BlackBerry Ltd (BB) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Certicom Corporation fiscal 2008 first quarter 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, September 6, 2007 at 10:00 a.m. Eastern time. I will now like to turn the conference over to Ms. Dana Broadworth, Account Executive. Ms. Broadworth, please go ahead.

Good morning, and thank you for joining us for Certicom's conference call to discuss results for the first quarter of fiscal 2008 ended July 31, 2007. On the call from Certicom are Bernard Crotty, President and Chief Executive Officer; and Herve Seguin, Chief Financial Officer. I will remind that you all dollar amounts discussed today are in U.S. dollars. This call is also being webcast live on the Company's Web site 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 the 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 Bernard Crotty.

Good morning. And thank you for joining us. I would like to point out as we begin that Dr. Scott Vanstone is not with us today due to his attendance at an international ECC conference.

Please turn to slide number four. We will follow the traditional format starting with an overview and a review of the operational highlights for the first quarter. Herve will then go through a discussion of our financial performance and our outlook for operating expenses. I will then comment on our business review and give an update on the Sony litigation. After a brief summary of the quarter, and our outlook for fiscal '08, we will be pleased to take your questions.

Slide five. As is characteristic of our business, our first quarter revenue of $3.2 million demonstrates the quarter-over-quarter variability that can occur due to the complexity of negotiating large multi-year contracts with global companies. However, I will point out that we have not lost any of our Q1 prospective deals, and we are confident that we will close these contracts in this fiscal year.

I will also reiterate that the large increase in design wins in fiscal '07 is significant, as it serves to strengthen our pipeline of potential recurring revenue. I will discuss this further a few minutes. We also continued to invest in expanding markets that are poised to benefit from our technology expertise, such as the open source cryptographic application market and the mobility market.

Please turn to slide six and I will go through some of the operational highlights for the quarter. As discussed in our previous earnings call, the patent infringement case against Sony Corporation was initiated in May. Organizational changes included the appointment of Dr. Matthew Campagna, a security professional with extensive experience in ECC implementation, as Director of Research.

On the product front, we launched UMA Device Software for the mobility market, one of our high potential markets. This software is designed to make it easier for device manufacturers to get their products to market faster, while reducing development costs.

Slide seven. Another product positioned to help developers speed up the development process is Security Builder API for Open Source, another high potential market which we also launched during Q1. Although the contract details cannot be disclosed due to customer confidentiality agreements, we also secured an ECC design win in the digital identity market with a global manufacturer.

An additional announcement of note during Q1 was the a awarding of the rigorous ISO 9001 standard to Certicom for the development of security software using ECC. By meeting this standard, we have further affirmed our commitment to provide customers with quality products and world class support.

Please turn to slide eight for announcements subsequent to quarter end. Just last month, we launched yet another product, this one being security builder API for .NET, which will provide a valuable tool to developers for easily adding advanced security to applications built on the Microsoft.net framework. Earlier this week, we announced a licensing agreement with Sycon Semiconductor in which Certicom technology will be used for content protection. This win is representative of the potential in the content protection market due to the high value of digital content.

On August 31, Sony answered our patent infringement complaint denying infringement and asserting invalidity. However, Certicom remains confident in its legal position. I will now pass it to Herve to discuss Certicom's financial performance for the quarter.

Thanks, Bernie, and good morning, everyone. Please turn to slide 9 for the financial review. Revenue for the first quarter was $3.2 million, down from $4.7 million in the same quarter last year. As Bernie discussed, this quarterly review variability is similar to some prior quarters due to the timing of contract closings for several large multi-year contracts.

Operating expenses for the first quarter were $5.7 million. This compares to $4.5 million for the corresponding quarter of fiscal 2007. The increase in year-over-year operating expenses was mainly due to legal expenses related to the Sony litigation, a planned increase in product development resources, specifically related to a new product initiative, and the impact of the annual salary increases for employees given in this last quarter. However, these expenses were lower than guidance given in Q1, for Q1 operating expenses, due to lower-than-expected litigation expenses which totaled $400,000 for the quarter.

The net loss on a GAAP basis for the first quarter was $3.4 million, or $0.08 per basic and diluted share, compared to a net loss of $1.2 million, which rounded to $0.03 per basic and diluted share in the first quarter of fiscal '07. At quarter end, we had $43.6 million in cash compared to $43.2 million at the end of fiscal '07 and $21.8 million at the end the of the first quarter of fiscal '07.

Slide 10, and I will now discuss the financial outlook. For the second quarter of fiscal 2008, we expect operating expenses to range from $6.1 million to $6.5 million, excluding cost of revenues, depreciation, and amortization, stock-based compensation, and including estimated legal costs ranging from $600,000 to (inaudible) and this associated with the Sony legal action. Management continues to aggressively manage expenses to achieve a cost structure that is in line with revenue, which is key to Certicom's goal of achieving sustainable profitable growth. As we stated before, Certicom's strong cash position, debt-free balance sheet, and a solid base of recurring revenue, provide ample strength and flexibility as the Company continues to pursue its growth strategy. I will now turn the meeting back to Bernie to discuss the business review and some summary remarks.

Thanks, Herve. Please turn to slide 11. I would like to point out that we booked 36 design wins during our last fiscal year, up from 26 in fiscal '06, and six during fiscal '05. These successes can take time to translate into recurring revenue, however, they serve as an important signal of the growing global acceptance of Certicom's technology. Further, these annual design wins provide an important barometer for potential recurring revenue from royalties and software support fees.

Slide 13. For an update on the Sony litigation. As was expected, Sony answered Certicom's patent infringement complaint on August 31, denying infringement and asserting invalidity. However, we remain confident in our legal position and in our ability to successfully pursue this litigation. Management expects to receive a reasonable royalty on the sales of Sony products that allegedly use ECC for content protection.

Please turn to slide 14 for a summary of our performance and our outlook for fiscal '08. I will reiterate the quarterly revenue is subject to variation due to the complexity of negotiating large multi-year contracts. However, we are confident that these contracts will close in this fiscal year. I will again point out that the substantial increase in design wins in fiscal '07, which indicates growing global commitment to ECC and the potential for recurring revenue. We will also continue our focus on investing on high potential expanding markets.

Slide 15. Going forward, the story is the same. Manage will continue to leverage Certicom's position as a global leader in ECC in order to build recurring revenue and sustainable profits for shareholders. We are committed to five key strategies for building market share; partnering for continued ECC adoption, expanding our global sales presence, investing in new product development, pursuing acquisitions, and defending our patent portfolio.

That concludes our formal remarks. Now with the operator's assistance, we will be pleased to take your questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Please be advised that members of the media and the 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. One moment, please, for your first question. Your first question comes from David Wright of BMO Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning, David.

So of the transactions that you missed in signing that you expected to sign for the quarter, have you subsequently signed any of those transactions?

We're continuing to work on all of those major contracts, David, but we don't have anything that we can announce today.

Okay. Are you able to give us an idea of what the delay is, what the hold-up is?

I think that there is a range of things that go into a customer's assessment of a particular contract. It can range from pricing to technical issues that get uncovered. There is no one major item that comes to play. I can just reiterate the complexity of the solutions that are being provided.

In many cases, significant investments for customers. Some customers engage in behaviors designed to extract pricing benefits at the end of a quarter. There is a number of things that can go on. We're committed to getting our technology out there. But to do this in a business-like manner which focuses on the long term, and we will continue to negotiate with these customers and we're confident we will bring them in this year.

Okay. And were any of those contracts, I suppose, were they new customers, all of them? Or were any of them revenue flows that you expected might come in the quarter and then they ended up getting delayed just because the customer delayed them?

So, David, there is a mixture. There were some new customers, a couple of existing customers, and, yes, our expectation was that some of those revenues would have landed in the quarter. I think that is the reason for the shortfall in revenue in this quarter. And so, yes, we had hoped and expected that some of those would land in Q1. They didn't.

Okay. Thank you for the details on the design wins. The 626, 36, so that is a decent trend. Could you comment on maybe how many of those are revenue generating at this time?

I will pass it to Herve Seguin.

David, if you -- if we think of how we define revenue generation, one is we get a fee when we get that design win and that typically is the fee for the use of the tool kit that allows them to design the product in. We get that up front. Once that occurs then there are two revenue streams that typically will come on, on board, one is the software support revenue stream, and that is a recurring annual revenue stream that we bring in and amortize on a quarterly, or record on a quarterly basis. And the second piece is the potential of royalties as the product gets deployed.

So I would say that by and large, most of these have a software maintenance attached to them, and a portion of them have got royalties attached. Now, these royalties come on stream, or the success of these design wins is based on three factors, and there is always a proportion of these that never hit the market. So the customer licenses a design win tool kit, and the product never makes it to market for all sorts of commercial reasons that the customer can better explain.

The second piece is it comes on stream and it is moderately successful, so that impacts our revenue, and the third one is, it comes on stream, and it is a winner and that will end up providing substantial revenues over time. So we have a mixture of these three in our pool, and I must say that we really believe that some of them -- some of the bigger opportunities are yet to come in our view. We've got some that have come onstream, but we have some other ones in our pipeline that we will call it the backlog of potential royalties that we expect and we keep on monitoring these.

Great color. Thank you. So it sounds like most of these are revenue generating then?

At some level, yes.

Okay. Good. Would the revenues from these contracts fall into your recurring revenue stream that you've described in the quarter as 62%, or I guess about $2 million?

Not design win, itself. The design win is a one-time, we don't include that.

Okay.

We only include the maintenance, the software maintenance royalty -- sorry, the software maintenance contracts in the royalties on shipments.

Okay. Great. Is this a large -- what portion of your overall revenues are recurring revenues as accounted for from these deals?

Well, we already said that. It is 62% for the quarter. And it was 40% last year. And on average, depending on the revenue, it is somewhere in the 40% range.

So these 36 design wins account for your $2 million in the quarter?

No, no, no. No, because not all of them have come onstream. And so for instance, those design wins we would have gotten in the last few quarters are not included in any of our recurring revenue, except for maybe the software portion. The software maintenance portion.

Okay. So also in your recurring revenue, is services revenue, correct?

There is a piece of the services -- the piece of the services revenue is included in there. David, our service revenues are made up of the software annual maintenance fees, plus the professional services fees.

Okay. I'm just trying to -- since the number has gone from 6 to 26 to 36, you know, I'm trying to get a sense of -- and yet your recurring revenues year-over-year are $2 million and flat, so I'm trying to figure out --

David, just one thing that I should mention is some of these products have a lifespan, so they have a beginning and end lifespan, so there will be situations where we do get recurring revenue for a period of time. And then the product goes away.

So it comes to end of life. And that's typical in some of the -- some of the mobility products that we have. And think about cell phones and how long they last, and so the maintenance revenue will end, and so will the royalty stream for that one, until the next version comes on board. And that becomes successful, as well. Or not.

Okay. Good. So this is on the OEM design wins. How about on the IP licensing side? Obviously, Sony is getting our attention. But what other design wins have there been? And -- or not design wins, but IP licensing wins have you had, and why has it been -- should it be generating more success to date?

We had wins like General Dynamics to name one, where it is a 15-year agreement. Some of these will occur over time. The fact that the -- that we've signed some of these design wins, sorry, these IP wins, indicates the adoption, that that adoption takes a while to come on stream. But it is all part of our backlog of potential royalties.

So your past announcements of I guess REM would have been one and that would be in the IP licensing or in the OEM --

That is really in the OEM.

David, sometimes the technology can be embedded in the form of a product license. It is not just a patent license where a customer is effectively adopting our technology.

And in fact, in some ways, it is advantageous to us, and to the customer, if we can have a product license, because we believe that we can add value to the customer's manufacturing process.

Okay. So what I'm getting at and I think for last year, you've recorded that quote, the IP licensing revenue for the year was something like $1.5 million, and now, I think that there was probably some revenues associated with that, also included in your regular revenues, so it seems to me, have you two funnels and I'm trying to evaluate the second funnel now.

I think, David, it is going to be very difficult, because the revenue we get from intellectual property in the form of royalty, so basically the customer comes to us and we provide them with a license where we deliver nothing but for them to have the right to use our patented technology and they develop their own products associated with that and we get a royalty when that product ships, so that is one revenue stream. We count that as intellectual property revenue.

The second piece is when we get design wins and eventually we get royalties on the shipments of those products, of the ultimate product, and that one gets embedded in as part of our product sales in the revenue streams associated with our products.

Okay. Thanks.

Your next question comes from Lawrence Rhee of Blackmont Capital. Please go ahead.

Hi, guys. I just wanted to get some clarity and some color around your recurring revenues of $2 million. I guess it's basically stayed flat for five straight quarters and how do we kind of understand that, is it just the fact that you haven't really got some new business that would contribute to driving some growth in that part of the revenue stream?

No, I think that the factor is one of we've got new deals that have come onstream. Some of the agreements, some of the agreements are end of life. So it is a matter of continuing to build on that.

With some of those end of life contracts, wouldn't -- I guess the presumption would be, if I assume they're pleased with the contracts, and pleased with the product, wouldn't they kind of adopt that for their future products, as well?

Sure. No, I think you're right, but again all of this is to do with timing.

I think the biggest way to look at your question and to answer it is to look at the design wins. So you see that increase in design wins, and that represents a potential pipeline of revenues to us. Then you have all of the uncertainties that then get factored into that, which we mentioned previously. Is the product shipping, what volumes is it shipping at, and are certain products coming to end of life, and it all goes into the mix, but we believe that on balance, when you look at that annual design win number, it provides a solid barometer of the adoption of our technology.

But I guess at the end of the day, the design win increase, although it seems, great, it hasn't translated into anything on the financials yet and I guess that is the question behind -- the 6 to the 26, over the past couple of years, I guess 36 now, but I guess I would have presumed that some of those design wins from a couple of years ago would have translated into an increase in recurring revenue stream over the past couple of quarters.

We would like the pace of the revenue growth to be higher. And we're working on that. We've tried to share the design wins to allow the investment community to see that one barometer of adoption. There are a lot of other factors that go into the mix, as we mentioned, including the timing and volume of shipments that go out there. But it all goes into the mix, but we do believe that the design wins is an important barometer to look at this.

And just to clarify, some of those -- I guess some of the large contracts that I guess you expected to close in the quarter, would some of those delayed contracts, would have been large enough to actually maybe come close to where the consensus estimates were around the $6 million mark?

Yes, so again, if you just follow the thread that Herve was presenting, previously, where on a design win, we typically would get up front, a license fee, and then the recurring revenue comes from the follow-on of the maintenance in royalties.

But when you ink that contract in the first instance, there is many instances a very large up front license fee that comes in when that contract is signed, so, yes, it is the difference, if you will, between where the number ended up, and the broad range of targets that are out there.

Okay. That's great, guys. Thanks.

Your next question comes from Glenn Jamieson of Orion Securities. Please go ahead.

Bernie, can you update us on your CEO search?

Yes, Glenn, we have a search committee of our board that is looking, or is seized with responsibility for that matter. They are actively engaged, working with a search consulting firm. They have identified a number of candidates that they're in various forms of discussion and negotiation with. We will make an announcement as soon as there is something to announce. And we expect that will in all events take place by the end of the year.

By the end of this calendar year is the expectation?

That's correct.

Okay. And it may be a more appropriate question for an incoming CEO, but what is your view on the ability for Certicom to grow its business this year? If you look at the past couple of year, the business had steadily grown, and given the start that we've this year, I question whether you're going to be able to achieve that.

So how are you thinking about that internally? And are you doing anything cost-wise, given what you think the revenue will come in this year? Or will that be left to an incoming CEO to deal with?

I think have you two questions there, Glenn. On the top line, we've indicated earlier that we expect to grow it year-over-year. We recognize the challenge that Q1 has presented, but in looking at our pipeline as a whole, we haven't changed that view, but we will continue to monitor it and plan accordingly.

But at this point in time, in light of the pipeline, our fundamental view of the prospects and opportunity for the year has not changed. Consistent with what I just said, of being -- dealing with the real world, we see what the number is, and we recognize that that represents some real estate to cover, and we're looking, and as we indicated in our press release that we're looking at costs and so, yes, we're monitoring costs all the time, and let's just say that we're taking -- putting a little more focus there in light of the disappointing results in Q1.

Okay. Has there been any change in your sales force in the last three to six months? Anything material on that front?

When you say change, in terms of additions of head count?

Right, addition, subtractions, expansions?

No, it is substantially the same over the last three to six months. It has grown over the period prior to that.

The only significant, not in terms of head count but in terms of allocation, is we've opened up an office in mainland China to support the activities in the region where we believe there are substantial opportunities for us.

And that office is staffed with an employee or is it a sales agency?

Yes. In fact, it is an employee, one of our existing employees, a Chinese Canadian who we moved to the region.

Okay. And just to go back to the discussion that you are having about design wins, Bernie, you tried to bring our attention back to the absolute number of wins as a barometer, as one barometer for the direction of your business, which is fair enough.

If I think about it in a different way, can you give us any idea of how many design wins you internally believe will -- or have significant revenue-generating potential, but have not come onstream yet? So if we say $0.5 million in royalty revenue over a year is significant, how many wins of that type are out there that have not yet come onstream, but are you tracking and expect the products to come to market in the next six, 12, 18 months?

So, Glenn, we track that, so we track all of those design wins, we have a review internally, here, a frequent review of where we think that revenue stream -- how big that backlog is, and, obviously, it is not a science, and it is really either asking the customer or asking the sales rep to try to get a view of where that is, so we track that.

And I don't think it would be appropriate to give you numbers, because those numbers are wild guesses anyhow. But we do track it. And we track the numbers. And we give this full visibility to our board of directors on a quarterly basis. So we're all focused on what that is.

How many do we need to make the year? I don't think it is based on a number of design wins, because every company and every project, and just to remind you, we don't license our technology corporate-wide. We license our technology by project. So it all depends on the size of the project, and, obviously, what we believe will be the ultimate success of that and it gets proven out when it gets shipped.

Right. And what I was trying to get a feel for and an appreciation for is that you internally believe there are maybe five projects out there of various customers that product hasn't come to market yet, but you have high hopes internally and that may lead to some growth in the recurring revenue growth?

There are a great number of them. Without providing you with specific numbers, there is enough of them that we believe that the recurring revenue should continue to grow. Now, one thing that we have always said is there is no hockey stick.

It is going to grow and our revenue model is such that we build on these recurring revenues, and that over time, they will build, but unless we would have a specific customer which has such a high success rate, we don't see that having a hockey stick effect in our recurring revenue stream.

Okay. Thank you.

Your next question comes from Izet Elmazi of TD Newcrest. Please go ahead.

Hi, guys. It's Izet Elmazi on behalf of Scott Penner. I just had a couple of questions. Can you provide us some milestones for the Sony litigation? What are the next steps in the process and when can we expect them?

Well, at this point, the Sony litigation is on a conventional timetable. Sony has now filed their statement of defense. So we get into a broad discovery phase, which over the next approximately six weeks or so, the discovery process commences whereby we're required to provide certain documentation. Thereafter, Sony is required to provide certain documentation, so broadly, over the next three-ish (sic) months, there is a discovery process that is ongoing.

And speaking with our counsel on this just yesterday, following that discovery process, the Markman hearing would be scheduled for in and around January, February of this year, so I think those are the broad markers at this point. Discovery for the next little while, followed by the Markman hearing.

And have discussions with Sony taken place in the interim?

We are not going to answer those kinds of questions in this context. But what we will tell people is what we've said before is that we would prefer to be licensing our technology rather than litigating.

If the opportunity for meaningful settlement discussions presents itself during this piece, we will engage in those constructively. But I think it is inappropriate for us to kind of give a play-by-play on those sorts of details as this litigation process is ongoing.

Fair enough. And the confidence that have you in your pipeline, can you just talk about what is giving you that confidence? Have the deals actually moved forward or are people just waiting for the Sony litigation to end?

You know, on the Sony litigation, I do want to -- I think as a whole, we want to share a couple of thoughts. Is ECC adoption where we would like it to be? No. We would like the pace and extent of it to be higher and faster and deeper. We are ultimately very confident that that adoption will take place. The challenge that we're confronting right now is the pace of that isn't where we would like it to be.

That being said, what gives us some confidence? Well, we tried to share one of those principal items with you today, the design wins, that is there, it is real, it is subjective. It is a pretty good barometer of one of the items that gives us confidence. On Sony, there is no doubt that this is a big deal for Certicom and that broad concept of ECC adoption.

We haven't had anybody say to us specifically that because you've sued Sony we won't do business with you. But on the other hand, we don't know who hasn't phoned or what -- people who just may be just sitting on their hands. So all of those things come into the mix where we are extremely confident that ECC will be adopted fully and completely out in the marketplace.

We'd like the pace of adoption to be faster. We see the very positive proof points of the licensees that we have, of the design wins that we have. And we're dealing with the challenge of this Sony litigation. All of those things go into the mix. But we're very confident on the ultimate destination that we will arrive at with the adoption of our technology.

What type of items could spur the pace of adoption that haven't taken place already? Several years ago, it was supposed to be the big NSA deal you guys signed. Like what standards have been changing, ECC is being implemented in standards, yet your revenues don't seem to be following that pace?

I think the standards work is very important, and that is ongoing, but the pace of that, again, we would like it to be faster. We're continuing to focus on those standards, and we will continue to work in there. I think that the commercial uptick from the NSA license has not been as fast as we would like, but again, we have no doubt that that will happen.

The significance of that for the government sector is overwhelming. And that we remain confident that that will take place. The adoption by commercial users, we would like to have going at a faster pace. The Sony litigation is very significant in that respect. You have a user who we believe is using our technology and hasn't paid for it. As that litigation unfolds, we think that will have a very significant impact ultimately on the adoption issue. But all of those thing goes into the mix.

Okay. And not to belabor this too much, but the DTCP group has several other members in there, have they been approached, and do we expect any potential litigation against them in the near future?

I'm not going to comment on, we are actively working to license our technology with all market participants who we believe are using our technology or have a use for it. That being said, we're not going to specifically say who we have issued notices to, or any of that sort of detail.

I just -- we will confirm to this group what we said before, that look, we're not going to be shy about enforcing our technology or enforcing our IP rights. However, this is a big deal for us to have one of these claims on the table. While I never say never, I don't think we want to get into more than one fight at a time. And I think that is the way we're looking at it at this point.

Okay. That's it for me. Thanks a lot.

Your next question comes from Paul Lechem of CIBC World Markets. Please go ahead.

Thank you. Good morning. I have a few questions. Just going back to the recurring revenue line again, could you give us some sense of what is the split between the software support component and the royalty component of that?

You know, we have not disclosed that, and at this point, we have decided not to do that. I think the important thing is there is a very healthy revenue stream in both that keeps on growing, and we just believe that what is important is the fact that it is a revenue stream, and it is a blended -- it is a blended stream.

Is it fair to say that the support revenues outnumber the royalty revenues at this point in time?

No. I wouldn't go that far.

The support revenues are for your Security Builder and other products, but a lot of the products are used in the development phase for your customers, and so I'm trying to understand, what is the longevity then of these maintenance agreements? Once they have developed the product, what is the requirement for them to continue paying support and maintenance and can you give us some idea of the --

Well, one of the services we provide is, obviously, the -- we upgrade the software. Typically, when the product gets into production, and that doesn't change very much, but what does change is we keep them informed on any potential threats, and bring them any fixes on any potential threats that may occur from time to time as hackers get smarter.

Do you have any stats on what the turnover has been in your support revenues? Do you have 90% renewals, 80%, 50%?

It is very high. It is in the -- it is certainly in the -- I would say in the 80%.

Okay.

I mean it is quite a high number. Of renewals.

Okay. On the litigation side, or the infringement side, do you have any sense, or can you give es any thoughts in terms of what the level of infringement is out there, in terms of how widespread it might be in terms of products, and in terms of volumes, as well? What are we talking about in terms of infringement out there that you think is happening?

I'm not sure how to answer your question, Paul. Do we believe that there are other people who have effectively, through their own development work, and development of their products, that are infringing our IP? Yes. We do believe there are others. And we believe that the numbers are very, very -- that the amounts are potentially very, very significant.

I think it would be inappropriate for us to get into more details on that at this point. Other than to, I think -- I think we are being quite transparent in this in that we're saying quite clearly that we will defend our IP rights. We have demonstrated that by the Sony claim.

I've also indicated in the past and again today that we're dealing with Sony first, and then we will look at the world as we find it after Sony. But that being said, we do believe that there are other infringers out there, and that it is not an insignificant number.

Okay. I guess my question is, are we talking about thousands of units which are being shipped with -- potentially shipped with Certicom technology, or infringing on Certicom's technology or are we talking about millions of units? Can you give us some level setting in terms of where you think the level of infringement is at this point in time?

Paul, it's Herve. The question may be answered in one way, it is very difficult to say because you may have a unit that includes -- you may have a manufacturer that has incorporated our technology in a unit that sells for a nickel a piece, and having huge volumes of that may or may not have huge revenue impact to us, if we had that.

On the other hand, you may have the manufacturer that has a smaller number of units, but higher price. And again, the same rationale is there. So we don't have a good feel for that, if only because in many cases, we may not even know that a manufacturer is using our technology. If it is a closed loop system, we wouldn't know. If it is part of a standard, it becomes easier to find out.

Yes, so I guess what I'm trying to get at is when you launch these lawsuits, how do you even understand what the potential damages might be when you are spending a certain amount in legal fees every quarter right now and increasingly in the next quarter, how do you understand what the potential damages might be?

Okay, so Paul, again, just to try to be specific, because we do want to answer your question, if you look in the release, what we've said this time around about Sony, where we've indicated that we expect to obtain a reasonable royalty applied against the products that Sony ships that we believe are using our technology. So as part of our background work for this, we evaluated that. We looked at the products in question. We identified the security architecture.

We applied various potential royalty rates based on what we see in the marketplace and our past experience. We came up with a number. And you know, we've indicated in the past that although the cost of initiating and pursuing this claim is significant, that the amounts in question with Sony far and exceed the amounts we have to invest in it. It makes very good business sense for us to pursue the claim.

So, yes, we do look at this in that type of detailed, precise dollar-based levels. That's where we came out on Sony. We've indicated in the past and again today that, yes, we believe that there are others out there. And without trying to dance around the question, the only thing that we would say to you is that the amounts in question are material. They're material to Certicom. And we will continue to stay focused on that as we move forward. But Sony is first.

Okay. Thanks. Moving on, in the digital rights management space, there have been a couple of companies that have now stopped putting digital rights management on online music sales, and I'm wondering does that change your view of the potential for your technology in the DRM market? Or is it still as robust as you once thought?

It is a significant development that you're talking about, the whole evolution of that space. I don't think it changes our overall view that it is a very significant opportunity for us, and we have worked in that area in the past, and we will continue to work towards opportunities. Important development, we're monitoring it, I don't think it has had a fundamental impact at this point.

Okay. Last question, as you are searching for a CEO, I was just wondering if the board has reviewed other options in terms of where to take the Company? Are you focused on going this alone with a new CEO or have you looked at other alternatives, as well?

Our board, so the answer to your question is that we have always, and we will continue to look at all opportunities, and that's what any board should be doing. Our job is to maximize value for shareholders. So we're continually focused on that. And as we go forward, both in the context of the CEO issue, or other opportunities that present itself to the Company, all options are always on the table. There is nothing that is arbitrarily opened or closed. We look at every opportunity. And we will always do the right thing that provides the best value for shareholders.

There haven't been any step-up in the level of activity to review other alternatives?

Have we formally initiated some process? No. If we did, we would announce that. But we have not formally initiated any kind of process, other than we're doing the things that I believe that this audience would expect us to do.

Do we talk with potential partners all the time? Yes. Do we look at new business opportunities? Yes. Do we always continually assess the opportunities in front of us and the human capital that we have available to execute on those? Yes.

So all things are always on the table. We view that as part of our job. And we will continue to go forward with that broad awareness of our responsibilities in mind.

Thank you. Thanks for those answers.

Your next question comes from Robert Jordan of Morgan Stanley Investment Management. Please go ahead.

Hi, good morning. Of the 36 design wins, how many different and unique customer does those represent?

I don't have those details, but they represent quite an array of them. And some of them are with existing customers, but by and large they're with new customers.

Okay. So it is, it might represent 20 or more individual customers, whether new or not, i.e., it is not like five customers each with seven products?

No, no, no. It does not represent that.

Could you break it down somewhat by sort of technology or application end point type? I think that might help a little more without disclosing what the actual product is or the customer itself.

Okay. Well, we have chosen not to break it down any finer. I think what is important is to understand that we have quite a level of activity in each of the five markets we're in. Some of them are more mature markets. So -- and we're much more entrenched, like the mobility markets.

So we would tend to get a bigger share of that than we would, for instance, in the sensor market, which is a relatively newer and less mature market for us at this point. But -- so to bring it by sector, we believe that is probably not the best barometer. The barometer is in total, where are we heading, and what does that provide for us in terms of view of the potential for royalty revenues in the future.

Okay. Now, a bit of a technical question. When somebody is implementing AACS, how often, in order to do the appropriate encryption do they have to exchange a new key, or like a new session key? I remember with DTC/PIP, I thought it was on the order of every two seconds you had to do a new one, and I wondered how it is for AACS?

Bob, I think to make sure your question is answered correctly we would have to get some technical input on that, so I think we will have to get that one by way of follow-up for you.

Okay. That would be great.

Now, what is the -- what was the thinking, if you can remind me, or is the current thinking in terms of use of direct cash to prosecute infringement cases versus either one-time or an ongoing relationship with contingency firm or other sort of firm that specializes in making sure people get paid for their fair amounts for their intellectual property?

I think, Bob, your question is, you know, and I can answer that specifically in the context of Sony, and again, before initiating that, we looked very carefully at what the alternatives were. We made a determination simply to pay our lawyers as we go, rather than enter into any contingency arrangements because we believe we are going to win, and it costs us a lot less to pay them on a cash basis than a contingency basis.

Agreed. But it always looks better if you think you are going to win, as a small company with -- you have plenty of cash resources, but one of your greatest strengths is that at this point for a small company is that have you good cash resources, you can afford to stand up for yourself, and be tough, if necessary, and if something goes wrong with, or not as well as hoped for, with these suits, then that major advantage could be significantly diminished, which hurts you a lot in the long term. And that's, I think, the greatest shareholder concern at this point.

The costs of the litigation have the potential to be significant, so I certainly agree with that. We made the determination on Sony on the basis that I described, which is we made the best assessment of how do we put the most dollars in our shareholders' pockets while we will be the first to acknowledge it is uncertain, we are planning on the basis that we've done our homework. We believe we are going to win that case, and we proceeded on that basis.

Okay. What is your capability of opening multiple fronts, whether it be in district courts or with something like the ITIC? And with other products?

So, financially, we do have the capability to do that. If there was a -- the right circumstance, as I mentioned in the case earlier today, or pardon me, in the call earlier today, we're focused on Sony presently, so that is not something that is currently in our plans.

However, as I mentioned earlier, you never say never. If a circumstance is such that the right thing to do for our shareholders is to bring a claim, we have pretty significant financial resources today. We want to husband those resources responsibly, we will continue to do that.

And if we ever got to such a circumstance, we would, again, give consideration to the alternatives that you've discussed, including potentially partnering. So I think everything is on the table, Bob, is the answer to your question.

Okay. Final, just bit of encouragement, to the extent that you can point out specific applications or not even applications, but elements of implementing applications that would tend to infringe, or where your technology offers specific advantages, as opposed to generally talking about ECC, I think it will serve you particularly well with your investor base, and, frankly, with the customers, too because I know that having talked to other people in the industry, there are plenty of skeptics out there who say, well, there is a big difference between Certicom and ECC and I think that is something you've acknowledged in the past, while you certainly have lots of intellectual property, ECC itself is out there and the more detail you bring, the more credible your case in front of everybody. So that doesn't require a comment. It is just my comment out there.

Valuable input and we want to -- I think we've taken a step today towards being a little bit more transparent on the design wins. We will continue to work on it and try to do better and provide more detail each time we meet with you.

Okay. Thank you very much, and good luck, gentlemen.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up question from Glenn Jamieson of Orion Securities. Please go ahead.

Bernie, just in terms of the CEO search, you said you hoped to have something announced by the end of this calendar year. If for whatever reason you're unable to find a suitable candidate, will you stay on in the CEO role for an extended period of time?

Glenn, I think to answer your question, I will stay in this position as long as it makes sense, and that can make sense from the perspective that you described, that as we're working toward getting someone, and we haven't obtained them, or the board asks me to stay in this -- in the circumstances that you described, or in other circumstances.

So there is stability here. And I'm not going anywhere until we've got the right person to lead the Company, so I do want to give that assurance, that there's complete stability here, in terms of I'm here, in the role, until we find a person that the board determines is the right permanent CEO.

Okay. Thank you.

Your next question is a follow-up question from Lawrence Rhee of Blackmont Capital. Please go ahead.

Sorry, guys. Just to clarify, can you just provide, what has been the historic time frame from a design win translating into revenue? If you can just give it in terms of months or years, it would be great.

So what I said a little earlier is we have an up front tool kit fee when we sign a design win. And then while it is not cast in stone, we do have a period of time that is from the time that we signed the agreement for the tool kit to be used and the technology to be embedded in the customer product, then the customer product going to design phase, manufacturing phase, marketing phase. What we have seen is that typically doesn't start until about nine months, but it can go sometimes a lot further than that before the product gets released.

Got it. And what has been your track record for your existing -- I guess the six design wins in '05, and 26 in '06, have all of them somehow are expected to translate into revenue or have some of them fallen off the table?

Some of them have fallen off the table. Some of them have been mildly successful. And a few have been more than mildly successful. Some of them, while -- if you take the 36, for instance, these happened in the last, I would say, five quarters, or the four quarters ended April 30, '07. Many of those have not come on stream yet in terms of shipping, but we are getting some revenue from many of them, if not most, in terms of annual support maintenance.

Got it. And just to clarify, the 36, that is a net design win number, and just to clarify, that, I assume, that is all -- if one of them has fallen off the table, the number would be 35?

Those are the agreements that we have signed in the year.

Okay.

Typically, if they are going to fall off the table, it is not going to be in the first several months. But we may not -- we may not know until months and months after, that it has fallen -- that the customer has decided not to roll it out.

Got it. Okay. Thanks, guys.

Your next question is a follow-up question from Izet Elmazi from TD Newcrest. Please go ahead.

Hey, Herve, I know you don't apply revenue guidance, but given the consensus number that was out there prior to the warning in Q1, I think it was about $28 million, and given the comments about your pipeline and how confident are you in closing some of those deals, can you just maybe provide some input as to how you see the year shaking out? I know you said earlier that you do see some growth. Maybe how much?

Well, to reiterate Bernie's comment, we look at our pipeline, we look at the level of activity, we look at the deals. We're very confident that we will have year-over-year growth as we've -- and significant growth, as we've mentioned previously. We don't see that changing at this point. We keep on monitoring it.

Obviously, we're disappointed in the first quarter and we have to keep on staying close to it to make sure that we understand where our numbers are going to be for the year. But at this point, we don't provide guidance and it would be inappropriate for me at this point to provide any further comment on it.

All right. Thank you.

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

If there are no further questions, we thank you for your time this morning. As a reminder, our annual and special meeting of shareholders will take place on Thursday, September 20, at 10:00 a.m., at the TSX Broadcast Center in Toronto.

Our next earnings conference call will take place in December when we report our results for the second quarter of fiscal '08. Thank you very much. That concludes our call.

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