.

Okay.

Okay.

Great.

Thanks very much.

It's a tough environment and you're controlling things well, it seems.

Thanks, Dave

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1.

As a reminder, if you're using a speaker phone, please lift the handset before pressing any keys.

Mr. McKinnon, there are no further questions at this time.

Please continue.

Thank you very much, ladies and gentlemen for joining us today and please do not hesitate to contact either Brendan, Herve or myself at any point for any questions you may have.

Thank you for joining us today

Ladies and gentlemen, this concludes your conference call for today.

Thank you for participating and please disconnect your lines.

Call ended at 5:26 p.m. --- 0