BlackBerry Ltd (BB) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Certicom Corp second quarter fiscal 2007 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 would like to remind everyone that this conference call is being recorded today Thursday, December 7, 2006 at 10 AM Eastern time. I will now turn the conference over to [Dana Broadworth], account executive. Please go ahead.

Good morning and thank you for joining us for Certicom's conference call to discuss results for the second quarter and six months of fiscal 2007.

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 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. Please refer to the Company's most recent annual reports 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 statement.

I will now turn the call over to Ian McKinnon.

Good morning and thank you for joining us.

We will follow our traditional format starting with an overview and review of the operational highlights for the second quarter. Then Herve will go through a discussion of our financial performance and outlook for expenses.

After a brief summary of the quarter, we will be pleased to take your questions at the end of the call. Please turn now to slide five.

Our second quarter results showed continued progress in executing Certicom's growth strategy. We announced a number of major royalty-bearing multiyear recurring revenue contracts with large multinational organizations. The Nokia and Visto agreements in particular provide evidence of our growing global market leadership and securing mobile push e-mail applications.

Although our quarterly results were positively skewed by an unusually large prepaid royalty contract, Certicom's core growth was positive and our recurring revenue stream continues to grow in line with our business plan. Please turn now to slide six and I will go through some of the operational highlights for the quarter.

Early in August Certicom completed a bought deal raising net proceeds of US$22.2 million. Also the multiyear contract Nokia licensed Certicom's cryptographic technology as the foundation for security in Intellisync Mobile Suite and other messaging and file synchronization products. Customers using this Nokia product, which include many large multinationals, depend on Certicom for secure and reliable wireless communications.

In addition Visto Corporation licensed Certicom's technology and ECC cryptography from mobile push e-mail and messaging applications in a multiyear agreement. The growing value of content being sent across wireless networks demands a reliable security solution that can keep pace with evolving standards and protocols. We are very pleased that Certicom has been selected to offer that level of security to Visto. Please turn to slide seven.

A global manufacturer licensed Certicom's security technology in a multiyear, multi-million dollar agreement. Although the contract involved the prepaid royalty component it is expected to yield additional royalties in the future once the prepaid number of devices has been deployed. Due competitive reasons the customer has requested that their identity not be disclosed. Slide eight.

Our third annual ECC conference held just last month in Toronto was the most successful to date. More than 150 attendees saw presentations by distinguished speakers from prestigious companies such as Microsoft, Phillips and QUALCOMM. The record attendance and number of notable speakers from multinational companies shows the increasing global adoption of ECC. Slide nine.

Subsequent to quarter end, we announced two new developments. One was a technical and marketing alliance with Texas Instruments to launch Certicom security for RFID product authentication, a solution that protects high-value products against counterfeiting and ensures privacy. The other was an agreement with General Dynamics in which they license Certicom security builder GSE and security builder crypto for use on the U.S. Army Land Warrior program. These announcements provide further evidence of the growing number of multinationals that recognize how critical Certicom's technology is to their own product security.

So at this point, I will ask Herve to discuss Certicom's financial performance for the second quarter.

Thank you, Ian, and good morning, everyone. Please turn to slide 10.

Revenues for the quarter were $5.9 million compared to $2.2 million for the same period last year and $4.7 million quarter over quarter. The increase was primarily attributable to an upfront licensing fee of $3 million per prepaid royalties pertaining to the multiyear, multi-million dollar licensing agreement with a global manufacturer that Ian mentioned earlier.

This contract is expected to yield additional royalties in the future once the prepaid number of devices has been deployed. Continued growth in contract wins with large multinationals and increasing royalty revenue also contributed to the second quarter revenue growth.

Operating expenses were in line with expectation at $4.6 million compared to 2 -- $3.5 million in the same quarter last year. The year-over-year increase was due to the strength in the Canadian dollar, higher sales commissions related to increased revenue and [upland] increase in product development resources.

As reported in the first quarter of fiscal 2007 Certicom is now reporting operating expenses excluding cost of revenues, depreciation and amortization and stock-based compensation.

On a GAAP basis the Company posted net earnings of $600,000 or $0.01 per basic and fully diluted share. This compares to a net loss in the same period last year of $2.3 million or $0.06 per basic and diluted share.

Certicom's cash position strengthened to $44.4 million at the end of the quarter. This compares with $21.8 million at the end of the first quarter of fiscal 2007 and $22.5 million at the end of the same period last year. The increase reflects the net proceeds of the $22.2 million equity offering that concluded in early August. Excluding the impact of the offering, the Company generated $400,000 in cash during the quarter.

Please turn to slide 11 and I will run through the year-to-date numbers. Revenue for the six months ended October 31st was $10.6 million, up from $5.7 million in the same period last year. Operating expenses for those six months were $9 million compared to $7 million last year. The year-over-year increase was due to the same factors I mentioned while discussing the second quarter. The year-to-date net loss on a GAAP basis was $700,000 or $0.02 per share basic and diluted compared to a net loss of $3.1 million or $0.08 per basic share and -- per share basic and diluted in fiscal 2006.

Please turn to slide 12 and I will discuss our financial outlook. For the third quarter of fiscal 2007, excluding cost of sales, we expect operating expenses to range from $4.7 to $5.1 million. With our strong cash position, debt-free balance sheet, steady revenue growth and increasing revenue -- recurring revenue base we are confident that Certicom has the right financial strength and flexibility to execute our growth strategy going forward.

Our revenue for the six months just ended is consistent with the financial targets contained in Certicom's fiscal '07 business plan and is generally indicative of our expectations for the remainder of the year. Our outlook for the current year continues to be in line with our five-year strategic growth plan.

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

Thanks, Herve. Let's turn now to slide 13.

So prior to taking your questions I will give you a brief summary of our performance in the second quarter. Worldwide ECC adoption continues to grow rapidly. This has helped us in signing more multiyear recurring revenue contracts with large multinational companies. We continue to increase our global leadership position in securing mobile push e-mail applications, which is helping to drive our future growth. And we are making steady progress in our high growth target markets.

So to sum up we have built a strong foundation for Certicom's future growth and we look forward to creating long-term value for our shareholders as we continue to execute our growth strategy.

So that concludes our formal remarks for this morning. We would now be pleased to take any of your questions.

(OPERATOR INSTRUCTIONS) Scott Penner with TD Newcrest.

Herve, I was hoping to kind of sift through some of these numbers. Last quarter you mentioned that the recurring portion was over 40% which would be call it a little under $2 million of that quarter. Did the recurring piece pick up this quarter sequentially and what was the percentage of the overall?

The recurring revenue increased slightly from quarter over quarter. Our recurring revenue was approximately 36% this quarter. The reason why it's done in percentages is the fact that in the calculation, the common denominator is a much greater number this quarter than it was last time.

Now just so in looking at that -- and that's very helpful but if you look at the overall revenue less obviously the global contract and less that recurring piece, it does suggest that the residual part of the business is down somewhat substantially from last quarter. So I know there's some things going on there. Maybe if you just talk us through I guess why we should not view that with a little bit of suspect?

The revenue in the quarter and the order received was quite in line with our revenue plan for the quarter and the resources that we deployed to close it. We are on plan to achieve our objectives for fiscal '07 and the current quarter was part of that. So there's nothing other than the fact that it was a big order in the quarter. We couldn't chop it up and spread it over a number of quarters. It was part of the plan for the year.

And also -- it's Ian here, Scott. I will just add onto that by saying that we track and are certainly goaled on the number of design wins that we win in the fiscal year. Every year that target number goes up. It is certainly up in FY '07 over FY '06. We are well on track with achieving that targeted number. We don't disclose that number but it is a very important metric for us to monitor to determine growth in market share and growth in future recurring revenues through royalty payments.

We are very pleased with the progress that we have made on the design win metric for the first half and our outlook for the second half, as Herve said, is quite positive. So at this point we are focused on making the plan for the fiscal year and making it -- which is certainly in line with our strategic plan and are then given quarter to quarter, we are of course tracking metrics such as number of design wins and recurring revenue.

Right.

Yes; and I would also like to just point out that we still continue to be focused on developing and growing a recurring revenue base for the Company.

Thank you and the -- I guess the last question or topic I wanted to address is, obviously, the ECC Conference had a lot of excitement around the technology, around the opportunity. I guess I am a little bit surprised to see that -- given your cash position -- that we are not saying at least at this point the investing in a higher operating expense to try and get a phase in front of anybody who might be making a security decision. So maybe you could just talk about your plans there, please?

Yes, I will ask Herve as well as Scott if he wants to comment on that. But we are very pleased with the results of the conference. As you know it was a very very high-profile group of presenters that spoke and many new organizations for this conference. We intend to use our cash reserves for executing our strategic growth plan. That consists of a number of components, Scott. One would be in no particular order targeting tuck-in acquisitions. We expect to use a certain percentage -- not significant -- but a certain amount of cash that we certainly plan to also be in a position to defend our patent position when and if necessary. We have a number of other elements from an investment perspective that we are using to grow the Company. We have talked at length in the past about the increase of our product development resources to build new products to drive ECC adoption.

So there are a number of components to these proceeds for that cash and we expect that we will be deploying that under those guidelines over time.

Thank you.

Scott, do you want to make any comment on the ECC Conference?

No. I think that was -- we are certainly getting in front of people.

Yes. Thank you, Scott.

Glenn Jamieson with Orion Securities.

Herve, in the outlook that you gave you mentioned that you think the first half of this year is indicative of what we would see in the second half of this year. I haven't heard the Company make that type of statement before. Is that -- to me that sounds a little bit like guidance and is that what it is intended to be? And if so, why are you now feeling more comfortable about talking about a few quarters whether as a result as opposed to what you have been doing up until now?

Ian mentioned a few minutes ago that we are focused on the year rather than quarter over -- I shouldn't say we are focused, we are not focused on quarter over quarter but we have the year as our vision. As we get closer to the end of the year, we have a greater comfort level in terms of where we think that is going to be given the order flow we are seeing in front of us.

So that is the -- and in doing that we are trying to be helpful to the investment community by trying to provide guidance that we are -- not guidance but a view that would -- that where we are more comfortable with.

And as the press release said our first half is generally indicative of what we would see our expectation to be in the second half. Our revenue in Q2 was positively skewed by an unusually large prepaid royalty contract. However, we can't predict if a similar prepayment will occur in the second half of fiscal '07.

So we have to put all that into the blender. And again we have to remind that our strategy continues to be to develop this recurring revenue model for the Company. So to the extent that we have a comfort going for the second half, that's the message we want to send to the investment community.

I would add to that by saying -- compared to prior years and you are right in your question we are being somewhat bolder in this press release than we have in prior years at the midpoint of the year. We frankly see a more concrete number of pipeline opportunities to make the year; and there is no guarantee in life as you know. There is always some risk in timing and the negotiation process, but we feel just that much more confident about the pipeline for the second half, and the outlook overall that we wanted to try to put all the more information into the press release to help on the guidance front as you are short of actually giving specific numbers.

So you are feeling incrementally more comfortable in talking about those kind of longer-term views than you had in the recent past?

Yes; I think it's indicative of the confidence we have in our growing pipeline of a number of companies. And more importantly the type of companies that we are talking to, compared to the past. It is reflective again of the ECC adoption and the evolution of ECC's growth in the market, compared to prior years. It's -- as we've said to you before it's an evolution not a revolution so it's a progressive approach that we are seeing in ECC and adoption and that shows up in our pipeline.

Can I ask another question? You would have generated a certain amount of royalty revenue this quarter and you have announced a number of deals with large OEMs that pay royalties; and I would imagine that there's probably some other deals that we are not aware for various reasons that also would be structured to pay you royalties. Can you give us an idea of how many customers are actually paying you royalties in this most recent quarter? Is it one, two, three? Is it 10 companies all paying you a small amount?

The reason I'm asking is I am wondering if that number is going to increase significantly in your view as we look into 2007.

I will let Herve answer that specifically. I just want to reiterate that one thing -- let me answer the negative before the positive of that question if I will. We do not accept under -- all circumstances but very rarely do we accept royalty buyouts. That used to be a quite common thread for us back in the early days and we have been vigorous in making sure that our account managers convey the message to our prospects that we do not take one-time royalty buyouts. We always get asked for that. It is always in the negotiation process but we have been very successful in the last number of years in ensuring that we get an ongoing multiyear recurring revenue stream through royalties.

So that has been an important transition for us over the years and that certainly helps to build the foundation for future revenue growth. I will let Herve talk about the specifics.

I guess in terms of generalities, it is not one or two, it is many and I don't think it's appropriate for us to disclose the number that we have. The number is growing and it will keep on growing. I would just like to make one point is in the last 12 or 18 months. we have been focusing and speaking much more about multinational companies who have strategically decided to use our technology. While these orders take much longer to close, they are much more strategic with these companies which would lead us to believe that the royalty flow from these orders over time will be much more significant than with some of the other companies that we've been signing -- we signed contracts previously. However having said that there is a time delay that sometimes is a little longer with multinationals because it just takes longer for the products to roll out. So we are seeing the time between the contract signing and as you know the contract's announcing because of who we are dealing with and the revenue flow can be slightly greater than what we have seen before. So it's not three to four months it's more now between six to 12 months before we see the products roll out. So we would expect that in the next year you'll see a normal acceleration of our royalty revenues.

Not to belabor it, but just one final point. The quality and Herve alluded to this but the quality of the companies that we are dealing with today is far better in general terms than we were dealing with a number of years ago. So in the past four, five, six plus years ago when we would get a design contract with an OEM there wasn't always a certainty that that company would be successful in its product launch, which would potentially negatively impact our expectations or royalties.

When you close the deal with a company like General Electric or Phillips or these other large companies that we have been announcing, the likelihood of their product launches being successful is obviously far greater. And that just increases the probability of future royalty streams from those contracts compared to some of the much smaller companies who have a higher risk of successful product launch.

So that also factors in to our calculations. There's no guarantee that every product is going to be successful but the likelihood of success is far greater with the types of companies we are closing deals with now.

So just to summarize the ideas, then, you would expect that the number of companies paying you royalties in the coming calendar year will increase? And beyond that the size of the companies that will be paying your royalties and the potential volumes of those underlying products is likely increasing as well?

Yes. And I said in the last question to Scott Penner, we track that through what we call design wins and so we do expect that the number of design win OEM royalty-bearing contracts to increase on the year-over-year basis; and our target in '07 is certainly larger than it was in '06 and will subsequently be larger next fiscal year. In addition to caliber and the quality of design wins that we are closing with large multinationals is also an important metric in that. It's not just enough to have a design win. But we want to ensure that we are getting our lion's share of as we use this phrase constantly the large multinationals that we are in discussion with. Because they will give a much higher likelihood of ongoing continuous revenue royalty.

Thank you.

Peter Misek with Canaccord Adams.

Good morning. Couple of things. Firstly, sort of reiterating that we made last quarter on the guidelines of your financial plans. Happy to see that giving us some view on the outlook but again on the plans and on your five-year plan. Just like to reiterate the desire, the hope that we would -- we don't want quarterly views per se but at least some kind of yearly milestone or guidance or guidepost. That would be really really really helpful. That is just a comment.

The second thing is, my question -- do you guys -- you guys are cashed up now? Do you anticipate especially in the case of some of the more problematic multinationals, such as the Japanese players to commence commits litigation. I mean these folks seem to really like to play hardball. There seems to be some moves in the U.S. to try and water down the ability for intellectual property holders to have injunctive relief. Could you help us understand that?

Yes. Without talking specifically about any one opportunity, you are absolutely right that with the number of companies that we have on notice which we don't disclose the number or the names, but after a period of time -- and I think I've mentioned this to you in prior calls. We are not going to continue to be "nice Canadians", to put it bluntly. I mean at some point, if we don't see reasonable serious intent to come to a reasonable conclusion from the commercial contract licensing term, we feel like we are being needlessly strung out over time, that people are just trying to find delay tactics. We will become more aggressive in terms of defending our patents. We have stated that from day one and we are absolutely committed, if necessary, to go that route.

Frankly however I will tell you that -- and the proof, of course, will be in the results ultimately but we feel that the approach that we have taken and are taking in terms of dealing in a more commercial vein upfront without the pounding fists of litigators from day one on a meeting to threaten -- we feel that this approach is much more -- first of all it is lest expensive. Second of all, it opens opportunities for other licensing opportunities for our products, our tool kits. So we think it creates a much better relationship to build future growth opportunities. Third, we believe we can be successful in coming to conclusion.

But I want to reiterate that at some point it doesn't matter where the company resides -- whether they are in Japan, or Europe, or the US. We will take actions to defend our patents. And at some point who knows when, who knows with who -- at some point will probably have to take that step because we don't want to be seen as a company that will do everything but take the appropriate legal actions to defend our patents. We have to of course be recognized as a company who will take the necessary steps to protect our intellectual property assets.

Scott, I don't know if you want to add to that.

No. I think that summarizes it very well.

One of your peers if I may add to that question appears to have come out and given a timeframe. Said like you have six months, sign that you get a good discount we will work nicely with you afterwards, we are just going to litigate. I mean, is that an approach that would make sense for you folks?

I don't know the firm you are referring to but every company has kind of a different set of circumstances. In our case we do have what you refer to as early adopter discounts. So we do have that in place, in particular situations of various standards, that are moving forward of ECC.

But keep in mind that we have to make sure that we are encouraging people to adopt ECC. That we are seeing to be both proactively driving ECC adoption, but in a way that helps to drive revenue growth for Certicom. So there is a balance between being aggressive and being excessively aggressive from a timeframe perspective.

We have stated in the past that we certainly have mentioned -- have not mentioned six months, but we have mentioned that we believe a two-year timeframe from the start of putting someone on notice to the point where we will take alternate steps, if necessary, is generally what we feel is appropriate. We have been -- in some cases we've come to resolution much quicker.

Remember we started this process back in 2004. So we are in that two-year window with the number of organizations and as I said if we feel we are not getting taken seriously; if we feel there is not progress being made we won't necessarily wait that whole two years if we feel that we are -- I'm just using that number to give you a sense, but we want to make sure that we are doing things that will help to drive adoption in a nonlitigious way through commercial terms. But every situation is unique and we are tracking that closely; but we take very seriously the issue of not letting an organization drag out our discussions unnecessarily.

I guess the last question I would have is that, obviously, people are very pleased that you have signed this $3 million deal in multinational etc. and that's a great achievement. I guess the one comment and I think it was alluded to in previous questions is, it seems like the core business is just tracking the growth is much lower than we anticipated. I am trying to reconcile what the opportunity is. I mean certainly when we've looked at ECC and how it is being adopted and Suite B etc. it doesn't seem to be congruent. Is there a lag? Are we not thinking about this appropriately? It's hard for us to reconcile.

Yes; I think I will have Scott talk about the generational shift that is going on now from RSA algorithm to ECC. Because it's not just the business model. We are very confident, Peter, in that our business model being able to generate sustainable revenue growth on a year-over-year basis. That call is called over in our strategic plan. We are very confident in being able to execute our strategic plan. Is the analyst community a little ahead, a little behind in terms of short-term quarter goals and fiscal goals? I can't comment on that, but we are very confident in terms of where we are going to drive the level of revenue growth that we think will satisfy shareholders and reflect the adoption of ECC.

But we are very tied to the industry and the market's adoption of ECC overall. It is not something that takes place over a short period of time. The generational shift that we are going through now -- which has certainly begun -- if anything the reflection of the speakers at the ECC conference indicates of that. It does take a number of years and of course with the business model to get does organizations to license ECC from Certicom and pay appropriate royalties going forward. There's a time lag there.

Scott -- is there anything you would like to add about the whole shift of our RSA to our ECC and some of the nuances of that?

I think in my opinion the last year, there has been a dramatic change. We were at a DOD convention a couple of months ago. There was absolutely no talk of RSA. It was all about Elliptic Curve and that was the first time we have really seen that. RFID, the announcement we made to partner with Texas Instruments to develop that technology. Elliptic Curve is the only security that possibly can work in that environment; it is such a constrained environment. But yes we have, we think, very rapid adoption now. It just takes a while to turn it into revenue.

Thank you.

David Wright with BMO Capital Markets.

Thanks very much. Good morning. This large contract that you had in the quarter, how much visibility did you have on that? So if you can talk about when you first heard about it? And when you felt that you would be finding it in the quarter?

In general we have a six to 12-month view on our pipeline. So this particular opportunity, we have been aware of for a number of quarters. It was part of our FY '07 planning process back in April of '06. So it is part of our fiscal plan and that's one of the reasons why we've been able to make the comments we have about the second half is, we are able to say what the most part is in front must for the next two quarters. Again no guarantee but no, it was part of our FY '07 plan. So it wasn't a bluebird became in the last minute that surprised us.

And when Herve -- at what point to you think, okay, looks like it's coming in Q2?

We can go through a forecast process and its -- we tried to position these based on our understanding of the sales cycle and it came in pretty well as we had thought it would, from a timing perspective.

So did that give you an opportunity to look at your other prospects and say, "Hey guys. Maybe you don't have to sign everything that you are working on this quarter." You can move it for next quarter. So how flexible are you able to adjust some revenues for the next quarter?

When we look at our forecast and we look at our pipeline and we focus on those orders in the priority in which we see them in closing. What we do that then we focus all of our resources and not just sales resources but it means that other resources in the company to close the deal. So we will earmark certain accounts where we want to close deals because we think they are more eminent than others. So this particular agreement was part of our FY '07 plan. We knew a few quarters ago where we thought that would land and we focused all of our resources in that particular order.

So to say that we plan when orders are going to follow, we don't plan them specifically. What we do is we react to market pull and or market push and we deploy our resources accordingly.

I was thinking of the flip side of this which is that if you didn't have this contract, are there other contracts around that you pushed out a little bit so it makes you feel comfortable for Q3?

I've got to tell you it's not going down the line of questioning you want but when we do our fiscal planning, we certainly look at the pipeline for FY '07. We try to time it, or determine the timing of it but frankly it is very difficult at the beginning of the year to know where contracts will fall, particularly as you get into the third and fourth quarters. So we really at the beginning of the year planned from a fiscal '07 view and the quarter to quarter variance is very tough to plan and forecast. As I say particularly when you get into months nine and 12, quarters Q3 and Q4.

Yes I was just wondering if you see that there's this large $3 million contract coming in in October then hate you don't have to close some other stuff so let's move that it to November and it falls into Q3. And then that would address I'm trying to get to the question about it your recurring revenue is not growing that because you somewhat orchestrated it that way?

To put it another way is that we always have some -- we always look at the accounts we are focused on closing and other accounts in the event that they would not. However and it is very difficult in hindsight to say what would we have done if it hadn't happened because it did happen. So as we went along there was a point where we understood that our focus had to be on this account because we knew we are going to close it if we put all the right resources behind it, which is what we did. Had we -- had there been an inflection point that told us differently, then the total company resources would have been deployed otherwise. But it is very difficult to tell you how it would have turned out, because we have the results in front of us.

The recurring revenue that you describe. How flexible is it? Is it just automatic and it comes in whenever it comes in? And you really can't influence it or do you have any kind of flexibility in being able to take it this quarter over next quarter?

We don't have flexibility and here's in general terms how it occurs. But there is really two streams of royalties. One stream is where under contract each of our customers has to report to us on a quarterly bases and they give us the metrics on which they have to pay their royalties. So it's the number of product shift or the revenue and so on and so forth. So that is one way of doing it.

On that basis we know at the end of the quarter how much has been reported and that is what we record as revenue. We have no flexibility on doing anything else.

The second part of it is, we have certain agreements whereby there has been some prepayments or some take-or-pay where there's a definite amount that the customer is committed to pay in the quarter regardless of whether they ship or don't. So that is the other stream that we can record.

On the second piece, we have very much visibility ahead of time as to what that is going to be. And on the first piece which is, as we report then we don't have and we cannot influence it. But we -- you count it as recurring revenue because we have a fairly high degree of comfort and in certain cases, certainty, based on market, based on what these customers have done.

In certain cases, we can look at public records and we can see how well these products are doing in the marketplace. I mean some of these are public companies and so on.

I will tell you one point there just as -- and I will let Herve continue, but we don't necessarily like to take all the revenue in one quarter. We tend not to generally as a rule do that. So while we knew about the opportunity we try to dispute the revenue recognition where we can, over time, so we don't upset the quarter to quarter SKU. I would say from that perspective in Q2 was an unusually large prepay royalty contract that we've discussed in the past.

I want to again stress that it was not a royalty buyout, but it did from a [revrec] perspective it's not the way we normally like to handle deals as Herve said before.

The other day you announced General Dynamics contract which despite the fact that it was back from the summer seems to me to be relatively important considering you signed an agreement with them a year ago? And then six months later you actually had activity with them. Or maybe was it two years ago actually that you signed with General?

Yes it was.

It sounds like it kind of took them 18 months to get going. Could you comment either on other activities that are going as at General Dynamics or maybe just in the Defense Department -- defense division sector -- what sort of activities are happening that we might not be able to judge yet?

We think the General Dynamics contract recently announced was very important and is indicative of a trend we see over all the market that we've talked about in the past in general, that being where companies are not only interested in licensing our patents as General Dynamics did two years ago but they're also interested in using our software products -- that allow them to build products, build security solutions much quicker -- than doing it themselves. It allows them to keep their cost down. They don't have to go out and hire a slew of ECC software crypto developers. Making use of our toolkits development level much more easily. So we think this is a great example of where it's not just the patents that the technology that people are finding benefits from.

We would love to have put more into this press release frankly, Dave, from General Dynamics than what we got allowed. So let me talk in general terms.

I think it's reflective of just the general trend in the defense contractor sector to deploy ECC-based technologies or of course we can assist them with, in line with government standards. And as we've said before the first couple of years after the NSA press release, we didn't see the number of contracts from the defense sector coming in at the volume that we would have liked but we are seeing a greater and greater level of activity, as Scott said, in the last year. Around the deployment of government standards and in that area we certainly see Suite B adoption as being a significant catalyst.

Scott is there anything you want to add on the GD contract or in General on the government rollout of ECC?

Yes I would, actually. I would like to emphasize they originally took a license to all over intellectual property. They believed in the fact that had deployed some ECC that they had developed themselves, their own software and now they are realizing that this software is very efficient, very effective. We have lots of good techniques and we implement well. So now we are seeing more software deals with them; and we are going to replicate that model.

Just as a last comment, David, is I think it is a time to market as well is we have proven technology that has been developed. We are known as probably the organization has the most knowledge of ECC implementations in the world. They know that they can implement our products quicker. They have all the government certifications that they acquire in doing so and they just get to market quicker and with a safer application.

So just in summary I would say that our challenge as a Company is to make sure that we get to companies as they are planning their ECC rollout, that we get to them and start talking with them about what Certicom can do to help them before they roll out their ECC-based products. There are companies that you will hear about who will be trying to roll out ECC on their own without coming to Certicom and without taking a license and -- from us. That's one of our challenges and that is one of our ongoing objectives, is to make sure that we minimize the number of ECC deployments that do not have a license with Certicom. And that will be a continued focus for us in future and will probably more of a growth focus area for us to make sure that we are maximizing our market share potential.

Thank you. I have other questions but maybe I will let others go and jump back into queue.

Lawrence Rhee from Genuity Capital.

Just to clarify with respect to kind of I guess the more confidence you have in the second half of this year. Is that more a function of some of these kind of agreements you signed a year earlier in 2006 with respect I guess GE security or the unnamed global manufacturer last December or Phillips? And are those guys and you are used to seeing implementation coming onstream I guess by Q4 or is that (indiscernible) fiscal '08?

I would say it is generally an overall level of confidence in our pipeline. As I mentioned before we do expect to see the recurring revenue foundation work base grow steadily as Herve said on a quarter to quarter basis, but I would say that we are on track with our internal plan for the year. And it's principally based on our ability to close royalty-bearing multiyear contracts in the third and fourth quarter. Again as I mentioned earlier it is about our pipeline.

With respect to some of these unnamed (indiscernible) manufacturers I guess there's over two now over the past year. Is it a situation where the (indiscernible) you're not allowing to disclose the name of the company where maybe a year, a year and a half later with their products fully deployed in their solution that you may be able to release their name or is it kind of indefinite?

It's both. We certainly have some, as I mentioned in the past on this call, we've got some contracts that we have closed where we have not been given permission by the customer to issue a press release subject to their product being announced and shipped. So I will give you an example. Sony Ericsson was a good example of that.

We had announced that in -- I can't remember -- Q1, for example but we had signed it somewhat earlier and it was all dependent on their product management group launching that product. That is a very common occurrence for us but we always pressure us to try to get those announcements out, but we always do it with the customers' permission. We don't do it on a one-sided basis.

There are other situations to the flip side such as the ones you mentioned, where we do not get the permission of a customer to disclose their name and that is a permanent set of circumstances for that particular contract. So I don't envision being able to come up with a subsequent press release saying the press release that we announced last year and it was undisclosed and it's actually the following company. That situation will not occur. So these organizations, some of these companies regardless of whether the product is shipping or not view our technology as a competitive edge, a competitive leverage in the market that they compete in. And they do not want to disclose the technology or the company that they are working with.

It's really nothing to do with us. It is more of a competitive marketing position that they have taken for their target markets.

Lastly, just with respect to the comments about your two-year timeframe before looking at litigation. I think you mentioned there's a couple that are in that two way window already. Does that imply that we may hear something over the next couple of quarters with respect to that?

No. Not necessarily and as I said to Peter on this question, if we are of the view that we are making very positive progress in terms of commercial negotiations we of course are not going to flip to a defense litigation stand. It all depends on each individual circumstance in terms of whether we feel we are being taken seriously, in terms of moving to commercial conclusions.

So I'm not answering your question directly; but that is the set of circumstances. It is not as black and white as you say, but we certainly want to give the situation time to play out, and at the end of that period of time it is either going to work or we go to Plan B.

Thanks.

David Wright from BMO Capital Markets.

Are there any contracts that you are not happy about the progress being made during the last six months?

In terms of pipeline or contracts that are closed?

In terms of just on the previous question about lawsuits and things like that. So you've said, as long as there is progress in progression in the people that you're dealing with that you are not going to slam a fist down and say "Dammit, pay us today." But if there is progression then hopefully you'll come to some terms.

So are there any particular contracts or pipeline that you feel you're getting nowhere on?

Any given week I will probably say yes but I would say over the long-term there's no question that some are taking longer than I would like. I think we are all impatient. At a certain time we would all like to get to closure faster. We also at the same time don't want to squander a lot of dollars on expensive litigators if we don't have to. So yes, there are some that are taking longer than we would like, but do I feel confident in being able to get some, what I would consider to the critical milestone decisions in our favor at some point? Yes I do. Otherwise we would be -- otherwise we would have taken steps by now.

Yes. So it's in negotiating tactics on their side I'm sure. (multiple speakers) interpreting.

As your revenues ramped here so far the expenses really haven't ramped too much which was the original plan that royalties come in without a lot of extra expense. Is that still what you are seeing on your current business that you have?

Yes. I think -- I don't think we will see material increases in the expenses. We certainly want to continue to bring new products out which as I said in the past will require more product developers. We have brought some of those additional headcount on board. I would say we are mostly, Dave, focused on trying to look for complementary acquisitions. That has been a challenge. I mean, I would like to have -- like to be able to move somewhat quicker in that area but we are not going to move quickly just to get -- acquire companies for the sake of acquiring. We want to make sure that we have got a very good technology and chemistry fit with various organizations and we are continuing to scour the market for appropriate targets.

And I -- that's one area that is very difficult to forecast from a timing perspective. But, no, overall I would say that we don't see material increases in expenses, at least in the short term coming forward. And as we get into our planning process for next fiscal year that may change; but I don't envision a dramatic shift.

You commented on the government sector. What sectors right now are showing the most activity and you're most excited about?

Mobility is, has and continues to be very active. There is no question that DRMs -- digital rights management space -- shows tremendous potential and there's a lot of activity going on their that has just tremendous amount of future upside for us as mobility does. Government is a fairly steady level of activity. I wouldn't say it is as active as mobility but it shows ongoing opportunity. I would say that -- and I would say probably software enterprise focused is comparable to government. We have a large customer base in that area and we are talking with a number of organizations about evolving to the point where they can integrate Suite B in their offering.

So that takes up a fair bit of time. I would say the area that and we have mentioned this visit in the past that has a tremendous amount of potential that we are starting to say movement in taking more of our time is the area of sensor networks and RFIDs. Scott talked about the TI relationship within the RFID sector. I think that will take on more of our sales and marketing focus in the future than it has in the past.

Lastly, don't know if there weren't any surprises you noticed at the ECD Conference, if you could comment on that?

Scott, I will let you talk (indiscernible) if you would like to answer that.

And the question was.

Were there any particular surprises from statements made by presenters at the ECC Conference? May not be anything because you probably saw the presentations in advance but -- .

That's right. And I invited most of the people. So.

Right. Okay. Thanks.

They were doing and that's why I want them to tell other people about it. But no there were no surprises. It was very exciting. Especially the ones on RFID, showing how our technology runs in a very constrained environment as we have always said that this is the extreme environment.

I would say that any surprises would have been pleasant as opposed to unpleasant.

That's true. Very, very pleasant.

Thank you for your time.

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