BlackBerry Ltd (BB) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by.

Welcome to the Certicom Corporation second quarter results conference call.

At this time, all participants are in a listen-only mode and 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 a question. (Operator Instructions).

I would now like to remind everyone that this conference call is being recorded today, Thursday, December 9, 2004 at 10:00 AM Eastern time.

And now I would like to turn the call over to Mr. John Vincic, Investor Relations Consultant.

Please go ahead, sir.

Thank you, operator.

Good morning and thank you for joining us for Certicom's second-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 Brendan Ziolo, Director of Marketing.

Let me remind everyone that all dollar amounts discussed today are in U.S. dollars and this call is also being webcast live on the Company's web site at www.certicom.com.

During the call, management may make projections or other forward-looking statements regarding future events of 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 and thank you for joining us.

I would like to begin with an overview of our second quarter results for fiscal 2005 and a review of our second-quarter operational highlights.

Then I will ask Herve to provide you with a review of our financial performance in the second quarter and for the first six months of fiscal '05, plus our outlook for expenses in Q3.

I will return for a brief summary before the question and answer session.

Slide 5.

During the second quarter, Certicom made progress with our licensing strategy and signed two significant contracts, including one with Sybase and another for Security Builder IPSec with a customer that cannot be disclosed for confidentiality reasons.

Both of these contracts will generate revenues which will be recognized over a number of quarters.

Momentum generated in previous quarters carried into Q2 as we continued to see increasing adoption of ECC in the marketplace, and over the long-term, this will be the key growth driver for our product and intellectual property licensing business.

We are continuing to see strong opportunities for our intellectual property licensing strategy and we expect to complete some agreements in the second half of fiscal '05.

These opportunities support our long-term business model by providing royalties and revenues over future quarters.

In fact, our deferred revenues have increased by more than 400 percent over the past six months.

This clearly demonstrates that we're successfully executing our plans.

Q2 revenues were $2.6 million compared to $2.7 million, excluding revenues from the NSA contract in the same period last year.

Revenues including the NSA contract were $27.6 million for the same period in fiscal 2004.

In Q1 of fiscal 2005, Certicom reported revenues of $2.9 million.

Subsequent to the end of the second quarter, we announced two key milestones that we believe will help speed the adoption of ECC.

First, we announced Security Builder NSE, our national security initiative, a toolkit that helps contractors meet the NSA guidelines for protecting mission-critical operations.

Second, our implementation for the elliptic curve digital signal algorithm earned the Phipps (ph) 186-2 validation and we are confident that both of these initiatives will be of particular benefit to OEMs and software vendors who sell to government organizations.

Slide 6.

Some of the operational highlights from the second quarter of fiscal '05 include the announcement of these important successes and changes.

In August, David Sequino joined the Company as Vice President, Worldwide Sales and recently, he also assumed the additional responsibility for marketing.

A majority of Mr. Sequino's experience is in the embedded systems industry, a primary focus for Certicom.

In addition, we licensed Security Builder Crypto, a cross-platform cryptographic toolkit to Avanza (ph) Technologies to build ECC into its secure identity management product.

Slide 7.

In August, we disbursed approximately $10 million U.S. to fully retire Certicom's convertible debentures.

With the repayment of these debentures, Certicom is now completely debt free and well positioned to pursue its long-term business strategy.

In September, Certicom announced Security Builder IPSec, a cross-platform client side virtual private network toolkit that will capitalize on the greater opportunities presented by the embedded VPN market.

This enables developers to quickly embed the IPSec protocol into wireless handheld devices and to secure voiceover IP.

We introduced Certicom's security architecture for mobility, enabling device manufacturers to quickly and cost-effectively embed security across multiple families and generations of devices.

Certicom worked with Intel and device manufacturers to develop this comprehensive security platform that is optimized for the Intel wireless trusted (ph) platform.

We announced that Perceptive Software has licensed our Security Builder PKI Developer Toolkit, enabling its developers to quickly add ECC-based digital signature functionality to its fleet of products.

Slide 8.

Subsequent to quarter end, ECC researchers, industry experts and customers attended the first annual Certicom ECC conference.

In over two days, participants discussed the growing adoption of ECC and shared best practices and insights for new applications.

We announced Certicom's implementation for the elliptic curve digital signature algorithm, earning the Phipps’ 186-2 validation.

As a result, Certicom becomes the first company to receive the designation for our ECC-based algorithm.

Certicom announced Security Builder NSE, a national -- a cryptographic toolkit that enables organizations to build applications that meet the NSA guidelines to protect mission-critical national security information.

Slide 9.

Also, Scott Vanstone, Founder and Executive Vice President of Strategic Technology of Certicom, was awarded the prestigious University of Waterloo Award for Excellence in Research for his role in researching and deploying ECC as a practical security technology.

In addition, Tony Rosati, Vice President of Intellectual Property Licensing at Certicom, was recognized by the Center for Applied Cryptographic Research with the 2004 Distinguished Fellow Award.

Our Security Builder IPSec toolkit was licensed to Ireland-based WorldNet 21 to build its own IPSec compliant virtual private network client.

We extended Certicom's security architecture, enabling developers to embed government mandated security into devices and applications and give them access to the lucrative government market.

Certicom's security architecture for government also provides developers with an efficient way to enhance new and existing applications with ECC and to meet the NSA guidelines.

At this point, let me call on Herve Seguin to discuss Certicom's financial performance in the second quarter of fiscal '05.

Thank you very much, Ian, and good morning everyone.

Could you please turn to slide number 10?

I will begin with a year-over-year quarterly review, followed by a year-over-year six-month financial review.

Before I begin, let me remind everyone that in the second quarter of last year, we signed a very major contract with the National Security Agency.

This had a significant impact on various metrics.

Most notably, the NSA contract impacted revenue gains and also triggered incremental expenses.

For comparable purposes, we will provide a review of results, both including and excluding the impact of the NSA contract.

As Ian noted earlier, revenues were 2.6 million for the second quarter compared to 2.7 million in the same period last year.

The revenues in the second quarter last year, including the NSA contract, were $27.6 million.

Operating expenses were 3.4 million, in-line with previously provided guidance of 3.4 to 3.7 million for this last quarter.

This compares to operating expenses of 2.7 million for the same quarter last year, excluding the NSA contract.

The increase in operating expenses on a year-over-year basis reflect the Company's increasing investment in support of the intellectual property licensing strategy.

Including the NSA contract, last year's second quarter expenses were $3.9 million.

For the quarter, the Company posted an EBITDA loss of $800,000 compared with a loss of 53,000, excluding the NSA contract in the same quarter last year.

Including the NSA contract, the Company's EBITDA was $23.6 million in the second quarter last year.

On a GAAP basis, the Company posted a loss of $1 million, or 3 cents per basic and fully diluted share.

This compares to net income in the same period last year, including the NSA contract, of $22.3 million, or 70 cents per basic, or 63 cents per diluted share.

At October 31, 2004, Certicom had $29.1 million in cash, compared with 38.5 million at July 31, 2004 and 5.3 million at October 31, 2003.

During the quarter, the Company disbursed $10 million, or $13.2 million Canadian to fully retire its convertible debenture, which matured on August 30th.

Please turn to slide number 11.

Certicom reported revenues of 5.5 million for the first six months of fiscal '05, compared to 4.9 million excluding the NSA contract in the same period last year.

Excluding the NSA contract, revenues in the same period in fiscal '04 were $29.8 million.

For the first six months of fiscal 2005, operating expenses were $6.7 million, compared with operating expenses of 5.6 million, excluding the NSA contract in the same period in fiscal 2004.

Including the NSA contract, for the first six months of fiscal 2005, expenses were $6.8 million.

The Company posted an EBITDA loss of 1.2 million in the first six months of fiscal 2005, compared to an EBITDA loss of $700,000, excluding the NSA contract in the same period last year.

The Company's EBITDA in the first six months of fiscal 2004, including the NSA contract in the second quarter last year, were $23 million.

On a GAAP basis, the Company posted a net loss of $2.2 million, or 6 cents per basic and fully diluted share for the first six months of fiscal 2005, compared with net income including the NSA contract of $20.7 million, or 65 cents per basic and 60 cents per fully diluted share in the same period last year.

We are pleased with the progress we made during the quarter by signing two significant contracts that will help establish a recurring revenue stream for future quarters.

Let me also remind you that with the repayment of our convertible debenture during the quarter, the Company is entirely debt free and has a very strong cash position to support the execution of our long-term business strategy.

Our financial position has been further enhanced by eliminating the related interest expense.

Going forward, we remain committed to prudently monitoring expenses as we continue towards our goal of sustainable, profitable growth.

Please turn to slide 12.

While Certicom does not provide guidance on revenue or cash, we do give guidance on operating costs.

Looking ahead to our third quarter fiscal 2005, we expect operating expenses to amount to between $3.3 and $3.6 million, compared to second quarter operating expenses of $3.4 million.

To provide an overview of the business going forward, let me ask Ian to lead the remainder of the discussion.

Thanks, Herve, we are now on slide 13.

It is important for investors to keep in mind some of Certicom's key long-term growth drivers.

Certicom is the knowledge world leader in ECC technology.

We have an extensive portfolio of exclusive patents, most of which have 12 to 17 years remaining.

That is a significant barrier to entry to this business.

We are effectively targeting high-growth markets.

We have a revenue model aimed at delivering recurring revenues and profitable growth.

We are financially strong with a debt-free balance sheet and a solid cash position and we have an entrepreneurial and committed senior management team.

Slide 14.

So in summary, we're pleased to have completed a strong second quarter in fiscal '05, but let me conclude our remarks with a look at where Certicom is going.

Our corporate vision is simply stated -- we want to see ECC-based security solutions embedded in all network devices and applications.

And I should note we are making very strong progress towards that goal.

The NSA decision to license our technology has provided a major boost for ECC to become the new standard for public keyed (ph) cryptography around the world in both the public, as well as eventually the private sector.

It also heightens Certicom's position as the authority for strong, efficient cryptography.

This leadership position was reinforced recently at the first annual Certicom ECC conference.

Our strategic gold (ph) initiative, which is to advance and promote the licensing of our intellectual property and ECC, is gaining momentum.

The addressable market in our six verticals is large due to both the presence size of these product categories and to the exploding requirement for security.

Based on a combination of external and internal research and market analysis, Certicom estimates that the potential addressable market for its intellectual property and product licensing strategy is $2.4 billion over a four-year period and as the acknowledged leader in ECC security, we expect to have strong growth in the product licensing market, but we see the greatest potential in intellectual property licensing as ECC adoption grows.

Our focus is to maximize and grow our share of that market.

We appreciate your ongoing support as we continue towards our goal of sustainable, profitable growth.

At this point, we would be very pleased to answer any of your questions.

(Operator Instructions).

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. (Operator Instructions).

Bruce Krugel, Research Capital.

Good morning, gentlemen.

I have a number of questions.

We have seen over the last two quarters, service revenue seem to be declining on a sequential basis.

Is there anything we should read into that?

No.

We have been seeing some renewed interest in Certicom's professional services from a pipeline perspective.

And as I've mentioned in the past, the consulting or professional services business is very labor-driven.

And based on the activity of our customers, it will have peaks and valleys, as most consulting businesses do.

What we really -- and I guess essentially (ph), it is very much (indiscernible) driven and really leveraged by product licensing.

And not every product licensing deal requires consulting.

Certainly, many do, but it isn't necessarily a given.

So we're not concerned or alarmed about where professional service has performed.

And as I say, we do see that having growth in terms of pipeline as we look at our business today.

So it's not an area of concern for us.

We recognize it is down from a year ago, but our main concern and our main focus is to see our product and IP licensing businesses grow.

And that over time does leverage some amount of professional services growth.

Right.

With regards to your Security Builder IPSec, you announced it during the quarter and you I presume announced your first customer or for that, WorldNet 21.

Could you give us an idea of the size of the contract and/or how it's structured, please?

We don't disclose dollar amounts, Bruce, on every contract as you know, but it is based on -- very much in line with our model of royalties and recurring revenues.

This is something that we've been talking about for quite some time.

And WorldNet I think is reflective of many of the contracts that we are writing up to date.

We have always been trying to evolve our model to a point where the contracts are more structured to allow for recurring revenues, and WorldNet 21 certainly provides for that.

Compared to a year ago, we are doing a lot more of those, or we're writing a lot more of those contracts as an overall percentage of the business.

And you can see that reflected in the significant increase in deferred revenue.

So far us, it's about building deferred revenues, royalties and backlog.

WorldNet 21 is a contract that really supports that model.

So would it be fair then to say the bulk of the increase in deferred revenues was a result of that contract?

No, I would not say that.

Okay.

And could you at least provide us with some color perspective or give us some kind of that idea with regards to these contracts we're looking for in the back half of the year?

Are all the blocks, all the building blocks in place for these contracts to then just be concluded, or are we waiting for anything?

Is it just a matter of time?

And if these deals finally get consummated, again, is it going to be meaningful in terms of the revenue outlook?

Bruce, we're very busy, and the activities that we have underway are certainly in support of the business model.

That's why we're continuing to make the statements we are about the second half.

Keep in mind that we are, as we work in closing the business in both product as well as the IP licensing side, we are always going to be trying to structure the contracts, and I said just a couple of minutes ago, to provide for recurring revenue.

What we're not trying to do is to have a lumpy revenue stream.

So don't look for any one-time significant revenue contracts out of the NSA deal a year ago.

We are very pleased to receive that contract, but that is not the model that we're looking for.

What we want is to structure contracts that provide for ongoing multi-year recurring revenue, in both the product as well as IP licensing side.

We are very confident that we have activities underway, building blocks as you say, in terms of both the short term as well as the long-term in both IP licensing and product.

So it is a matter of time to a certain extent and we do our best to try to provide some guidance for the second half for the IP licensing side.

But I would say just at a higher level, we're very confident that we're, based on our activity level, based on the demands, based on the level of interest in our technology through both patents as well as products, we're very confident that the overall demand for ECC is increasing.

So to summarize, it's all about structuring a recurring revenue foundation of contracts as we move forward.

Finally, without laboring the point, if the gods were to smile and everything were to work out the way that you're hoping it does for the balance of fiscal 2005, these deals, are they worth hundreds of thousands of dollars, or millions of dollars on a per annum basis?

Bruce, I'm not going to answer that question, because we don't, as you know, provide revenue guidance.

But we're certainly focused on opportunities that provide significant upside for growth for this company.

We are not in the business of focusing on contracts that have minimal revenue potential over the long-term.

We're glad for any contract.

But I can assure you that from an ROI perspective, we go through an ROI analysis before we embark on a sales opportunity.

And I would tell you that we are from an IP licensing perspective where we see significant growth, yes, we're certainly looking for long-term large overall contract potential.

So stopping short of giving you specific ranges, I would look for large contracts.

And if they are material in terms of classification, we will absolutely make an announcement.

But when you talk about a large potential contract that is based on royalties, royalties as you know, unless we follow the model we did with RIM (ph) a couple of quarters ago, the 3.5 million where we sold a prepaid block of seats for 3.5 million, the cash was received up-front, the revenue was spread over three years.

And at the point when they used that block of seats up, they will come back and license more.

That is one model that we really like.

Other contracts with a royalty component will provide ongoing royalty payments at the end of each quarter, for example.

That is not something that gets reflected in backlog or deferred revenue, so it's a little to tougher to forecast that.

But we are looking for opportunities where that royalty, the recurring royalty aspect, stands the potential to generate very significant revenues for us over a multiyear basis.

Thanks, Ian; thanks, Herve.

Glenn Jamieson, McFarland Gordon.

Good morning.

Herve, can you break out what was IP licensing revenue that you report within the product line?

We have not started to report that, and it is very early days to break it out.

I can tell you that there is one piece of it which we announced, which was the RIM agreement for 3.5 million, which is all IP.

So that one, you know that for instance, there's $300,000 per quarter over the next three years that will be recorded, and this is all IP-related revenue.

At this point, the balance of it is at this point insignificant.

I'll just add, you know we launched that business nine months ago.

And apart from the RIM contract, which Herve just mentioned, we've always been targeting the second half of '05 to start generating or closing some contracts and start to generate IP license revenue.

And we're still holding with that perspective at this stage.

In fact, the RIM agreement was a pleasant early proof point for us.

Right.

What I'm trying to figure out is you mentioned a licensing win was five days.

Is that an IP licensing deal that has not been announced perhaps because of the customer's wishes or the size of it?

Or, is that some other type of product sale?

That will -- there will be a separate press release, we believe, for Sybase at some point in the near-term.

I can't tell you though that that was a contract we closed in Q2 on the product side of the business.

And as we noted in the press release, it was a fairly significant contract, but not material to the extent that we had to disclose the dollar amount.

But it would be for -- on our product side.

When I look at a $1 million increase in your deferred revenue, you mentioned two significant licensing winds, and you named Sybase.

Is that the bigger piece of that million-dollar increase in deferred revenue?

Glenn, no it's not.

Without giving you any details at this point of the Sybase agreement, it is not included in there.

The bulk of that increase, or the net of that increase is, if you remember, our mysterious (indiscernible) agreement that we signed that we can't disclose.

It was a prepayment, and that was included in the deferred revenue and part of the increase.

When you talk with increased confidence about delivering additional licensing deals in the second half of this year, can you give us an idea some of the developments that you've seen in the last quarter that would give you that increased confidence?

And can you give us any idea as to whether or not these additional deals would likely be signed with existing customers, or are they likely new customers?

It's a little difficult to provide you more details, short of getting into pipeline disclosure, which I'm not going to do.

I can tell you, and I think I've mentioned this before, but I wanted to emphasize that we are at various stages in our IP licensing strategy specifically, which is what I think you're referring to.

We're at various stages of development with that pipeline.

There's some very early pipeline that has been qualified that we are essentially just starting to execute on and there's some very advanced discussions with a number of organizations.

So what I've talked in the past about being very pleased with the progress, in fact pleasantly surprised with the progress in our IP licensing business, it is really from that perspective.

We have more opportunity at the early, mid and latter stage of the selling cycle, if you will, than we had anticipated by this point.

We are very pleased with the progress.

And we would not be making the statement about second half at this stage unless we were relatively comfortable that we had some high level of confidence in being able to start to see conversions.

There's always risk with that.

It's still pipeline and it is never done until you have the contract signed and in.

So having said that, I can also add that we are looking at a wide range of opportunities with companies that we have not necessarily in all cases done business with in the past.

It runs the gamut.

I would say probably (ph) off the top of my head in the IP licensing area specifically, I would say the opportunity, they're a company (ph) with organizations who we have not done business with more than those that we have done business with.

So it tends to -- from my perspective, that's good because it expands our market share with organizations that will be new to the Certicom customer list.

So far the most part, it is generally new opportunities, new organizations.

One last question.

You talk about a $2.4 million addressable market over five years.

Can you give me an idea of how you think you can address that market, the breakdown between product versus IP licensing?

We have not, as we stated, broken down that number, and I will make a couple of comments on the addressable market.

First of all, it is based on a series of research reports that we've been purchasing over the last 9 to 12 months as we started to build the business model for IP licensing and as we've continued to evolve our product licensing strategy.

It does consist of both our view of both IP, as well as product licensing opportunities.

But we have stopped short purposely breaking that down for you.

We have generated much of those numbers from third-party reports and have been able to put our own collective wisdom together to try to come up with a reasonable number.

I can tell you though that, apart from the addressable market data which we have disclosed, we do believe that the most significant opportunity for growth with Certicom does rest with the intellectual property side of the business.

So you can make your own conclusions about how that flows into that addressable market data.

But we also absolutely see some growth on the product side of the business as well.

And let's face it, when you talk about licensing products, there is a range of additional competitors that one deals with in our business.

When you talk about IP licensing, it tends to be a much more closed set of opportunities and different issues versus traditional selling of products.

And so they're really not necessarily apples-to-apples when you compare the product market versus the IP market.

So that is one of the reasons why we have not broken it down.

We've done our best to try to analyze and look at those sectors individually and have combined them into the data that we have now reported publicly.

Thank you.

David Wright, BMO Nesbitt Burns.

Thanks, good morning guys.

The Sybase contract you said you signed in the quarter, did it contribute any revenues in the quarter?

David, it did.

We will provide some further data as we announce it publicly, but it did provide some revenue.

And is it a multiyear agreement?

Yes.

And you have mentioned Sybase in the past as being a customer.

So was this for some new technologies of Certicom's?

Was it new product lines for Sybase, or was it just kind of an extension of a previous agreement?

David, you're right.

They are an existing customer.

And I think it's fair to say that this particular contract resulted due to our long multiyear relationship with Sybase.

But we cannot disclose any data really apart from the fact that it's on the product side of our business, as we said.

Any other details we hope -- in fact, we would have hoped to have been able to announce that contract prior to today.

But we have not been able to close off agreement on some of the wording.

So that will be, we expect, coming out shortly and more information on what's in the contract and the details will be out, I hope, fairly shortly.

The ECC conference that you held, did it generate revenues, and should we expect to see it contribute to the services line in the coming quarter, in Q3?

It absolutely generated leads.

So we got -- there are opportunities that come from that.

I think it's also safe to say that some of the organizations who were attending had a chance to meet and there was a lot of exchange of information and between companies other than Certicom as well, customers who had a chance to meet for the first time.

So there are some partnerships and alliances I think that stems from that as well.

So ultimately, I would absolutely hope that over time, some revenues are generated as a result of that conference.

What I was just wondering was would I see, should I expect to see sort of a small bump in the services line in Q3 from people in attendance?

Not as a result of that, no.

No?

Again, we focus on really the technology side of the business, the products and the IP licensing.

Services is a very critical part to help companies implement and integrate.

So it's an element of leverage.

But our services business is very much connected to our products business.

We don't go to do a lot of stand-alone consulting jobs.

It's really got to be related to driving ECC adoption or it's got to be related to helping companies implement their technology.

So depending on the companies we do, not all require professional services.

They may (indiscernible) of our technology of our products.

Depending on their level of sophistication, they may need a lot or very little of our professional services organization.

You said you didn't want to provide too much in specifics regarding the pipeline.

But perhaps I could get you to talk a little bit about the opportunities, and I think you said earlier that you guys are busy these days.

Is it across the board?

Is there any one kind of sector you have identified kind of six different areas that you're going after?

Is government ahead of consumer, which is ahead of the financial market, or are the opportunities right across the board?

Could you comment on that?

And then maybe if you're talking about government, with the U.S. government head of other international governments, or are other international governments also looking?

So Dave, I think I was referring to IP licensing pipeline specifically, although product pipeline is also growing, but we don't talk about other details, you know.

On the IP licensing pipeline side, which I think is where your question is headed, we do see pipeline growing in a number of different verticals.

And I want to remind you that on the IP licensing side, there are organizations that are just beginning to research and planning to roll out ECC in much of their product line.

And for those opportunities, we would see that as a new or proactive IP license opportunity where they may have the in-house expertise to develop technology and need to be licensed for our patents to ensure they are compliant with the ECC technologies they're rolling out.

So we see a growth in that area.

There are also some organizations who are using ECC technology that in production that need to be licensed in order to continue to roll that technology out in a meaningful and appropriate way.

So both of those areas are growing, and it certainly covers the gamut of the consumer electronics sector.

It covers, in some cases, not a significant amount, but there's some suppliers to governments -- not governments themselves, but suppliers to government.

There is a semiconductor element that is growing.

There has been lots of press recently about different technologies that are in the market that are using ECC.

So I'm sure you've seen those reports as I have.

So it does run over a number of different verticals, as opposed to just one.

But some verticals represent greater opportunity than others.

But it does overall, to answer your question, cover (indiscernible).

Okay, good, thanks.

You specified the timing of contracts in the second half.

So we are in the second half.

I'm going to try and narrow it down a little bit.

Does that mean Q4, or is there any significance in the fact that December falls part-way through Q3, and that's a year end for some governments and organizations, things like that?

Are you expecting that we should kind of eminently see things show up here, or is there really still another number of months of work to conclude some of these contracts?

It's second half.

I can (ph) tell you that, as I said at the outset, we're very busy.

There are a lot of opportunities that we're working on, some at -- all at various stages of the selling cycle.

And at this point, we're not going to be able to make any comment about when, but we're confident that the second half looks positive.

And as I said, don't look for any significant onetime revenue hits.

If they happen, then they do and there maybe some early adopters we may have to go with that model if necessary.

But the intent here, as we've said, the business model is really changing at Certicom from a year or so ago.

We're really trying to build that recurring revenue foundation.

And I would be very happy to see contracts come in that have an ongoing quarter-by-quarter contribution to our revenue, as opposed to a onetime buyout.

You've heard me say many times that we don't like to do onetime buyouts where there is no opportunity for upside.

It does not help a long-term company, and it certainly does not provide upside for us working with those organizations in other areas.

So the second half (indiscernible).

My last question is related to your study about -- or the market-related study, the $2.4 billion.

And you have been very prudent with your spending.

I guess there has been excesses in the past with other management teams.

But you've been very prudent.

So I guess the question is -- if the market opportunity is that large, should we be expecting to see a ramp-up in expenses?

And as you hire more people to kind of address all of these opportunities, or do you feel that you have enough people and kind of steady as she goes and you will capture a good portion of the opportunities?

Very much as you say, steady as you go.

We do not see, certainly in the foreseeable future, any significant increase in expenses.

And as noted, if you look at our expenses a year ago, we have increased our expenses by about $1.5, $2 million on an annualized basis over last year to invest in our intellectual property licensing business for the most part, as well as some on our product side.

And we believe at this point, we have got the sales and marketing cost structure in place to drive both of those opportunities.

And as I look at the pipeline, we absolutely have the cost structure in place to drive the business.

So research continues steady as you go.

We continue to find numerous patents each year.

That has been a cost structure that's been in place for some years and we don't anticipate increase there, but it is a steady level of spending.

The sales and marketing infrastructure is in place.

So yes, we are absolutely watching our nickels and dimes, investing where we need to to drive the revenue, but we don't anticipate any significant growth.

I don't anticipate a very significant change in the employee headcount, apart from individual hires here and there that may be required.

So we believe we have the cost structure in place for the foreseeable future to drive the revenue that we anticipate we can get in the model we've discussed.

David, in support of that, we've done some studies other companies who have a similar model.

And what we've found over time is that they execute their IP licensing strategy is that the revenue can scale up tremendously without increasing the expense base.

You need a base sort of overhead level.

Beyond that, there's quite a bit of scalability.

We think we are about at that level.

Okay.

That's good.

I guess 2.4 billion is a big number.

Yes, and we're confident that we're going to get our share and be aggressive in gaining as much market share as we can.

That really is tied, as you know, to ECC adoption.

So as goes ECC adoption, will go we hope our revenue (indiscernible) products and IP.

And we are confident that adoption is occurring.

We're in effect, I would say we're very confident that there is more adoption, more interest, more awareness throughout the public, but also the private sector.

We're really getting strong messages from the private sector as a result of the, in part, the NSA contract a year ago.

As we've said publicly -- as goes the government, (indiscernible) the private sector in terms of creating.

And the private sector is responding very positively to that.

So we just have to make sure we can generate that into qualified pipeline that can convert.

Terrific.

Thanks very much.

Ladies and gentlemen, please note we have an amendment to Brendan Ziolo's telephone number.

You may now contact him at 613-254-9267. (Operator Instructions).

Scott Penner, TD Newcrest.

Herve, can you just give me an update on the currency hedging program, how much you are protected at this point, whether foreign exchange had any impact on either the revenue or expenses in the quarter, and when those start to unwind?

Scott, just to remind everyone, we are a U.S. dollar reporter.

So our US dollar is our functional currency.

But we have quite a significant amount of Canadian dollars spent here in Canada that we hedge in order to be able to predict our expenses going forward.

We have a hedging program within the company consistent with GAAP guidelines that provides the following.

We hedge 95 percent of the current quarter's requirements, 85 percent of the next quarter, 70 percent of the third quarter and 50 percent of the fourth quarter.

So we have a four-quarter rotational hedging program.

At this point in time, we are fully hedged to those guidelines, so they sort of unwind on a monthly basis over the next 12 months based on those hedging level criteria that I have just discussed.

The program is quite healthy.

We keep on doing it.

Our view is, it allows us to streamline our fluctuations over a period of time.

So I hope that answers your question.

That's very helpful, actually.

And just, Ian, do you have any information as to where the NSA is in granting any sublicenses of their technology?

Have you seen that happening?

What sort of conversations do you have with them about where they are in the whole process?

I think I've said in the past, Scott, that the NSA took a number of quarters to coordinate their plans and activities.

And beyond that, it's difficult to make any specific comments.

But they have stated publicly that they are moving aggressively with a number of organizations to start that sublicensing activity.

We also, however, if you note our NSE Toolkit announcement this past month or so, that we also provide licensing in that Toolkit for both the 26 patents that were licensed to the NSA a year ago, along with implementation technologies that are required to build an effective ECC security application, or security solution.

So an organization can get those patents or that sublicense from either the NSA or from Certicom.

And we are seeing now -- and it took some time, I will be quite open that it took a little longer than we anticipated for some of this activity to start resulting in pipeline.

But we are now seeing a fairly high level of activity on the NSE Toolkit, which would be one indication of companies now starting to move towards getting license for the technologies that the NSA licensed from us a year ago.

So they're getting fairly aggressive within the NSA in their own way, in terms of promoting that technology.

And they have been public in making those statements to this point.

Okay, thank you.

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

Please continue.

Thank you very much for your interest.

And again to remind you, if there are any questions, don't hesitate to contact either Brendan, myself or Herve.

Thank you once again for your interest.

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

Thank you for participating and please disconnect your lines.