BlackBerry Ltd (BB) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Certicom Corp. second-quarter fiscal 2009 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts and institutional investors. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, December 4, 2008, at 10AM Eastern Time.

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

Good morning. Thanks for joining us for Certicom's conference call to discuss results for the second quarter and six months of fiscal 2009, ended October 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 recent Annual Report and other documents filed with securities regulators.

A couple of reminders before we begin. All dollar amounts discussed today are in US dollars. Supporting slides are posted on the Company website at certicom.com under Investor Events. The audio of this call is being webcast live. The live and archived webcasts can be accessed at certicom.com.

I will now turn the call over to Karna Gupta.

Thank you, Dana. Good morning and thank you for joining us. I would like to acknowledge the press release that was issued yesterday by RIM and their intention to make an unsolicited offer to acquire all outstanding shares of Certicom. In response, we have ourselves issued a press release indicating that we have a special committee of our Board to consider the full range of alternatives in a due process to maximize shareholder value.

However, as you will see from the information released this morning, Certicom is showing good progress in executing its growth strategy. We believe the Company is in excellent position to deliver improved value to shareholders.

Please turn to slide 3. Now I would like to begin with an overview of our performance and a summary of our quarter's key announcements. Herve will then discuss our financial results. I will then conclude by providing details on our progress with our three-year plan and our outlook. We will be pleased to take questions at the end of this call.

Slide 5. We continue to make good progress at this early stage of our new three-year strategic plan. We are now two quarters into our 12-quarter plan, and I'm very pleased to inform you that we are on target, even in this backdrop of economic turmoil. Our new business model and robust product roadmap is leading to strong results in our new target verticals. We have also refreshed our executive team and increased our business activity for both sales and development in Asia-Pacific and Europe.

Our progress has led to several key licensing agreements that have contributed to second-quarter revenue of $6.6 million and a year-to-date six-month revenue of $10.8 million, which is a 54% increase over same period last year. Furthermore, it should be noted that 45% of our revenue to date is from new customers, 33% is from new customers and 45% from new contracts. And 35% of our revenue came from two new target verticals, semiconductors, and energy and utilities.

Slide 6. The energy and utilities vertical has been the center of activity this quarter, and this has been driven by emerging area of Advanced Metering Infrastructure, known as AMI. We have made two key announcements in this space. Early in the quarter, Daintree Networks licensed Certicom's technology for the development of secure ZigBee Smart Energy networking products. We also formed a significant new partnership with Itron, the world's leading provider of solid-state meters and automated meter management technologies, to offer authentication and enhanced security for their AMI systems.

On the solutions development front, we have just a few weeks ago launched our new asset management system. This innovative solution manages, secures and controls manufacturing processes in a global outsourcing environment. It provides dual benefit to our target customers, cost efficiencies and potential new revenue from brand protection. The system has already been implemented and the feedback has been tremendous. I will elaborate on this and more on our recent developments when I return to discuss the progress of our strategic plan in more detail.

Other highlights from the quarter include licensing agreements with Proginet, Nortel and Sybase. These three customers have licensed Certicom's security solutions for FIPS certification, a benchmark standard for government agency data security. We also secured an agreement extension this quarter. Sterling Commerce announced that they will continue their license of Certicom's security solutions for professional services for protecting their financial transactions.

Slide 7. Looking at this chart, revenue distribution for the first half of the year, more than 50% of our revenue was from our core focus. Further breaking down the year-to-date revenue, 31% was from toolkits, showing stability; 27% from solutions, driven by sales in our new target verticals; 18% was from professional services; and the balance was from maintenance and IP licensing. This distribution is on target with our plan.

I will pass it to Herve for the financial review at this point.

Thank you, Karna, and good morning, everyone. Please turn to slide 9 for the second-quarter financial review.

As Karna mentioned, revenue for the quarter was $6.6 million, and this compares to $3.8 million for the same period in fiscal 2008. Operating expenses, which are now defined as including the cost of revenues and exclusive of Sony litigation costs, were $6.9 million compared to $5.9 million in the same period last year.

The expense guidance given for the second quarter was $5.2 million, and this excluded the cost of revenues and Sony litigation expenses. The actual equivalent expenses for the second quarter were $5.9 million. The higher expenses were mainly attributable to our investments in accelerated product development and onetime management restructuring costs.

Our operating margin, excluding Sony litigation expenses, yielded a slight loss of $300,000 compared to a loss of $1.7 million in the second quarter of fiscal 2008. The Sony litigation expenses were $1.8 million compared to $600,000 in the same period last year and consistent with the guidance given last quarter.

The net loss on a GAAP basis was $2.6 million or $0.06 per basic and diluted share compared to a net loss of $2.8 million or $0.06 per basic and diluted share in the same quarter last year.

At quarter end, we have $33.3 million in cash compared to $38.5 million at fiscal 2008 year end and $40.4 million at October 31, 2007. The Company continues to be debt free.

Slide 10. For the six-month period, revenue was $10.8 million compared to $7 million for the same period last year, an increase of 54%. Operating expenses, again under the new definition that includes cost of revenues and excludes Sony litigation costs, was $12.8 million compared to $11.3 million in the prior year's period, a 13% increase.

Sony litigation costs totaled $3 million for the six-month period versus $1 million a year ago. The higher expenses were mainly attributable to the same factors mentioned in the second-quarter operating expenses.

The net loss on a GAAP basis was $5.9 million or $0.14 per basic and diluted share compared to a net loss of $6.2 million or $0.14 per basic and diluted share in the same period last year.

I will now turn the meeting back to Karna, who will discuss progress being made on our three-year plan.

Thanks, Herve. Please turn to slide 12. Our results for the first half of fiscal 2009 reflect that we are on track with our plan. Our sharper focus on fewer verticals and more comprehensive solutions is leading to larger deals with longer-term revenue potential. I will now take some time to provide more detail on the progress we have made to date on the four key strategic priorities.

Slide 13, please. On our first priority, the development of complete solutions, we have launched our Asset Management System, known as AMS. This system provides a revolutionary new way of protecting semiconductor IP and preventing counterfeiting. I'm pleased to report that we have now moved from proof of concept to commercial deployment with several customers.

As I indicated before, we also have had tremendous success with our AMI initiatives. We are an active participant in the fast-growing green energy movement where smart meters and smart grid is essential. These two solutions, AMS and AMI, make up 35% of our revenue to date. Our launch of Certificate Authority service for the SSL market, which is also designed to reach multiple verticals, has already seen inbound customer demand. The official launch is planned for second half of fiscal 2009. Moreover, for our Device Certificate business, we have issued more than 250,000 certificates to date for the energy and utility sector.

With respect to our second priority, we have seen strong uptake in demand for our offerings in both semiconductor and energy and utilities segment. As for our toolkit business, we have seen a stable business in both consumer electronics and defense and aerospace segments. Gaming, on the other hand, has seen a slower growth due to the current economic conditions.

We've continued to make good progress on the third priority, building operational excellence and cost efficiencies. We have consolidated product development across the organization and have established offshore capabilities for development. We have also refreshed our middle-level and senior management team with a clear accountability map.

Finally, for our fourth priority, we have strengthened our sales teams in Asia-Pacific and Europe. We now have qualified customers in each of our target areas that will help drive our future business.

Next slide, please. As you can see on slide 14, our traditional business is steady and continues to show stability in two key verticals. We also see a wider adoption of ECC technology.

As for our new areas of focus, semiconductors and energy and utilities, we've continued to show strong growth prospects. In each of these areas, we have signed several market customers that will drive our forward-looking business growth. Our contract wins to date continue to build a robust backlog, and our average deal size has almost doubled year-over-year basis.

Slide 16. We believe our revenue for fiscal 2009 will grow at least 25% over previous year. We expect our quarterly operating expenses to stay about the same. For third quarter, the outlook is between $6.5 million to $6.9 million. The Sony litigation expenses are estimated to be $1.4 million for the third quarter.

We will continue to aggressively manage our cash and receivables, and we will continue to improve our overall cost structure. As you have seen in Herve's discussion, without litigation and extraordinary items, we are almost at a breakeven this quarter on a cash basis.

Slide 17. With our first-half revenue in line with our target, we expect to meet our annual business plan, and we are on track to double our revenue within three-year plan window. At the same time, we have an increased focus on building sustainable profitability.

Please turn to slide 18. This revenue projection is based on several developments that demonstrate the strength and relevance of our new strategic direction. Our AMI and AMS value propositions have been well received, which has led to several new engagements with industry-leading customers. Strong growth prospects in energy and utility and semiconductor verticals will continue to generate a substantial revenue stream for us.

ECC adoption is clearly accelerating among global players, driven by FIPS and Suite B, as indicated by our recent agreements with Nortel and Sybase. These have all contributed to the robust pipeline that will fuel our future growth.

Slide 19. Another key aspect of our strategy is our strict focus on IP protection, which led to Sony litigation. Our legal counsel has completed their initial deposition and software review. The Markman hearing is set for June 11, 2009, and the trial date is September 8, 2009. We continue to be very confident about the outcome.

Slide 20. Our results summary and outlook can be summed up as follows. We have clearly made excellent progress in meeting the goals of our strategic plan. Based on our strong first half, we are confident about achieving the growth of at least 25% in the fiscal 2009 and doubling the revenue within three years. We've continued to improve operating margins. In fact, we have improved 54% in the first half of fiscal 2009. With both revenue growth plans and our absolute focus on cost containment program, we believe that we will be cash flow positive no later than fourth quarter fiscal 2010.

While we're very pleased with the early progress we have made in our new strategic direction and are confident about the market drivers and our technical strengths, we recognize the potential challenges presented by the current economic conditions. Yet we are committed to deliver on our ultimate goal of a sustainable, profitable growth for the shareholders.

Now, before the question period begins, note that the Board has established a special committee to review the RIM offer. It is not appropriate for the management to comment on this further. Please frame your questions accordingly.

With the help of the operator, we will now take your questions.

(Operator Instructions). Certicom will be pleased to arrange any follow-up discussions or interviews of senior management after the call has been completed. To make these arrangements, please contact John Callahan at 703-234-2357. (Operator Instructions).

Lawrence Rhee, Blackmont Capital.

I'm just trying to stay away from the actual announcement with respect to RIM yesterday. But can you just give some color on kind of the history with you and RIM and the original license agreement signed in 2004? Did that expire in early 2007? And have you generated any revenues from RIM since that point in time?

Thank you, Lawrence. RIM has been one of our best customers and a partner over the years. We've been doing business with RIM since 1998, I believe. And we've continued to do strong business with them year over year. They have licenses from us on the encryption technology since I believe, Herve, it's '98, right?

That's right.

So there is no change in terms of our relationship with the RIM as a customer. They are a strong partner, and we work with them quite a lot.

Just looking at that 2004 press release, it looks like the one-time license agreement expired in early 2007. So I was just curious if you generated any revenue from RIM since 2007.

Lawrence, that agreement is still in place. There was a provision for it to extend. It is happening. We have a number of agreements and a number of deals that we have signed since then, and we continue to count on RIM as a very solid customer of ours.

Got you, okay. Great. And just with respect to your previous customers, IBM, I think was it this quarter, did you actually recognize some of the $500,000 this quarter from IBM?

Yes, we do. If you remember, we will be taking the revenue on a quarterly basis over the year. And as we explained when we announced the deal, this is a multiyear, multi-million-dollar agreement.

Great. And with respect to the one-time restructuring costs, could you just quantify that approximately in the quarter, how much that was?

It is a couple hundred thousand dollars, because as I mentioned, we changed about 10% of our mid- to senior-level management. There has been a turnover of at least 10%.

Great. And just with respect to -- looking at your annual filing from a couple months ago, Herve, maybe you can give us some color on your tax loss carryforwards, and how much is there and what expires kind of in a year's time?

We have approximately $130 million of tax loss carryforwards that have been reported in our results. We haven't disclosed details of when they expire, and I don't think it is appropriate to discuss it -- to disclose it at this point because we have not disclosed that publicly. Let it suffice to say that we are not anticipating losing any of this through time.

Okay. Great. And lastly, with respect to the Itron partnership, it looks like you guys recognized some revenues from this vertical going forward. Just to be clear, is there still the plan to maintain a high degree of recurring revenues from future partnerships and customers as it was in the past, or has there been some revenue recognized from one-time license deals?

Itron is the leader in this space and number one in their sector. And we have recognized some revenue this quarter. And the business, as we look at how this market plays out, we expect steady growth in the business, with significant revenue stream over next several years.

Great, thanks.

Paul Lechem, CIBC World Markets.

Just a first question on your maintenance and professional services. When I look back into past quarters, you were generating around $2 million a quarter from that revenue stream. And yet, when I look at the first-half numbers that you gave out and the breakdown of revenues, it comes out to about a little over $1 million, $1.25 million per quarter. So I'm just wondering, has your maintenance and royalty stream fallen off in the last year, or how do I reconcile those two numbers?

Paul, it has not fallen off. If you look at our recurring revenue, our recurring revenues were for a number of -- a few years stuck at about $2 million per quarter. They are inching up quarter by quarter. This quarter they are approximately $2.4 million and we expect to see those moving in the future. Recurring revenues include maintenance, they include royalties, and they also include expected professional services that we get on a recurring basis from certain customers. So that number is moving and keeps on growing.

Okay, I got you. Thanks. That includes some of your professional services revenues?

Correct.

Okay. Just going on to the outlook for this year and maybe the three-year outlook, obviously it is difficult for you guys to give precise revenue guidance. But I'm just wondering how for this year you have built up your guidance for the 25% revenue growth. And then looking beyond, what are you basing these projections on? How confident are you? How much insight, how much visibility -- at least through the balance of this year, how much visibility do you have into your revenue guidance?

So for the fiscal 2009, we have a very strong visibility into our revenue stream going forward, largely because the nature of the business we do has a little longer sales cycle as you move toward solutions. The type of deals we have signed up until now also has a revenue stream attached to it for future quarters. So we are very confident about our guidance that the rest of the year we will be at 25% over last year.

Sorry, can I just ask one question on that? Just in terms of the outlook for this year, then, if you didn't sign up any new deals, just based on what you have currently signed, how much, versus your revenue plan, how much -- what percentage would you be at versus your revenue plan for the year? How much are you counting on in terms of new deals coming in to make your numbers?

From a new deals -- several of the new deals will probably make up, I don't know the exact number -- in front of me. But we expect to have new deals we signed in first half about 30%. So for the rest of the year, I anticipate that we will add customers at a same pace as we have done in the last two quarters. So I don't anticipate that to change.

And in most cases, these engagements are already through better part of the lifecycle on the sales process gone through. So from a visibility point of view, that's what your question was, from a visibility point of view we have a very strong visibility, given our current engagements, where the revenue would likely be for the rest of the year.

I got you. And sorry, I interrupted you. You were about to go into the three-year outlook.

The three-year outlook is based on, when we do our business plan, as I mentioned in previous calls, we have taken very, very detailed segment-by-segment analysis what the target markets are, what the potential is and how we would engage. And when we walk through that level of a bottom-up build, we're quite confident, given the space we play in, that we will be able to grow our revenue twofold over three years.

Okay. So that's kind of -- so you've actually identified clients and opportunities -- rather than a top-down approach, you've actually gone through a bottom-up analysis?

That is correct. It is a both top-down and a bottom-up exercise.

On the wireless segment, that doesn't seem to be one of your key segments that you talked about in your prepared remarks. Can you talk about maybe some of your other wireless customers out there, the wireless equipment manufacturers and the likes, and what your relationship is with them at this point in time, and how much of your revenue they may make up?

We've continued to play quite a bit in the wireless segment. It is rolled -- the whole mobility sector is rolled up under the consumer electronics. By and large, we are an embedded piece in the mobile devices. And these devices, end of the day, mostly are consumer market and end user demand driven.

So broadly speaking, most of our mobility activity is vectored under consumer electronics. We have several customers, announced customers in these areas, and some of them we have not announced. But I could tell you that of the top six or seven handset manufacturers out there, we are engaged with more than 60% of them.

Okay. Last question on the Sony litigation. Do you have any running total of how much you've spent to date in terms of your legal expenses on that?

We do. And I'm trying to get them off the top of my head now. It is $3 million this year, and it was something of the same value last year. So we're probably close to $6 million.

And assuming that it goes to the Markman hearing and then all the way to trial, do you have any sense of how much more you might have to spend just to get to trial?

You know, at the beginning of this trial, of the lawsuit, we estimated, and we're still on track to view that, up until the trial would probably be somewhere around $10 million, in that range, $8 million to $10 million. And we are in a very high-spending period right now, just because the lawyers are all over trying to build the case and so on and so forth, as they would normally do. So we're still on track to spending what we thought we were going to spend.

Okay. And have you announced how much or what kind of damages you have actually asked for? Have you had to lay that out, or is it still unspecified, or--?

I think if you refer to the filing documents, there was no specified amount requested. And there is all sorts of legal reasons why the lawyers put it that way. But no, there was no amount specified.

Okay. And at the Markman hearing, would you try and go for any injunctions, preliminary injunctions against Sony at that point in time if things were to go favorably?

That is premature for us to comment at this stage. We cannot comment on it.

Okay. All right, I will pass it on. Thank you very much.

Greg Reid, Wellington West Capital.

Just a couple questions. First of all, noticing on slide 22 of your presentation, you talk about a stock-funded acquisition, I think a year or so out. Just wondering what types of things you were looking at in terms of size and maybe potential product offerings.

So let me kind of situate this slide. That was a slide we used in our AGM to lay out our three-year plan. So over a three-year plan to grow the Company, there were various alternatives we looked at. Now, the stock-funded acquisition, if you're trying to look at the map we laid out, it is forward-looking desire of ours that we would need to look at some acquisitions, either technology or otherwise, to increase our footprint or expand our product line and offering in the marketplace.

So it is, at this stage, it is still under consideration, but we haven't gone through any kind of a definitive discussion what it might look like over next nine to 12 months.

Okay. And then the second question was, you made the comment about cash flow breakeven, I think, for Q4 fiscal '10, which is six quarters out. Wondering what revenue level you need to be at cash flow breakeven at that time?

That will be giving you a revenue guidance at this point, which we are not prepared to do. But all I would tell you is if you look at our current revenue run rate and you look at our current growth projections we're putting on the table, with an expense guidance that is running at almost a quarter of the revenue ramp, it is fairly easy to get to that calculation, including Sony litigation costs, that we'll be cash flow positive by fourth quarter of 2010.

Okay. And then last question, just on Sony -- have there been settlement offers over the last year?

No comment at this stage.

Okay. Thanks.

(Operator Instructions).

If there are no questions, thank you all very much for coming in to the call. We appreciate you asking the questions. And we will be back with another quarter results after we close our January 31 of 2009, our third-quarter results. Thank you. This terminates the call.

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