NSA deal re-energizes Certicom

[R. A. Hettinga]

<http://www.theglobeandmail.com/servlet/ArticleNews/TPPrint/LAC/20040219/CERTICOM19/TPTechnology/?mainhub=GT>

The Globe and Mail

 NSA deal re-energizes Certicom

Morale at the high-tech security firm has improved as it finally reaches
profitability


 By KEITH DAMSELL
 TECHNOLOGY REPORTER



 UPDATED AT 11:34 PM EST
 Thursday, Feb. 19, 2004

MISSISSAUGA -- For the first time in a long time, there's some optimism in
the halls of Certicom Corp. Staff at the high-tech security company
recently received their first raise in three years. In December, the annual
Christmas party was reinstated. The Mississauga firm turned a profit last
quarter, the first time it has made money in its 19-year history. Over the
past four months, shares have almost tripled in value.

"Morale around here is the best it's been in a long, long time," one
information technology employee said.

The source of optimism is a $25-million (U.S.) contract with the U.S.
government, the biggest deal ever for Certicom. Management considers the
agreement a watershed moment that proves the tech survivor is, at long
last, living up to its potential.

"This is a landmark deal," said Ian McKinnon, the company's president and
chief executive officer, of the 10-year agreement with the National
Security Agency, the largest and most secretive of U.S. spy bureaus.

"There is no greater endorsement one can get in the industry than the NSA .
. . this has really created another market for us," Mr. McKinnon said.

Certicom was founded in 1985 by Scott Vanstone, a math and computer science
professor with a knack for cryptography, the science of secret codes. He
spent the next 10 years pioneering the development of "elliptic curve"
encryption, a technology that can tamper-proof everything from charge cards
and car keys to smart phones and data networks.

The first efforts to commercialize the company's so-called ECC technology
in the late nineties were greeted with a roar of approval from the
investment community. Licensing deals with blue-chip techs including
Motorola Inc. and Palm Inc. helped drive shares to a record $240.95
(Canadian) each in March, 2000.

 At its peak, Certicom had a staggering stock market value of $2.7-billion
on annual sales of less than $40-million.

"The stock went really, really high . . . everybody had options and there
was a lot of overspending," one former employee said.

Employees were dressed in Certicom sportswear and enjoyed round-the-clock
in-office meals on the company tab. In one instance, 80 Canadian employees
were flown to the San Francisco operations and took in an Oakland Raiders
football game and a Napa Valley wine tour.

But substantial orders for Certicom's technology failed to materialize and
the firm repeatedly missed sales and profit targets. The Internet bubble
burst and shares plunged to a record low of 65 cents in 2002.

That year Mr. McKinnon, a well-regarded executive with a history of turning
around troubled tech firms, was brought in to restructure operations.

 The employee headcount was slashed to 105, down from a peak of 450. Costs
and expenses were cut to $13.6-million (U.S.) in fiscal 2003, down from
$100-million in 2002.

The October deal with the NSA is a shift in Certicom's revenue model. Going
forward, there will be less priority on wireless and consumer product
licensing deals and greater emphasis on exploiting the company's patents,
especially with security-conscious government and military agencies.

Under the terms of the NSA deal, contractors will incorporate Certicom's 26
patents into communications devices manufactured for use by the U.S.
government. Positive buzz from the NSA contract helped the company conclude
a $15-million (Canadian) stock offering in November.

The big problem is no one knows how rapidly Certicom's market will grow.
Security is a rising corporate priority and ECC is widely considered the
technology to beat. But predicting Certicom's future sales stream and when
demand may unseat security market leader RSA Security Inc. of Bedford,
Mass., is very difficult, analysts agree.

"The technology is great, but the real question is what do you need it
for?" one analyst said. "Do you know anybody doing bank transfers with a
BlackBerry? It may happen one day, but it's not going to be tomorrow."

For Certicom, a firm that's weathered the sector's lavish highs and
tumultuous lows, there's only upside.

"We believe ECC is moving in to a very high growth phase of its evolution,"
Mr. McKinnon said. "We know it is going to happen, it's a question of how
quickly, how rapidly . . . it's hard to know when people will make that
shift, but it will occur."

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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
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