BlackBerry Ltd (BB) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Certicom Corp.'s first quarter fiscal 2008 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 is being recorded on Thursday, September 4, 2008 at 10:00 a.m. Eastern time.

I will now turn the conference over to Dana Broadworth, Investor Relations consultant. Please go ahead.

Good morning. Thank you for joining us as we discuss results for the first quarter of fiscal 2009 ended July 31, 2008. On the call from Certicom are Karna Gupta, Chief Executive Officer and Herve Seguin, Chief Financial Officer. 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 annual report and other documents filed with securities regulators.

A couple of reminders before we get started, although amounts discussed today are in US dollars, the slides are posted on the Company website, Certicom.com, this call is also being webcast live and the link of the website posted on the website at Certicom.com. I will now turn the call over to Karna Gupta.

Thank you, Dana. Good morning. Thank you for joining us. Please turn to slide three. I will begin with an overview and a summary of the operational highlights. Herve will then go through a discussion of our financial performance and our outlook for operating expenses. I will conclude by summarizing the quarter and commenting on our outlook. We will be pleased to take your questions at the end of the call.

Please turn to slide four. Certicom entered the fiscal year 2009 with a new sense of purpose and we have successfully completed the first quarter of our 12-quarter strategic plan. This quarter's results are consistent with our transition plan. As our recent wins indicate we are making headway in developing business in our chosen market verticals. We have several internal milestones in our plan, and we are on track. In energy and utilities vertical, there has been considerable activity in the emerging area of advanced metering infrastructure, otherwise known as AMI. Early in the quarter, we launched device authentication services for Sydney smart energy. Since the quarter end, Daintree Networks a leading provider of analysis tools for wireless smart metering has licensed Certicom security builder technology for the development of ZigBee Smart Energy networking products, and just this morning, we announced a new partnership with Itron, the world's leading provider of solid state meters and automated meter reading technologies to offer strong authentication and enhanced security for Itron's AMI systems. This is a significant win, at a time when the world is moving forward a green energy, it allows us to participate as a Company in the smart metering business in a very substantial way.

In other verticals, several agreements were announced during the quarter. As noted on slide five, in the semiconductor vertical, Micronas in Europe, licensed our KeyInject solution and Qualcomm announced the use of Certicom's advanced cryptographic modules. With respect to our tool kit business, Clear Commerce Corporation selected Certicom's ECC technology to support secure payment processing. And Tumbleweed Communications announced the use of Certicom Security Builder family of solutions. In addition, we continue to strengthen our existing position in the growing satellite-based content management arena. We are becoming increasingly engaged with the leading players such as XM radio, WorldSpace and Ondas. These wins and engagements are important initial steps in our strategic focus. They support our ultimate goal of sustainable profitable growth. I will now pass it over to Herve for the financial review.

Thank you, Karna. Good morning everyone. Please turn to slide six. Revenue for the quarter was $4.2 million compared to $3.2 million for the same period in fiscal 2008. Operating expenses were $6.2 million compared to $5.7 million in the prior year's quarter. Excluding the Sony litigation expenses, operating expenses were $5.2 million in line with the same period last year, and slightly higher than the expense guidance of $5 million given for the quarter. The higher expenses were mainly attributable to our investment in accelerated product development in the enhancement of our customer service infrastructure. The Sony litigation expenses were $1 million compared to $400,000 in the same period last year. The expenses were, however, lower than the guidance of $1.5 million due to timing of legal services rendered. The net loss on a GAAP basis was $3.4 million or $0.08 per basic and diluted share consistent with the net loss in the same quarter last year. At quarter end we had $37.6 million in cash compared to $38.5 million at the end of fiscal 2008 and $43.6 million at July 31, 2007. The Company continues to be debt free.

Slide seven. Operating expenses for the second quarter of fiscal 2009 excluding Sony litigation expenses, cost of revenue, depreciation, amortization and stock-based compensation are expected to range from 4.8 million to $5.2 million. Sony litigation expenses are estimated to be approximately $1.7 million. While we are always prepared to invest in our future we continue to drive to closely align our expenses with revenue in order to achieve positive operating margin and sustainable growth. I will now turn the meeting back to Karna for concluding remarks.

Thank you, Herve. Please turn to slide eight, please. This quarters results reflect a strong progress we are making on our new three year plan. As I announced during the last earnings call, Certicom's new strategy is based on key, four key strategic priorities. Number one, create a sharper focus on target market verticals, those being consumer electronics and mobility. We are making good progress here and we have renewed engagement with our current customers. Second is semiconductors. Some have been announced and more to come soon. The current energy and utilities we have made very good progress as I discussed before. Gaming, we continue to broaden our offer in this area. And finally, defense and aerospace also did some solid progress. Continental Airlines, renewed engagement with General Dynamics and General Electric.

Number two, drive growth by delivering complete security solutions to our customers. And these are evidenced by the explanation I gave before. For example, satellite-based content management. We are providing complete solutions to the service providers, and gaming and AMI, we continue to broaden our offer of solutions.

Number three, establish a significant presence in the high potential geographic areas such as Europe and Asia Pacific. We have already hired sales and support personnel in these geographies and we're working to build pipelines, and finally, we continue to build operational excellence and additional cost efficiencies. We continue to do more with less, we have accelerated product development schedule without severely taxing our expense line.

Slide nine. Going forward, we will continue to develop tight total security solutions by leveraging our core strengths. They are our technological innovation, our ECC leadership position, a highly recognizable brand, and an exceptional human capital. Going along with this will be our steadfast focus on protecting our IP our patent infringement litigation against Sony is progressing as planned. We are currently involved in the discovery phase, which involves documentation review and exchange of specific information. While this case is important, it will not divert our focus away from the significant early progress we are making in the important build phase of our new strategic plan. As we take further action to implement this plan, we expect to report more customer wins and improved cost efficiencies as we move through the remainder of the fiscal year 2009. Thank you. With the help of the operator, we will now take your questions.

Thank you. (OPERATOR INSTRUCTIONS) 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 call John Callahan at 703-234-2357. (OPERATOR INSTRUCTIONS) One moment please for your first question. Your first question comes from David Wright from BMO Capital Markets. Please go ahead.

Thank you. Good morning.

Good morning, David.

Congratulations on your quarter.

Thank you.

So, in the past, because kind of new orders are sort of few and far between it seems, management started giving kind of contract win data, and I know Karna, you have talked about that sort of gives you false hope because your -- it depends on whether the customer is going to actually ship or not. But do you have any kind of data like that that we can chew on a little bit?

Sure. Good question, David. I think if you contrast with the past, the issues were we gave data on design wins and we really did not know when the success will come in terms of the shipment from our customers. As you look at the new type of engagements we are having, we are not really moving towards more of a solution set. Two things are happening. The deals are a little larger and more substantial. So when you see things like Itron, you know that with the Smart Energy movement that's out there, there's a significant footprint, that's going to unfold over time in the Western Hemisphere with the smart metering. By providing this solution to companies like Itron and others in the AMI space it allows us to participate much more substantially in those areas. So yes, the deal structure has changed. We cannot give out the design wins anymore because we are not really using that as an indicator but as we provide you with the contract wins in various market verticals, I am sure you would be able to see a different trend line in terms of the volume of revenue we are look at going forward.

Okay. So if I go other some of the customers that you have mentioned now being active in the quarter, one of the names is a name we haven't heard from for a while which is General Dynamics. Could you, in anyway kind of provide for us the status there in that, I guess they signed up with you a couple of Christmas's ago and then nothing much has happened. What stage are you at with them in terms of shipping of product for revenue?

So, our original deal with General Dynamics which was done a couple of years ago it was a tool kit sale. We are engaging with General Dynamics and we, in our new product portfolio offering, and as we review the capabilities that we bring to the market today, most of our existing customers have shown a renewed interest in engaging several of the areas. When we talk about our AMS portfolio and other offers we have in the marketplace, most of the existing customer base as we come through them have shown a tremendous amount of interest in participating in what we are doing. So, there is no specific answer to that, I have a new sale in General Dynamics to happen over the next 30 days, but this new engagements on existing customer base does provide me a significant amount of optimism in terms of what we are bringing out and how customers are reacting to it.

So how do we deal with originally when General Dynamics was signed it seemed like over the next ten years it could be millions of dollars. And so are we just kind of beginning to scratch at that? I mean, you mentioned Dynamics, General Dynamics would have great prospects, but are we in the tens of thousands or hundreds of thousands or millions of dollars of orders?

David, it will vary. I think in past we saw, we still with the bated breath waiting as to when they successfully start shipping those things. So we do anticipate what we sold and they will come through with proper approval from all of the appropriate authorities, and shipment will commence and we will collect the much anticipated revenue stream. So that's one piece. The second piece is we are engaged with these accounts like General Dynamics on our new offers in the marketplace. That is also opening up a new revenue stream for us as we reengage with them. So it is not only the success of what we sold them that might come through. It is also the success of our new offers that might deliver new revenue stream.

Okay. Your split of service versus license sales, could you remind me, I think it was $1.8 million of service in the quarter, was it?

Yes, I think the, that percentage is, you need to probably look at it two different ways. One is the absolute number, and second is the percentage. So, the services side includes two pieces. That includes professional services as well as maintenance in services revenue. And whereas the product revenue includes all of your royalties, subscriptions, IP, perpetual product revenue. So everything is built into the product revenue. I do expect the services revenue, as we engage in our new solution mode to slowly climb up. That is the anticipation because we are not only at a, at a only designing new product, but we are very much part of the implementation and integration phase. So that number slowly will creep up as the projects take on hold. And I think I am satisfied with the number. I think currently sitting at some 30% or slightly above 30%.

Okay. And so on the, on the product side or even in total, how much would you say is kind of recurring revenue and how much was a one-time item in the quarter not to be repeated?

David, the recurring revenue, this quarter was $2.3 million. That's up from $2 million and if you remember, we have been stuck at this $2 million number for a number of quarters. It is now up to $2.3 million we are very confident that some of the activities we have got going on right now will see that number increase steadily over time.

David, I would underscore Herve's comment as you look at the analysis of this you need to look at it over time largely because when you do sell a product, the products in the revenue could come into your recognition fairly immediately. The service side of the revenue is really based on percentage completion of project and that is length of the project and how long we work at it. But it is a slower climb. So you will not see similar type of bump ups in the service revenue as you may see in the product revenue, just the nature of the business. So you need to have a slightly different curve when you are looking at product bump versus the service line bumps.

Takes longer to build it but then it is steadier in the long term, I guess. Just going back to your strategic plan for the year, now you are kind of four or five months into it. Are you feeling like you are growing the way you expected or are things going a little slower than you expected or are you quite happy with where things are?

So, a couple of comments there. Again it is a good question. Let me start with the areas we have focused in. The areas we have focused in are fairly significant in terms of their size. I'm very satisfied in terms of the response we are getting from the market and the customer in the chosen areas and the offer we are bringing to the market. And these areas each of these segments are global in nature and in scale. And it does allow us to very firmly focus on the future. The down side are the slowness is largely because part of the macro economic situation we are under. Most of the Western Hemisphere, the economic condition a lot of the decisions are moving slowly. So you have a situation where you have a high interest from the marketplace, you have an offer that you are bringing to the market and we are developing that is coming on board. And on the other hand, you have got an economy that is moving a little sluggish so the decisions are longer and our sales cycles are much longer than they used to be. We are not selling tool kits anymore which is a three month in and out. We are selling solutions which is a slightly longer sales cycle. We would have a ramp which is a much more steady climb over time, but in terms of its depth and in terms of its reach into the marketplace, it is going to be much more robust. So based on our internal guidelines and our milestones in the three year plan, I am very satisfied as to we are making progress on those.

Okay. Would you feel that the current quarters results would be the base of revenue and cost expectations for the year or is it still early stages and the quarter results for the next couple of quarters could be very bumpy?

I think there there's always a risk of bumpiness because of the economic circumstance. But if I kind of account for the economy, neutralize that, my expectation is the revenue growth and the business growth we will see a steady climb throughout the time period.

Thank you very much. I will pass the line.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is a follow up question from Mr. David Wright. Please go ahead.

If there are no other questions then I will ask, what's the hiring situation? Are you hiring services people, and where are you looking for those people if you are hiring?

As we build the business, we are looking at increasing two areas to drive the business agenda. One is really the front end of the organization which is all of the sales, sales support and marketing needs to be addressed in terms of its adding people in right geographies and growing that part of the business. That is the one area we are actively growing. The second area is, as the, as our engagements start in the professional services, I do anticipate to support that growth business, we will be looking at additional resources to support the services side. And as Herve mentioned, the nature of the business is also changing for us as we move from tool kits to providing solutions, we are putting in place a worldwide customer support infrastructure that will operate 7 by 24 to support our key customers.

David, we have already put in place a program whereby we use internal resources and third party contract resources to meet our obligations. In that way, we don't tax the ongoing cost base before we need to.

Okay. And I think lastly is RIM is another customer that you mentioned on your list. What can you tell us about them? I know originally they had a contract many, many years ago where they kind of bought out the patents at the time. You then came back to them in I think it was 2003 or 2004 or 2005 or somewhere around there where you had a three year agreement. What has the new contract dealing with?

So, David, let me kind of make a couple of comments. I think with RIM we have done business even last year. So, know, fourth quarter of this year. So, the original contract was there as you said and that has given us some business. We have, we are going back to all of the top tier customers, trying to assess their business issues and business problems which we can solve with our current solution offering. So we have reengaged with RIM and typically any company who is going into solutions that is our engagement model we would walk into a customer and we would have a review in terms of our capabilities. We bring to the market now a set of capabilities that we did not have before. And these capability reviews always lead to a discussion as to what type of problems they're trying to solve. Like any other company, RIM is no exception they have set of business issues and business problems that need to be addressed. We are actively engaged with them in terms of how do we best provide the solution. So we are, I know we are reengaged with RIM in several areas. I expect some of them will lead to some fruitful business for us in the near future.

During the quarter was there revenue from RIM?

In this quarter there was some revenue. Every quarter there is some revenue. But we could do lot more business with any of these large accounts.

Okay. And if you could tell us about the Itron business, was business in the quarter was that kind of an initial payment for tool kits and start ups or are they actually shipping product and you are starting to get royalties on product shipments and that?

Okay. Itron is not in the quarter one. Itron, we just announced this morning as you know. It is a very substantial deal. Let me kind of frame it slightly differently. Itron is the leader in its market, and the overall AMI area in the Western Hemisphere is going through a significant transformation in terms of need for smart energy, smart grid and the whole green energy movement that's taking place. By providing, the type of solutions we have and Itron is one of the leaders and we are very pleased to be partnering with them, we feel it gives us a significant opportunity to participate in this growth area. In terms of the specifics, we expect Itron, some revenues will materialize in quarter two, and going forward as the each of the regions, states and Western Hemisphere go through their jurisdictional roll out of Smart Meter and Smart Grid we anticipate the business to grow, with the natural growth of the business. And it has all of the elements, it has a revenue stream from the products we ship, it has a revenue stream tied to the royalties on certain pieces, it has, -- it is a complex arrangement, but there is a multiple revenue stream which we anticipate will have a long longevity significant impact on our Company.

Do you feel that this is something that is now immediately ramping and therefore there will be meaningful revenues in calendar 2009 or, because we have seen many announcement where it seems like we are just on the cusp but the cusp just keeps taking a while?

I think, good point. I think the Itron there is a revenue to materialize as I mentioned in the Q2.

Okay.

And then it will continue into forward-looking basis.

And would you -- is this going to be one of your largest customers in the next 12 months do you think?

It could be a very big customer for us, yes.

David just to remind you, this is part of the ZigBee standards, so as you know our technology was adopted within the ZigBee and ZigBee is being used to deploy this technology worldwide. So there is some tremendous opportunities for us going forward as mentioned as various jurisdictions adopt and roll out the technology.

Okay. And you announced IBM last quarter. Was the revenue from the IBM contract in this quarter?

Yes, it was.

Okay. Good.

Just to remind you that it was and it will be in every quarter.

Okay.

We will be reporting the, the various milestone payments over the, on a ratable basis on a quarter by quarter basis.

That's great. I'm purposefully no asking you about Sony because I can't imagine there's anything to update us on.

We're really, David, we wish we could, but as you know it is before the courts and we have to be very careful about anything that we would do and we certainly don't want to play out for the court case in analyst calls.

Yes. Thank you very much.

Thank you.

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

Okay. Thank you. If will there are no more question, thank you for your time this morning. Our next earnings conference call will take place in December, when we report our Q2 results for fiscal '09. Also, please note that our analysts general meeting will take place on September 24, 2008 at 10:00 a.m. at the Toronto Stock Exchange Broadcast Center. This concludes our call.

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