Lucas Skoczkowski – CEO David Charron – CFO

Michael Urlocker – GMP Securities Robert Young – Canaccord Genuity

Thank you. Good morning, everyone.

And welcome to Redknee’s fiscal 2014 third quarter earnings conference call. I’d like to draw your attention to slide two of our presentation, where we have outlined the company disclaimers and cautions regarding forward-looking statements.

I’m Lucas Skoczkowski, Redknee’s Chief Executive Officer, and joining me on today’s call is our Chief Financial Officer, David Charron. This morning we will be discussing the results for the third quarter of fiscal 2014, which were issued after the close of market yesterday.

The press release and accompanying financial tables are available in the Investor Section of our website. If you haven’t done so already, I encourage you to download the slide presentation available in the Investor Section of our website which further provides analysis of our quarterly results.

David and I will be referring to this presentation during today’s call. Following my opening remarks, David will review our financial results and then I will return to give you an operational update before we open up the call to your questions.

To start off, I would like to give you an overview of the quarter. During the third quarter of fiscal 2014 we made good progress existing on our operating plan, and our head of our plan in terms of order growth and revenue expansion.

Our focus remains to build and deliver high quality solutions to customer base in order to drive quality recurring revenue in the form of support revenues, as well as subscription or SaaS software license fee. The results of our continued effort is visible in our growing business in Americas, APAC and EMEA region, which have all grown over the past 12 months.

Our third quarter came in at $63.9 million, and on trailing 12-month basis revenue have grown to over $254 million. We also saw $9 million of revenue from software license capacity increase, issued but not recognized in the quarter, that is expected to be recognized in the first quarter of fiscal 2015.

Just to put this in context, as management, I look at the quarterly forecast in terms of $73 million, 51% gross margin and 9% EBITDA, of course we report revenue as it stands. Our gross margin in the second quarter was 44% on trialing 12-month basis they were 50%, as a result of a significant increase in the use of sub-contractors as the company expands into new regions and delivers on commitments from acquired contracts.

Over the coming quarters we expect margin to improve as cost of providing service are improved, and the revenue mix shift with increased licenses. This resulted in an adjusted EBITDA loss of $3.2 million in the quarter and $12.4 million EBITDA or 5% of revenue on a trailing 12-month basis.

As I have said on previous occasions, our focus remains on revenue quality and we’ve made progress in continuing to drive towards the software product model, while minimizing low or negative margin items from our top line. Our order backlog at Redknee grows at record $173 million, giving us strength in revenue visibility.

For third quarter fiscal 2014, our recurring revenues was at 51% of total revenues or $33 million or and more importantly, on a trailing 12-month basis $125 million. Our cash balance at the end of the most recent quarter was very healthy $99 million.

I’ll provide the detailed operational update in a few minutes. However, first, I would like our CFO, David Charron to walk you through the financial results for the quarter.

David?

Thank you, Lucas, and good morning, everyone. I’d like to spend the next few minutes summarizing our financial performance for the third quarter of 2014 and to put this discussion in context, I encourage you to review the company’s financial statement, MD&A in earnings release which are posted on SEDAR and also available for download on our website.

Please note that our financial results are presented under International Financial Reporting Standards and are presented in U.S. dollars.

And for comparative purposes, our previous year’s results are also shown under equivalent accounting standards and functional currency. Overall, total revenues for the third quarter increased 9% to $63.9 million from the $58.6 million in the same year ago quarter.

The improvement was driven by a 10% increase in software and services revenue, a 5% increase in support revenue, and a 57% increase in third-party software and hardware revenues. Recurring revenue which we define as revenue from support and maintenance agreements, term-based product licenses and long-term service agreements was $32.8 million or 51% of total revenue in the quarter, as compared to $31.4 million or 54% in the same year ago quarter.

Gross margin came in at 44% of revenue as compared to 55% in the same year ago quarter. The change in gross margin was primarily attributable to the increase in the use of sub-contractors as the company expands into new regions.

Adjusted EBITDA loss for the quarter was $3.2 million, resulting in a loss from operations of $7.6 million. This compares to an adjusted EBITDA of $7.3 million and income from operations of $1.5 million in the same year ago quarter.

Net loss for the quarter was $6.9 million or $0.06 per share, compared to net income of $0.8 million or $0.00 per share in the same year ago quarter. And as at June 30, 2014, cash and equivalents totaled $99 million.

As presented in the reconciliation of net income loss to adjusted EBITDA in our press release, the Q3 2014 net loss includes $0.6 million of costs linked directly to the BSS acquisition. Specifically, legal and professional fees incurred for that acquisition.

Now looking a little more closely at revenues for the quarter, we saw software and services revenue increase 10%, to $28.7 million or 45% of total revenue from $26 million or 44% of total revenue in Q3 of fiscal 2013. Support revenue grew by 5% to $32 million or 50% of total revenue, and this compares to $30.6 million or 52% of total revenue in the same period last year.

Sales of third-party hardware and software components in the quarter increased over 57% to $3.2 million or 5% of total revenue from $2 million or about 4% of total revenue one year ago. And finally, recurring revenues increased 4% to $32.8 million or 51% of total revenue from $31.4 million or 54% of revenue in the comparable period.

Total operating expenses adjusted to exclude acquisition costs, amortization and stock compensation was $31.1 million or 49% of total revenue compared to $24.7 million or 42% of total revenue a year ago. I’d like to discuss each of the OpEx lines separately.

So first in the quarter, sales and marketing costs totaled $9.1 million, which was relatively flat compared to the same period last year, and as a percentage of total revenue, sales and marketing expenses were 14% of revenue, down slightly from the 15% recorded one year ago. General and administrative costs increased to $9 million in the quarter from $6 million in Q3 of fiscal 2013.

As a percentage of revenue, G&A expenses increased to 14% from 10% of revenue in Q3 of fiscal 2013. The increase in G&A cost is mainly attributable to one-time expense of $1.3 million related to our reserve for doubtful accounts for the announced bankruptcy of one of our customers, as well as higher professional fees, travel costs, and amortization.

R&D expenditures increased to $16.8 million compared to $12.4 million for the same period last year. And as a percentage of revenue, R&D expenditures increased to 26% from 21% in the comparable period.

The increase is attributed to the impact of sub-contractors used as a result of the investment Redknee is making in our business critical monetization platform. Total cash cost related to the BSS acquisition in the quarter was $0.6 million compared to $3 million in the same period last year.

Now turning to the balance sheet, at June 30, 2014, cash and equivalents including restricted cash was $99 million as compared to $80.1 million as at September 30. And at June 30, we have drawn a total of $49.4 million on our credit facility.

I believe we have turned the corner on our negative cash usage and expect that we will generate cash from operations in the September quarter which will be reported in early December. In the quarter we announced details of a normal course issuer bid under which we can purchase up to $9.4 million common shares, and that commences June 3, 2014 and June 2, 2015.

As of June 30, 2014, we have not purchased any common shares under this MCIB. Looking at other balance sheet items, unbilled revenue increased 8%, from $46.8 million in Q2 of fiscal ‘14 to $50.4 million in the June quarter.

Unbilled revenues increased $11 million from the $39.4 million recorded at our 2013 fiscal year end. And as a reminder, unbilled revenues rise as a result of long-term multi-phase software implementation projects from which revenues are recognized on what is known as a percentage of completion basis.

Moving on to other balance sheet items, accounts receivable decreased by $11.4 million to $85.7 million from the $97.1 million in Q2 of fiscal ‘14, reflecting the impact of improvements we’ve implemented in our billing and collection programs earlier this year. And although AR decreased quarter-over-quarter, our measured day sales outstanding increased to 118 days from the 100 days as of September 30.

The day sales outstanding calculation uses an average trailing fourth quarter accounts receivable, hence DSO has increased despite the drop in accounts receivables. Deferred revenues at the end of the quarter were $15.8 million, down from the $19.1 million recorded at the end of fiscal Q4 2013 but up slightly from the $15.5 million we recorded last quarter.

And as a result, working capital decreased to $164 million from the $170 million reported last quarter, but of course up from the $100.1 million we recorded at September 30, 2013. The increase was primarily due to the increase in trade and other receivables, the decrease in deferred revenues, and in combination with the cash from the $75 million equity raise which closed on March 13, 2014.

Our order backlog increased to $172.7 million versus the $160.4 million in Q4 at fiscal 2013. And this reflects the continued impact of strong orders received in the quarter.

Of the $172.7 million backlog, approximately 70% of it is expected to be recognized as revenue over the next 12 months with the remaining to be recognized over a future period. This completes my financial summary.

Now we could turn the call back over to Lucas for his operational update.

Great, thank you, David. We feel it is important to view our financial results within the context of our overall growth strategy.

Here I will like to update you on three areas. Number one, I’ll discuss the cost structure realignment project we noted in our press release.

Number two, I would like to discuss our short-to-medium term management priorities. And finally, I would like to discuss our long-term growth strategy.

Regarding the cost structure realignment project, as we discussed on the call we have completed the integration of Nokia Networks BSS earlier this year, and turned to optimizing our cost structure. Now, this is the logical time for us to assess our global operations to ensure we optimize our business in order to meet the short and long-term plans we have set for ourselves and discuss on these calls in terms of the top line growth, profitability and cash flow.

To meet the goals we set an competing integration, we opened additional work centers and took on external contractors to assist our full-time R&D, support and delivery staff. Now we are taking disciplined steps to ensure that we optimize our operations and our cost structure.

The project will involve reducing operating spends over 12 to 18 months period. The project involves evaluation of our operations and we intend to reduce our cost in three main areas.

Number one, we intend to significantly reduce our dependence on external contractors, most of whom we recruited to assist in completing the integration of the Nokia Networks BSS asset. Number two, we will consolidate R&D and support activities from high cost centers to lower cost centers.

And number three, we will concentrate our R&D and support staff into fewer locations, into key geographic areas, although we have to reduce our headcount and reduce facilities and administrative costs. In conjunction with this project we expect that to incur a one-time charge of approximately $15 million to $20 million over fourth quarter fiscal 2014 to first quarter fiscal 2015.

We expect that the result of this project will reduce our operating expense by $30 million to $50 million by fiscal year 2016 with partial savings of during [ph] fiscal 2016. Although it is important to note that these changes will not impact our customers, the service levels we provide or our product, additionally we remain committed to advancing the capabilities of our software as it is the driver of our business.

Because of that we expect that R&D will remain a key investment for our company going forward. With regard to our short-term to medium-term management priorities, as previously discussed we see a large opportunity to build significant value for our shareholders.

As a software product focus company, our immediate priorities remain in – number one, improving support value from our acquired customer base by innovating annual support and maintenance contracts for each acquired customer to unbundled industry standard pricing. Here alone, we believe there remains a significant opportunity to grow their reoccurring revenue stream through innovating the support contracts from NSN over to Redknee, and aligning support value of current market prices.

Number two, driving upgrades to the latest version of our software within our current customer base. And finally, number three, upselling the additional features of our full product portfolio to our customer base.

During the third quarter, we continue to progress steadily towards achieving these objective. Number one, with regards to support value we made a good progress aligning support values with our existing customers.

We renewed over 30 support contracts and continue to drive substantial – sustainable terms to support our customers. We remain encouraged by the progress of our process and innovative contracts, and we feel we are in line with our plan on achieving the correct support values for our business critical platforms.

We have completed approximately 75% of our target contract activities, and we expect to be completed by April 2015 by either way negotiating this contracts, expiring them, or terminating them. We remain encouraged by the progress here and have a clear path towards executing on the opportunities over the next 24 months to drive improved margin.

Number two, we continue to close on upgrades the latest software release providing true validation to our customers that we are taking care of their investments while providing them with a competitive advantage through the latest version of our reunified platform, bringing the best platform to support the real-time charge and policy in billing requirements. We are pleased with the traction we are experiencing here as we have closed record bookings in the company’s history and closed over 25 upgrades in license expansions in the quarter.

Number three, we have deployed the current version of our integrated products in the quarter, Redknee Unified. That’s a new product investment we have made has provided us with the opportunity to engage with new prospected customers, and we are very much encouraged by the interest and level of activity from both, existing and new customers, as seen in growth of our qualified opportunities pipeline.

Finally, I would like to provide you with an update on our long-term growth strategies. These are comprised of three main elements which build upon the short-term objectives we discussed earlier.

Number one, continued evolution of our business critical software product offerings. Number two, market share growth and leadership in our served addressable markets.

And number three, an increasing proportion of sustainable recurring revenues. Expanding on these, number one, on the product offering front, we are investing and building our product platform, and as of most recent quarter, Redknee has over 169 patents granted and other 50 patents pending.

In the quarter we demonstrated our fully virtualized real-time capability in our release regarding Vodafone Germany who are scaling our social support for 50 million and 100 million subscriber service providers. We have introduced Redknee connected suite.

As a software platform from crucial averages [ph], Redknee defined product line but this is the support that internet markets. We are engaged with opportunities and expect to announce commercial contracts in fiscal 2015 in this area which will provide additional leverage on our R&D investment.

Number two, on expanding our market share leadership through our deployed systems which are in place at over 200 service providers who support approximately 2 billion subscribers. We remain relentless about customer polite approach to our business.

We have not lost any customers in the quarter and have grown the share in existing customers. I would like to observe that according to the industry analysts, our additional market has been growing in a low single digits while we have been able to grow substantially faster in other markets over the past few quarters, thanks to superior product and customer service.

We continue to make very good progress engaging our perspective customers on a very large transformational opportunities that is $50 million to over a $100 million, especially for customers who are looking for product-oriented software approach. As previously discussed, we state to be able to announce one of these customers deals by end of the calendar year as we have moved into complex contract negotiations with few of these opportunities.

In addition, product core communication business, we have advanced our strategic efforts with regards to the interest of things, which presents us with expanded market verticals where our Redknee connected suites can be implemented to monetize the opportunities created by embedded intelligent modules either in healthcare, smart grid or automotive telematics, or retail. We see this as an additional great growth opportunity for Redknee to expand into this space over the next three to five years.

On the sustainable recurring revenue front, our recurring revenues are primarily comprised of support and the SaaS licenses that are together on trailing 12-months basis comprising high $25 million or 49% of the revenues. We see this opportunity to continue to increase the value of our support while providing more opportunities for SaaS through hybrid, that is on-site and in-cloud implementations across our existing customer base over the coming 24 to 36 months.

We continue to focus on sustainably growing our recurring revenues while progressively scaling our EBITDA margin. We see medium-term and long-term opportunities for us to grow our EBITDA margin, first to mid-teens and then to 20% to 25% of total revenues, substantially higher than where we are today.

In summary, our revenues and orders have grown significantly over the past 12-months and our teams continue to work steadfastly to ensure the quality of fundamentals of our business remain intact. We’re building strong quality revenue stream, improving EBITDA margins and cash flows, and expanding into evolving market opportunities.

Before opening up the call to your questions, on behalf of the entire management team, I would like to say thank you for the continued support from our employees, our partners, our customers, as well as our shareholders. Now with that, we are ready to open the call for your questions.

Operator, please provide appropriate instructions.

Thanks. Just to start with actually the end of your commentary Lucas, so to be clear, the margin targets which were originally mid-teens, two years into the acquisition, that is unchanged as of now?

Correct. So we are still – we’re taking all those steps to drive towards these targets.

And obviously from our perspective, the essentially – obviously, the license revenue that got pushed out had a short-term impact in the quarter but we feel it will contribute over the coming 12-months to be able to drive the markets in the right regions.

So the notion is now that I guess, with this sort of level of cost realignment there is – there could be some concern on the top line, concern on the order intake that would cause you to take this kind of actions, maybe you can just talk to what you’re feeling about the pipeline now versus 36 months ago?

I feel very much encouraged by the growth in our pipeline. We have grown much faster than I expected and obviously, much faster than our peers in the industry.

At the same time I think it was – it is important to make sure that our key ratios of investment are in line where we expect to drive the operating leverage in the business. So if I look at both our cost of goods sold, aligned as well as our reinvestment, our commitment remains superior [ph] in line with industry practices for software companies.

Does that help answer the question?

Yes, it does, thank you. The contractors that have – are mentioned in the gross margin contracts this quarter, I assume this isn’t the first time you’re using those type of contractors.

Are they – I mean are these delivery guys that are on implementation or are these on the ground for new deals in new geographies?

It’s a combination, we’ve got folks who are involved in delivery but also we have people on-site to provide support to existing customers that we want to fulfill that obligation that we have in acquired contracts. And these – eventually we have work both directed but as well as through Nokia Siemens Networks to make sure that we provide end-to-end relentless support to our customers.

What do you think the – when you look at cost structure post the restructure, and what does the gross margin profile look like? Does that get it back to call 65%, 70%?

I think there is a path to get there, we’ve always talked about the three years post to close of the acquisition Scott where we see gross margins getting back to those levels where we enjoyed pre-acquisition and running the business like a software company, getting it up to 70%. But we have always talked about of that three year journey to get there, and once we get there, the gross margins that would drive would be in that 20% to 25% range, but it really was kind of thinking three years here in the margins, three years post the acquisition.

And I think as we move into kind of 2016 timeframe, we do look to have an EBITDA objectives rather than gross margin that is to be in mid 60s in a way to drive that leverage in our business. I think interpreting it we look to have their appropriate gross margin to drive the mid-teen EBITDA as we go through 2016.

Is that helpful Scott?

Yes, just a couple of questions on the working capital if I could. David, what is the accrued on other liabilities, what is in this line that would cause that kind of decrease this quarter?

Well, it’s really just paying it out. So the point that is important to note here is that we’ve had tremendous cash collections in the June quarter, and we used that opportunity to pay down some of the liabilities that were on the balance sheet.

So both, accounts payable and accrued liabilities came down substantially, hence the decrease in overall cash. But some of those accrued liabilities turns into accounts payable and then we’re paid in the quarter, so it didn’t really – it didn’t see yet in a move that from crude liabilities to accounts payable and then pay.

But those are obligations that have been wishes for sometime.

Just lastly, the – how many contracts are left to be innovated or to left on a bundle that control let’s say of NSN that – and related to that, at what point are you at a time when you can say as the quarter-over-quarter changes in working capital can be judged on Redknee alone and we don’t have to add this aster [ph] for the back-to-back?

I think I’ll tackle the first one. With these rates – we have completed 75% of the plant contract activities.

We expect all the aspects to be completed by April 2015. Any contract that we are unable to reach the right terms, we will let them expire or we will terminate them just to make sure that we are driving the disciplined progress.

And we do expect that any revenue decline from these activities will be compensated by the strong pipeline and new customers that are providing the right margin contributions. David, do you –

And on your second – second part of your question Scott, the way that we look at our forecast and our model, into sort of mid-to-late fiscal ‘15, you and I expect some of these metrics to start to reach the steady state level. So you’ve heard me talk in the past about how we are building up accounts receivable or there is this imbalance between unbilled revenue and deferred revenue that we’re working on to, changing terms and conditions in contracts and other activities.

I expect that those will start to reach steady state as we go into the second half of fiscal ‘15.

Okay, I appreciate it. Thank you.

Thanks, Scott.

Thank you.

Good morning, Michael.

Sorry about that, yes, thanks for taking my question. So – my question is little bit open ended.

Lucas and David, you said consistently you expect cash generation from operations in the September quarter, clearly, some investors are going to have some doubt about that today. Could you just maybe offer why you have that confidence and whether you think you’re going to be on a sustainable cash generating basis from here onwards?

Sure, I’m happy to tackle that question Michael. So, from the onset of the acquisition we’ve had very detail cash and cost forecast that had driven our cash assumptions.

And I think in previous quarters you’ve heard me say that we were consuming cash, we’re building up working capital to meet the needs of the business. And last quarter I said that we expect it to be cash positive in the September quarter, and I’m coming back to you today to say that that’s exactly what we see.

So we’ve got substantial assets on the balance sheet in accounts receivable and unbilled revenue that will turn into cash. We are managing closely our cost and costs going forward.

And we really improved our invoicing and collection process where we have better understanding of how quickly those things turn into cash. So with all that said, I’m sitting here saying I expect that we’ll be cash positive from operations, not only in the September quarter but as we go forward.

Okay. And then, the challenge of lot of people, including myself, will have is – really looking at gross margin, clearly there is kind of people or staffing or cost challenge here that has caused your gross margin to be low this quarter, and you’re taking a restructuring.

But – pardon the question, does it really require you guys to have a substantial capacity expansion like this $9 million revenue to make profits or can you get to a cost structure that doesn’t require kind of a bluebird contract to generate profits?

I think, number one, on your large expansions, it’s a core part of our business, I would not qualify among bluebirds but more important to tackle the core of the question. We believe that the construction that we have in mind – actually it allows us to drive the right margins for – this is although the medium-term.

We have in light of the forecast that we saw in the quarter, we have made additional investment in sub-contractors to work, to both address customers’ needs and opportunities that we see for us to be able to grow with customers, it’s a little late investments of contractors both in cost of goods sold, as well as additional R&D well done in this life that we felt that those investments would be offset by high margin license increase that we obviously changed, as we forwarded to you, but it has to be in concern that it was made in light of those opportunities. And I think for large, we have the – I would say increased flexibility to use of sub-contractors to be able to drive the right margins as we go into fiscal 2015.

Is that helpful, Michael?

Yes, it is. And just if you could reiterate, I know you do have discussions with large Telco’s in Asia, North America, and you announced some dealings with Vodafone Germany.

On the virtual I-software, maybe if you could express the tone of discussions you’re having with these customers for expanded business or for new customer wins. How can you distinguish between, let’s say, we are live valuable prospects and tier kicking?

I think the number one is with existing customers, and Tier 1s being their Vodafone group just because those are telecom group. Our – like customers across Asia Pacific, I would say we have very robust engagement which is turning into strong orders but extension, and if just recall them over 30 transactions require either upgrades or license extensions in the quarter.

So I feel that the discussion and progressively increased confidence these customers share with us because of the track record that we have been able to establish is very strong. With new customers, there is little discussions.

Some of them potentially could be qualified as prospecting but I think as I have been discussing over the last three quarters, we have entered in the past – over past few months into complete contract negotiations with few of those prospects where the amount of commitment of time from both sides is very substantially and we look to be able to announce at least some of those before end of the calendar year. So I would say we’re very disciplined and this is very expensive to push at some of these opportunity, they are not short-term, in our business sales backorder means roughly about two years.

But opportunity, both in terms of the pilot [ph] contracts, as the long-term recurring revenue stream is very substantial and we’ll have that take additional market share. So I personally believe both, our existing customers, as well as bunch of new potential prospected customers, and I’m personally of the view that these levels are – because I’m not very serious, we host some of our customers that travel from abroad to here, and executives of these customers don’t have necessarily too much time, so when they come into spend time either in Toronto or Berlin or Bangalore with us, by far indicates their level of seriousness of commitment that they had to engage us.

Okay, thanks. Yes, it is helpful.

Thank you, Lucas. I appreciate that.

Great, thanks Michael.

Thanks very much. Just in regards to the cash flow over the next couple of quarters, it looks like there is a couple of payouts that are – larger payouts, the first one being the contenting consideration, I think it’s worth $10 million.

And then, in regards to the restructuring charges, could you speak to the timing of the paired on those restructuring charges, are they over like 18 or 24 months or is it closer to the near-term?

Good question Paul. So both, the contingent liability of the order note, and I’m looking at cost which are primarily expected to be severances as we reduce our cost structure.

I expect those to be over the next – probably four to five quarters. And they’re not going to be – I’m not expecting them to be anyone big lump sum in the near-term.

Okay, then on the – sorry, I mentioned the [ph] consideration.

Yes, likewise. I think those will occur over the next – probably fourth quarter or so.

Okay. And then, just on the restructuring charges, how or what proportion relates to casket sold versus OpEx, or maybe in other words, what proportion of the cost savings relate to cost of good sales versus OpEx?

Another good question. So if you just look at the comments that Lucas made and it was in the press release, regarding the expected $30 million to $35 million of cost savings that would hit in fiscal ‘16.

And if you look at the expected charge that we are looking to take in the $15 million to $20 million. What you’re seeing is a large piece of the savings – really coming from the sub-contractor and contract agreements that we had a in place that we will be ending or they naturally with roll off.

So – and there is really no one time cost to achieve that. The sub-contractors, and those costs we’ve – if you look at cost between the first quarter – third quarter of fiscal ‘13 to where we announced that in July 30, you see a large increase in cost of goods sold than in R&D, and that’s where a lot of those savings will come from in those two lines.

Okay. And then, just lastly, in regards to the lower mix of contracts and I guess the lower expected mix of professional services going forward that dries up the gross margins.

How do we – like, how much personal services are – is in the revenue right now, when should we think that going, should that go to doing forward.

We haven’t disclosed the specific mix of services versus software in the revenue mix but if you do look at the block of revenue that’s there, a large part of it is services right now, hands that’s driving lower gross margin folks in their software business now – software licenses carry high gross margin, services are not as high and those services are one-time as we’re implementing the contract that Lukas has talked to. Lukas, you want to add something?

Sure, I can build on it [ph]. So I think from a semi-protective, we will always deliver services, either directly or with partners, and our partner engagement actually is growing as we’ve been investing to work with the companies like Accenture, IBM, and TCS globally.

I think from our perspective, we want to make sure that we also join this at the right margin. And I think we have a big opportunity, the biggest opportunity for improving the margins in the support where we had bunch of commitments which we – as we continue to update we are renegotiating and changing the process and we made good heavy weight there.

We also feel that some of the contract, we might see to support, there will be late expire terminate, because if we cannot come to the right terms where they are sustainability from out perspectives. So I think there is a big opportunity while we are adjusting the sub-contracts to deliver on some of these commitments today, those will be rolled off, as we move into fiscal 2015.

So we do see opportunity to improve, overcoming fourth quarter is bad debt gross margin, I only see drive additional improvement in operational cost which will result in improvement to the drug for the target EBITDA margins. Is that helpful Paul?

Yes, it is. And thanks so much, I’ll pass the line.

I will just expand on that last question. And to hit that mid-teens EBITDA target for the second 12-months which I guess would run from this quarter, through our next three quarters.

We starting from a little bit of a deficit here in the core regions reported, and if the OpEx benefit from this restructuring it’s going to take several quarter to flow through, then it sounds as though you’re expecting gross margin or top line to grow substantially to get to that mid-teen EBITDA. Am I thinking about that correctly?

I think the way to think about it is, you know, we talked about the capacity increase being pushed to Q1 of fiscal ‘15, still within that 12-months period, that you’re talking about Rob. And we still see the opportunity to drive substantial increases in our EBITDA from where we are today.

Okay. But still that – the mid-teen sort of target is still there, is that right?

Yes, I think – from my perspective, when I look at it, I look at over the next twelve months to drive there. The fact that we’re visiting a quarter has negated EBITDA obviously, without cold delay because obviously the revenue got pushed out.

We do believe that we have opportunity to assign some other things but we want to make sure that we remained disciplined as opposed to just trying to address – I’m not sure. So I think, to me over the next twelve months I do see very disciplined past and clear path that this is within our control to be able to drive the right dynamics and drive to meet our planned targets.

Is that helpful, Rob?

Yes, that’s great. Second question for me just on the – you noted that there is a bankruptcy impacted us.

What if that impacted – I guess it impacted your accounts receivable or your unbilled revenue, like what would have the impact of that been?

Yes, it would have been on accounts receivables. So when you have something of that nature, it’s prudent to put a reserve in place for the outstanding receivables, and that’s what we’ve done and we take the hit on the P&L, and we are following up with the receiver to – we have a claim in to collect the money, and so that process is ongoing.

Just to note, there will also be some impact as always to order backlog which we reduced accordingly as well.

Okay. And then last question, I guess a broader question.

Just Ericsson announced that they are acquiring MetraTech, I know that you have an M&A strategy, and how that affects your – how that affects the cloud into sort of enterprise billing opportunities for you? And how that affects your own M&A strategy?

If you can update us on what strategy is, that would be great as well.

Sure. Number one, I think I have a lot of respect for Scott Swartz, the CEO of MetraTech, and we’ve been – I’ve known MetraTech for at least last five years, and definitely a company that deserves a good place – I think it’s a good transition for Ericsson.

I think it doesn’t deserve to track WC [ph] – it’s a place which is exciting and quite dynamic. And I think, in particular, if Ericsson is making good strides in being aggressive in acquiring in similar fashion to our strategy.

So now updating on our strategy, we remain committed to driving value and increasing our market share in our core business of communication service providers. We are the largest pure player in the space, and we continue on to add both, customers and potentially some additional offerings to be able to cross-sell into this market.

In addition to that we do see opportunity in the intimate of things area where a connected economy, real-time acquisition becomes more and more important. Organically we have some great prospects because I think as I mentioned we expect by 2015 I’ll announce some commercial contracts that fully leverage our – addressing R&D investment.

But I do expect that we will be able to do some target acquisitions over the coming 12 to 18 months to be able to put bolster in the additional footprint, an expertise to support our long-term three to five years strategy for the internal things, a category in our business. So I’m actually very excited, it does long good robust opportunity, obviously our portfolio is to continue to drive execution.

Is that helpful, Rob?

Yes, that’s great. Thanks a lot for taking my questions.

Okay, thanks. Just from a modeling standpoint, how should we think about gross margin going into the September quarter here?

We’re not providing guidance on that quarterly basis Leo [ph]. I think we’ve tried to provide as much color as we can on where we see gross margins going over the next 24 months or so.

And that’s exactly about as detailed as we can get at this point.

Okay. Now I was looking for some commentary about the potential rebound, obviously you’re putting some of the measures in place to cut cost but I’m wondering if – obviously, if there was some revenue missed here, obviously on the license side, it would have significantly helped that margin line but – just trying to understand if there will be less services related work next quarter that required as much sub-contractors as it had in the last two quarters?

No, our gross margin on a quarterly basis is very susceptible to the mix of what we’re selling in that quarter. So lenders, big chunk of software licenses, that’s pushed out or if there is high end, what we saw last quarter, a higher third-party revenues that carry low gross margins is really susceptible to the mix because the gross margins on each of that kind of four different types of things that we sell vary so greatly between software licenses, one-time deployment services or customer support or care, and then on third-party hardware and software.

They each carry such different gross margins that depending on the mix that occurs in that particular quarter, you’ll see that bounce around quite a bit. That’s what we saw of course, previously in the March quarter, and to some extent we saw that in the June quarter as well.

Okay, that’s fine. Look at it, you talked about I think – 25 or 30 license expansions and upgrades that you’ve signed in the quarter.

Is that the metric?

Yes, those are over 25 upgrades and license expansion and over 30 support contractor renewed.

That’s all happened in the quarter?

It did happen in the quarter. Yes, so we – it probably not that we have fewer press releases, mainly driven because we want to have more named press release, if I have the most press releases in the quarter but those as you can imagine take bit longer because it requires extensive approvals from the corporate companies that we are trying to get a name but I think they are valuable both as validation, as well as for both, obviously the investors, but also for other the customers who are engaging with us.

Okay, so those are the prints to the metrics. Do you have any metrics on how many did you had at the prior quarter in terms of upgrade before contract renewals?

Things are moving forward, what I would like to do is as I provide – as I provide this quarter, I will provide additional, but obviously the previous quarters you had a lot of renewals announced, almost on weekly basis. So we will now provide more of a summarized momentum [ph], either into a press release or on these calls.

Okay, perfect. And just on those metrics, I’m assuming that the support contract renewals didn’t go into backlog per se, right?

Or did they could?

When we receive a purchase order for an annual support that does grow into our backlog, yes.

I think a point to note, along some of that heavy contract, our [indiscernible].

And as the revenue is recognized on a quarterly basis, the backlog gets drawn down so there is a constant ad inflow from a support basis of contracts that – and purchase orders as we receive throughout the year on a monthly basis and how that revenue is recognized.

I think, just to help you – the greater degree of bookings, the number has been obviously our upgrades and from a do or die perspective, our upgrades and expansion in the quarter would have gone to the right and then for us to be able to advance our both, as good book-to-bill ratio, as well as drive growth in our order backlog. Is that helpful?

Yes, it is. Just – also on – can you just talk about kind of what’s going on in the competitive landscape, I know you’ve talked about missing on your pipeline would been very strong but how are you seeing things in Europe versus Asia?

And are you making anymore inroads into North America?

So I think, couple of things. I mean, if I look at any specifics compared to really perform in terms of opportunity.

I think we have a strong sales organization across each of the regions but opportunity wise there is strong transaction growth in Asia Pacific. We see improved dynamic in Africa and Middle East, with both investment and actually given – of course, Europe we’re looking very good strides with traction with customers.

If I look at America, we’ve done very good traction both in Latin America, as well as with – expanding our footprints in U.S. with some of the Tier 1s.

So I think from my perspective, I see our America’s region growing over next twelve months and definitely becoming more substantial because we need to see good growth in Asia Pacific and we continue to have good performance in across Europe and Middle East and Africa what’s driven – there is a lot of other investment in Africa because of its subscribers. I was there last week meeting with quite a few customers and partners, and we do see our product approaches being very good for the region, but also great in Japan, great in India, great in Central Europe.

And obviously, if I look at the big countries like Brazil and U.S., we do see these markets as – and Mexico, assigned as we will be able to make more announcements in over next 12 to 24 months.

Okay, great. One last question for and then I will pass the line.

Just on the restructuring charges, in terms of the headcount that is currently supporting legacy contracts, you took over from the others, that you plan to rule off. Like, how significant is that?

Is there any way you can kind of quantify it?

Yes, we tend not to try to convert it from a competitive perspective to contractual headcount. We could get combination of – and our contracts are based on most number of people that are under value in order to manage better and align our incentives properly.

But I think we do see opportunity – two things; some of the legacy contracts are very low margin, and in some cases negative margin based on older cost that’s to be able to deliver on the commencement. And we have things to note – just putting in perspective, we think the structure have already declined in this fiscal year as we discussed during the business acquisition report of 10% to 15%.

We actually in fact had a revenue growth year-over-year, primarily because customers think both gained confidence in our approach and we have delivered a great service as well, executed on the upgrades and extension. And in that context, we have – I would call, the room and luxury to be able to drive hard some of that substantial [ph] with respect to renewal support contract, as well as potential contracts which are not viable for us to be delivered in context of need that might have been viable in context of larger supply agreements while you delivered equipment, maybe on-site has different presence.

So to me we do see natural past to do that and now we have flexibility to twelve months to be able to do that much more – surgically in order to drive the improved performance on a comp side. Is that helpful?

Yes, and when do you expect that to happen or whether in the next two to three quarters?

Yes, I think we see the visual progress over next three to four quarters, it is as we kind of drive it – do not forget, to us it is important to make sure that the customers that are dependable, we keep them for lives.

Okay, thanks. I’ll pass it on, thanks, it was very helpful.

Thank you.

Great, thanks for taking my questions. Good morning, Lucas and David.

Just a first question, just because there is going to be so much focus on the next two or three quarters here, I just wondering to give us – I was wondering if you could give us a sense on the backlog conversion, you talked about 70% converting to revenue over the next twelve months. Can you talk about the linearity in terms of – do you think that the conversion is going to be fairly linear through that or do you think that there is going to be kind of either front end or back end loaded on the conversion?

I’ll take it first and Lucas you can provide some commentary. I think it’s going to be mixed Justin.

I think we have talked about the $9 million capacity increase which we now expect to be recognized in Q1 of fiscal ‘15, that’s a rather lumpy conversion of something that’s in our backlog currently. And you heard me talk earlier on the call about the support and the care contract that we had, and that gets recognized relatively linearly across the next four quarters.

And so there is a mix, again based on the items that are in our backlog, I think what we – what you’ve heard Lucas say, I’ll let him speak here but we’ve had some very good success with upgrade contracts and capacity, and license expansions. And – so there is a nice chunk of our backlog that is quite possible, that will be recognized over the periods that I talked about earlier.

So that is all, Lucas anything you want to add to that?

I think we obviously don’t provide guidance today, we do look in the future periods, we expect to be able to do so just to help everyone better think about how we are progressing the business but I think the way I look at it right now, as I mentioned I think on the last call, our business right now – the key to it is probably on the top line and mid to low 60s, where we ability to – as we get some license extensions, we are able to obviously create some lumpiness, not suppose of that size which I think – there is opportunities throughout in fiscal ‘15 to be able to capture them. And then from my perspective, that’s how I think about the business in terms of the visibility and be able to grow on that, although I have always have to make a comment that when we had to choose between top line, quality, and bottom line; our focus remains on driving the right margins, specifically EBITDA margin and driving cash flow.

So I want to make sure we don’t put empty calories through a tough line which remains important for us, that’s why we’re taking a strong position on renewals. And you’ve seen that – bringing back to the last quarter, we had $26.3 million of support revenue, we took a stance, we brought back to – the baseline maturity, we always had to pretty $2.8 million with the right renewals.

We’ve got few other renewals under $1 million that we have pushed out because we said we want to have renewals unless we get the right terms. So I think – all of this [ph] continue to be a disciplined leadership to make sure that we are driving the right business for us customers and what if customers that want to make it win win for both of us.

So, is it helpful?

Yes, absolutely. Thank you, Lucas.

And just a continuation from that, you talked about 75% of contracts now renewed and remaining 25% – is the remaining 25% very similar in terms of you expect to expire or terminate the contracts then what you’ve seen in the 75% or do you think that the remaining quarter year is any difference. Could you categorize that in any way or shape?

It’s a little bit difficult but I would say the following; we have a disciplined plan of which three of bunch of conduct which we believe will be eliminated and they are already categorized separately, except that 25% remaining. We see the 25% of the contract as being similar mix to what we’ve seen what we differ, what we’ve worked on for the last twelve months.

And the idea for us is, we’ve got clears of engagement, we have proven our approach to addressing them, I think we have improved our approach over the last four quarters in the new discussions, both, supported from our customers, yes making sure that we are going towards the right margin. So I think, to us we’ve got big team focus on that, I’m confident that we will be able to address those ads and we’ve got clear path to making sure that we do it by latest by April 2015.

Excellent, thank you very much. I’ll pass the line.

Thank you.

Great, thank you for participating on today’s call. We appreciate your question and while as the ongoing interest and support of Redknee.

I look forward to reporting to you back in – probably in early December on the results of our fiscal 2014. And then providing more color on what we see for fiscal 2015.

Thank you and enjoy the rest of the summer.