BlackBerry Ltd (BB) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Certicom Corporation fiscal 2008 second-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 to queue up for questions. (OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded today, Wednesday, December 5, 2007 at 11:00 AM Eastern time. I will now turn the conference ever to Danna Broadworth, investor relations consultant. Please go ahead.

Good morning and thank you for joining us for Certicom's conference call to discuss results for the second quarter and six months of fiscal 2008 ended October 31, 2007. On the call from Certicom are Bernard Crotty, President and Chief Executive Officer, and Herve Seguin, Chief Financial Officer.

I remind you that all dollar amounts discussed today are in U.S. dollars. This call is also the 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. For a discussion of factors that could cause actual results to differ materially from any forward-looking statements, please refer to the Company's most recent annual report and other documents filed with securities regulators.

I'll now turn the call ever to Bernard Crotty.

Good morning and thank you for joining us. Please turn to slide four. We will follow our usual format starting with an overview and a review of the operational highlights for the second quarter and subsequent to quarter end. Herve will then go through a discussion of our financial performance and our outlook for operating expenses. I will conclude with a brief summary of the quarter and our Company outlook, and then we will take your questions.

Certicom's revenue for the second quarter was $3.8 million, compared to $5.9 million in the same period last year. As we stated in our pre-release last month, our second-quarter revenue fell short of expectations due to a combination of factors. These included the complex nature of the strategic deals we focus on and our product development shift towards total security solutions. Also affecting the year-over-year comparison is a large upfront licensing fee recorded in the second quarter of fiscal '07.

While we are disappointed with our revenue, I reiterate that we have not lost any prospective deals for the first half of the year. Further, we are encouraged by the expansion of our pipeline of opportunities, which continues to grow by quantity and quality.

Since our pre-release conference call on November 6, we have announced several key licensing agreements including contracts with Texas Instruments and Bally Technologies. These commitments demonstrate that leading technology companies are indeed embracing Certicom's complete security solutions.

Please turn to slide six. On August 31, Sony answered our patent infringement complaint, denying infringement and asserting invalidity. However, Certicom remains confident in its legal position. Licensing agreements secured in the second quarter included contracts with Sicon Semiconductor, which licensed Certicom technology for digital content protection, and Vaultus Mobile Technologies, which licensed our ECC technology for mobile enterprise applications.

With respect to new product development, there were two major initiatives of note. We launched Security Builder API for .NET. This is a valuable tool allowing developers to easily add advanced security to Microsoft .NET applications. We also opened a state-of-the-art design center in Silicon Valley. The center is situated close to several leading chip manufacturers and will be dedicated to the development of hardware-based cryptographic technologies.

Certicom was proud to receive Frost & Sullivan's 2007 product innovation award for our ECC technology during the second quarter, an honor that affirms Certicom's leading position in Next Generation cryptographic technology.

Please turn to slide eight and I will draw your attention to several key announcements made subsequent to quarter end. Texas Instruments licensed our ECC technology for security and next generation government issued identification documents. IdentiPHY also licensed our ECC technology for new security products for business and government agencies. We also announced a partnership with Cavium Networks which will see our Suite B Power Bundle support their processors. The joint solutions are targeted for high security U.S. government applications.

Government security has been identified as a high-growth area due to Suite B recommendations from the U.S. government. ECC provides the required cryptographic strength and efficiency for addressing complex government security needs.

Slide nine. In addition, Bally Technologies licensed Certicom's technology for protecting its casino systems. Gaming is another specific growth area that we have identified and for which we are adapting total security solutions. In the area of digital content protection, we announced a partnership with Kilopass for the delivery of comprehensive security.

And now we will pass it over to Herve Seguin to discuss Certicom's financial performance for the quarter.

Thanks, Bernie, and good morning, everyone. Please turn to slide 10 for the financial review. Revenue for the second quarter was $3.8 million, down from $5.9 million in the same quarter last year. As Bernie discussed, the quarterly revenue is below expectation due to a combination of factors pertaining to the complexity of our deals and a product development shift towards a more complete security solution. Also affecting the comparability this quarter is a large upfront licensing fee recorded in the second quarter of fiscal 2007.

Operating expenses for the second quarter were $5 million. This compares to $4.6 million for the corresponding quarter of fiscal '07. The increase in year-over-year operating expense was mainly due to the legal expenses related to the Sony litigation. However, these expenses were lower than our Q2 guidance as our litigation expenses, which totaled $400,000 for the quarter, were lower than expected.

The net loss on a GAAP basis for the second quarter was $2.8 million or $0.06 per basic and diluted share, compared to net earnings of $600,000 or $0.01 per basic and diluted share in the second quarter of fiscal '07. The second quarter recurring revenue totaled $2 million consistent with $2.1 million in the second quarter of last year. As at quarter end October 31, we had $40.4 million in cash, compared to $43.2 million at the end of fiscal '07.

Please turn to slide 11 and I will run through the year-to-date numbers. Revenue for the six months ended October 31 was $7 million, compared to $10.6 million in the same period last year. Operating expenses for the six months totaled $10.7 million, compared to $9 million last year. The increase in year-over-year operating expenses was mainly due to legal expenses related to the Sony litigation, as well as a planned increase in product development resources specifically related to new product initiatives.

The year-to-date net loss on a GAAP basis was $6.2 million or $0.14 per basic and diluted share compared to a net loss of $700,000 or $0.02 per basic and diluted share for the same period of fiscal '07. Recurring revenue for the six-month period totaled $4 million compared to $4.1 million for the comparable period last year.

For the third quarter of fiscal 2008, we expect operating expenses to range from $5.4 million to $5.8 million, including estimated legal expenses ranging from $400,000 to $700,000 associated with the Sony litigation. We continue to aggressively manage expenses to achieve a cost structure that is aligned with revenue. This is key to Certicom's goal of achieving sustainable profitable growth.

As we have stated before, Certicom's strong cash position, debt free balance sheet, and 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 for summary remarks.

Thanks, Herve. Please turn to slide over 13. Now a quick review of our progress on the Sony litigation. As we announced last quarter, Sony answered Certicom's patent infringement complaint, denying infringement and asserting invalidity. 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. We are currently progressing through the broad discovery phase in which both parties are required to provide certain documentation.

With regards to the CEO search, the Company expects to make an announcement about the appointment of a new CEO by approximately December 31, 2007.

Please turn to slide 14 for a summary of our performance and comments on our outlook. We fully acknowledged that Certicom's top line performance for the first half of fiscal '08 was disappointing. I will also point out that the next few quarters may exhibit revenue variability, including upside variability as we adapt to changing market dynamics, progress through the Sony litigation case, and proceed with executing our growth strategy.

But I want to draw your attention to the longer-term outlook in which there are several factors that reaffirm our optimism. Our portfolio of design wins continues to expand, providing clear evidence of the growing global adoption of ECC. These wins, though they can take time to translate to recurring revenue, are essential for strengthening our pipeline of potential recurring revenue.

Our product development strategy is making excellent progress, as shown by our recent agreements with Texas Instruments, Bally Technologies, and others, which feature our end-to-end security solutions. The establishment of our new crypto technology design center in Silicon Valley also speaks to our increased focus on product development as we adapt to the dynamics of the market.

Please turn to slide 15 for closing remarks. Going forward, our strategy is unchanged. Management 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.

(OPERATOR INSTRUCTIONS) Please be advised that members of the media and general public will be in a listen-only mode for the duration of a question-and-answer session. Certicom will be pleased to arrange for any follow-up discussion or interviews with senior management after the call has been completed. To make these arrangements, please contact John Callahan at area code 703-234-2357. (OPERATOR INSTRUCTIONS)

The first question comes from Scott Penner, TD Newcrest.

Thanks. Herve, just to clear up a couple of things, the original or revise guidance range I believe was $3.1 million to $3.5 million. What created the $3.8 million relative to that range?

Well just the quarterly audit. As you know, we close our books. We then look back at every deal, scrutinize it to see -- to make sure that we comply with the revenue recognition rules. In this case here, there was an additional few hundred thousand dollars that we included in revenue as a result of that normal quarterly review.

Okay and similar to that, looking at the expenses, it does look like even with the lower litigation expenses that your OpEx was below the guidance range provided in Q2. Were there any expense reduction initiatives or anything taken during the quarter?

You know, Scott, given the fact that we have had a shortfall in revenue, we are being very, very careful about our spending. Having said that, we are also careful not to slow down revenue so much that we couldn't recover as opportunities come up. So we are being very aggressive in making sure that we review all discretionary spending and that all spending be made only as it relates to generating revenue for the Company.

So we are being very careful about our spending. But there was nothing in particular in terms of saying we took a specific major initiative within the Company, but I have to tell you we're reviewing everything on a case -- a spend-by-spend basis.

Okay. Relative to the -- looking at the recurring revenue of $2 million, as you know, it has been flat now for a few quarters and just if we could again return to the issue of trying to reconcile that with the design wins which, Bernie, you mentioned have continued to be strong and that we all have the numbers of the 36 design wins last year and 26 the prior. That metric seems very strong and as discussed in prior conference calls, the recurring revenue is not really moving anywhere fast.

So I guess could we return to that discussion of the revenue within that line that falls off due to limited life arrangements? What of the recent design wins are actually contributing to royalty revenue right now?

Well, I'd just like to remind you of a couple of points. One is design wins are very important because obviously they help us put in place this pipeline of potential royalties and as we mentioned before, in a prior call, design wins translate into three scenarios. We make our fortunes on the back of our customers' fortunes, and in some cases products that are released and are highly successful, in other cases, they are marginally successful. And there are some cases where the product never gets to market.

So on that basis, when we look at the 36 design wins, depending on where they came in last year, they could be still not producing because we said that on average it takes about somewhere in the area of nine months from the time we get a contract and to the time when they ship. However having said that, every deal is very different. It may go from a few months to a few years before they turn into revenue.

So we do have some of those 36 that are on stream, but we have many that are not. So when we look back at last year.

I review -- we keep track internally here of what that potential pipeline can be. I review that with our sales force every quarter to try and understand where that is going, and we try -- and we're really very much reliant on what the feedback our sales rep gets from the customers in terms of when we think these products are going to ship. And depending on how bullish or bearish those customers are on their predictions is what we look at this end here and that is the data we have to look at.

So we do keep -- we are disappointed that it is not growing. I can tell you the pipeline is healthy. That does not give you very good comfort, because it has not shown to the bottom line yet, but I can assure you that from my perspective it is still a very healthy pipeline and we are as anxious as you are to see some of these come on stream.

Sure, just looking as well at the services revenue that has done fairly well over the past few quarters, what -- typically going back into last year I would have expected larger companies that have services teams that licenses to those guys would not necessarily generate the same kind of services revenues. So I'm just curious to find out whether what we're seeing out of the services revenue is more of a consulting type focus for the Company or whether these -- some of your licensees are in fact taking some of the services?

Scott, it is a variety. We have always had -- I'll call it a consulting aspect to it, and that is fundamentally carrying on consistent with past practices. There are many licensees however who do require the services capabilities that we have to fully utilize the products and technologies in question. So it is a broad category of users in the services sector. But it would be wrong to go on a takeaway that it is an expansion of an ordinary course consulting business. That is not the case.

There are many, many users who are -- require the services to fully leverage our products. Herve, I don't know if you'd add anything to that?

No, that is right.

And is that line still expected to be --? It has been relatively consistent. Is it still expected to be lumpy quarter-to-quarter?

Well our services business has not by and large been very lumpy quarter-over-quarter. I think we -- it has been healthy over the quarter. So we would not say that. We do not expect nor are we planning to make our services business a substantially bigger number than the product business. In fact it is the contrary. We would like to as the model moves forward is to have greater product revenues in relation to -- as it relates to -- its comparison to the professional services, because obviously the margins are higher in product than it is in professional services.

Right and just lastly, Herve, the CapEx on a quarterly basis has jumped a little bit over the past couple quarters. Is there anything unusual there or is this a trend that we should see going forward?

You know, there is nothing unusual, but I would not think that it would -- not anticipating it is going to go up much more than what it has, but I am not anticipating that there is going to be a substantial reduction from it. We have an infrastructure that needs to be maintained and changed as it is growing and as the needs occur.

Okay, thanks.

David Wright, BMO Capital Markets.

Thanks very much. Good morning. Just staying on the services number for a few minutes, is there a seasonality in your services business? When I look at past years, Q2 was usually the weak quarter and then it built for Q3 and Q4. Was that just happenstance or is there in fact seasonality in the business?

You know, David, we continue to look to see whether there is any seasonality in our business and we don't see any. If you -- whatever you would see would probably be more coincidence than anything else. You know, we have quarters where we come into government year-end where there is a push on spending, whether it be the U.S. or the Canadian government. We've got year ends where other companies have got end of year period. Then we've got -- one would think that we have got summer slowdowns, well, in fact it does not seem to happen. We've got so many factors, we don't seem to have seasonality in our products -- sorry, in our cycles.

So from what you look at and I guess there's a bunch a short-term and long-term projects and there is maintenance being paid. Do have any kind of indication on what the January or the April quarter looks like?

We do at this end here because we know where our engineers are being deployed, so we have an understanding on a short-term basis where we think -- where the professional services revenues are going to come, because typically they need to be -- they need to be planned ahead of time in order to slot our engineers as they flow from one project to the other. So we have a fairly good indication on a short term.

Considering that this is I think the strongest number in services in many, many years in the quarter, might we see a new high in Q3 or Q4?

I don't think so. I don't think you will see a new high. I think you'll see a continued healthy professional services business, but I don't anticipate -- I don't anticipate it is going to be a new high, but we have some major projects going on now. You know, specifically we have for instance world space happening in Europe, where we are -- this is a very intense period for us. We also announced TI, where we're delivering on some chip designs. So those are intense periods that do require us to -- we do provide a lot of professional services in the implementation of those contracts.

Okay, that's great. Thank you. When I look at the operating expenses, the numbers -- congratulations on keeping your costs down considering what the Canadian dollar has done and what you are trying to do for delivering revenues. The mix was a little different than I expected. And I don't know if there is anything going on there. Sales and marketing number was a lot lower. So is that that your sales team is just making more phone calls on fewer flights or have you reduced people there? What can you tell us?

You know, it's probably all of the above. You know, we're being very careful and very aggressive in managing our costs. As an example, we opened up a new design center in Southern California, but our expenses have not gone up because we have managed to pull the money elsewhere. It did not come out of just engineering. It came out of everywhere in the organization. So we're committed to try and make all new initiatives cost neutral as we move forward.

So there has been -- we continue to aggressively look at it. We've got some changes. You are right, if it is possible to make a two-legged call as opposed to a four-legged call, we try and do that. If there is a possibility that we can do con calls as opposed a flying out, we do that as well, understanding that for a sales rep there needs to be some face-to-face meetings with customers.

So we try and take all that in balance and we did that in the quarter and I was quite pleased to see that of the results, but we are still working on trying to get more efficiencies that way.

I would just go, David, I would want to add to that is that while we are watching our expenses very prudently, we are more focused on growing revenue and we are not going to in anyway, shape, or form do anything to inhibit revenue. We're just going to manage the costs very tightly, but we will invest as necessary to grow the business. I think that is the most important message.

That is great. Thank you. The design center which you announced at the end of October, obviously there'd be set up costs during the quarter. So was there a full quarter of expense in Q2?

I'm trying to think when we started. I would think not. There is still some ramping going on.

Okay, so that is part the cost increase that's expected for Q3 and I guess currency would be the other thing that is added in there?

That is correct. And as you know, we have currency hedging program. We have expenses hedged out over the next twelve months. Our average on our hedges for the next twelve months is about $0.95, but they are a lot closer. This quarter we probably had a hedge of less than $0.90. So we are -- so a lot of -- it is catching up to us, though, because the hedge program is not there to -- it is there to cushion the impact. It does not take the impact away over the long term.

Right. Okay, terrific. Thank you very much for your comments.

Lawrence Rhee, Blackmont Capital.

Just wondering, could you comment on your sales force and kind of how -- have you experienced a higher degree of turnover there with I guess results being lackluster over the past two quarters? Or if not, then how have you been able to maintain keeping them?

Well we have not experienced any turnover in the sales force, voluntary or involuntary. While the results have been disappointing, I think that there are a lot of factors that go into that and we have a very strong sales force. We have a very significant pipeline of opportunities and we are confident that that team and the whole Certicom team will execute on those opportunities as we go forward.

Great.

And it probably plays to the strength of the pipeline we have. I mean, our reps are not going to run away simply because it is taking longer to close the deals. Sales reps who join our Company make a tremendous amount of investment in time as they build this pipeline and as they start to bring it in. And I really believe they are in that phase now. It is taking longer but they haven't given up and we haven't lost anyone.

That's great. With respect to the recent customer announcement with Bally Technologies in the gaming space, it is outside of I guess your previously stated market opportunities, I guess the traditional five market opportunities that you've highlighted in the past. Can you just comment on your opportunity in the gaming space and does that mean some of the other opportunities are just not as near-term as the gaming space is? Just provide some color there would be helpful.

That opportunity is a very, very significant win for us and we're very pleased with it. I wouldn't necessarily view that as off-focus. I think it was just one that ripened at an earlier point in time and we took it. We see lots of opportunities there and we're going to do everything we can to aggressively execute on further opportunities in that space. But I would not read into that that impacts on the growth strategy in any way shape or form. I think it is just simply the opportunity that ripened earliest.

In fact, Lawrence, it is not a new sector for us. It is still very much part of content protection. Effectively what we're doing there is we are making sure that we secure the movement of content between the server and a client in casinos. So it is not a change. It is just a new industry sector that is using the technology we developed in a vertical space of content protection.

Got you, okay. Great, thanks, guys.

(OPERATOR INSTRUCTIONS) David Wright, BMO Capital Markets.

I would just like to circle back on the CEO search. Is it -- I don't know if you can tell us if you have put an offer out to someone. I would assume that you're narrowing down your choices. And are you at the point where an offer has gone out and you're waiting for that individual to accept?

David, I don't think we want to get into the process details other than to stand by what we have said. We expect to have an announcement by about the December 31, and when we make that announcement, all those process details that you mentioned obviously will have been completed.

Okay, I just wondered about an update there. Thanks very much.

Glenn Jamieson, Macquarie.

Bernie, you talked about the need to transition your products to something more complete, a more complete solution. Can you give me an idea of the timing around that, when you as a Company recognized the need to make that change? When you think the investment in R&D work will be complete?

Then when we look at the variability in your two most recent quarters, is this transition the primary factor behind that? Or are there other factors that play now that weren't present for the last six quarters because those six quarters seem to be more consistent in terms of the revenue that you're able to generate?

It's a great question. I think this evolution in the marketplace is an ongoing evolution. It has been taking place for a number of quarters now and we expect will continue. I think the gaming wins that we have announced are a really good example of the way we are migrating that evolution and that transition. That represents much more of a complete solution.

So I think you have to look at this on a continuum, Glenn. We have been investing in it over the past and we're beginning to harvest a little bit of that investment, as evidenced by Bally's win. But we expect this trend will continue and that we will continue to need to make product investment.

I think the way to look at product investment for us, however, is don't assume you're going to see a big, substantial increase in R&D costs. We're trying to deal with this in a very savvy manner, which leverages previous investments, that looks to work with customers to provide the solution as part of their specific needs. And I think all of those pieces fit into an evolutionary cycle here which we are in the process of migrating.

Then to tie that conversation back to the idea that we've seen some unusual lumpiness in the couple of quarters most recently reported, is that process the driver, the main driver behind that variability, or is there something else that's been going on?

Well it is all of the items that we mentioned. So it is one of the things, but we also have some very substantial, complex contracts that we're negotiating that have slipped. You have a backdrop of the Sony litigation. There's all the things that we noted that fit into the mix. We believe they are all contributing to the variability that we experienced over the last couple of quarters, but I don't think it's necessarily one of them that is the reason. I think you have to look at them in combination.

Okay, thanks. One other question, as it relates to Sony, if you were going to have an early settlement from the process that you're going through, can you give us an idea your best guess at the timing when that would occur?

You know, Glenn, I can't give you anything precise other than to reiterate what I've said before, that we're very confident in our position and at every opportunity along the way, we will engage constructively to work towards a settlement. So I think the way to look at that is at any point in the process if there is an opportunity to engage constructively, we will. What will come out of that or won't come out of that, I can't say other than I can just reinforce that we are willing to constructively engage at any point.

Okay, are there any milestones that we should be looking out for in the next quarter to relative to that litigation?

I don't think anything new. We'd just reinforce the general judicial procedures that are in place. Obviously the initial filings have been made. As mentioned, we are in a broad discovery phase right now, which is ongoing. The next step will be the Markman hearing -- next substantial marker will be that Markman hearing, we hope, in around the second quarter of next year, all of which broadly tracks to a standard judicial timetable for this sort of thing.

We understand there is a pretty significant volume of filings in Texas, so this may be a little bit delayed, but we don't have any reason to believe ultimately that it won't track more or less to a standard procedure.

Okay, thank you.

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

Okay, thank you very much for your time this morning. Our next earnings conference call will take place in March when we report our results for the third quarter of fiscal '08. That concludes our call. Thank you very much.

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