BlackBerry Ltd (BB) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Certicom Corp. third-quarter fiscal 2005 conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded today, Thursday, March 3, 2005 at 10 AM Eastern Time. I will now turn the conference over to John Vincic, Investor Relations Consultant. Please go ahead, sir.

Thank you Operator. Good morning, and thank you everyone for joining us for Certicom's third-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; Dr. Scott Vanstone, Founder and Executive Vice President Strategic Technology; and Brendan Ziolo, Director of Marketing.

Let me remind everyone 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. And during the call, management may make projections 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. I would now like to turn the call over to Mr. Ian McKinnon. Ian?

Good morning, and thank you for joining us. I'd like to begin with an overview of our third-quarter results for fiscal '05 and our view of our third-quarter operational highlights. Then, I will ask Herve to provide a review of our financial performance in Q3 and for the first 9 months of fiscal '05 and our outlook for expenses in Q4. And I will return for a brief summary before the question-and-answer session.

Please turn now to slide 5. In the third quarter, Certicom signed a 15-year agreement licensing our ECC-based intellectual property to General Dynamics, a major U.S. defense contractor. This contract is further evidence of the momentum and long-term growth potential of our product and intellectual property licensing strategy. It's also another key validation point for the adoption of ECC-based technology. We remain confident that over the long-term increased ECC adoption will be the key growth driver for our product and intellectual property licensing business. We're currently in discussions with a number of multinational organizations regarding potential intellectual property licensing contracts.

Q3 revenues were $3 million compared to $2.1 million in the same period last year. Certicom reported revenues of $2.6 million in Q2 of fiscal '05. Subsequent to quarter-end, the NSA, or National Security Agency, announced at the recent RSA conference that it has selected ECC as the exclusive key management and digital signature standard to secure sensitive but unclassified data within the U.S. government. Combined with the NSA decision in October 2003 to license 26 Certicom patents and make ECC a crucial technology for mission critical national security information, this announcement means that ECC technology is the standard to secure all classified and unclassified U.S. government communications. This will support our business expansion objectives, since all government technology suppliers will need to embed ECC technology. As a result, this will broaden our market dramatically.

Slide 6 -- some of the operational highlights from Q3 fiscal '05 include the announcement of these important successes. As mentioned, General Dynamics C-4 systems, licensed Certicom's entire intellectual property portfolio of more than 300 patents and patents pending for a 15-year period. This agreement permits General Dynamics to use ECC and other related patents from Certicom as the public key security technology in any of its products with commercial and defense sectors.

We launched Security Builder NSE, or National Security Edition, a cryptographic toolkit that allows organizations to build applications that meet the NSA guidelines for protecting mission critical national security. We also extended the Certicom Security Architecture, enabling developers to embed government mandated securities into devices and applications and giving them access to the lucrative government market.

Slide 7 -- two Certicom executives received awards for their work in advancing ECC. Scott Vanstone received the prestigious University of Waterloo Award for "Excellence in Research." And Tony Rosati received the "2004 Distinguished Fellow Award" from The Center for Applied Cryptographic Research.

Certicom hosted the first ECC Conference 2004, bringing together ECC researchers, industry experts and users. During the 2-day conference, participants from North America, Europe and Asia discussed the growing adoption of ECC and shared best implementation practices and insights for future applications.

We announced the Security Builder IPSec toolkit was licensed to Ireland-based WorldNet 21 to build its own IPSec compliant virtual private network, or VPN, clients. We announced that Certicom's implementation for the Elliptic Curve Digital Signature Algorithm, or ECDSA, earned a FIPS 186-2 validation, making Certicom the first Company to receive the designation for an ECC-based algorithm.

Slide 8 -- subsequent to quarter-end, we had a number of key announcements in addition to the NSA selection of ECC for sensitive but unclassified data. The standards for Efficient Cryptography Group, or SECG, of which Certicom is a founding member, announced an ECC protocol test site and certificate authority. These two new initiatives being spearheaded by the SECG will help developers quickly and effectively test ECC-based implementations to facilitate faster time to market.

We also announced a partnership with Beep Science, enabling Certicom to integrate and resell Beep Science's Digital Rights Management, or DRM, software solution. This supports Certicom's objective to provide a comprehensive integrated security platform that addresses the evolving needs of device manufacturers.

And to support its long-term growth strategy, Certicom has expanded its sales presence by adding key staff in London, England; Stockholm, Sweden; and San Diego, California.

So at this point, I would like to call on Herve to discuss Certicom's financial performance in the second -- third quarter of fiscal '05. Herve?

Good morning everyone. Please turn to slide 9. I will begin with a year-over-year quarterly review followed by a year-over-year 9-month financial review.

As Ian noted earlier, revenues were $3 million for the third quarter compared to 2.1 million in the same period last year. Operating expenses were 3.5 million, in line with previously provided guidance of 3.3 to 3.6 million for the period. This compares to operating expenses of 3 million in the same quarter last year. The increase in operating expenses on a year-to-year basis reflects the Company's investment in its intellectual property licensing strategy.

For the quarter, the Company posted an EBITDA loss of $600,000 compared with a loss of $900,000 in the third quarter last year. On a GAAP basis, the Company posted a net loss of $900,000 or 2 cents per basic and fully diluted share. This compares with a net loss in the same period last year of 1.8 million or 5 cents per basic and fully diluted share.

At January 31, 2005, Certicom had $27.5 million in cash compared to 29.1 million at October 31, 2004 and 36 million at April 30, 2004.

Please turn to slide 10. As I run through the year-to-year -- year-to-date numbers, let me remind everyone that in the second quarter last year, we signed a major contract with the NSA. This had a significant impact on various metrics. Most notably, the NSA contract impacted revenue gains and also triggered incremental expenses. For comparative purposes, we will provide a review of the 9-month results, both including and excluding the impact of the NSA.

Certicom reported revenues of 8.5 million for the 9 months of fiscal 2005 compared to $7 million, excluding the NSA contract in the same period last year. Including the NSA contract, revenues in the same period of fiscal '04 were $31.9 million. For the 9 months of fiscal 2005, operating expenses were $10.2 million compared with operating expenses of 8.6 million, excluding incremental expenses from the NSA contract in the same period in fiscal 2004. Including the NSA contract related expenses, the first 9 months of fiscal 2004 expenses were $9.8 million.

The Company posted an EBITDA loss of 1.8 million in the first 9 months of fiscal 2005 compared to an EBITDA loss of $1.6 million, excluding the revenue gains and incremental expenses triggered by the NSA contract in the same period last year. The Company's EBITDA in the first 9 months 2004 including the revenue gains and incremental expenses resulting from the NSA contract were $22.1 million.

On a GAAP basis, the Company posted a net loss of $3.1 million or 8 cents per basic and fully diluted shares for the first 9 months of fiscal 2005 compared with net income, including earnings from the NSA contract of 18.9 million or 56 cents per basic share and 53 cents per diluted share in the same period last year.

Please turn to slide number 11. While Certicom does not provide guidance on revenue or cash position, we do give guidance on operating costs. Looking ahead to the fourth-quarter fiscal 2005, we expect operating expenses to amount to between 3.4 and $3.7 million compared to second-quarter operating expenses of $3.5 million. Going forward, we maintain a very strong cash position with the flexibility to support the implementation of a long-term business strategy. To provide an overview of the business going forward, let me ask Ian to lead the remainder of the discussion. Ian?

Turn to slide 12 now. So in summary, we're pleased to have completed a strong third quarter in fiscal '05. We made significant progress on two fronts -- our penetration into the government markets and our intellectual property licensing strategy.

Certicom is steadily building a platform for long-term growth in the government market. We signed a licensing agreement with a defense contractor and also launched a toolkit to help developers meet government security standards. The NSA's selection of ECC as the standard to secure all U.S. government communications supports our long-term growth plan. Now, every government department and technology supplier to the U.S. government will need to embed ECC technology. As the undisputed world leader in ECC, Certicom is ideally positioned to benefit.

On the intellectual property licensing front, the General Dynamics agreement is the foundation for building a recurring revenue stream. It proves that our licensing strategy is gaining momentum. And Certicom's priority is to continue to drive that strategy. The demand for security is growing, and Certicom is at the forefront. We will leverage this momentum in the government market and build business in our five other key vertical markets. And with our financial strength and debt-free balance sheet, we intend to maximize long-term profitable growth for our shareholders.

So at this point, we would be very pleased to answer any questions that you may have.

(OPERATOR INSTRUCTIONS). David Wright, BMO Nesbitt Burns.

The NSA -- they have established this now ECC as a standard. Do you know how it will work? Like they're obviously recommending to all the departments. Can they -- I mean do they step in at some point and say, they can block purchases? Or is it just strong encouragement and sort of a cultural thing, where they just encourage from now on people to be using ECC going forward?

David, it's Scott Vanstone speaking. This is very unique for the U.S. government. They have never come out with a Suite B, where they actually specify a series of algorithms for encryption and key management and digital signatures. So there are a number of things going on.

First of all, they have never come out and recommended a public key scheme before. And then, they have never really come out and said, here's a sequence of algorithms that we want everybody to use.

The way it went in the past is -- people just followed the FIPS standards that the NSA (ph) put out. And the unfortunate part with that is there are FIPS standards for various encryption schemes, various public key schemes. People could pick and choose, and so you didn't get interoperability. They need interoperability now. They need the classified systems to be able to speak to the unclassified systems through Homeland Security. So this is a historical event.

So then that means any entrance kind of unsure, but -- so do you think it would be the case that a year from now, the NSA would be frustrated if people weren't on this standard?

I would think so. I know that when they spoke at RSA about Suite B, they commented at length about getting interoperability between various departments within the U.S. government. Currently, that doesn't exist.

Maybe one of the other ways to position us -- if you think back, we've mentioned before that 5 years ago, the Advanced Encryption Standard, or AES, was introduced by the U.S. government. And today, as the de facto encryption standard both within government -- and is moving rapidly through the private sector. And of course, as you're probably aware, ECC is a very, very high-performance public key mechanism in conjunction with AES. It is one of the key leverage points for ECC with use in the U.S. government.

And that's a good point of reference to look at adoption curves. It has moved from a basic introduction 5 years ago to the point where it's, as I say, it is the de facto standard in government and moving rapidly private sector. I think if you just -- to Scott's comments, if you just stand back and look the last 1.5 for what has happened with ECC within the U.S. government at a high level, in October '03, as you know, the U.S. government licensed ECC -- licensed 26 of our patents. And at that point, their number one priority, which was moved forward, was to put ECC in as the standard for classified communications -- the standard for public key. And again, that was exclusive use of ECC in the classified standard for public key -- using ECC for public key.

What was announced a couple weeks ago was, as Scott said, a new standard. The first time in fact the government brought out a standard for sensitive and unclassified. And in that standard, again ECC was the exclusive public key technology. So there's clearly a commitment to moving both classified and unclassified standards forward with ECC, very much in line with what they did 5 years ago with the introduction of AES.

That's helpful; thank you. On the General Dynamics announcement, congratulations on that. And was there in the quarter -- was there anything you could talk about -- revenues from General Dynamics? And are there any minimum payments on perhaps an annual basis that you would expect from General Dynamics?

David, it's Herve. During the quarter, we obtained an amount from General Dynamics, which was not a material amount that was recorded in our numbers. And it was basically for some products that had been released already that have got ECC in it. There will not be any minimum payments going forward. The agreement we have with the customer is that they will provide us with an accounting of their activities every quarter. And we will be receiving a royalty check with that.

So, David, it's Ian. If you look at General Dynamics as an example -- and we think this will be representative of other defense contractors as they come in future quarters and years, General Dynamics have a broad range of products. And as they implement ECC into -- over time, all those product families -- presumably as a result, the quarterly royalties will increase over time.

So we -- as Herve said, we receive some payment for a set of products or product family that we're in today. And they're committed in line with the NSA direction to roll ECC in as the embedded public key infrastructure into their full line of products, where it is relevant and required.

So the encouraging news is -- they're already starting to use it. But of course, they have got to roll it into more products.

(multiple speakers) And at this point, we cannot predict how material this number will come -- will get quickly. As we -- as the quarters roll by, we will be able to determine some trends and have a better visibility into the ongoing value of the contract.

And as a result of the announcement of that contract, have you noticed any increased interactions with other defense contractors?

Yes, it is Ian, Dave. We have had an ongoing set of discussions with a number of defense contractors. And we anticipate over time that we will continue to move forward and conclude similar contracts with other organizations. It's hard to predict at this point what the structure will look like. But our model, as you know, is to build recurring revenue models based on quarterly royalties on an ongoing basis. And so as we talk with other organizations and certainly to Scott's point earlier, if you are a supplier of product to the classified market in the U.S. government, you're going to have to be compliant with ECC. And the good news now is that if you are a supplier of technology products in the sensitive but unclassified market, your commercial off-the-shelf products also have to be ECC-compliant.

So, yes, we are in discussions with a number of defense contractors and other organizations who are in the -- I will call it the general-purpose technology business of providing commercial off-the-shelf technology products for the sensitive but unclassified space. So it's a very, very significant opportunity for us in both sectors.

Could you also summarize what's going on at either foreign government -- I noticed something about the Irish and Irish product. But perhaps you could summarize for us what is happening elsewhere as well?

We will continue to work in conjunction with friendly governments, if you will, who cooperate with the U.S. The U.S. government is obviously one of the larger ones, and we do have discussions with other NATO governments who are cooperating and pulling together a common architecture, if you will, with other governments.

So there are opportunities. We can't comment in any specific country or government discussions. But there is opportunity for us certainly as a result of the NSA's exclusive endorsement of ECC in the public key domain. That will absolutely lead to opportunities elsewhere for us in other friendly NATO countries.

I have other questions. But perhaps I should let somebody else queue up, and then I will come back.

(OPERATOR INSTRUCTIONS) Scott Penner, TD Newcrest.

Ian, just wondering if you can comment now that you have had some IP success -- whether you're seeing opportunities in the pipeline progress faster than they were 3 months ago?

Well, it's hard to say against 3 months ago. I would say every quarter since the NSA agreement back in October '03, we have seen an increased level of interest in ECC, both in our patent and product portfolio. And there's no question that that has resulted in an increase in pipeline in both of those businesses.

So as mentioned in the press release, we are in discussions with a number of large multinationals for contracts that ultimately we hope will result in product and IP licensing opportunities for us. So there's no question.

And this is one of the reasons, by the way that we are increasing the sales force. We have noted that we added some sales resources in Europe and the States. One of the reasons is -- we have got an increase in pipeline, and we need that sales capacity in the field to handle the increased level of interest in our products and of course in our patent business as well.

So we are -- short of providing revenue and earnings guidance, which we do not do, we are very confident that the trend of ECC adoption is occurring. And announcements, such as the one at the RSA conference by the NSA, are indicative of the fact that there's an adoption of ECC that is occurring. That is certainly reflecting in our pipeline. So we are optimistic about the long-term growth potential. And I think we are seeing it on any given day in each quarter, we are seeing more and more interest.

And Herve, just a couple of things or a -- Ian mentioned a hiring. Is that a -- is the full allocation of that hiring built into the Q4 guidance? Or is this hiring that still yet to come?

No, this is all factored in. So the guidance we're providing is an all-in expense level for the next quarter.

And just if you could talk about the services business, specifically the margin, why -- what elements go into the increase in the probability on the services line.

Well, the increase in profitability happens mostly as a result of increased efficiencies. I think that we've been over time increasing those efficiencies in terms of the structure of our Company. We are striving for minimum 60-percent margins on professional services, and I must say that those efficiencies have recently yielded us greater margins than that. So if you look at the overall margins, you will see they are very, very strong. And we continue to see strong trends in that area.

And are you at the point yet, Herve, where you can comment on the -- within the quarterly revenue, how much of it you consider to be recurring from quarter-to-quarter?

It's increasing on a quarter-by-quarter basis. By way of background, the -- when we undertook to restructure the Company 3 years ago, almost 3 years ago, recurring revenues were in the area of 12 to 15 percent. Last quarter, they were in excess of a third of the Company. So they're growing quite nicely, and as Ian mentioned in his brief, our focus and our objective is to grow recurring revenues. So we are -- our objective is to continue in that route.

Now, along with the elements of that, like the rim deal, have you seen the -- what you may call, the old royalty stream? Has that started to increase?

I'm not sure I understand what you --

-- just as products are rolled out on Toolkit licenses (multiple speakers)

The agreements that we're seeing have got a much stronger recurring revenue element to them than they used to. So we are seeing that to start to materialize.

One of the things we really try to avoid is our royalty buyouts, for example. We really try to ensure that all contracts are models very much geared to this, whether it be patent licensing or product licensing -- have our royalty component to it. So that we have got that ongoing recurring revenue commitment to future quarters.

We very, very rarely will do a royalty buyout. Many companies are looking for that, but we resist that quite emphatically because it really is our ability to -- it provides us with an ability to provide build a foundation of recurring revenues, which frankly makes the business, as you know, much more predictable. So it's a practice that in terms of royalty buyouts that we steer clear of wherever we possibly can. And so far, we've been quite successful at doing so.

The General Dynamics contract, the research in motion contract that were announced last May are good examples of the model that we're trying to structure all our contracts around, which is the ability to have ongoing upside recurring revenue on a quarterly basis through royalties. That's the model we like, and that we strive to.

Great. Thanks guys.

Ladies and gentlemen, to arrange any follow-ups or discussion or interviews to senior management after the call is completed, the correct number for Brendan Ziolo is 613-254-9267.

David Wright, BMO Nesbitt Burns.

I just wanted to know -- the NSE Toolkit, I believe, was available in the quarter. At what point in the quarter, did you actually have any revenues from it in Q3?

We announced that Toolkit -- I cannot remember when exactly, but it was announced -- and it is still under development. We expect to have it available for shipment to our customers in the near-term, but it is not currently ready for market. We expect it to be fairly shortly.

So are you hoping for before the quarter-end or not necessarily?

Really have not provided any commitment on timeframe to any of our customers, so we have not provided a specific date. But it's not a huge undertaking for us to get this product up. As I say, at this point, we have not provided any delivery guidance to our customers at this point. But we expect it out fairly shortly.

Do you have customers that are waiting on it? And you would expect this? And as soon as it is available, they will be shipping? Or is there going to be some time period once it's available that you will have to go around and market it and that sort of thing?

Yes, there is a lot of interest in it. We have got a lot of organizations that are very interested in licensing it. It's one of a number of ways to license our technology. The defense contractor community is a very specific target for that product. And it will be one of a number of offerings that we are in discussions with currently at this point with that particular market.

The Beep Science's announcement -- I was wondering how it might change your model if at all. I would assume that there's going to be some kind of revenues from this change -- your gross margin cost structure at all. And how significant do you think this product will end up being?

Well, it is a change to a certain extent. On the one hand, we are placing a lot more emphasis on establishing alliances and partnerships with third-party companies. We have complementary technology. It's one of the ways that we extend our sales reach -- one of the ways that we extend our product and patent reach. And it really comes down to a buy versus build decision. We don't want to be all things to all people and try to build everything. We want to make sure we stay focused on our core competency but also provide technologies that are complementary to what our customers are looking for.

So in the example of Beep Science, it lines up very much with the interoperability that is provided through our Certicom Security Architecture, which at a high-level is simply how all of our products play together on a common architecture, from our core crypto offering to protocol Toolkits, which is where we focus. We have got an architecture that allows third-party products like the Beep Science DRM solution to plug into that environment.

We have had a lot of input from many of our customers -- many of the major players in the industry have helped provide us guidance in mapping out our product roadmap for CSA. And so the ability to provide both Certicom-developed product as well as third-party products is a way that we're going. So I would expect to see more third-party reselling relationships in the future along the lines of the Beep Science contract -- at. Wherever our customers want certain functionality and capability, whether it is provided by Certicom, built by Certicom or built by a third party, we will try to comply to that and make it part of our Certicom Security Architecture. So partnering is going to continue to be a greater and greater theme for us in terms of both reselling, technology and marketing alliances.

And my last question is on the ECC protocol test site. Is that something that would have any kind of direct revenue or cost to you? Or is it more or less an industry educational site that just sort of helps the overall initiative?

The purpose of this site is to give people who are doing ECC implementations an opportunity to test those against given test vectors that we have reproduced for them. We also want to produce ECC certificates so that we have more certificates in the infrastructure. We think it's a great first step to get ECC certificates in browsers.

So is it an industry-run site or Certicom-sponsored and run site?

Certicom sponsored -- but certainly, we have a number of companies now who have signed up to participate in the SECG. We anticipate having several meetings a year. We have so far produced two documents -- what we call the primitive ECC cryptography, or in those (ph), and we will produce others to further ECC technology.

Great. Thank you very much for all your interest.

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

Okay, well, if there are no more questions, thank you very much for your time and your interest. And as was mentioned previously, please don't hesitate to contact us for any further follow-up. Thank you very much.

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