BlackBerry Ltd (BB) 2005 Q1 法說會逐字稿

Good morning, Ladies and gentlemen, thank you for standing by. Welcome to the Certicom Corporation first quarter results 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, 0 for operator assistance at any time. I would like to remind everyone that this conference call be is being recorded today, Thursday, September 9, 2004 at 10:00 a.m. eastern time. And we'll now turn the conference over to Mr. John Vincic, Investor Relations Consultant. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for Certicom's first quarter fiscal 2005 results conference call. On the call from Certicom today are Ian McKinnon, President and Chief Executive Officer, Herve Seguin, Chief Financial Officer, and Roy Pereira, Vice President Marketing and Product Management. Ian will begin with a review of the Company's operations and operational highlights for the first quarter ended July 31, 2004. Herve will then review the Company's financial performance and let me remind you that all dollar amounts discussed today are in U.S. dollars. This call is also being webcast live on the Company's website at www.Certicom.com. Let me remind you that during the call, management may make projects or other forward-looking statements regarding future events or future financial performance. Actual performance, events or results may differ materially. Please refer to the Company's most recent annual report and other documents filed with securities regulators for a discussion of factors that could cause actual results to differ materially from any forward-looking statements. Now, let me turn the call over to Mr. Ian McKinnon. Ian.

Good morning, everyone and thank you for joining us. I would like to begin with an overview of our first quarter results for fiscal 2005 and review of our first quarter operational highlights. I will ask Herve, then, to provide a review of our financial performance in Q1 and outlook for expenses in Q2. I will return for a brief summary before we open up for questions-and-answers. Please turn now to slide 5. Q1 revenues were $2.9 million, up 28% compared to the same period last year and up 10% compared to the fourth quarter of fiscal 2004. Higher revenue was due primarily to the growth and sales in both the product and intellectual property licensing business. During Q1, we continued to see an increase in adoption of ECC in the marketplace. This will be the long-term growth driver for our product and intellectual property licensing businesses. An example of this is the contract we signed with RIM early in Q1. RIM licensed our Security Builder Crypto Toolkit and ECC-based intellectual property, extending the ECC-based security from Certicom that RIM provides in its Blackberry offers. This is an important early win for the Company. We believe it will help us realize our goal of incremental, intellectual property licensing revenues in the latter half of fiscal 2005. Subsequent to the end of the first quarter, we also achieved a key financial milestone, the elimination of the Company's entire debt in August. As a result, our cash position remains strong and we can leverage the strength of our balance sheet to support the long-term execution of our growth strategy and business plan.

Slide 6. Some of the operational highlights from Q1 fiscal '05 include the announcement of these important successes. We announced that Sierra Wireless has embedded Certicom's IPSec technology into its VoqMail professional edition wireless E-mail solution offered for the new Voq professional phone. We announced that Unisys has licensed Certicom's Security Builder Toolkits to embed ECC in its document processor families. Also, Certicom received the 2004 Award for Excellence in Technology from Frost & Sullivan, an international market analysis and consulting firm. Certicom was selected for its work with ECC and its selection by the NSA. We released Certicom CodeSign, a standards-based code signing application for firmware. CodeSign enables users to remotely distribute firmware updates and applications without fear of rogue code or viruses. Slide 7. Subsequent to quarter ends, Certicom announced that David Sequino has joined the Company as Vice President Worldwide Sales. David has more than 15 years of sales and business development expertise, most of which has come in the embedded systems industry, a primary focus for Certicom. On August 25th, Certicom announced it had licensed Security Builder Crypto to Avanza Technologies to build ECC into its secure, identity management product. And on September 2nd, Certicom announced Security Builder IPSec across platform, client-side IPSec Developer Toolkit that will capitalize on the greater opportunities presented by the embedded VPN market. Certicom will migrate its existing movianVPN product from an end-user application to Security Builder IPSec, which enables developers to quickly embed the IPSec protocol into wireless handheld devices and to secure voice over IP. In addition to contracts announced with Motorola and Sierra Wireless, Certicom has recently signed a substantial licensing contract for a Security Builder IPSec with a customer that can't be disclosed for confident -- confidentiality reasons. At this point, let me call on Herve Seguin to discuss Certicom's financial performance in the first quarter for fiscal '05. Herve?

Thank you, Ian, and good morning, everyone. Please turn to slide number 8. As Ian noted earlier, revenues were 2.9 million for the first quarter compared to 2.2 million for the same period last year and 2.6 million for the fourth quarter of fiscal 2004. Operating expenses including cost of sales and excluding depreciation and amortization and stock-based compensation expense were $3.3 million. This compares to operating expenses of 2.8 million in the same quarter a year ago. This increase in expenses on a year-over-year basis reflects the Company's increasing investment and support of the intellectual property licensing strategy. Let me point out that expenses in the first quarter were in line with previously provided guidance for the period of between 3.3 and $3.6 million. For the quarter the Company posted an EBITDA loss of $400,000 compared with a loss of 600,000 in the first quarter of last year. In the fourth quarter of fiscal '04, the Company posted an EBITDA loss of $1.3 million. On a GAAP basis, the Company posted a net loss of $1.2 million or 3 cents per basic and diluted share. This compares with a net loss of 1.6 million or 5 cents per basic and day -- and diluted share in the same period last year. In the fourth quarter of fiscal '04 the Company posted a net loss on a GAAP basis of 2.1 million or 6 cents per basic and diluted share. Please turn to slide number 9. Subsequent to the quarter end, Certicom dispersed 13 million Canadian dollars to retire its convertible debenture which matured on August 30, 2004. As a result, the Company's cash exceed $27 million at the end of August 2004. This compares with 38.5 million at the end of Q1. Going forward and by eliminating its debt the Company's use for generation of cash should virtually equal its EBITDA results. This could further improve in any given quarter by prepaid loyalty agreements such as the RIM contract announced earlier in Q1.

With our strong cash position and debt-free balance sheet, we're well positioned to execute our long-term strategic growth line. Going forward we remain committed to prudently monitoring expenses as we continue towards our goal of sustainable profitable growth. Now, please turn to slide number 10. While Certicom does not provide guidance on a revenue or cash position, we do give guidance on operating cost. Looking forward for the second quarter fiscal '05, we expect operating expenses including cost-of-sales to amount to between 3.4 and $3.7 million, compared to our first quarter operating expenses of 3.3 million. To provide an overview of the business going forward, let me ask Ian to lead the remainder of this discussion. Ian.

Thanks, Herve. Please turn to slide 11. It's important for investors to keep in mind some of Certicom's key long-term growth drivers. We're the acknowledged world leader in ECC technology for security. We have an extensive portfolio of exclusive patents, most of which have 12 to 17 years remaining. That's a significant barrier to entry to this business. We are affectively targeting high-growth markets. We have a revenue model aimed at delivering recurring revenues and profitable growth. We're financially strong with a debt free balance sheet and a solid cash position and we have an entrepreneurial and committed senior management team. Slide 12. So in summary, we're pleased to have completed a strong first quarter and fiscal -- fiscal '05. We continue to see increasing adoption of ECC technology in the market. This is evidenced by the $3.5 million contract we signed with RIM and the Award for Excellence in Technology Certicom received from Frost & Sullivan during the first quarter. We appreciate your ongoing support as we continue towards our goal of sustainable, profitable growth. Slide 13. I would also like to remind everyone at this point that Certicom will hold its Annual General Meeting on Wednesday, October 13 at 10:00 a.m. The AGM will be held at the TSX Conference Center Auditorium at the Exchange Tower located at 130 King Street West in Toronto. It will also be simulcast on our website at www.certicom.com. We hope to see many of you there. So, at this point we would be very pleased to entertain any of your questions.

Thank you, one moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. Please be advised that 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 senior management after the call has been completed. To make these arrangements, please contact Brendan Ziolo at 613-266-1793. If you have a question, please press the star key followed by the 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be polled in the order they're received. Please ensure you lift the handset if you're using speakerphone before pressing any keys. One moment, please, for your first question. The first question comes from Bruce Krugel from Research Capital. Please go ahead.

Yes, good morning, Ian and Herve.

Morning, Bruce.

Morning, Bruce.

Just with regards to this substantial licensing contract that you signed post quarter end, what industry was that and when could we expect revenue contributions from that contract?

Bruce, as we mentioned in our press release, unfortunately, we're -- we're being very careful in terms of not providing any information on that contract. So we're not even getting into the -- the segment of the industry that it's represented in. However, I can tell you that we -- we are recognizing that revenue ratably, we are not disclosing over what period of time. We will bring forward a more fulsome announcement of that contract once we have permission from this particular client when they have given us permission. So, we -- we certainly hope intend to provide more information in the future. But now, we're being, at this stage, very -- very careful not to talk about it in detail.

Okay. Just looking at your revenues, your software products, revenues went up from 1.1 million to 1.8, the 700,000 difference, how much of that is RIM and what was the balance?

Bruce, it's Herve. Let me just -- a follow-up on -- on Ian's comment of a minute ago. On that undisclosed client, we will start to record revenue in Q2.

Okay.

In regards to your current question on the $700,000 Delta, the -- the RIM contract announced in May of this year accounted for 300 of that Delta.

Okay.

And we will be, as you know, the contract was for roughly $3.6 million and will be taken into earnings -- into revenue at the rate of 300 over the next 3 years per quarter.

Okay. Service revenues declined just any update there.

Yeah, Bruce, Ian. You know, as with most professional services business that is -- tends to be subject to customer demand in that business from a labor perspective, so we're not seeing any significant trend concerns there. We had some very substantial professional services contracts in '04 that were successfully completed and we anticipate that we'll be able to fell that backlog, but you will see, and this is true with our quarterly results in general, there is some tendency for it to be predictable from one -- unpredictable from one quarter to the next. We're trying, obviously, to -- trying to gravitate to more of a recurring revenue model with contracts like RIM and others, we're trying to get to more of a predictable stream on that, but there was -- there were some large contracts in PS, professional services, last year that were completed and we're anticipating we're going to backfill that.

Okay. And then just finally, I know you don't give guidance on the revenue level, but given the RIM contract in for a full quarter, this deal that you've just signed now, it would be safe to model in a sequential increase in revenues for software?

No, I -- I, as you say, we're not providing revenue guidance and so I think it's important to note that we still see, and the reason we don't provide revenue guidance, is we still see some unpredictability in terms of being able to accurately call out reasonable ranges. So, on the short-term, we -- we think we will still have -- have some, you know, some good quarters and some quarters where we're slightly disappointed. We anticipate that will get behind us in the near-term as our, some of our intellectual property revenues start to kick in as ECC adoption continues to grow in the market. We also believe very strongly that will have a positive affect on our product revenues. But for the short-term we're - we're seeing very -- fairly cautious in terms of -- of where the business is going.

Okay. Thanks for that.

Thanks, Bruce.

The next question comes from Glen Jamieson from McFarland Gordon. Please go ahead.

Morning.

Morning, Glen.

Ian, you had previously suggested that we would see additional IP licensing deals in the second half of this fiscal year. And I suppose you've reiterated that again this morning. Can you just go over what activity the Company's undertaken in the most recent quarter to give you the confidence that you're going to be able to deliver on that.

Yeah, Glen. Again, we -- we're very positive about the progress that we're making with our intellectual property licensing business. We -- we don't discuss, as you know, pipeline or specific projects in that area. I can tell you that we're -- we're extremely pleased with the progress in that area. In fact, I would have to say, as I mentioned last quarter, that we're -- we're probably well ahead of where we thought we would be in terms of just the process, the business flow, the opportunities, the way in which that business is being led and managed. Certainly it has met and I would say we exceeded our expectations in terms of the business plan and execution against that plan. Short of that, we're not providing any specific guidance but we're confident in maintaining the general comment about second half intellectual property license revenue starting to kick in. I will also remind you that the RIM contract in Q1 really beat that -- that forecast, if you will, by bringing a very large intellectual property licensing contract in early fiscal '05. In fact in our first month. But apart from that, we're very pleased with our progress and anticipate that we'll start to see contribution incremental to the RIM contract commencing in the second half.

Can we assume at this point that you have moved as you're describing there kind of well beyond the fleshy note where the opportunities are and doing some of the reverse engineering work that you need to do and perhaps had initial contact with some -- some early potential customers?

Yeah, we're -- we're well along in all aspects of our model and I will point out that we have a lot of opportunity in -- in both new licensing as well of intellectual property that doesn't require reverse engineering. So, there are really 2 streams of revenue at IP. There's -- there are some organizations that would like to license our -- our patents that does not require reverse engineering on our part. And that's-- that's great. That's -- there are opportunities there as well as in the -- in the other area of -- where reverse engineering is required and we're making good progress on all of those fronts. So, short of saying how many companies that we're engaged with, which we're not going to comment on at this point, we're, you know, satisfied sufficiently at this point that we're confident in maintaining that second half guidance.

Not to beat a dead horse, but if I could just ask you one more question here. You'd suggested that deals in this area could be a million dollars up. Is there anything that would change your view on that range?

No, and I'll just take a couple of comments on that. There's no question that the IP licensing revenue stream has very significant potential to -- to give Certicom, you know, some strong revenue growth projecting forward into our future. The model for both products as well as IP licensing is to -- to move to more of a royalty-based model. So, as we look at the IP licensing opportunity, we're trying to avoid lump sum contract resolutions. I would say the NSA, for example, would be the type of contract which we're very glad to receive and the endorsement from the NSA. But we're trying to ensure that contracts, as they are finalized, allow us to have a recurring, ongoing revenue run rate where we don't have that lumpiness associated with the contract like the NSA. So, yeah, the -- the -- the average contract value certainly is substantial in terms of potential with the IP business. And the figure that you mentioned, sort of the 7 digit range is -- is accurate from our perspective and that would warrant the kind of ROI we need to support the investment we're making in that area. But I -- I would say that, you know, we're going to try to avoid as best we can lumpy revenue contracts and move more to ongoing loyalty revenue run rates.

Okay. Thanks, Ian. If I can ask one last question for Herve. You've disclosed a cash balance subsequent to the repurchase of the debt. Am I safe in assuming that the balance that you threw out there wouldn't include the cash that you will receive or have received from that significant IPSec deal that we were talking about earlier?

It doesn't include that.

Will you be receiving that cash in the current quarter? You said you were going to start to recognize revenues. Is the cash to be received up front on that deal?

Yeah, that's normal terms.

Does that mean the cash gets received this quarter, then?

We hope so. It should be.

Okay. Thank you.

Thanks, Glen.

The next question comes from Paul Lechem from CIBC World Market. Please go ahead.

Yes, it's Rangi Knod on behalf of Paul Lechem.

Hi, Rangi.

Morning, gentlemen. My questions have actually been answered. So, Thank you.

Okay. Thank you very much.

The next question comes from David Wright from BMO Nesbitt Burns. Please go ahead.

Morning, guys.

Hi, Dave.

Hi, David.

(inaudible) is there any light you can shed on the situation at either around the NSA contract or at the NSA. In other words, you signed a contract late last year and that is assumed to have some intangible benefits to you in terms of opportunities for signing new deals. So, are there steps that maybe, you know, that don't get announced but that you're aware of, you know, sort of distribution agreements with the NSA that are being established that will lead us to all of a sudden observe some new announcements or, you know, has it been easier for you to hire people, for instance, and things like that.

Yeah, Dave, so we have a -- an ongoing relationship with the NSA clearly and that has been in place for sometime and we're -- we're obviously working with them to continue to provide value to -- to them in whatever way is appropriate. We have said since the signing of the NSA contract last October, that it opens up opportunity for us to work with the defense contractors who have partnership with the NSA and, you know, we're -- we're certainly in -- in discussion with a number of defense contractors. And, you know, these things do take some time, so from the contract signing with the NSA last year in October, you know, to this point, the NSA's rollout of their technology to the defense contractors provides us opportunity. And we are in discussions and as we have mentioned in the past, we certainly anticipate that we'll get some opportunity for incremental revenues from -- from that defense contractor community going forward.

Is it safe to assume that those announcements will come in the next 6 months? That's what you're saying?

We're not providing any guidance on that.

yes.

And in fact, they may not necessarily be announced depending on the nature of the contracts, depending on the nature of the confidentiality. They may not be announced, unless of course they're material, in which case we would -- we would go through the appropriate filings. But the nature of that business, as you can appreciate, doesn't always result in a -- in a press release.

Right. Would there -- are there agreements that the defense contractors have to establish with the NSA or is it more or less just with you?

No, they certainly would need to have licensing rights established with the NSA for their work. And this is not -- that's not unique to Certicom. When a defense contractor is doing work with the NSA there is a contract established and that could result in the NS -- the defense contractor needing to come to Certicom to acquire some technology to fill that contract if it may have with the NSA. That's not unique to this particular contract. That's where the opportunity is, absolutely.

Right. And how about opportunities with other governments. Obviously you can't announce things before you announce them, but, you know, is there any update there in terms of discussions with other governments as a result?

In general, they were seeing a -- a broad level of adoption of ECC technology in the market in both the public as well as the private sector. And, you know, we -- that's -- that's the trend that is always difficult to predict in terms of how rapid that growth will occur and over what period of time. But, as it pertains to the government sector, we absolutely have government as a key vertical focus. It's one of our 6 targeted verticals and that would include not just the U.S. but Canada and European, NATO allied countries where there are opportunities. We would -- we would hope to see ECC adoption occur, as I say, in both the government and as well as private sector segments.

Dave, when -- when announcements are appropriate, we'll -- we'll make them. But we would hope to see our -- our growth continue in the government space as well.

Okay. And just a question about employee count. What sort of level are you at and do you expect to add many people in the next year?

Right now we have been pretty steady at about a little over 100. We have been at that level for -- for some time now and I don't anticipate, you know, any significant change there. As we have mentioned, we have made this fiscal year compared to last fiscal year investments in both the intellectual property licensing business. We brought on a couple of people in that area. We have expanded -- invested into our product side and that has allowed us to -- to grow somewhat on the product development side. But for the most part, we don't anticipate any significant increase nor the need to add significant headcount in order to fulfil our revenue growth objectives. We -- we've made the bulk of at least the investments that we see required for the short-term to drive our revenue growth objectives.

Great. Thank you very much for your time.

Thanks, Dave. Nice picture in the "Globe "the other day.

Ladies and gentleman, if there are any additional questions at this time, please press the -- sorry. -- the star key followed by the one. As a remind, if you're using a speakerphone, please lift the handset before pressing the keys. Mr. McKinnon, there are no further questions at this time. Please continue.

Thank you very much for your interest. If there are further questions, don't hesitate to phone -- phone us directly at Certicom. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.