BlackBerry Ltd (BB) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Certicom Corp. Q4 and year-end results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question-and-answer session for analysts and institutional investors. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

I'd like to remind everyone that this conference call is being recorded today, Thursday, June 8, 2006, at 10 AM Eastern time. I will now turn the conference over to [Tanis Robinson], Investor Relations consultant. Please go ahead.

Thank you. Good morning and thanks for joining us for Certicom's conference call to discuss the results for the fourth quarter and fiscal year 2006.

On the call from Certicom today are Ian McKinnon, President and Chief Executive Officer, Hervé Séguin, Chief Financial Officer and Dr. Scott Vanstone, founder and Executive Vice President - Strategic Technology. Let me remind you that all dollar amounts discussed today are in U.S. dollars. This call is also being webcast live on the Company's website at www.Certicom.com.

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. We refer to the Company's most recent annual report and other documents filed with the 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 [Anderson].

Good morning and thank you for joining us. We are very pleased with what we have achieved in the year and in the fourth quarter. This morning I will be reviewing some of the operational highlights that contributed to this performance. Then Hervé will go through a discussion of our financial performance and our outlook for expenses. After a brief review of our strategy and plans we will be pleased to take your questions at the end of the call. Please turn now to slide 5.

Fiscal 2006 was a milestone year for ECC and for Certicom. I call it a breakthrough year for ECC as we saw unprecedented interest from leading companies and government agencies around the world.

ECC is no longer the next-generation cryptography solution. I can confidently say that it is now the accepted new standard in cryptography. And Certicom is definitely benefiting.

We signed a number of contracts with new multinational companies in fiscal '06 including a significant number of new design wins. We have been successful in executing our model of signing multiyear recurring revenue contracts.

Throughout the year we also launched a number of new products to capitalize on the most promising vertical markets, particularly in the high-growth government market and digital rights management or DRM sectors. As a result we are steadily expanding our marketshare, consistent with Certicom's growth strategy. These accomplishments translated into 31% growth in revenue over last year and a 26% improvement in our bottom line.

Please turn to slide 6 and I will cover some of the operational highlights for Q4.

We signed a design wins legacy agreement with Sony Ericsson for our Security Builder IPSec product. Sony Ericsson will be using our toolkit to securely add VPN functionality to two models of their SmartPhones. We are gaining traction in the growing mobile VPN market and this is tangible evidence.

We also signed a licensing agreement with L-3 Communications, a manufacturer of military satellite communications terminals. They'll be using our ECC technology to meet emerging security requirements from the National Security Agency or NSA including Suite B. Suite B is the NSA's implementation of ECC.

In addition to success in the mobile and military markets, we also gained tractions in another high-growth market - DRM. We signed a partnership agreement with Freescale Semiconductor, one of the leading global semiconductor manufacturers, to enhance DRM capabilities on mobile devices.

We've integrated Certicom's security architecture with one of their multimedia processors to create a trusted platform and robust DRM solution. This builds on our already strong relationship with Freescale.

Please turn now to slide 7. Apriva also licensed security builder GSE to strengthen security for mobile devices and the FIPS 140-2 government requirements. Increasingly developers are relying on our toolkit solutions as the quickest way to get to market with FIPS 140-2 products.

This means the products make the most rigorous testing requirements as set out by the National Institute of Standards and Technology or NIST.

A fifth licensing win for the quarter was with Mobile Armor, a leading provider of enterprise mobile data securities. Mobile Armor licensed our technology to provide VPN security for mobile devices.

In addition Certicom launched two products during the quarter. Certicom Security for sensor networks is a software module and hardware IP core that secures low-power wireless sensor networks, using ECC. We believe that segments such as industrial and building automation, government, medical, and transportation will all benefit from the strong security offered by our ECC-based Security Builder solution.

And Certicom's security for Voiceover Internet Protocol or VoIP is a flexible standard space solution for desktop VoIP handsets and mobile flight devices. These two product launches are consistent with our strategy to expand our presence in key target markets.

Now on slide 8. In terms of subsequent to year end in late May, we announced a new contract with GE's security business licensed -- and they licensed our ECC technology. And for competitive reasons the applications were not disclosed.

Another win was a strategic partnership with Identify - an industry leader in enterprise, advanced authentication, single sign on and endpoint management solutions. Identify is a key partner of Dell's and is strongly focusing on growing their government revenues. They intend to use the Certicom security architecture to add FIPS 140-2 validated module that includes Suite B algorithms to their authentication offerings.

The licensing win with GE and the partnership with Identify show that Certicom's ECC momentum is accelerating across market sectors. This bodes very well for our strategy and for our outlook.

So at this point let me now call on Hervé to discuss Certicom's financial performance in the quarter and the year. Hervé.

Hervé Séguin: Thank you, Ian, and good morning, everyone. Could you please turn to slide No. 9?

Revenue for the quarter was $5.1 million compared to 3.4 million for the same period last year. The higher revenue was driven by an increased number of customer design wins and increased royalty revenue with Certicom's product and intellectual property.

Operating expenses were in line with expectations at $4.9 million compared to 4.1 million in the same quarter last year. The increase in year-over-year operating expenses was due to the strengthening Canadian dollar, higher third party direct cost of sales resulting from product sales mix and higher sales commissions related to increased revenue. On a GAAP basis the Company posted a loss of $200,000 for the quarter or $0.00 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 (indiscernible) share. Certicom maintains a strong cash position at $24.7 million at the end of the quarter. This compares with 21.4 million at the end of the third quarter and $25.9 million at the end of the same period last year.

We generated strong cash in the quarter as a result of our cash position and as a result our cash position increased from the prior quarter.

Please turn to slide No. 10 and I'll discuss the numbers for the year. So revenue for the year was 15.1 million. So that was an increase of 31% over 11.6 million last year. Operating expenses for the year were $17 million compared to $14.3 million last year.

The increase was due primarily to the same factors I mentioned in discussing the quarter. I'd like to point out that a great deal of that increase is due to the impact of the foreign exchange.

The year-to-year net loss on a GAAP basis was $3.2 million or $0.08 per basic and diluted share, compared to $4.3 million or $0.11 per basic and diluted in fiscal 2005.

Could you please now turn to slide No. 11? And I will discuss our outlook. Looking at operating expenses in fiscal 2007 we will report expenses, excluding cost of sales, where we previously included (inaudible). The reason for this change in outlook process is that we are selling more solutions now that include third party costs, which make the cost of sales very difficult to predict.

And so in the first quarter of fiscal 2007 excluding cost of sales we expect operating expenses to range from $4.6 to $4.9 million.

We are reporting year-end dollars but the bulk of our expenses are paid in Canadian dollars. Given the strength of the Canadian dollar we continue to face expense pressures. However Certicom has a strong cash position and debt free balance sheet.

In addition we are steadily winning more business with a focus on multiyear recurring revenue contracts. We have good financial strength and are on track towards achieving a long-term and sustainable profitable growth.

I will now turn the call back to Ian for closing remarks.

Thanks Hervé. We are now on slide 12.

The Board of Directors and management team of Certicom recently completed our annual fiscal business plan process in addition to the updating of our five-year strategic growth plan.

I'd like to take a minute to go through that plan and share with you to market opportunity that we see ahead.

Our strategic plan identifies five target markets that we believe are ideally suited for Certicom's ECC-enabled solutions. We believe each one has high growth potential.

These markets are mobility, government, digital rights management, conditional access, sensors and enterprise software. We have mapped out ways in which we will maximize our market share in each of these target markets. We intend to do this through a combination of partnerships, expanded global sales channels - including recent expansion in Asia-Pacific and Israel - incremental investments in product development and tuck-in acquisitions that can add critical technologies.

Early indications are very encouraging and we have already seen positive signs of growth in all five target markets.

Slide 13. We have also updated the addressable market for Certicom's securities solutions and our target verticals. Based on a combination of internal and external research, we estimate the total addressable market over five years combined is approximately $6 billion. And while Certicom can obviously only expect to capture a portion of that market, we believe the size of the opportunity demonstrates significant potential upside for the Company.

Please turn now to Slide 14. So in summary we are very pleased with what we achieved this fiscal year; and our outlook for fiscal 2007 is very positive. We are still -- we are steadily winning new licensed contracts and expanded our customer base with large multinational companies. We are gaining market share in each of the target markets we're pursuing.

ECC had a breakthrough year in fiscal '06 and we are seeing significant growth in worldwide adoption.

Finally we have a clear strategy for growth to take advantage of that opportunity for the benefit of all Certicom shareholders.

So that concludes our presentation and we would be very pleased to answer any of your questions.

(OPERATOR INSTRUCTIONS) To make these arrangements please contact Tanis Robinson at 416-367-5000. Your first question comes from Scott Penner of TD Newcrest.

Hervé, just wondered if you could be a little bit more specific on the foreign exchange impact, basically for the year just ended and then any kind of sensitivities that you used to sort benchmark your exposure going forward?

Hervé Séguin: Generally for every change in any or in the dollar probably hasn't changed in about $150,000 or so after-tax. But when you look at what it was at the beginning of the year what it was at the end of the year and then you can see that that's the impact. Now that is the first part of the equation.

The second part is we hedge a real hedging program where we try and minimize that. So to the extent that we have that hedging program in place it smooths out the curve that eventually catches up to us over time through these hedging programs.

I want to just make sure I understand the expense guidance. Does this now -- does it still include your cost of services?

Our cost of services are not included in that; we've excluded all of the costs of sales out of that. So part of -- and the reason why we do that is until recently we had very little third party cost in our equation. Since we've introduced our key inject product line it does include a third party cost as a component of our solution.

So we decided to exclude that. But I can assure you that when you look at it you still see that we maintain very very high margins. And the reason we pulled it out is just to be able to smooth out our predictability, to being able to take the volatility out of it.

So you would no longer -- your cost of services then also is more volatile than it has been in the past?

Hervé Séguin: No it's not but we're just making a break it out. Because we just are not going to break it out and it's not a significant number that would create any issue from our perspective from a materiality standpoint. It is very fixed.

Basically what the expense guidance does include is the three operating line sales and marketing, product development and G&A?

Hervé Séguin: Correct and that is we're subject to the most volatility.

It does say, I mean I just kind of ran it. If you look at last year I guess excluding cost of sales in Q1 it was about 3.5 million. And now you are looking at 4.6 to 4.9. Just I would be interested in any sort of breakdown you have as to where those costs are going.

Sure. Let me give you a few and we did explain them throughout the year. One is the effects factor. The second part is higher commissions as a result of higher sales. So those are the main ones that we have incurred to the process.

And some generally increased expenses in running our operations with a higher revenue base. We went from 11 to $11.6 million in revenue to 5.1. So you (MULTIPLE SPEAKERS). Just start at 15.1 so you can expect that there will be a logical increase in certain expense levels.

Ian, just on the market size that you gave of the 6 billion. I recall a number and I couldn't actually find it but I think it was 2.4 billion. Could you just give us what the difference has been now from 2.4 to 6?

I know it's a significant ramp up. The number in fact was 2.5 billion accumulatively over five years as we started to present about a year and a half ago. And we announced that. And the data that formulated the 2.5 billion is probably at this point about a year and a half to two years old and it consisted of the then six target verticals that we were focused on; so that two primary factors that accounted for the jump to 6 billion in our updating really is in two areas.

No. 1, we have just seen a vastly improved level of ECC adoption compared to a year and a half to two years ago. So the market essentially has grown overall in general. And that is reflected in the increased 6 billion.

No. 2, we've added some verticals that we didn't have in place from a focus perspective a year and a half, two years ago. Those being the digital rates management conditional access sector and sensors and the sensor market for example is quite a substantial portion of that increase from 2.5 billion to 6 billion.

And we just see that as a market frankly that really lends itself very favorably to incorporating ECC; and all of the benefits of ECC play very well in the sensor market which is as you know a very constrained device battery-sensitive market and we're seeing a lot of growth potential in that area.

But also as I say the digital rights management sector - which we didn't have focus on a year and a half ago - we are seeing more and more DRM standards evolving. And it's a crowded market but there are more standards evolving that are incorporating ECC technology.

We've been talking for about a year and the half about TCPT as an example of DRM standards; but there are many other standards that either are out or are planning to come out in the near-term and midterm that are using ECC.

So that opens up a whole realm of growth opportunities and being able to use ECC to protect digital content in many different devices and environments that is now reflected in that $6 billion market.

So I guess those are of the two primary areas. The adoption of ECC having grown quite rapidly in the last year and a half to two years and then the addition of sensors in DRM.

That's very helpful. I'll turn the line over; thanks.

Peter Misek of Canaccord Adams.

Good morning. Just a question - more philosophically. I know thus far you folks have been taking a very cooperative approach with licensing some of your patents. And at what point do you say to yourself you know the Company is clearly not going to sign giving as a little bit of a ring around the rosy -- when do you pull the plug?

For example we have been tracking some of these consumer electronics firms. And it appears you've been in discussions with some of them for well over a year and we're getting a sense especially in Japan that they are just going to try and draw you out.

When do you start to play hardball with them?

That's a fair question Peter. And we've stated in the past and will continue to state that our model does have a much more commercial upfront approach. Nonthreatening, if you will.

But we've also stated publicly that we will defend our patents when necessary. And we maintain that position, Peter.

I can tell you sorry, the the third element I've had before I go on, is that we've always stated it's about a 12- to 24-month timeframe from starting discussions with an organization that is using our technology - our patented technology - in various products.

And as we get into that second year we certainly intend to ratchet up the messaging around alternative options to, if you will, friendly conversations. I can tell you that we don't discuss this without pipeline in any manner other than just some broad general statements.

But I can tell you that we continue to see in our strategic growth plan, tremendous growth upside for this Company from the patent licensing business. And remember, there are two sets of patent licensing.

There is licensing around what traditionally is called infringement where organizations are using our technology knowingly or otherwise and we go through a process to ultimately get them to pay for that right and that is the -- that's I think the model you are referring to.

But we also have a tremendous amount of proactive patents to licensing that is underway. And that is probably the bulk of our pipeline is in some ways although there's some very very significant opportunities in both areas.

And in the proactive area that is typically a combination of patent and product licensing and that's not necessarily the same sort of sales cycle. It can be 24 months but typically that's more of a 12-month -- 12 to 15-month sales cycle on average. And we are seeing a lot of growth there.

So I think in summary, you can assume at some point as we've always said that there will be a point at which we will decide that we have to take a much more legal or litigious approach on some of these discussions.

If we feel like we are being dragged out or simply time is marching on and we are getting to the point where we need to look at various options. So 12 to 24 months is our general working model and that's where I leave it, Peter.

Is there any way you can give us a sense in that pipeline on what the average age of this opportunity is, given that comment? Specifically we are trying to track for example, Windows Vista has Suite B in it. Microsoft has been pretty vocal on the fact that it has ECC and all kinds of other items in it.

We would think that that launch or the timing of that launch would be a good time to give them a little bit of a pressure given already delays they have had to say you might want to license our patents.

As you know I appreciate your comments but Microsoft and we don't talk about pipeline. But beyond that any organization -- and by the way you are right. There have been some public statements from Microsoft about their planned usage of ECC. We've also seen very similar announcements from Sun. Scott McNealy made some public announcements a few months ago about their using ECC and some of their key product lines.

So these are all opportunities; there are other organizations, Peter, of similar size so we see everyone of those opportunities as a chance of an opportunity for us to go in and commence licensing discussions. I would consider both of those examples that you used to be proactive licensing discussions.

We are not talking about organizations that are already in those two samples examples - shipping products that use ECC at least specific to those announcements. So we see that as a great opportunity for us to build on the momentum of ECC adoption in the market.

I think they are indicative of what we have been saying for well over a year now. We are seeing tremendous ECC adoption in the market and every one of those opportunities is possible or potential to build into our active pipeline in terms of discussions.

Scott I don't know if you want to add anything in general about ECC adoption beyond what I stated.

That's good Ian -- let me just emphasize. We've seen tremendous adoption in all areas that we are looking at. So it's gratifying to see it. (MULTIPLE SPEAKERS) that is getting now.

Just the last comment. Do you guys see an acceleration of adoption - given the 2008 deadline that was put in place, do you see any potential there?

The last thing is, Hervé, you normally disclose percentage of revenue that is recurring.

Sorry you'll have to be a bit more specific on the 2008 deadline.

Well the -- appears to be an NAS deadline for government and sensitive and classified information that they have to be suite B compliant. Have you seen a surge in interest because of that deadline or --?

Peter, again, I've got to get Scott to comment. The NSA was very clear about their plans around their desire to see the industry not just the defense sector but the private sector as well evolve as quickly as possible to implement ECC. And given their -- the advancements and the development of ECC, there's a lot of concern about moving to ECC quicker than we would have thought.

The industry in general is responding very very rapidly to ways to deploy ECC faster and move beyond their traditional use of RSA. I think RSA is as we said has seen its day and is yesterday's story. People recognize that.

It would be -- for example in our mind, it would be hard to conceive of a company coming up with a new product family. For example in the Type 1 sector of defense contractors that would not deploy Suite B ECC.

It wouldn't make sense given the kind of timeframe so that are being discussed. The NSA have stated publicly that they want to make sure that there is a level of interoperability with old devices or devices that have been out in the field for a number of years and newer devices that are coming out.

So yes we absolutely see significant increase in the volume of opportunities and a lot of it as you say couldn't because of the NSA.

Scott you have any additional comments?

No. I think this 2008 deadline must be specific to certain products that they've been working on at certain standards. I'm not familiar with this.

So under recurring revenues (MULTIPLE SPEAKERS)

Well recurring revenue, Peter, have continued to grow quarter over quarter. However the last quarter it didn't grow at the same level as our revenue quarter over quarter. So our recurring revenue is slightly below 40% for the quarter.

Thank you.

Glenn Jamieson of Orion.

Can we just go back to the market segments that you've identified as adding up to that $6 billion opportunity? Can you rank those five segments in terms of size? Or are they pretty much all equal in terms of the magnitude of the opportunity?

Thanks for your question. I can't really rank them per se. We don't rank them.

We certainly have individual, total addressable markets for each of those five segments. But it's clear that as we stated in the past that there are some where they received greater opportunity but they all -- they are reasonably focused on these five that all five represent at various times over the next five years significant opportunity that warrants investment.

So it would be inappropriate to highlight one or two over the others. I mean in mobility we are seeing tremendous opportunities for our ECC Naval solutions today and with our IP SAN VPN client solution. DRM is huge. That's a very very large field as you know.

But DRM government suppliers, mobility, they are all massive (indiscernible). It would be wrong I think at this stage to break out how that $6 billion though is broken down by industry segment. But suffice it to say they are all quite significant.

Is the level of activity that Certicom has, in terms of addressing each one of those market segments, is that at an equal level or are there some segments where you are much better developed in terms of building relationships with the major OEMs or suppliers in that particular space?

Yes, I think it is fair to say that some segments of those five are further advanced than others. For example I think the sensor market is just starting to evolve.

So if you look at our pipeline relative to the target markets, I think you'd see more pipeline in government and mobility and DRM and enterprise, areas such as sensors. As I say a little longer term or a little bit further out in the five-year plans but that is a whole sector where there's industrial automation or medical devices.

That is a fast evolving market and we did a lot of analysis on all of these areas but sensors in particular, which is quite new for us compared to what we've been communicating in the past, that's huge. Probably not reflected in our pipeline today, but represents tremendous growth opportunity.

We have had some success there in the past; so we have some experience and we have some track records.

We've also, Ian, participated for a number of years in these standardization organizations for -- in particular in the sensor area and in DRM. So we've been very active at getting security into those technologies. And they are now starting to roll out in products.

Right and with the sensor market we are talking about the Zigby standard and the 802.14.5 wireless standard. Those are the primary areas of focus right now?

That's correct.

In terms of how you go about penetrating that market, there are major suppliers of industrial automation and control products. Is it that group of companies that you would be targeting or would you be going to the semiconductor manufacturer that helps supply those chips into that marketplace?

Certainly the former and very much we're also in active discussions with the semiconductor manufacturers. But it's very much our OEM model. It's very much one of getting our technology embedded in devices that are being manufactured and ultimately shipped to end-users. So yes it's certainly our OEM model and that's one the reasons why we are comfortable with this sector is that it's right in our sweet spot in terms of not just technology but the business model itself.

And we have a great deal of experience in implementing ECC and hardware. We've done a number of chips over the year. It is now becoming more difficult because these (technical difficulty) are so constrained but that's our specialty.

Okay. One last question. You've mentioned in your quarterly release for the first time, acquisition and desire to potentially do tuck-in acquisitions. What is interesting technology from your perspective and what other kind of criteria would you have around an acquisition?

I'll ask Scott to comment on this, if you would like, for more detail. But I can tell you that our overriding guiding principle in terms of any potential acquisitions is anything that will help to drive the adoption of ECC on a global scale.

So we are looking at companies that could provide either skill sets and or technologies that will help to leverage that vision.

So Scott was just talking about for example, the hardware implementation of ECC. Any company that could help to accelerate our presence in that space might be a possibility. Any company that could add an incremental geographic presence to our Company that would help to take the ECC story in a more effective way to geography, say, in Asia or Europe, we potentially might consider it.

Any companies that are operating with complementary technology where we might have prior partnerships, where there's a logical step forward to a tighter relationship through acquisition, we would consider those.

Scott, do you want to add anything?

No I think that's great, Ian.

You would -- those companies in my mind would tend to be private companies?

For the most part although I wouldn't limit it to that. We are certainly glad, I can tell you, we are not on a major acquisition binge. I mean to just state the other side. We are looking very very selectively and carefully at a series of companies in different sectors.

We -- I should also say by the way in terms of criteria we want to make sure that every one of those companies can contribute to if not all at least the vast majority of our five target growth markets.

So, yes, some may be public. Probably the majority would be private and we are looking very selectively at different companies that can continue that vision. This is not -- we are not trying to build a GM model here for example. This is very specific technology that we are looking for. It could be patent portfolios that we are interested in. That would complement and add to and ultimately accelerate the Company's leverage in ECC solutions being deployed in different sectors.

Is that the early stages of a Company building up a business that has life beyond the expiry of some of your key patents in 12 or 15 years whenever that starts to occur?

I'm sorry your question is that they (MULTIPLE SPEAKERS)

Could those be early building blocks to building on -- similar to what RSA the company did. They built a business that survived the expiring of the RSA patents. Is that a position potentially one where you would go about doing that? Resales at Certicom?

We really don't have that particular timeframe driving our decisions reference. We have such a long window of time yet remaining on our patents that we are not -- I mean, we are always thinking about what happens after that.

I don't want you to take that we are not mulling that around strategically but for the next -- we are really looking at a five-year window here. And certainly within five windows we are not worried about patent. The key patents expiring. Nor are we worried about that (indiscernible) timeframe.

So this is really a five-year plan to capitalize on maximizing our growth. It really is driven by the fact that this past year we saw an unprecedented adoption and recognition of ECC in ways that we have never seen before.

We really believe that now is the time to make the kind of investments and product development acquisitions to really capitalize on this trend on this growth. And so it's really more about how to leverage the growth of the Company in the wake of the very significant transition globally from our state to ECC.

So I would leave it at that but Hervé or Scott may have additional comments.

Just a further comment on that is as you've seen over the years, that a number of patents that we have either issued or pending growth so Scott's team has been very creative and we continue to file patents and Scott can probably elaborate but that's strengthened the already very strong patent portfolio we have now.

So we are not seeing this as a cliff in a few years. There's a long window going and we keep on building.

Yes we continued to likely file 10 to 20 pieces of intellectual property a year at Certicom. In my opinion it's they all the key patents and so yes we don't see an end to our intellectual property. We see a lot of -- as we move out into various sectors we see problems that have to be solved. And we sold those and we protect that.

So it's not an issue I think that some of the early ones will expire in 10 years.

The (indiscernible) of this market and it's very unique compared to other markets and I would say it's a good example of our benchmark. Our -- I'll say the algorithm I'm referring to now -- has really been the incumbent public key technology for upwards of 30 years.

And so as you know the barrier to entry is multifaceted but it incorporates a lot of time around the analyzed and researched and studied quite carefully. Once you are the incumbent which we absolutely categorically believe ECC is becoming, as we said in earlier comments, we are the new cryptographic center. The new cryptography standard.

Once you are there you are in for decades and the NSA (indiscernible) is certainly -- does reflect that. They have a 25- to 50-year vision for their use and deployment of ECC.

So we are thinking beyond the patent. The scope of our patents in terms of timeframes and RSA, the Company did a pretty good job in terms of building up other businesses to carry on their revenue if you will, with the expired (indiscernible) algorithm patents. We actually are thinking and have plans in those places that are evolving.

Thank you.

David Wright of BMO Nesbitt Burns.

Thank you very much. Good morning and congratulations on your year.

Thank you.

Were there any large contracts, i.e., multiyear, multinational companies that you weren't able to announce specifically but you had signed in the quarter?

Have we got any unannounced deals?

Yes. Of size. I mean you probably have small once but of size?

David. I'm sort of -- at any one time we have relationships with certain customers where just by the nature of the work that is involved, we are precluded from making any announcements. Whether it be for competitive reasons or national security reasons. So we are and that is a tough question to answer. The answer is that, yes, but the answer is we can't provide any further information and it will happen from time to time. It has happened in the past.

Yes there's always there are always contracts signed where it may take a month. It may take a number of months before we have or never if we -- in terms of our press release. Now if it's a material event for the Company we clearly will announce the day of the contract signing and we saw evidence of that in December 2005.

But there's often a time lag from signing contract to getting a press release out and as Hervé said, potentially, in some cases never, given the competitive nature of many of the environments (technical difficulty) customer selling.

So I was just trying to qualify or confirm that a few months ago you said that you had a great pipeline. You have a number of multiyear agreements that you are working on. I was just trying to get some sense as kind of argue working through that pipeline and in fact you've made some advances but you just haven't been able to announce them or are the contracts taking a little bit longer to sign?

Let me be clear. We have, I would consider GE for example, a good example of a large multinational company. New Company for us. New customer, as an example of that conversion of what I've been referring to in past quarters as large contracts, multinational companies in terms of our pipeline.

We have, I think every month that pipeline grows and we are again have more of those opportunities with large multinationals that are recurring -- multiyear recurring revenue contracts. Very large contract potential. Ongoing in various stages of the sales cycle today.

And it is our view and our plan that we will always have something in short-term sales discussions or negotiations and longer-term. So we have those discussions ongoing pretty well consistently now.

And yes, they absolutely do take more time. There's more complexity. Frankly the numbers are so much more substantial than what this Company has seen in past years that they are going to be more complex.

So we would really dearly like to be able to say that a certain number of them will close every quarter. And I hope that at some point in the not too distant future, we will get to that stage. But we always run the risk that some will take longer than we would like and some will drift from one quarter to the next. We saw that in Q2 last year.

But let me reassure you that the pipeline of large global multinational companies negotiating contracts with us continues to grow rapidly.

I was just trying to get a sense that I think we were all waiting for a number of names to come out and the GE name came out. And I can't think of other names so I'm trying to figure out were there are some signs that just can't -- you don't have permission yet to use the name or are you still moving forward?

It sounds like you are moving forward still on some of them and maybe you've closed some other ones but you just can't announce them yet.

Yes we will always always press as hard as we can to get the announcements of this and where we can. So given the construct that Hervé talked about earlier sometimes we don't necessarily get our wish but we will try to get as many announcements out as we can in a reasonable timeframe.

The other day I was reading about digital passports and so it sounds like there are a number of initiatives throughout the world on this. Could you maybe -- I don't know if you are involved in the various areas but is it possible perhaps Scott could comment on what is going on?

Yes. I certainly can. Yes we are very active in that area. There is a standard being driven by the International Civil Aviation Organization or the ICAO to produce digital passports.

In fact, we go to the meetings. I actually presented to this group in Geneva about a year ago this time. So for the public key portion they have adopted both ECC and RSA. We are seeing the U.S. currently is working with RSA but large key sizes and I think they will, they're giving serious consideration out of ECC.

Germany, for instance, has adopted ECC exclusively. I know that Canada is embarking on a pilot project for electronic passports. The UK has done that.

So it is a huge initiative and ECC will certainly participate to a great extent. In fact if there are two algorithms they both have to be in every reader. You have to be able to read either one.

I think in the long run or even the short run ECC will be the predominant security technology that you use in these systems.

Are there any other kind of industry standards that you are able to speak about today that you are working on having ECC?

Yes. One that I think is quite interesting - and I think it's public knowledge and I think it will be actually a standard soon - is Department of Transport in the U.S. is -- been putting together a system to communicate with cars passing given points up to a 300 meter range.

They can pass safety information, pass advertisements and so forth in that standard is all ECC-based.

Excellent. What is happening generally in the defense contractor area? You seem to have a good start obviously with the MSA and we've heard the odd contract here and there but just wondered if you could update us there?

Yes (indiscernible). Dave, our pipeline certainly reflects the vast majority of defense contracts of certain U.S.-based and some European-based defense contractors on specific projects that they are embarking on. In some cases, we've had some wins and you saw the L3 announcement.

We are, not every one of those organizations wants an announcement. So back to your earlier question. Some don't get press released. So we are seeing greater -- in fact, again out of the past year since the announcement by the NSA in February of '05 of what I will loosely term the Suite B architecture or specification, since then, organizations have been able to build to the Suite B specifications as outlined by the NSA.

That has accelerated our pipeline up. At that point there hadn't been a lot of detailed telecommunication around Suite B in terms of how to build to it. That has gone away. That's changed as of February '05 and we're seeing that in pipeline and these organizations are certainly deploying Suite B ECC-enabled products as they are awarded contracts.

Scott, did you want to add anything that?

No. I think that's quite accurate.

So really you are in -- the customers are in the product development mode and you are still waiting for those products to be released?

The product development mode or they're bidding on contracts. Where they are waiting for an award that would allow them to start licensing out to their suppliers.

A question for Herve. I've seen this with other companies recently. You've got a lot of tax loss carryforward. You are on an annual basis not yet profitable.

At what point do you take those tax loss carryforwards and put them on your balance sheet and start to expense them off the income statement?

I think that will occur when we start to have some traction and good visibility into the future from a GAAP analysis standpoint. I think we are a number of years away from that; because as you know we have approximately $120 million of tax loss carryforward between Canada and the U.S. and these are solid and they are not going away soon.

So we will be using them in the future years but we are not ready to put those in the balance sheet yet. We are a number of years away.

So if you were profitable in '07 it doesn't mean to say they go on to your balance sheet?

No it doesn't. Because it's one year and it's -- so you've got to have some (MULTIPLE SPEAKERS) more traction and visibility into the future. We are still in the earnings stage adoption of the technology. So from a purely GAAP analysis standpoint you have to have a lot more substantiation.

Just my last question. Back on the target market and that sort of thing, so in the coming year you've given us guidance for your costs in Q1.

Is there any specific infrastructure, significant infrastructure changes you need to make to execute your plan in the coming year i.e., you got to add a whole bunch of salespeople or lawyers or Asia or whenever.

As you know, we have an internal business plan that we mentioned in our earlier comment so that has been approved by the Board of Directors. And it of course, at a general high-level assumes growth in FY '07. And we have an expense plan that supports that growth target and you'll see that reflected in our quarterly expense guidance that we come up with.

I wouldn't say there's any areas of material change if I could use that phrase. But we are certainly planning to invest as we said in the press release in the areas of product development and related sales and marketing costs associated with our growth targets. We absolutely want to get new products, more new products out to market to take advantage of the clear adoption curve of ECC.

We want to have more offerings to leverage and attract people to Certicom and that will show up hopefully in topline revenue growth. So we are making the appropriate investments in those areas to get those products developed and out the door as quickly as we can.

We will continue to manage our expenses carefully and prudently but you'll see some, as we said, incremental costs associated with investment and product development and you'll see that in our quarterly guidance.

But we are not making a massive megamillion investment in FY '07. It's certainly incremental and you'll see that reflected with the guidance. I don't know, Hervé if you want to (inaudible)?

Hervé Séguin: No. No.

Thank you very much.

Lawrence Rhee of Genuity Capital Markets.

Just quickly, with respect to that December 23rd announcement, is it fair to presume this particular quarter was the first quarter that included some potential recurring revenue from that December 23rd announcement?

In fact, no. This is the second quarter that includes the recurring revenue. That was a very large multinational as we discussed. But we signed the agreement the product had already been designed in and was shipping.

So it's one of those rare cases where by the time we get the design win negotiated with the customer it's already into the product. Conversely typically a deal is one where we sign it and there's a delay and it could be six months', nine months' delay before the product hits the street.

(indiscernible) more than (indiscernible) said. (MULTIPLE SPEAKERS) Normally the design win has a lag period before the royalties start to keep in as product ships.

And that's (indiscernible) to the GE announcement, I presume?

Yes GE would be a good example and most design wins have that. The December deal, as Hervé said, we had to stumble out of upfront work with that organization. And so we've been able to see the royalties start to kick in sooner.

And net (indiscernible) profitability for the past two quarters are break even or just small profits. Is the plan to continue that over fiscal '07? I ask that because the operating expense guidance 4.6 to 4.0 was a little bit higher than I was looking for for Q1 and just kind of trying to reconcile that.

Obviously our objective is always to move towards recurring profitable growth. Ian didn't or we didn't mention in our press release that we would have some investment in product development. We would be introducing some new products which you'll see over the years.

As part of our strategic growth plan we have internal growth goal in terms of topline and bottom line. And so the increase in expenses is very much part of that and will be and you will see some very controlled expense growth to support our general growth plan.

Just as a general statement over the last four years you've seen expenses creep up and Hervé certainly commented on that being a combination of a number of factors - most notably the Canadian dollar exchanges has been a big impact on that, even though we have a very effective hedge program.

It's still been quite dramatic. I think when we came on board the changing dollar was (indiscernible) $0.63. There's a large element there.

Now having said that, we have been very careful at controlling expenses in prior years and will continue to be very focused on that. But we are making a very notable change in this press release if you picked up on that but we've seen unprecedented growth at adoption of ECC globally. And we absolutely have to make the necessary investments to take full advantage of that.

We are doing so and our plan calls for that, both our '07 plan and our strategic growth plan. But again with a view to make sure our expenses don't get out of line or don't get out of control in light of our revenue growth charters.

So Lawrence, you should be -- you'll be aware of what we are doing ahead of time because we will be providing guidance. And as in the past we've had a fairly good track record of being within the guidance that we've provided the market.

With respect to -- Hervé, can you remind us about the seasonality on the topline and does that -- just a month [before] quarters and does that change as you announce these new vertical markets?

Hervé Séguin: Typically, if we look back in time, we tend to have a slightly weaker first and second, and stronger third and fourth quarter in the year. With no specific economic indicator. It just, that's the way it seems to happen. We've got the summer season. We've got government year ends at Canadian U.S. and that sort of drives some government purchases. So that tends to do it.

I would hope that as we go forward, as we continue to build our recurring revenue base, that we would have less dependency on that. We could see maybe some bit of reversal in that particular area. But that's just how we see it now.

With respect to your comment of expanding some sales channels, can you just give some color on that? And would that include bringing on some or as it needed some domain expertise in some of these new markets you are targeting?

Yes we've seen, I think it's really in line with the whole adoption of ECC. We've expanded clearly in Asia-Pacific and Israel as we've indicated in the press release and that's principally because we are able to get some very very talented individuals, who we think will help to carry the story effectively in those regions.

And I can tell you that two or three years ago we looked hard at this. And we just didn't feel we could see the demand (indiscernible) to justify making those investments. And we are actually seeing it now.

So I would view that expansion of sales channels which, to your comment, is specifically in Asia-Pacific, is in the area of Japan and South Korea are two primary areas of new sales channel investments.

We also have our West Coast pockets out of [Foster City] in northern California. We have a number of individuals there who cover other countries in Asia along with the sales channels in Japan and South Korea. So we are seeing a ton more of opportunity and activity in Asia-Pacific today than we saw a year, two years ago. It's just unprecedented.

Again we just got a ton of opportunity there and that's why we have made these investments. Two years ago we didn't see that level of activity. So it wasn't justified.

Same with Israel. There's a lot of activity there. So I hope that answers your question but it's all in line with the whole area of our experience in seeing the growth of ECC adoption globally.

That's great. And how long would it typically take for just (indiscernible) sales channels to actually advance at your topline? (MULTIPLE SPEAKERS)

We actually it's a bit different in Asia-Pacific Japan and South Korea because we in fact that had pipelined building there for some time that we've been trying to handle from Foster City. So on the one hand there is active pipeline there that we are working in conjunction with these new sales channels in those regions.

Having said that there's only the ramp up for a new sales organization, new sales people in terms of understanding the technology. So our experience can be anywhere from six months to 12 months. But these are individuals who have come from the embedded industry. They know security in many cases. They know the embedded space.

Most importantly they know the customers and the prospects extremely well and that coupled with backup from our technical expertise in Mississauga and the West Coast, we can give all these individuals the technical support they need to, I believe, be more effective in closing deals sooner than later is my belief since there already is an active pipeline.

But not going in and having to create or generate a brand new pipeline from nothing, they are inheriting a fair bit of active pipeline.

Thanks.

Greg Reid of Wellington Capital Markets.

Just one question, actually, maybe for Scott. Just wondering, you have talked a lot in the past on the DVD hardware side with DTCP but wondering your expectations on the actual disk side with the ACS standard and do you believe that you will collect royalties from that? And if so, over what timeframe?

That's like your better question for Ian.

Thanks for the question. We don't, of course, as you know, talk about the pipeline and revenue forecast but I said a number of times DTCP is one of the number of the RS standards that are coming out that utilize ECC. AACS is a great example of yet another standard in a digital content architecture, where we see great opportunity for working with organizations that are going to deploy that standard.

So I said in one of the questions earlier that DRM conditional access is a market that we didn't have focus on to a large extent two years ago. The reason it's one of our five target markets is that we see tremendous growth potential in our traditional multiyear recurring revenue contact mode, working with organizations that are implementing these standards.

We said for a long while that the importance of standards at Certicom is very critical. And we see more and more evidence of more standards - some that we are involved in, some that we are not even aware of until they make the announcement frankly - where ECC is being deployed.

So there's no question that we see royalty opportunities in the deployment of AACS, TTCP and other standards that we know will be announced at various points that just reinforce the fact that DRM is evolving and it is clearly embracing ECC on many different fronts. Other standards like the one Scott mentioned, the Department of Transport standard.

While that's not necessarily DRM specific if you will, it's digital content. It needs to be secure using ECC. These are just all various opportunities for us to go out and talk with the organizations that are deploying and implementing the standards. And that's where the royalties are going to kick in.

I couldn't have said that better myself.

Thanks that's helpful. Just a follow-up on that one, Ian. For AACS something like that, would you actually go through the licensing authority to try to establish yourself? Or do you actually go individually company by company?

You know it's a good question and we have various options and various models. And we are -- we consider going directly consider going to the licensing authorities. Sometimes as I said, we don't even participate on the standards' bodies but there are -- when we are participating in certain standards organizations there are methods where participating companies who have patented technology and standards that are being developed pool their patents, if you will, into a way where all of the standards' members who pool their patents anticipate on a relatively equal basis in terms of future royalties.

So that's a third wave, if you will. We consider all of those; and we make a business decision based on whether we are involved or not. Whether we think there's more revenue to be had by going to the individual companies. Whether we can get quicker wins going through the licensing authorities. We consider all those great and I wouldn't say one approach is preferred over the other.

I think it is also safe to say that we can presumably have a more lucrative revenue stream by going to the individual companies than the licensing authorities. But we will consider all of those.

Thanks.

(OPERATOR INSTRUCTIONS). Scott Penner of TD Newcrest.

Just wanted to ask, Hervé, the services revenue this quarter just remind me whether your services not including maintenance whether you consider that leading or lagging and what do you think this sort of this level is more indicative of what you are going to see going forward or more like the million dollars we have seen over the past few quarters?

Hervé Séguin: You know I think that PS revenue is leading for us but it's leading in the sense that it drives ECC opportunities. We don't take PS professional services type of environment and or (indiscernible) security environment unless we know it is going to lead to an ECC environment.

So having said that, it will tend to fluctuate over time depending on how the opportunities are and how that flows into an eventual ECC deal.

Example. We may have professional services where we will be consulting with an organization on implementing an ECC application. We then get an ECC license from that. It may or may not require a follow-on professional services implementation services. So it can fluctuate.

The beauty of the model we have is, we have integrated professional services and development team where there's -- where to the extent that the professional services team is busy they work on billable projects, to the extent that they are not integrated back into the development team which means we have very little or we have no down time.

And so our PS efficiency is rather high. That's a model that we introduced at Certicom a few years ago and we find that works very, very well compared with some of the models that we worked with before.

So this line will continue to be growing but still volatile.

Lawrence Rhee of Genuity Capital Markets.

One quick question. With respect -- you are mentioning that your inclusion of third party products I guess is increasing over time. Would that imply that the gross margins are going to start to trend downward over fiscal '07? And if possible is Q2 of '05 when gross margin hits 74% would that be kind of bottom of a range?

We are not seeing that - the margins being affected. We have very high margins even in professional services. If you look at the margins, globally we are a total company. We are in the high '80s, low '90s% margin so very very high.

Our professional services -- we don't look at a deal unless it's got a minimum of approximately 60% margin. Same thing on third party drawback. So we don't expect that fiscal will completely change our margin model. I think it will not do that but there will be some quarters where we've got some more third party than others; and because of the unpredictability of specific deal flows (indiscernible).

So the deals are there but sometimes they will slip from one quarter to the other. So it's hard to predict so that's why we've decided not to put it in. But very high margins and we are not seeing that change.

Thank you.

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

Thank you very much, everyone, for your questions and your interest in Certicom and we would be happy to take any follow on questions one on one at the office. Thank you very much.

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