BlackBerry Ltd (BB) 2006 Q1 法說會逐字稿

Welcome to the Certicom Corp. first quarter fiscal 2006 results conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on Thursday, September 8, 2005, at 10:00 a.m. eastern time. I will now turn the conference over to Tanis Robinson, Investor Relations Consultant, please go ahead.

Good morning and thank you for joining us for Certicom's conference call to discuss results for the first quarter of fiscal 2006. On the call from Certicom today are Ian McKinnon, President and Chief Executive Officer; Herve Seguin, Chief Financial Officer; and Dr. Scott Vanstone, Founder and Executive Vice President of Strategic Technology. Let me remind you that all dollar amounts discussed today are U.S. dollars. This call is also being Webcast live on the Company's website at www.certicom.com. 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. Now I will turn the call over to Ian McKinnon. Ian.

Good morning and thank you for joining us. I'd like to begin with an overview of the operational highlights for our first quarter of fiscal '06 and then I'll ask Herve to provide a review of our financial performance and an outlook for expenses in Q2. I'll return for a brief summary before the question-and-answer session.

Please turn to slide 5. We started fiscal '06 on a strong note delivering revenue growth for the fourth consecutive quarter and improving our bottom line. In addition, we're tracking as a result of our success -- we're gaining traction as a result of our success in the government market, we're seeing unprecedented levels of interest in Certicom following the U.S. Government's inclusion of ECC in its standards for technology. ECC is now designated by the NSA for both classified and sensitive but unclassified information. And all government departments, agencies, and suppliers will need to use it. So as a result we're also seeing strong interest from the private sector as well. Certicom's opportunities to grow revenue are now significantly larger. We're working hard to capitalize on the growth and demand. Late in fiscal '05 we expanded our sales force to ensure we increased penetration in our various target markets and we're already seeing results and are currently in discussions about licensing agreements with a significant number of multinational companies. Our focus is on concluding those agreements as soon as possible to maximize long-term revenue for Certicom.

Slide 6. During the quarter we built on the momentum of our licensing strategy in fiscal '05, signing an intellectual property license agreement with Freescale Semiconductor. Freescale is a leading global semiconductor company headquartered in Texas. This is the fourth contract since we launched the patent licensing business in March 2004. We also announced a patent licensing agreement with Pitney Bowes for our latest digital signature scheme, Nyberg Rueppel. This scheme offers greater protection against fraud without compromising speed. Finally, Certicom had success on the product licensing front during the quarter. We achieved a key win in the government market when our technology was selected to build a prototype for the Special Forces and U.S. Army Rangers. Intelligent recognition systems licensed our Security Builder Crypto tool kit to provide ECC-based authentication.

Slide 7. As I mentioned, we see great potential in the government market and are launching new offerings to win business in that sector. A module of Certicom's security architecture for government which we launched in December 2004 earned FIPS 140-2 validation. This is important because it allows device manufacturers and software vendors to meet government standards both quickly and cost effectively. And as the private sector complies with the algorithm standards mandated for government we expect this offering to gain increased success.

In Q1 we announced that Certicom will host the second annual ECC conference in Toronto from October 3rd, to the 5th. Once again, we're pleased to be partnering with industry leaders to offer presentations and discussions on some of the hot-button issues in security cryptography. We hope that some of you will join us at the four seasons for this conference. You can register on our website. Subsequent to quarter end we announced that we have developed what we call Fast ECDSA Verify this new implementation reduces the time needed to verify an elliptic curve digital signature algorithm by 40%. Certicom is committed to gaining market share by introducing innovative, new technologies that add solid value for our customers. So at this point I'd like to ask Herve to discuss Certicom's financial performance in the first quarter of fiscal '06. Herve.

Thank you Ian and good morning everyone. Please turn to slide number 8. Revenues for the quarter rose 22% to $3.5 million compared to 2.9 million in the same period last year. Operating expenses were $4 million compared to $3.3 million in the same quarter last year. The increase was due to the strength in Canadian dollar and the fact that we initiated the practice of accruing quarterly a portion of annual bonus payments as well as higher sales costs related to commissions, travels, and employee relations. On a GAAP basis the Company posted a net loss of $800,000, or $0.02 per basic and fully diluted share. This compares to a net loss in the same period last year, of 1.2 million, or $0.03 per basic and fully diluted share. At quarter end Certicom had $25.1 million in cash compared to 25.9 million at year end and 38.5 million at July 31, 2004. In August 2004 we fully retired our $10 million debt which accounts for most of the year-over-year difference.

Please turn now to slide number 9. While Certicom does not provide guidance on revenues or earnings we do give guidance on operating costs. Operating expenses in the second quarter of fiscal 2006 including cost of sales are expected to range in the 3.8 to $4.1 million. Certicom has a solid track record of prudent financial management and cost control and we expect to continue that. With our strong cash position, debt-free balance sheet, and solid recurring revenue we are in a strong position to execute our financial -- our growth strategy. To provide an overview of the business going forward let me turn the meeting back to Ian.

Thanks, Herve. Please turn now to slide 10. Certicom today enjoys a greatly expanded growth opportunity. We're at the start of a paradigm shift in the security landscape. ECC is now the U.S. Government's designated standard for public key cryptography. The private sector has time and time again in the past demonstrated that it quickly follows the highest technology standards established by the government with large multinational companies generally leading the charge. As the undisputed world leader in ECC Certicom is ideally positioned to benefit from this trend.

We have a focused strategy that aims to capitalize on this growth in demand and maximize our market share by launching innovative new solutions that target the highest growth markets we are steadily making progress. In fact we're currently in discussions about licensing our technology to a significant number of multinational companies. While I can't provide you with more detail at this time on those specific opportunities, I can tell you that we're working hard to profit from the unprecedented interest in ECC. Our focus is on concluding agreements that maximize our revenue over the long term. We have a strong foundation for building our business and are committed to delivering sustainable, profitable growth.

I'd also like to take a moment to remind everyone that Certicom will hold its annual general meeting on Thursday, September 22, at 10:00 a.m. The AGM will be held at the TSX conference center auditorium in the Exchange Tower, which is 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. At this point we would be very pleased to answer any of your questions.

Thank you. [OPERATOR INSTRUCTIONS] 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 discussions or interviews of senior management after the call has been completed. To make these arrangements please contact Tanis Robinson at 416-367-5000 at extension 252. [OPERATOR INSTRUCTIONS] Your first question comes from Scott Penner from TD Newcrest.

Thank you. Herve, maybe first of all, with regard to the operating expenses, what brought about the decision to do the quarterly accrual of expenses and then maybe so we have a better basis for comparison, would the operating expenses have been well within guidance if you hadn't made this decision? Thanks.

No, I think that the reason why we accrued a portion of the employee bonus is because of a change in our bonus plan in the coming year. It recognizes the fact that employees do have objectives, personal objectives, as well as corporate objectives to be met. And as you know last year we had a tremendous amount of good things that happened, and we wanted to recognize the employees for that achievement, and we've decided that we would do that again this year, that it would be a portion that would be paid to the employees on the basis of their personal achievements and the balance on the corporate achievements. And as a result of that we made a decision to accrue on the basis that there's a high probability that we will be paying at least a portion of the bonus this coming year as we did last year and we did not want to have that all backed -- all into the -- backed into the last quarter of the year.

As we -- and that accounted for approximately 150,000 or so of the increased expenses from the guidance that we provided the last quarter. So outside of that we would have been lower than that amount. There's also the fact that the strengthening dollar is creeping up on us. As you know, we have a hedging program, what the hedging program does is sort of streamlines it over time as it moves to have great peaks and valleys, so some of it is now catching up to us. So those were the main reasons for the expenses. There was also, as we mentioned, some commission, travel, and employee relocations. We estimate that the commissions and travel will level off in the second quarter, and we also expect to have less employee relocations. They should be completing in the second quarter.

Okay. Then on the services business in general, the revenue was a little lighter than it has been in past quarters but the margin was also quite a bit down from the level that we've seen. If you could just kind of comment on the components there.

Well, Scott, it's Ian and I'll turn this over to Herve in a second but I'll just mention that the services business as we've said in the past tends to be one of ups and downs, if you will, from quarter to quarter. It's very much dependent on the degree to which our customers want to engage our organization to do some integration and implementation. It has -- we feel it has room for growth looking forward both short term as well as long term but we will periodically get quarters where it's not at a level that we may have seen in prior quarters so it does have the ability to swing both up and down on a quarter to quarter basis, but generally I can tell you that the outlook for services is one of growth over the long term. It tends to a large extent line up with the growth of our products business, which, of course, we also see growing. So we do monitor closely the margin. I'll ask Herve to comment on that specifically.

Sure. On the margins generally speaking we focus on trying to obtain margins that are in excess of 60% on our PS deals. In this particular quarter there was an element of third-party products that we had to incorporate into a solution and that in itself had a lower margin so from time to time as to the extent that we may have third-party involvement in the delivery of a PS deal then the margins may dip somewhat but generally speaking this was a blip.

And how much of the services revenue is accounted for by maintenance or support revenue?

I'm trying to think of it. I guess the revenue tends to be more fixed, so at least half of it is maintenance revenue, then the balance is services.

Okay. And there -- at the end of it all there hasn't been a dip in support revenue?

No, support revenue is solid and it keeps on growing.

Ian, just finally, I know you can't talk a lot about the pipeline, but maybe with respect to the kind of revenue models that you're dealing with, with these large companies, are we -- can we expect to see more sort of conventional royalty-based deals, or are you able to sort of structure some of these along the lines of the RIM deal?

Well, certainly the RIM deal was a royalty model, and we've had a number of those with RIM and others but I'll first of all say that we have -- this is really an unprecedented level of strategic opportunities that we're currently working on with, as I mentioned in the press release, these multinational companies. We're talking to the organizations that a couple of years ago we wouldn't have had the opportunity to discuss, so it's very much reflective of the trend in growth of ECC adoption and we're thrilled with the amount of opportunity that we're currently engaged in, and as I mentioned at the last quarter that's one of the reasons why we had a fairly significant increase in our sales force.

As it pertains to the revenue models on these and other deals we always, always try our best and are successful in the vast majority of cases to structure our contracts so that we get recurring revenues. We absolutely try to avoid royalty buy-outs. We try to avoid the blips of large revenue in any one given quarter. We want to spread that out over multiple years and certainly in every one of these cases, as the negotiations progress we always try to ensure that we end up with a revenue model that provides for recurring revenues. Now, that may be a deal, for example, where prepaid royalties are agreed to and where cash may be received up-front, and then we spread the revenue out over a prearranged or agreed to amount of time. There may also be other deals like General Dynamics, for example, where a royalty agreement is agreed to but it's not prepaid. It's on a quarter by quarter basis where we will receive a check at the end of their quarter for royalties on products that our technologies shipped in.

So some of these deals may show up in backlog if they're prepaid where we receive the cash up-front. Some of them won't show up in backlog if they're like the GD deal, but they will certainly all contribute to our recurring revenue model. So that is always what we try to do, Scott, in terms of the recurring revenue. We could have been, as I've said in the past, we could have been profitable some time ago had we been structuring these deals on a one-time royalty buy-out basis, so it might have made us look good for one quarter but it certainly would have been mortgaging the future, and that's what we're trying to avoid at all costs.

Appreciate it. Thanks, guys.

Thanks, Scott.

Your next question comes from Glenn Jamieson from MGI Securities.

Ian, you've said that you're trying to close licensing agreements with a significant number of multinationals as soon as possible. I think that's the strongest language you've used in terms of licensing opportunities. So I just want to ask you a few questions here. When you were talking about licensing agreements are we primarily talking about patent licensing opportunities as opposed to software license sales?

No, Glenn, we are talking about both. There are many that are in both the product sector as well as patent. In fact, a number will involve contracts where we have both patents and products. So it's a good mix of both patents and our product side. So I think you'll see that as the contracts are closed and announced in coming quarters.

Okay. And a significant number, can you give me any idea of what a significant number, from your perspective is? You've announced four or five patent licensing agreements to date. Is that a significant number?

It's a large number, Glenn. We're not going to get into specifics with how many but I've done my best to give you some sense that this is, I think I said, really unprecedented in many ways for the Company's history looking back over the years that I've been here and prior, compared to what we have on our pipeline today and organizations that we're in discussions with. It's really a very dramatic shift for us and without getting into specifics about who or what number it's certainly enough to have warranted us going out and increasing our sales force and expanding our field presence in order to properly respond to those opportunities. So we -- our challenge is to make sure that we close them as quickly as possible but at the same time to not sacrifice the recurring revenue model basis that I just previously mentioned on the last question.

I'm going to push on a little bit more here. In terms of markets that you're seeing these opportunities in, you've mentioned that the government/military market is one that you thought held some near-term promise and the consumer electronics market is another market that you've said in the past looks to be positive from a near-term perspective. Is it safe to assume that the activity we're talking about here would fall into those market?

Yes, and again there are a couple of reasons. First of all, there's no doubt that the U.S. government adoption of ECC is driving overall ECC adoption in both the public and private sector, so we're seeing interest in the government side, government suppliers, but equally so on the mobility market, the embedded device market, the consumer electronics markets, if you look at the Freescale contract, for example, in Q1, it's indicative of the fact that many organizations who sell products to other sectors are now needing to be able to say on their product feature sheets that they offer ECC. It's becoming a competitive advantage for our customers to be able to have ECC in their products for their market, their target markets. So we're seeing a fairly wide level of interest across the vast majority of our target markets, and again it's all related to the increased interest in ECC and the adoption rate that we're seeing in both public and private sector.

One last question on this topic. Is it fair to say that these are companies located in different geographies, Asia, Europe, North America?

Yes, it is. We certainly see opportunities both across all of our target markets but also geographically, that's correct.

Turning to the extended sales force, is that -- are the new additions fully up to speed now from your perspective and the question really is I guess, going forward, can we expect to see some further gains in terms of license sales because of the expanded sales force?

Short of providing revenue guidance we are very, very pleased with the progress of our expanded sales force. Many of the contracts that we're engaged in now with these large number of multinational companies, as mentioned in the press release, are being managed by our sales organization, many by the -- some of the new sales professionals that joined us, so yes, we're very pleased with the progress, and I think I've mentioned in the past on other calls that we are receiving a very significant and unprecedented level of unsolicited inbound inquiries into Certicom about our technology, so that's feeding a certain amount of lead generation for our sales force. That's keeping our sales force busy and, of course, they are also proactively generating new opportunities as well. So there's always a ramp-up with any sales organization and I would say that we're probably a little bit ahead of what I've seen in my experience in terms of sales reps being able to get productive as quickly as possible.

Okay. And on the topic of bonus accruals, if I look at the current consensus, revenue forecast out there it seems to be in the 16 to $17 million range. If you were, in fact, to hit those numbers, would a large portion of the corporate objective be met and consequently a good percentage of the bonus actually be paid out?

This is Herve, Glenn. Good question. Unfortunately we're not going to answer that because I think it's a little too close to providing some of the guidance on some of the information that for a whole host of competitive reasons we need to keep private. So I -- but it is fair to say, though, that as we progress throughout the year and to the extent that we will be achieving and crossing the boundary of where we are reasonably assured that we would start to pay bonuses on the corporate achievement of our objectives, we will start to accrue bonuses at a higher level.

Glenn, it's Ian, I'll tell you one thing without getting specific. But if we achieve our financial target this year, while that's good, it won't be a successful year, from my perspective, and many of the executives' perspectives, if we don't also conclude some very critical strategic contracts with some of these large multinational organizations. So we're goaled on not just the financial targets for Certicom and FY '06, which, again, we're not disclosing, but it's also critical to us to be able to call FY '06 successful by closing some of these large contracts. We want to be able to have those strategic agreements in place as soon as possible, and maximize as many of those throughout the year because that's going to build future revenues in FY '07 and beyond. So it's not just about the financials as it pertains to goaling. It also includes an element of strategic account closure with many, many new names.

Understood. One last question for you, Herve. If I look at your patent licensing and license revenue, and guess that about 25 to 30% of it relates to patent licensing, am I in the ballpark?

The interesting thing is, I can't answer that, only to the extent that we're -- at the end of the day we're not sure whether revenues -- nor are we concerned whether revenues come in the form of IP or in the form of product. In the case of certain customers we may have some product sets that fit into their requirements and we'll be able to be used in the deployment of their products in which case they may -- the customer may choose to license our products and not our IP directly. In other cases, the customers we may not -- with other customers we may not have a product set or they may decide that they simply would prefer to have all of the IP and develop their own products and tool kits in which case then it would show up as IP. So I'm evasive but I'm not trying to be purposely. It's just that we're early enough in the deployment of our strategy that it's difficult to predict.

Glenn, I stated in the past that as part of our five-year strategic growth plan that we anticipate that in that period of five years we expect that IP licensing will contribute approximately 50% of corporate revenues at some point down the road within that -- as part of that five-year strategic growth plan. So while we're not talking about specifics relative to this quarter or short term, from a trend perspective that's actually where we see the patent licensing business going as well as continued growth in the product side of the business.

Fair enough. Thank you.

Thanks, Glenn.

Your next question comes from Peter Misek from Canaccord Capital.

I wanted to ask you a question regarding your deferred revenues. Noticed it was down a little bit. If you could give us some explanation and rationale for that. Also, if I could try and understand going forward what kind of collection cycle. What I'm trying to drive at is cash flow and cash usage. That would be great. Thanks.

Okay. Peter, in terms of deferred revenue, at any given point in time, the balance of the deferred revenue account will fluctuate and it may not necessarily be reflective of the number of deals that we sign. By way of just background, the deferred revenue account is made up of prepaid or prebilled maintenance revenues, so at the beginning of every year we will bill our customers on a go forward basis for their maintenance contracts for the upcoming year. That revenue is recorded as deferred revenue and we record the revenue, recognize the revenue over the course of the maintenance contract. That's one piece of it.

The other piece that goes in here is in the area of prepaid royalties. So to the extent that we have situations like the RIM agreement last year where we signed a $3.5 million agreement and that is being amortized over a three-year period, so the balance went up in one quarter by a factor of $3.5 million and we're now drawing down on it. So to the extent that we have those prepaid agreements, then the balance will go up and obviously it will go down as we use it up. On the other hand we may have some significant agreement that where on the long term, for instance, General Dynamics, we are very confident will provide a tremendous amount of good revenue to the Company but they have chosen not to give us any prepaid royalties and have chosen to amortize -- sorry, to pay on a go forward basis as they ship the product. In that case it doesn't show on our balance sheet. So to that extent and for that explanation deferred revenue is one indicator but not the sole indicator of the health of our business going forward.

In terms of collection cycles, we really have two pieces in there. One is we sell -- we license the technology and we bill -- we bill for the software license. Typically collections in there are in the area of -- terms are typically 30 to 45 days in collection, or in the area of 45 to 60 days. That's the norm. In addition to that we have a professional services contract where there are a number of milestone trigger points for billing and collection. And depending on the type of contract we have, we may at any given point in time have provided more work than we've billed for and it's just a question of timing. That, again, once it gets billed, it gets into the 45 to 60-day time cycle.

Okay. Thank you, gentlemen.

Thanks, Peter.

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

Thank you. Good morning.

Good morning.

Just starting on the expense front, and your guidance for the coming quarter, are we to assume now that kind of your level of spending is roughly in the $4 million range for the foreseeable future really, or is there -- are there sort of any one-time events that are going on?

There's obviously always a few one-time events that we had. For instance, last quarter, this quarter, on some relocation expenses. But I think we should be looking more on an ongoing basis hopefully at the lower end of the range. So we provide some high range because there may be some factors like the currency fluctuation and so on but generally speaking we're hoping to be able to maintain that at the lower end of the range.

How many employees are you at currently?

We're typically at any point in time we're at about the 100 to 105 range is where we stand. It will fluctuate up and down a bit but generally that's where it is.

Where do you think that will be a year from now.

Not much more than what it is right now. I think we've got the complement that we require to deliver on our business plan on the short term.

Dave, we don't need to add a lot of head count to leverage more IP licensing contracts. That's quite -- very, very high margin business that leverages a lot of business from our perspective going forward with a limited amount of expense. If you look at the product side of the business it will have a more traditional expense model from a sales and marketing cost structure. But that would be the only area of growth, as the product business grows we'll have a proportionate increase on the sales organization, as IP licensing grows it will potentially add cost but not nearly to the same extent that you'd see in a traditional products business.

Right. Okay. Have you given out the specific number on your sales force, how many do you now have?

For competitive reasons we don't disclose other quotas, annual quotas or number of sales reps but we did disclose that, as you know, our overall sales expenses went up about 40% on a roughly year-over-year basis, and that includes both sales reps as well as field application engineers or SEs, as they're also commonly referred to.

Would--.

I can tell you we've changed our -- sorry, Dave. I was going to say we've also changed our mix. We've put a lot more FAEs into the field than we had traditionally so we're trying to increase the level of technology resources available to our customers and our sales reps out in the field close to where our markets are.

Okay. Would you imagine that based on the significant number of contracts you're looking at and things like that that we should continue to see the number of field reps continue to rise over the coming year?

At least from our planning perspective, I would say we've completed our hiring from a plan perspective. We're also expecting many of our executives to fulfill business development roles on accounts that are -- have a longer term close cycle, but are very significant, very large in terms of opportunity where it's appropriate to have people like myself and others very much engaged in nurturing and developing an opportunity through the sales cycle. So there's also an executive business development capacity here that we're increasing as well, just to make sure that we're able to execute sort of a two or three-tier sales and business development strategy on large accounts.

Okay. Getting into -- back to the discussion about what is a significant number, you signed four deals in the past, call it five quarters. Are you seeing the level of activity that at least enables you to double the number of deals in the coming few years, would you expect?

Yes, we absolutely are seeing more design wins, we're seeing -- and we have seen that both over the last few quarters as well as going forward. And design wins are great in the sense that they don't contribute up-front a lot of initial revenue but they're very much royalty based, and with large volume products, where we are designed in at the point of design, prior to shipment, those turn out to be very lucrative. We're seeing many, many more of those, and I would say, again, short of giving specific numbers, the number of new name accounts, I believe, will increase significantly versus building off of the existing customer base, if you will. So many of these multinational companies that we're in discussions with are not companies that we can fairly call historical customers or organizations that we were in discussions with in prior years. They're in many cases new organizations. So that, to me, is the most important aspect. New customers, new opportunities in terms of growing market share, plus the number of combined increase in design wins I think really bodes well for us in terms of market share growth.

Good, good. . Your Fast ECDSA Verify product, congratulations on that. How long do you think it takes for you to -- what's the sales cycle on a product like that?

Maybe I could -- first of all, Scott Vanstone is with us. Maybe I could ask Scott just to talk very briefly about the benefits of the ECDSA Fast Verify, in terms of what it means to a customer from a performance perspective, then we can talk about the sales cycle but it's really a feature that many of our ECC customers will benefit from. Scott.

Yes, good morning, David.

Good morning.

Yes, we're -- of course, I was very pleased when we discovered the way to almost double the speed to verify an ECDSA signature. As you likely know, there are many elliptic curve digital signatures but ECDSA is by far the global standard. People are going to do elliptic curve signatures, they will be ECDSA signatures. We've been looking at this verification problem for many, many years, creating the signature is typically the fast part, and verifying is slower. It's typically twice as slow. We've found a mathematical technique, a very elegant technique to make it comparable with signing. And, of course, if you're on a server, and a server has to do millions of verifications a second, being able to speed up that verification, there's a real return on investment for people. So we're seeing a lot, a great deal of interest. Also a great deal of interest academically. I'm actually going to be speaking on this tomorrow at the University of Calgary. So I think it also shows another thing, that we are a world-class security team. We continue to do research, we continue to develop the technology, we continue to increase our intellectual property position. So does that -- at least answer where we stand with the technology.

Great. Thank you. And so from a sales cycle, what you've identified is this is the real benefit to customers that are probably using something like this so how long might it be before you actually see revenues coming out of it?

Well, it's certainly on our product road map to get it into Security Builder. It's relatively new, and -- but I believe we will see it in Security Builder and actually available by this fall.

Yes, that's correct. It's on our road map. And a s Scott said, the ROI in this is very, very compelling. And as a result, we certainly see it being something that will leverage more interest in our product licensing sales. It just helps the overall ECC growth trend.

Okay. And lastly, a series of questions on, have you put companies on notice yet?

We--.

Are you able to discuss this?

Dave, we don't disclose or discuss either the number of companies or who is on notice. That's in our IP licensing organization and for competitive reasons we just don't disclose that but obviously as best we can in the press release by indicating that we're in licensing discussions with a number of multinational companies, we wanted to convey the message that we're moving as rapidly as we can in terms of executing our business model. We wanted to indicate that we're at various stages of the sales cycle with large organizations. And as I said earlier, that pertains to both products as well as patent licensing.

So short of giving specifics on companies on notice, we're very, very pleased with the progress that we're making in our patent licensing business. We hope to provide evidence of that over the coming -- throughout the coming months as we will do on the product side, and we always do our best, as you know, to get permission from our customers to release -- to issue press releases giving the specifics. Sometimes we don't get that permission due to competitive reasons for our customers, but we'll try to be as open as we can be, as our markets allow us to provide information on that as it becomes available.

Thank you very much for your time this morning.

Thanks, David.

Your next question comes from Duncan Stewart from Orion Securities.

Hey, guys.

Good morning, Duncan.

How are you doing? I guess I've got a couple of -- I'm probably going to be getting at issues that other people have already asked questions on but let's see if I can do it without forcing you to say anything you don't want to. But I'm trying to get a little more sense of maybe process on a couple of things. Specifically, let's start with the accruals. Making the accrual for bonuses. Who decides that? Is that management of the Company? Is it the Board? How often is it revisited? Is this something you're going to be checking on quarterly and adjusting it up or adjusting it down? Obviously if you sign a large deal that pushes people into bonus territory that's a material change, but I'm sort of like -- that one is fairly obvious. Leaving that aside, how do you come up with how you accrue that?

Well, first of all, let me just talk about the compensation philosophy and the process. We have a fiscal business plan that is prepared by the management and approved by our Board of Directors, and as part of that plan there's a compensation or bonus program element. That is reviewed in detail by the Board of Directors compensation committee. And it is geared directly to our fiscal business plan, and once it is put together and approved, those -- that compensation or bonus program is communicated to employees through individual goal sheets, if you will, and every employee, including executives, including myself, has a goal, set of goals, both corporate goals and individual or personal goals, that are lined up directly with the business plan and the bonus program associated with that is what, as I say has been approved by the compensation committee and Board of Directors in general.

So we've evolved it. There's no question that we look at it very closely every year to make sure that it's incenting the right kind of behavior, that it's rewarding the right aspects of executing our business plan. We didn't used to pay any bonus unless we hit our corporate fiscal targets, and while that's still a very, very critical aspect in the majority of our bonus payout, we also wanted to this year make a slight change which essentially allows us to pay bonus dollars out assuming that there's a certain amount of achievement on the financial side but allows us to pay out personal objectives as I say, assuming that there is some level of success on the financial side. A full bonus would be paid out if both the corporate financial targets are hit as well as the personal--.

So just to interject, the accruals are at this point taken only against a personal objective? Those are the only ones you could measure intra-year.

That's correct. And those are the ones that we know stand a good chance of being paid out at the end of the year, based on achievement.

Right, and you'll still have measured that quarterly and that will alter the accruals as we go forward?

Yes, and I should also say that nothing gets paid out to any employee, executives included, until it is reviewed and approved by the compensation committee and Board. So they not only approve the plan, they approve the payment and look at actuals versus goals and so on.

And this is maybe less financially relevant, but I'm curious, just in terms of corporate governance, do you kind of make the accrual when you know at the 50% level, the 99.9% level, or once the achievement, the personal achievement has already been made?

Okay, David, Duncan, it's Herve. In terms of the personal portion of it, we make that determination after we've looked at the plans, structure the plan, and look at the probability of us having a payout.

Right.

So we've already gone through that in the Company and we've determined that there was a strong probability, and a strong enough probability that bonuses, personal objectives of employees will be met and therefore bonuses will be paid in -- at the end of the year that we found it prudent and the Board supports that and so do our auditors in making that level of accrual going forward.

Right. Strong probability is sort of like 90% plus, right?

We feel very confident. Whether it's 80 or 90 there's a high probability that that will occur. And we will revisit that on a quarter to quarter basis. To the extent that something were to happen and we say, wow this is really not going to happen then we would adjust it accordingly. On the other hand, if we find that as we get closer into the year that we start to have a really high probability that the corporate piece will be paid, then we would start to adjust our accrual to reflect that. Again, after having had a lot of discussion and soul searching to ensure that we're -- it reflects what we really believe will be happening in the year and that there is a high probability that it will occur.

Perfect. Thank you very much. That really helped clarify that issue. I guess my second question is similarly kind of qualitative in nature. In your press release you suggest you were talking to a significant number of multinational companies. Not counting, of course, the -- I think it's four you've already signed, can you give me any kind of just qualitative? Is the number more or less what it's been for the last quarter or two, not counting anybody you've actually closed on, or is that number growing? I would actually expect, you really can't negotiate with a constantly growing number of people. That becomes unwieldy. I would guess that the number is more or less constant but the discussions are becoming more intense.

In terms of trend, Duncan, it's Ian here, we are seeing a growth in -- from a trending perspective on a quarter to quarter basis, in terms of the number of strategic opportunities that we are working on. It's really reflective of the growth in ECC adoption. So as I said earlier, compared to a year or so ago versus today, we've just seen a very significant increase in trend. It's one of the reasons why we increased the sales force. But, yes at some point you start to run into at a point where you can only handle so many of these and obviously we have to look at the resources in the Company necessary to move every one of those opportunities forward. But I think the most important part of this for me is that there are not many of them, a large percentage of them, are not existing customers.

I think that sort of comes through. Okay. That's great. Thank you very much for the clarification.

Thanks, Duncan.

Your next question comes from Scott Penner from TD Newcrest.

Herve, could you just give us the the component of recurring revenue of the overall revenue? Last quarter you made the statement that it was around 45%.

We're still tracking in that range. So we're quite pleased to see that we're tracking in that range. As you know and as we've said before our whole model is geared to increasing that percentage over time, and we're quite pleased with the results.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from David Wright from BMO Nesbitt Burns.

Thanks. Just a follow-up on a previous deal. So General Dynamics signed on with you last January, I guess it was, roughly. And there has been some statements since that time that there are other divisions of General Dynamics like other geographic locations that might be interested in the technology. Obviously you haven't announced anything yet but is there any progress you could give us on that front?

Dave the General Dynamics contract we licensed was a corporate-wide contract so if I understand your question correctly any contract that GD wins that involve classified products, for example, will fall under agreement and we'll see that in terms of increased royalties as those products, that they're winning contracts for, are developed and start to ship.

So like the U.S. Government design, $18 million design contract that we saw recently, that would fall under that, right?

Absolutely. That's a design contract. So ultimately when that product, if it comes into volume shipment that will fall under our patent licensing agreement. I think the opportunities, though, are incremental opportunities with firms like GD and others, is that there are many firms who will license our patents both looking back over the last year but also in the future who may also want to license many of our products. It's not just a question of licensing patents but some organization don't have the Crypto -- the Cryptographic expertise in house necessary to develop security solutions that they want to put in their products. That can include ECC so they may want to license our -- some of our products to bring the -- develop the security solutions as quickly as possible for time to market benefits in a way that will benefit their business so it's not just about licensing patents. There are many companies that, including firms like General Dynamics potentially and others who may want to license our products incrementally as well as the patents.

Has there been any advancement on, for instance the Canadian General Dynamics licensing your products or hiring your services organization to further their development of products?

Yes, we haven't disclosed any specifics about pipeline in those areas or contracts. Many of these services, for example, they are not necessarily financially material but we would disclose as we're allowed any new contracts that are relevant. I think it's fair to say though that the defense contractor community is fairly varied in terms of the amount of security Cryptographic expertise that any one organization may have, so some may have a fair bit of in house expertise where they may not need our product capability. Some others may not have as much and they would be certainly right for licensing our products so it really varies.

Thank you very much.

Thanks, Dave.

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

Thank you very much for your questions and don't hesitate to phone us directly if you have any further questions that you want to follow up. We look forward in the meantime to seeing as many of you as possible at the TSX conference center auditorium for our annual shareholder meeting on September 22. Thank you very much.

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