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Gold/Mining/Energy : Certicom Corporation (TSE:CIC, NASD:CERT) -- Ignore unavailable to you. Want to Upgrade?

To: Tom Gordon who wrote (1579)	3/11/1999 5:09:00 PM
From: Tom Drolet	Respond to of 4913

Leveque Beaubien( Joe V.) write up after Q3 financials. For what it is worth, I think Joe is about right- save for the optimism that costs will be kept under control until the Royalty hockey stick slap shoots its way onto the rink in a year or so (sorry). Tom D. CERTICOM CORP. (CIC TSE - $16.80) - Q3 FISCAL 1999 RESULTS YIELD INCREASED LOSSES BUT ROYALTY POTENTIAL REMAINS INTACT - MAINTAIN BUY – 12MONTH TARGET $30.00 Certicom's Q3 fiscal 1999 results yielded revenue at the low end of the projected range at 30+% quarterly growth. Although the yearly growth was 559% for the same period last year, EPS for the quarter was an operating loss of ($0.34) versus a loss of ($0.39) for Q3 1998, which is greater than expected. What contributed to a larger loss was the fact that last quarter the company utilized some scientific research tax credits which was not repeated in Q3. Additionally the company acquired Uptronics in Q3 and launched a new consulting division as a result. Expenses increased on the selling and marketing front to almost $3 million up from $2.8 m. R&D expenses decreased from $1.52 million to $1.43 million in Q3. We believe Uptronics and Consensus Development, the two acquisitions completed in the past 2 quarters, will help the company to generate faster short-term revenues. The true potential of Certicom still remains the royalty revenue stream that should follow on from new product developments of secure handheld and smart devices. The delayed rollout of these new products has more to do with political implications than technology requirements. We believe that product vendors have made a marketing decision to delay product releases until after the commencement of the year “2000”. The logic behind this conclusion stems from potential loss of consumer confidence in smart cards or digital signatures resulting from Y2K issues that may have nothing to do with the “bug”. Uptronics consulting services will not only provide a valuable integration role from Certicom's clients, but the new division will drive quick short-term income growth. The acquisitions also provide a negative effect on non-cash items by increasing the amortization of goodwill and depreciation charges, which increased from $0.37 million and $4.5 million to $0.53 and $4.8 respectively. Overall, there is progress, and management stated that Certicom's client list numbers more than 100 licensees of which only 30% have deployed OEM products and from whom only minimal royalty revenue has been collected. Since Certicom is fundamentally a royalty-based financial model, we believe that the biggest potential of the company is yet to be realized. Management has also revealed that the Certicom continues to negotiate all of its contracts with a “per copy element” in their client contracts, with an average price of approximately $1 per unit shipped. Only 5% of Q3 income was based on royalties and more than 66% of Certicom's licensees have yet to deploy their new products, but we feel that many of these delays are for marketing purposes. The barriers to entry of competition to Certicom's ANSI-standard encryption remain very high, and unlike RSA (whose encryption patents expire September 30, 2000), time is on the company's side. We believe that Certicom has a niche in providing standardized encryption technology to “resource-constrained” environments such as wireless devices and smart card products. Certicom is best positioned to provide data security in the markets for handheld Internet appliances such as cell phones, two-way pagers, and Mobitex network gadgets such as the PalmPilot which require fast, efficient and compact encryption algorithms. Since many of these OEM products that use Certicom's ECC technology are yet to be rolled out to the mass consumer, we believe that Certicom's revenue upside is substantial and will escalate after the calendar rolls over from 1999 to 2000. We are also optimistic that the company is still progressing on a large infrastructure deal that would see a significant (un-named) licensee adopt Certicom's encryption in a household utilization. Our $30 target for Certicom is achieved by applying a 17X multiple to our fiscal 2001 EPS of $1.76. We maintain Certicom as a BUY recommendation and highlight both the dramatic price volatility and royalty revenue potential. Certicom's Q3 teleconference was at 2:30pm EST on Tuesday March 9 th 1999. The conference call playback can be accessed at 416-626-4100 with entry number 1888375. (Good for 48 hours)