BlackBerry Ltd (BB) 2007 Q3 法說會逐字稿

Welcome to the Certicom Corp. third-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 on Thursday, March 1, 2007 at 10 AM Eastern time.

I will now turn the conference over to Mr. John Simpson. Please go ahead, sir.

Good morning and thank you for joining us for Certicom's conference call to discuss results for the third quarter 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 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 report and other documents filed with securities regulators for a discussion of factors that could cause actual results to differ materially from any forward-looking statements.

I will now turn the call over to Ian McKinnon.

Thank you, John, and good morning everyone. We'll follow our traditional format starting with an overview and a review of the operational highlights for the quarter and Herve will go through a discussion of our financial performance and outlook for expenses. Then 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 third-quarter results showed continued progress in executing Certicom's growth strategy. Throughout the quarter and just subsequent to quarter end, we announced several royalty bearing multiyear recurring revenue contracts with large multinationals such as a Cybertrust and WORLDSPACE. The WORLDSPACE licensing agreement is particularly significant given their reputation as a global leader in satellite based digital radio.

Our quarterly revenue reflects the timing of contract closings for several large multiyear contracts. These occasionally take longer to negotiate and conclude than we expect and consequently the timing and closing of these contracts can be pushed into future quarters. However, our nine-month results are in line with Certicom's business plan and we are on track to achieve our goals for fiscal 2007 as well as our second half revenue guidance as provided last quarter.

Please turn to slide six and I will go through some of the operational highlights in the quarter. First we formed 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. General Dynamics licensed Certicom Security Builder GSE and Security Builder Crypto for use on the U.S. Army Land Warrior program.

We announced a marketing partnership with Infineon where Infineon will include Certicom's ECC based technology solutions in their smart card microcontrollers. This will allow customers from both Certicom and Infineon to quickly comply with the U.S. Government's Suite B specifications.

Cybertrust, the global information security specialist licensed Certicom's Suite B Power Bundle products for use in its range of PKI based identity management solutions. And with respect to new products, we launched Suite B Power Bundle solutions to promote Certicom's ECC leadership at the recent RSA conference in San Francisco held in early February.

Please turn now to slide eight. We also launched Security Builder IPSec with support for dual mode handsets and also on the topic of products, EDN, a U.S.-based technical magazine for electronic engineers recognized Certicom Security for silicon design protection as one of the hot 100 products for 2006.

Slide nine. Subsequent to quarter end, we announced three significant developments. Certicom signed a significant licensing agreement with WORLDSPACE Satellite Radio, a global leader in satellite based digital radio services. They will license Certicom's conditional access system to secure their satellite digital radio based broadcast services for the European market. In addition we also announced a joint research agreement signed between Certicom and NTT for ECC Digital Signature Technology. These announcements provide strong evidence of Certicom's growing market leadership.

So at this point, let me ask Herve to discuss Certicom's financial performance for the quarter.

Thank you, Ian, and good morning everyone. Please turn to slide number 10. Revenue for the quarter was $4.3 million compared to $4.4 million for the same period last year. As Ian mentioned, our quarterly revenue reflects the timing of contracts closing for several large multiyear contracts which can take longer to negotiate and conclude than we expect. As a result the timing and closing of these contracts can be pushed into future quarters.

Operating expenses were within expectation at $4.7 million compared to $3.7 million in the same quarter last year. The year-over-year increase was primarily due to a planned increase in product development resources and the impact of the fluctuating Canadian dollar.

On a GAAP basis, the Company posted a net loss of 3.1 -- I'm sorry -- $1.3 million or $0.03 per basic and fully diluted share. This compares to a net earning of $142,000 in the same period last year which rounded to $0.00 cents per basic and diluted share. Certicom's cash position was $44.3 million at quarter end. This compares to $44.4 million at the end of the second quarter and $21.4 million at the end of the third quarter of fiscal '06.

Please turn to slide number 11 and I will run you through the year-to-date numbers. Revenue for the nine months ended January 31, was $14.8 million, up from $10 million in the same period last year. Operating expenses for the nine months were $13.8 million compared to $10.7 million last year. The year-over-year increase was primarily due to higher sales commissions related to increased revenue, a planned increase in product development resources and the impact of the fluctuating Canadian dollar.

The year-to-date net loss on a GAAP basis was $1.9 million or $0.05 per basic and diluted share compared to a net loss of $3 million or $0.08 per share basic and diluted in fiscal 2006.

Please turn to slide number 12 and I will discuss our financial outlook. For the fourth quarter of fiscal 2007, we expect operating expenses to range from $5.9 million to $6.3 million including bonus accruals and excluding cost of sales depreciation and amortization and stock-based compensation. With our strong cash position, debt free balance sheet and steady business growth and increasing recurring revenue base we're confident that Certicom has the financial strength and flexibility to continue to execute our growth strategy.

Revenue for the nine months just ended is consistent with the financial targets contained in Certicom's fiscal 2007 business plan. We continue -- we believe the Company is on track to meet expectations for the second half of the year as stated in the second-quarter earnings release. The outlook for the current year continues to be in line with Certicom's five-year strategic growth plan.

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

Thanks, Herve, and please turn to slide 13. Prior to taking your questions, I will give you a brief summary of our performance in the third quarter. Worldwide ECC adoption continues to grow as seen by the increasing number of major multinationals committing some multiyear recurring revenue contracts with Certicom. In addition to our growing number of licensing agreements, we continue to demonstrate our ECC leadership by collaborating with multinationals for research and development initiatives. We continue to make steady progress in our high-growth target markets.

To sum up, we feel that the strength of our foundation and our proven ability to successfully execute our growth strategy makes Certicom well-positioned for building long-term shareholder value.

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

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, we will now conduct a question-and-answer session. Please be advised that members of the media and general public will be in a listen-only mode for the duration of the question-and-answer session. Certicom will be pleased to arrange for any follow-up discussion or interviews of senior management after the call has been completed.

To make these arrangements please contact John Callahan at 703-234-2357. (OPERATOR INSTRUCTIONS). Scott Penner from TD Newcrest.

Herve, maybe just to begin what was the recurring revenue as a percentage in the quarter?

Well as a percentage, it was slightly over 50%. I don't think that's a representative number given the fact that our revenues are lower this quarter. However in absolute amounts, it is a slightly higher than it was last quarter at this time. We closed out at about $2.2 million.

Okay. I'd like to -- if you could drill into the sequential expense increase guided for Q4, it seems like an awfully big jump so maybe you could just walk us through some of the components?

That major component of the increase is really to do -- well there's really two areas. One is increased -- excuse me -- commission expense as a result of our anticipated revenues in the fourth quarter. The second one is our typical year-end bonus accrual. We are very confident that we're going to meet our objectives for the year so therefore, we are including in our outlook the corporate objective attainment bonus for the year.

Just to remind everyone, the bonus plan in the Company for the executives and the employees is made up of two major components. One is a personal goals component which we accrue that portion on a quarter-to-quarter basis. And the second piece is a corporate objective attainment which we only accrue when we've achieved it or when we anticipate to achieve it so that the most significant piece of that in this quarter is the corporate attainment bonus.

Now when we read in the press release and in here that the results on a nine-month basis and with regard to expenses are in line with the strategic plan, it would seem just looking at the numbers and looking what the street had been expecting both for this quarter and if you go back possibly to last quarter, that your strategic plan is in some cases significantly different than what expectations are in the marketplace. I know it is something that you struggle with but is there any way that in this forum that you can give us a better expectation maybe into the next year what we should look for to better align with what your strategic plan is?

Scott, it's Ian. There is no question that we have a challenge in trying to align our internal plans with the analysts given that we don't provide revenue and earnings guidance. As you know we provided second half revenue guidance during our last quarter's results and we're very confident despite the somewhat disappointing Q3, we're very confident in being able to attain that second half revenue guidance which is approximately equal to the results that we achieved in the first half which I remind you was $10.5 million for the first half.

I will ask Herve to comment on outlook and strategic growth plan relative to guidance but I can tell at this point there is no immediate plan to change our communication with regard to guidance. We are going to continue at this point for the short-term at least to provide only expense guidance for the upcoming quarter.

I don't have a whole lot to add to what Ian just said. I think that from time to time we think about it and I think at some point we may revisit as to whether we want to start to provide further guidance. I think it's a little early for us to be able to do that. We visit it from time to time I think as the model becomes a little bit more predictable. On a very short-term basis we would hope that we'd be able to see our way through that. But I don't think we are there yet.

Scott, I will just add one final comment. We are very optimistic about the Company's growth potential. We absolutely see continued growth in our pipeline, we see growth in terms of our planning as we look out a year plus. We will periodically if we see a significant variance with analysts, we will try to make some public disclosure. Obviously it would be and through a press release to try to get back in line if there is a wide variance and try to get back in line what our plan points to relative to what the analysts are indicating. But I understand your comment about the variance that is out there with some of the analysts in regard to our results.

In fact, Scott, it's Herve -- we did that last quarter. We issued the last half guidance because we had a high level of comfort on that last half and we knew that there were some analysts who had expectations which were greater than that. So that is why we did that.

Great. Lastly, and I will pass the line. Is there anything built into the current expense run rate in relation to building up a potential litigation force should it ever come to that? Or is it the case that if you were to become more aggressive and become more litigious with some of these potential clients that we would have to see a fairly substantial investment on the expense line?

I think if we were to launch any kind of a situation from a legal perspective, you would see a significant jump in our expenses. Obviously because we would be dealing with some outside legal assistance in that respect. As to the extent that we would do that, yes you would see a significant increase in expenses and we'd let you know in due course.

Okay, thank you.

Lawrence Rhee, Genuity Capital Markets.

Can you just outline whether or not some of your contracts you announced earlier in the year in 2006 call it the GE security of the world or the Philips -- whether or not that is starting to contribute somewhat to the top-line and whether or not we can expect a more significant contribution in Q4 and following?

I think, Lawrence, in general without giving specific about any one contract, it typically takes anywhere from on a liberal basis, six months to a year, year and half before a design win starts to generate royalties. We're actually in a much better position today than we were three, four, five years ago given the nature of the types of companies that we are closing contracts with; the names of the firms you just mentioned, GE, Philips, are very, very high-profile firms. When they come up with a product launch they typically are quite successful in terms of both volume and market adoption. So that bodes well for us from a royalty perspective.

Having said that in many cases it takes some time for these organizations to develop the solution that they license with Certicom embedded into the product and then it starting to ship. So you can assume that there is some increase that is occurring every quarter and our absolute recurring revenues from royalties based on contracts that we've closed historically. And as Herve just said there was an absolute increase this past quarter as we generally see on a quarter-to-quarter basis.

That is understood that is why hence the question. Just because the GE security announcement I think was with several -- three quarters ago at least -- I think nine months ago. And I think Philips was just after that. So we've always used kind of a nine-month to twelve-month timeframe before we expect to see some type of revenue contribution. And I just wanted to get some more color on that.

But with respect to your attendance at the RSA conference, can you just add more color about whether or not -- is that a place where you are going to see some additional leads or how can we gain confidence that you guys are going to see some revenue traction in the near term?

It was the most significant RSA show that this company has had in its history as far as I'm concerned. We had a very, very major presence there. For those of you who may have attended to show, we were really front and center alongside some significant organizations in terms of our physical presence. The booth attendance was very, very active.

And as we said in the past one of the important transitions that has occurred at the RSA show in the last year or two is that there has been a real shift in terms of the overall mindset from the RSA algorithm having been dominant in the past decades, there is now a clear recognition that ECC and specifically Suite B is the new standard and everyone is talking about it. If you went by the booths of other companies and organizations you would certainly see reference to ECC and Suite B.

So, yes, we have a significant amount of lead generation and presence that we anticipate will result in future business either reinforcement for existing pipeline that we're working on or development of new pipelines. We go to the shows for a number of reasons but certainly the lead generation is one of the primary reasons as well as to ensure that people are understanding the messaging of the company.

Just with respect to the satellite radio opportunities obviously you mentioned WORLDSPACE. But just looking at them they seem to be a pretty small player currently and obviously it sounds like you guys signed a pretty solid contract for yourselves. But wouldn't the more near-term opportunity or/concern be your impact or the impact of the XM Satellite and Sirius merger and how that may impact you guys? Can you just add some color on that?

First of all, we are very confident with the WORLDSPACE contract. They are very well capitalized as you may know to drive the high level of capital cost to launch this sort of business. They were as we stated the parent company that launched XM Radio into their own stand-alone IPO a number of years ago so they have a lot of experience, a lot of depth in this area. So we are very confident.

Now there is a contract that as we indicated is a royalty-bearing contract and as they expand -- I believe their plans are to roll out their European service starting with Italy at the end of calendar '08. So this will be a fairly quick rollout by comparison to other firms in this industry who have come before WORLDSPACE and that will eventually cover all of the various countries in Europe.

In terms of the XM/Sirius merger I think it has been long acknowledged in the conditional access and satellite radio industry that the XM Radio technical infrastructure is very, very solid and in some cases is superior to that that Sirius had built up over the years. We are very -- we frankly view the combination as a great growth opportunity for us. Without getting into too many details about the Sirius conditional access solution, the firm that provided the Sirius conditional access solution, there was a division of a large firm no longer exists so from the perspective of continuation, growth and expansion of that solution, we believe the Sirius/XM combination may represent growth potential.

It's too early for us to really make any definitive comments but we see that expansion as a possible growth opportunity for us, primarily, as I say, for the reason that the quality of the solution that we provided, the reputation of XM's infrastructure and the fact that there is no continuing firm as it were that provided this conditional access solution to the Sirius organization.

Lastly, can you just add some color around the status of whether you're going to have any legal activities in the near-term with respect to some of these companies that are on your "watchlist" or on notice?

Yes. As we mentioned at the last quarter, we had indicated that we're approaching a crossroads, having been in discussions with a number of firms for over two years now. And our primary mandate is to try to develop commercial settlements without having to go down the legal path through defending our patents. But we are absolutely approaching a crossroads in the short-term where we will ultimately go down a path of either commercial or legal with some of these firms.

Frankly, Lawrence, I would've hoped that we would have had an announcement out by now, prior to today's Q3 results. However, for a number of unrelated factors, that wasn't possible. So all I can say at this point is stay tuned. This is not something that is a long-term decision but one that I expect will occur in a fairly short-term manner. I really can't say much more than that about specifics or timing.

Okay, thanks, guys.

Peter Misek, Canaccord Adams.

Good morning. Gentlemen, if I could just preface this comment, I mean looking at your progress here and how you're comparing it to your internal plan, I find it really difficult to have positive commentary about an internal plan that we still don't really know about. Looking at the progress over the last two years, there has been growth, but given your size I would think that the market and we find it disappointing.

And two years letting these large multinationals infringe on your patents, there has got to be a point when you guys say that is it. And we think -- we've got to be at that point. I mean how much longer do they have to infringe on your patents? I mean, these things degrade over time, right? Your patents expire at some point in the future. The longer they infringe, the less the value or potential value, or it's harder to extract value. I mean, guys like -- if we look at Wi-LAN or MOSAID or anything else, isn't it time to get aggressive?

Peter, as I just said with the prior question, we are taking steps to enforce our patents and protect our technology. We're not going to let this linger. As I said, I had hoped that we might have had an announcement out by this point. Frankly, if I can reach commercial settlements and avoid litigation costs, I will do that to a certain point. I'm not going to let it linger. And I can assure you, though, that there are no risks associated with our position being weakened by lack of what you perceive as action on either the commercial or litigation side. We, in fact, feel very strong in our position in all of these cases.

So we will not procrastinate unnecessarily in terms of getting a decision, whether it be commercial or through the courts. So as I said to Lawrence on the prior call, stay tuned. I understand there is a certain level of expectation and a certain level of frustration with the perceived delay, but from our view there are tangible reasons that we can't share with the public market at this point for a good reason. But we don't anticipate that there will be a long time at all before we make some decision. This is something that we expect to move on quite in the short-term.

Peter, just to finish up on that, just want to share as we've said before, we have all the resources that we require from a financial perspective to enforce those patents.

Guys, I mean we are huge fans of your patent portfolio, and we think it's extremely valuable, and all the diligence and work that went into it, I'm sure my colleagues did as well. I guess I really want to emphasize to you, express our frustration, express the frustration of investors that something gets done. I mean can you give us some time in the next three months, or is action going to be taken?

It has been cloak and dagger to say stay tuned, and we appreciate that that has been going on and you've done -- in the past you've done a good job. But now we're in 2007; it's been two years with some of these things. Some of your large shareholders are really frustrated.

Well, I appreciate that. I'm sensitive to those concerns. We're not going to push the button prematurely. We're not going to go a particular route until we determine that it's appropriate and necessary. So while I understand the frustration, we're confident that we're not talking about a lengthy delay, if you will, from where we sit today and I repeat that this is a very different model than some of the other organizations that you represented, MOSAID, Wi-LAN, this is not -- they are good businesses and have different business models. Where we have our focus, our model, we have a process that we're following and we're not going to delay it I can assure you that our Board would not allow us to delay unnecessarily.

There are steps that we want to make sure we are going through and frankly if I see an opportunity for commercial settlement, I will extend a certain amount in order to achieve that as opposed to going down the litigation path. But if litigation, if defending our patents is the appropriate route, we will not hesitate.

So I appreciate your concerns. I appreciate the comments about expectations in the market but we have to go through our process to ensure that when we take a route, take a direction in terms of the crossroads that we're at that we are fully committed and prepared to go down that route.

Can you give us a sense that -- any timeline like less than six months you are willing to wait? Less than a year? Can you give us any gauge of time? I don't want to keep you to a specific date but just some gauge of time on how much longer you're going to allow these folks to infringe? And I don't want any anything specific on any one infringer but like any timeline would be really appreciated.

I can tell without getting specific that we'd be very disappointed in ourselves if we waited the length of time that you've referenced by the end of the year, for example. This is not something that is quarters out, without getting specific about details on timing, we're not talking a long extended period of time here, Peter. We're not talking multiple quarters. As said I would've hoped to have had something announced by today. It is couldn't happen for a number of reasons that we can't disclose.

So if we were to say within nine months we would expect either announcements or actions -- that would be fair?

I would hope that we would have something out with -- in a lesser period of time.

Okay, thank you.

Glenn Jamieson, Orion Securities.

Ian, in October of '05 we had a similar situation where you had a weaker quarter. I think the commentary from you at that time was that there was some larger contracts that you were working on. And then about two months subsequent to that announcement you signed a large multi-million dollar multiyear contract. Are there any parallels that you can draw between what you've seen in the most recent quarter, how many large opportunities you were actually chasing down now and compare that to where we are at in '05?

Yes, Glenn, first of all let me just say that in general our pipeline is very strong; it continues to grow. It is complex. I would say the complexity of the deals are larger but they are also higher in proportionality to three, four years ago. But we are very optimistic about the outlook on growth. We have also indicated that from time to time periodically, not too often we hope that we will have an off quarter and I would consider Q3 to be somewhat off quarter as we had as you said back in '05.

Having said that we are very much on track with the guidance that we gave for the second half back in the second quarter. So in terms of parallels, I would say that yes it was a weak quarter like we had in '05. Are we about to announce a number of large deals? I'm not going to go into detail about timing or specific contracts, but we are very optimistic about continuing to sign up large multinational corporations to multiyear recurring revenue contracts. I know that is a theme that I continually repeat every quarter and it will continue to be a theme in terms of the recurring revenue model.

We are very confident that we are on track and fortunately we will from time to time have an off quarter. I don't like it any more than anyone else does. I wouldn't say the fourth -- or the third quarter was where we wanted it to be. We did have a couple of contracts slip in terms of signing. I frankly expect that we will be closing those contracts in the fourth quarter along with a number of others.

So we had a good strong recovery back in '05 after that very disappointing second quarter. I anticipate that we will have the same situation this particular go round.

Is that recovery dependant upon a resolution to the work that you've been doing in Japan with some of the large OEMs there or is what you are pursuing broader and go beyond that specific market?

I'm not going to get specific about sectors or opportunities. But certainly I would say it is a broader base of opportunities that we see and by the way, we are having a tremendous amount of success in general in Asia-Pacific this year. We've talked about that in the past. It is contributing a much more significant element of our revenue year-to-date than in prior years.

But across the board whether it be Europe, North America, Asia-Pacific or certain sectors, we are seeing good broad growth in our pipeline and that is what is allowing us to maintain our guidance for the second half as mentioned earlier.

And Herve, can I ask you to go out on a limb a bit here. And can you specifically tell us what revenue number you need to post in the fourth quarter in order for you to pay out the corporate bonus accrual that you went into the details on?

I can't go into specifics but just generally speaking it is close to the guidance we provided you for the second half. And so that is all I can say about it. But we are very confident that we are heading down that road.

(indiscernible) that that is a P&L target, Glenn, as a corporate financial target. It's not just a revenue target but both top-line and bottom-line and that triggers the corporate payment for all employees.

Does it need to be $6 million in revenue in the fourth quarter for you to pay out that bonus accrual?

I guess I'll just ask you to do the math. We provided some guidance in the second -- at the end of the second quarter. That's if the second half is going to be -- in the 10, $10.5 million range. We've got to make up the difference in this quarter here.

Thanks.

David Wright, BMO Capital Markets.

Thanks very much. Good morning. I guess through the conversations here you've suggested that you've signed a couple of contracts since quarter end. Is that correct?

Sorry, Dave, I misunderstood your question.

Have you signed contracts since quarter end that haven't yet been announced?

I won't get into the specifics on timing. But Dave, I'm very confident that the contracts that slipped in Q3 that we had hoped to close will close in Q4.

If we go back to -- I think was December when you had your Q2 conference call and you suggested that the second half of the year would be roughly equal to the first half so that does allow us to do the math and say it sounds like you going to have about a $6 million quarter in Q4 if all these things line up as they would. That would suggest that for the year you've grown about 40% roughly. And last year you grew about 30%.

Yes.

I guess question number one is, given the size of your opportunity, do you think -- are you happy with your growth rate? And number two, do you see your growth rate escalating in the coming few years or is this growth rate that we should kind of keep in mind as we forecast out?

I'm very pleased with the growth rate from a revenue perspective but coming more importantly I'm pleased with the quality of the contracts that are contributing to that revenue growth. And specifically in the area of recurring revenues through royalty payments. So it is not just building revenue up for one solid fiscal year in fiscal '07 but also building a foundation for future growth. So the outlook remains very strong.

But I've got to tell you that we're goaled particularly at the executive level on not just the fiscal P&L that is in place for this fiscal year, and it is certainly not to minimize that but we are goaled very much around being able to establish relationships with large multinationals, new names, certainly the opportunities that have been mentioned in Japan are critical to have progress.

So it's not just about bonus and it's not just about the top-line and bottom-line growth. Those are critical elements but it is about a broader range of successes that will build long-term growth foundation for the company. So there are a series of corporate goals that we focus on all of which contribute to continued positive outlook in terms of the future.

Herve, when I look at your expense guidance for next quarter, it is a bit of a significant uptick from Q3 appreciating that there is year-end bonus in that. But if I kind of look at what this suggests for the year expense, it suggests that the sales and marketing expense is going to be somewhere around roughly 45%. Last year it was at 46%. So this is suggesting to me that your sales and marketing expense as a percent of revenues is remaining roughly equal despite the growth. Is that how we should be modeling this Company or do you expect that there will be more efficiencies as you grow?

No, I think that the year is going to finish at somewhat less than the 46 of last year and the 45 year out you are projecting. I think there are some efficiencies being built into the sales and marketing organization, there is no doubt about it. I think let's wait till the year finishes and I think you'll see the results.

But when I take that number -- it looks like your expense growth for the year, total expense growth is going to be up about 30% on 40% of revenue growth and last year it was up about 20% on 30% of growth. So that is suggesting that your expense growth is growing at two-thirds to three-quarters of your revenue growth rate.

There is no doubt that in this current year and we've been saying that all along is that we've had obviously some sales commission expense as a result of our 40% growth. We've also made it -- we were upfront in Cingular some additional product development resources that were added to accelerate our product roadmap. So that is the other piece.

The third piece is one of the fluctuating Canadian dollar. As you know we have a hedging program in place. What the hedging program does is it smoothes out the ups and downs of any given quarterly movement in the FX but over time it doesn't hide the fact that our expense base moves as a result of that. That's another factor as well.

Okay, thanks. In the Sirius opportunity, I was wondering if you've already investigated whether they are using UCC in their products?

Dave, I don't know the specific answer to that. I would hazard a guess and say probably not but that is purely speculative. And in terms of an opportunity, I don't want to overestimate that. We have a lot of work to do there to determine what the architecture is of that solution and what sort of opportunities might unfold. So I think we have to wait for that transaction to close and work with our contacts to see what opportunities are there.

I think there is tremendous opportunity as I said earlier. Given the fact that the other firm, the firm that provided the conditional access solution to Sirius is not currently in business, I think that just logically it points to opportunity.

I guess you stayed away from them because of your agreement with XM, is that correct?

Yes, that is correct.

Did you sign any business at the RSA conference or was it merely you opened up selling opportunities at that conference?

It is mostly the latter. It is mostly opening up selling opportunities. It's not usually a situation where you sit down and sign contracts. That is not the nature of most tradeshows. So it is relationship building; it's establishing new contacts, new technology partnerships. It's about developing current pipelines, finding new opportunities and that is really where the focus is. And also just making sure and most importantly that the brand is getting out and entrenched in people's minds.

This show has transformed dramatically just even in the last three years from an architectural focus on RSA, the algorithm to ECC. There was as you know for those of you who were in attendance at the show, we announced this, a forum, a panel on ECC Suite B. That room would have been virtually empty a few years ago. This year it was to my understanding and I wasn't there personally, but I understand there were about 200 people with standing room only.

So that just gives you a sense of the transition or the transformation that has occurred at that show in particular from RSA to ECC. Certicom is the leader in this area by far in terms of global positioning and it was our intent at this show in San Francisco this past month to make sure that the brand and the messaging was conveyed appropriately.

Okay, great. If I could go back to a previous question about the question was kind of inferring that if you didn't sign something with a very large customer soon or within nine months, there'd be a lawsuit. And you answered it by suggesting that you thought that you would have an agreement much earlier. So I guess the difficulty with that question and the answer is if you announce a new customer tomorrow and we don't know if that is the one you were talking about.

so I guess I'm not sure how to ask the question. But is there -- are you thinking of a particular customer that represents very large opportunity that if you don't move ahead in the very near future you could start legal proceedings?

First let me just say we will make sure that you not misunderstand our announcement. We will be as clear as we can be to ensure that we are specific. We've also said a number of times in the past that we are at a crossroads where we will either pursue and achieve commercial settlements and when that goal is achieved, if that's the crossroads that we're able to go down and achieve, that will be a very proactive commercial settlement announcement that will be announced in an appropriate way. It will not talk about things such as infringement, settlement and etc. etc. but it will be clear about what has been achieved.

So you are at a point where you might make an announcement that says you started proceedings against someone or you'd make an announcement that you'd been negotiating for quite some time and you have successfully negotiated a contract?

That is a fair assessment of the two options. And we certainly preferred -- always prefer commercial settlement if possible. But we will not shy away from defending our patents.

If you did start legal proceedings, what impact do you think that would have on your negotiations with other customers?

It could potentially put some on the back burner if it's in the same area.

It could hurt your short-term revenue opportunity?

I don't think so. It may put other companies who are on notice -- it may delay their ultimate settlement until a court based settlement is achieved. But I don't anticipate that it would affect our revenue outlook. We've got -- most of the pipeline that we've got is proactive, value added licensing where we're bringing technology to companies in a non -- in a way that doesn't involve infringement. But there certainly is opportunity in both areas.

And as I say, this is one of the reasons why we prefer commercial settlements because we want to move as quickly as we can to establish revenue growth through contracts in a broad base level. But it's reasonable that someone might sit on the back burner if there's a court based direction taken to wait out the outcome.

Aside from the threat of legal action, is there anything that incents the customer or do you have a way to increase the urgency in getting a customer to sign on now as opposed to next month or next quarter?

In terms of a firm that may be on notice?

Yes. Is there a way that you are able to say to them if you sign now then it is X% minus -.01% or something like that and if you wait a month it goes up by a penny?

We've stated in the past in terms of our IP licensing business model that for firms who are in a particular situation where they're using ECC and are not licensed for that particularly if it is in a standard, we have an early adopter program that we have discussed quite openly that will benefit the first one or two firms that settle in that particular sector and we continue to provide that.

Now I will tell you that is for commercial settlements. If we go down the path of defending our patents through the courts, those early adopter programs go away. We will seek the maximum settlement that we can through legal action. But again, that is always the last resort.

Great, thank you very much for your answers.

Ralph Garcea, Credit Suisse.

Good morning, gentlemen. I don't two belabor the XM and Sirius situation but XM was initially a licensee and it was a lump sum payment, correct? Back in early 2000 I guess?

No, Ralph, in fact let may be clear. XM has been a customer going back I think it initially started about eight years ago. It has been and was initially started off as a principally a professional services contract. We don't do a lot of these but this was a time and materials relationship that was established starting eight years ago.

And I give XM credit as they were starting to build up their business long before they launched, they recognized the importance of a secure solution to ensure that no unauthorized listeners were able to get access to their paid offerings. So they came to us and we built and provided that solution to them through a professional services contract. It has actually been a very, very successful partnership. The solution that we provided starting eight years ago has evolved quite dramatically over the years. But it has always been based on labor.

The WORLDSPACE contract by contrast is a license with maintenance but also with royalties. It's quite different from a model perspective. But probably a very similar -- we're appropriate of a similar architecture.

And then two questions then, on the XM side are you still generating revenues let's say in fiscal '07 on a time and materials basis? And two, can you convert that relationship into a royalty based on unit assuming the merger goes through? Because then you are in the millions of subscribers versus the hundreds of thousands with WORLDSPACE.

Let me just address that, Ralph. Number one is XM Radio is every year one of our very significant customers. They rank right up there with many of our other customers. You don't hear about it because it's just an extension of an agreement that was signed eight years ago. So we have a relationship with them we help them improve their network all the time. We help them build out the infrastructure to all of their suppliers, example, making sure that the radio manufacturers that each of the automobile manufacturers have got in their factories, the equipment required to put the technology on their equipment. You never know about that because there are several hundreds of thousands of dollars on every one of these contracts. So you never see that but they are very important every year.

From a royalty -- from a structure standpoint, I think that those agreements, the agreement we have stands but understand that if Sirius adds -- the Certicom solution is the dominant solution coming out the other end. There is a tremendous transformation or transition that is required to occur to move the Sirius base over to the XM base if you -- the technology base.

I will say it in a different way. I cannot envision entering into another professional services contract of the type we entered into eight years ago. Our model is very royalty based today. So the WORLDSPACE model is the model that we would hold and place going forward for any other similar opportunity.

That is what I was trying to get at. And just with WORLDSPACE right now they are in India -- okay they are moving to Europe but that is 18 to 24 months down the road before you see any Sirius revenues for instance.

Not quite true. Let me just correct you on that.

Royalty revenues.

Royalty, you are right but there is a very significant important element of introduction of a service.

They already have one satellite up and operational, Ralph. Their plans are to launch a second that will allow them to roll out more aggressively throughout Europe. So they are unlike XM, eight years ago when they were just starting off, WORLDSPACE is already operational.

Okay. And then just lastly, can you give the geographic split and the number of employees at the end of the quarter?

The employee count is approximately 120, 115, 120 in that range. I will ask Herve if he has more specifics on that.

Within a few.

And then in terms of revenue?

Are you talking about --?

Revenue by geography?

I'm sorry, I don't have that here but I would say that at least half of it would be North American base with the balance split between Europe and Asia and as Ian has said, we've got a greater ratio of Asian revenues this year than we've had in prior years. We're starting to build out our business model to a greater extent in that area of the world.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Lawrence Rhee, Genuity Capital Markets.

Just a quick follow-up. With respect to the RSA conference, I know the date of that was in the early February so just after your quarter end and you guys obviously had a large presence there. Can you just explain whether or not is some of the increase in expenses in Q4 due to I guess the significant [expense] you made at the RSA conference? And if so can you outline how much approximately? Is it $1 million or so that you spent at the RSA conference?

Number one, the amount of money we spent is way, way lower than what you are telling us even though I'm not -- I won't disclose what it cost us in total. The expenses of the RSA conference have been borne roughly over the second and third quarter. There will be a little bit of remnant costs in the fourth but by and large they were all in prior quarters.

Got you. And just lastly, XM, we believe -- are they I guess -- one of your better customers from a revenue perspective? And if so, can you just outline what percentage of your call it top five customers are revenues? Like what top -- the top five customers, what percentage do they represent of your revenues?

It changes every quarter and it changes every year. And I'd refer you to public records on that. In certain years it has been as low as 15% and in certain years it has been as high as one-third of our revenue. So they tend to fluctuate.

Okay, that is great. Thanks.

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

Thank you very much for your interest. And we'd be happy to take any one-on-one calls later on. Thank you.

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