Lucas Skoczkowski - CEO David Charron - CFO

Robert Young - Canaccord Genuity Michael Urlocker - GMP Securities Scott Penner - TD Securities Eyal Ofir - Clarus Securities Paul Treiber - RBC Capital Markets Todd Coupland - CIBC Jonathan Lowe - Raymond James Justin Kew - Cantor Fitzgerald

Great. Thank you.

Good morning, everyone, and welcome to Redknee’s fourth quarter and fiscal 2014 earnings conference call for the year ended September 30, 2014. I’d like to draw your attention to Slide 2 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’ll be discussing the results for our fourth quarter and full year 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 Web site. If you haven’t done so already, I encourage you to download the presentation which provides further 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’ll return to give you an operational update before we open the call to your questions.

To start off, I would like to provide you with a brief overview of what we have achieved this year. Over the course of 2014, we have accomplished a number of milestone operational achievements, some of which include, we completed the integration of the Nokia Networks BSS acquisition and our own path to drive significant shareholder value to margin improvements.

We released the first version of our Redknee Unified software platform fully integrating our product roadmap post integration. We have also been recognized by industry experts as the leader in our space.

During the fourth quarter of fiscal 2014, we have made good progress executing on our operating plan and are pleased with the progress we have made in terms of the continued order growth, steady revenue mix improvement, improved margins and cash flow generation. In the fourth quarter, our revenue came in strong at $60.9 million.

On the constant dollar basis, adjusting for the impact of foreign exchange rates, it was $61.7 million and for the full year of 2014, revenues have grown to $257.7 million. More importantly, our gross margin in the fourth quarter was 59% while on an annual basis it was 51%.

This resulted in adjusted EBITDA of 5.8 million or 10% in the quarter and $13.8 million or 5% of revenue on an annual basis. As we have said on previous occasions, our focus remains on revenue quality and we have made progress in continuing to drive towards a software product model, while continuing to minimize low or negative margin items from our top line.

Our order backlog currently stands at $169.2 million and on constant dollar basis it would have been $176.7 million giving us strength in revenue visibility. Recurring revenue in the quarter was 47% of the total revenues or $28.5 million or more importantly, for the full year it was at $120.7 million.

Our cash balance at the end of the most recent quarter was a very healthy $109.5 million. I’ll provide a 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 fourth quarter of 2014 and to put this discussion in context, I encourage you to review the company’s financial statements, MD&A and earnings release which are posted on SEDAR and are also available for download on our Web site.

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. Now, onto our results.

Overall, total revenue for the fourth quarter increased 6% to 60.9 million from the 57.4 million in the same year ago quarter. The improvement was driven by a 22% increase in software and services revenue and an increase in third party software and hardware revenues.

Excluding the impact of foreign exchange rates, which varied greatly in the quarter, total revenue would have been 61.7 million. Recurring revenue, which we define as revenue from support and maintenance agreements, term-based product licenses and long-term service agreements was 28.5 million or 47% of total revenue in the quarter, as compared to 32.7 million or 57% in the same year ago quarter.

Adjusted EBITDA was 5.8 million in the quarter or 10% of revenue compared to an adjusted EBITDA of 4.5 million or 8% of revenue in the same year ago quarter. As presented in the reconciliation of net income loss to adjusted EBITDA in our press release, the Q4 2014 net loss includes 3.3 million of costs linked directly to the BSS acquisition as well as 22.5 million in costs related to the restructuring plan and 5.8 million of losses due to the impact of foreign exchange rates in the period.

Net loss in the quarter was 34.7 million or $0.32 per share compared to a net loss of 1 million or $0.01 per share in the same year ago quarter. And excluding the impact of the acquisition costs, changes in FX rates and the restructuring costs incurred in the quarter, the adjusted net loss was 3.1 million or $0.03 per share.

Gross margin was strong at 59% as compared to 54% in the same year ago quarter. The gross margin improved in the quarter as a result of improved mix as well as decreased dependence on outsourced contractors and lower cost of third party hardware, software and support.

Now looking a little more closely at revenues for the quarter, we saw software and services revenue increase 22% to $27 million or 44% of total revenue from 22.1 million or 38% of total revenue in the prior year quarter. Support revenue decreased to 26.6 million or 44% of total revenue and this compares to 31.4 million or 55% of total revenue in the same period last year.

Sales of third party hardware and software components in the quarter increased to 7.3 million or 12% of total revenue from 3.9 million or about 7% of total revenue one year ago. During the quarter, total operating expenses adjusted to exclude acquisition costs and restructuring costs was 33 million or 54% of total revenue compared to 34.7 million or 60% of total revenue a year ago.

And discussing each of the OpEx lines separately, first, in the quarter sales and marketing costs totaled 10.9 million, a 14% increase over the same period last year. And as a percentage of total revenue, sales and marketing expenses were 18%, up from the 17% recorded one year ago.

And this was due both to investments we’re making and improving the overall sales team as well as some increased sales compensation costs in the quarter. Next, general and administrative costs decreased to 7.5 million in the quarter from 9.8 million in Q4 of fiscal 2013.

And as a percentage of revenue, G&A expenses decreased to 12% from 17% of revenue in Q4 of fiscal 2013, which reflects our continued efforts to improve the leverage we’re driving and corporate overhead. R&D expenditures decreased to 14.6 million compared to 15.4 million for the same period last year.

And as a percentage of revenue, R&D expenditures declined to 24% from 27% in the comparable period. The decline was largely a result of the impact of the reduced use of external subcontractors, which we have discussed on previous results calls.

Total cash cost related to the acquisition in the quarter was 3.3 million compared to 1.8 million in the same year ago period and this reflects some final settlement of severances and other compensation per the BSS for anymore agreements. At this point, I’d like to turn your attention towards some specific balance sheet improvements that we’ve reported in the quarter.

And as we discussed on the last call, I’m pleased to tell you that we have turned the corner on a cash burn and in Q4 we generated $20 million of cash from operations. And as a result, at year end, cash and equivalents totaled 109.5 million.

This represents a $10.5 million increase from Q3 of 2014. We also saw sequential improvements in other balance sheet items including accounts receivable, which declined by 17% from 85.7 million in Q3 to 71.4 million at year end.

And as a result, our days sales outstanding decreased to 101 days compared to 118 days we reported last quarter. We also saw a 16% decrease in unbilled revenue from 50.4 million in Q3 to 42.4 million in the current quarter.

As I’ve discussed before, unbilled revenue represents a use of cash and I’m pleased that our efforts have resulted in this decrease. Conversely, deferred revenue which is a source of cash improved to 24.3 million from the 15.8 million reported last quarter and here the improvements in our invoicing terms have resulted in this increase.

On top of all these changes, we saw additional improvement in other balance sheet accounts, specifically our accrued liabilities decreased by 7 million to 38.5 million in the quarter as compared to 45.5 million in the third quarter. We also saw accounts payable decrease by 6.1 million to 9.5 million from the 15.6 million in the third quarter.

And as well, we paid approximately 5 million towards the contingent consideration or earn out related to the BSS acquisition. As a result of these balance sheet improvements, working capital decreased to 132.2 million from the 164 million reported last quarter.

Overall, we strengthened our balance sheet, generated 20 million of cash from operations and improved our overall cash balance by 10.5 million from Q3 to 109.5 million at year-end. Our order backlog was 169.2 million versus the 160.4 million in Q4 of fiscal 2013.

And as Lucas noted earlier in the call, if we adjust order backlog to remove the impact of FX rate variations in the quarter, our order backlog would have been 176.7 million and that is on a constant dollar basis. But of the $169.2 million backlog we recorded, approximately 80% of that is expected to be recognized as revenue over the next 12 months with the remaining to be recognized over future periods.

This completes my financial summary. I will turn the call back over to Lucas for his operational update.

Great. Thank you, David.

We feel it is important to view our full year financial results within the context of our overall growth strategies. Here, I’ll update you on three areas.

Number one, I will update you on the status of the cost structure realignment project we announced on our last conference call. I will also like to discuss our short-to-medium term management priorities and finally, our long-term growth strategy.

Regarding the cost structure realignment project, as we discussed on the last call, we have initiated a program to strategically reduce our cost structure following the completion of the integration of the Nokia Networks BSS. With the heavy lifting of the integration behind us, we are now in the logical place to assess our global operations to ensure our business is optimized in order to ensure we meet the goals that we have set for ourselves and discuss on these calls in terms of the software business model, margins, profitability and cash flow.

In conjunction with this project, in the fourth quarter we incurred a charge of $22.5 million as we completed a negotiation with German workers’ council, closed specific non-core locations and shifted specific rolls from high-cost locations to lower cost centers. We expect the results of this project will reduce the total annual operating expenses by $30 million to $35 million by fiscal year 2016 with partial savings occurring throughout fiscal 2015.

Furthermore, I feel it is important to note that these changes are not impacting our customers or the service level we are providing for our products. Moreover, we remain committed to advancing the capabilities of our software as it is a driver of our business.

We expect that R&D will continue to remain a key strategic investment for our company going forward. With regards to our short to medium-term management priorities.

As previously discussed, we see a significant opportunity to build value for our shareholders as a result of the BSS acquisition. As a software product focus company, our immediate priorities remain; 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 that there remains a significant opportunity to improve the profitability of the recurring revenue stream through innovating the support contracts from Nokia over to Redknee, and aligning support value of the current market prices. Number two, driving upgrades to the latest version of our software within our current customer base to increase the amount of software license being sold in our sales mix.

And finally, upselling the additional features of our full product portfolio to our customer base enhancing our software license sales and contributing to the long-term improvement in our recurring revenues. During the fourth quarter, we continued to progress steadily towards achieving these objectives.

Number one, with regard to the support values we’ve continued to see improvement in the support values with our existing customers; albeit, we are only six quarters into a 12-quarter plan. We remain encouraged by the progress we have made through 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 80% of our target contract activities and we expect to be completed by April 2015 by negotiating these contracts, expiring or terminating them. We have a clear path towards executing on the opportunity over the next 18 months to drive improved margin.

With regards to upgrades and upsell of our software, we have continued to close on upgrades, license expansions and upsells providing validation for our customers that we are taking care of their investment while providing them with a competitive advantage through the latest version of Redknee Unified platform. We are pleased with the traction we are experiencing as we had strong bookings and secured over 60 purchase orders for new licenses, upgrades, upsell and expansions and approximately 10% of these orders were multimillion dollar ones.

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 have described 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.

On the product offering front, we’re investing and building our product platform as one of the most recent quarter, Redknee has over 156 patents granted and more than 48 patents pending. After announcement this morning, we have secured our first order for Redknee connected suite, a software platform that fully leverages Redknee Unified product line to support the Internet of Things market.

This is strategically important to Redknee as we are demonstrating our ability not only to win in non-telecom business but also to do so with contracts of significant value; in this case $30 million. We’re engaged with strategic opportunities and expect to announce additional commercial contracts in fiscal 2015 in this area, which will provide additional leverage on our R&D investments.

On expanding our market share and leadership, we currently are deployed with over 200 global service providers supporting approximately 2 billion subscribers. As a company, we’re relentless about our customer-for-life approach that we take with our clients.

This approach to customer service is why we have retained all of our clients in the quarter and the full fiscal year. This is also a large part of our ability to expand our share of wallet within our existing customer base.

I would like to observe that according to industry analysts of them [ph], Redknee has grown substantially faster and taken market share from our competitors, largely thanks to our software product platform and great service and expertise. Specifically, we have grown our software licenses by approximately 230% year-over-year in service of objective to drive a software business model.

On a sustainable recurring revenues front, our recurring revenues are primarily comprised of support and Software as a Service licenses, SaaS, that together in fiscal 2014 comprise of $20 million [ph] or 47% of revenues. As previously discussed, there is expected decline in the recurring revenues related to specific customers that have made decisions to move off of the platform prior to Redknee’s acquisition of the Nokia Networks BSS asset.

As part of this, we see a great opportunity to continue to increase the support margins while providing more opportunities for SaaS or term licenses. In fourth quarter, two multimillion-dollar orders were for term licenses; one was for Tier 1 telecom provider and one for non-telecom enterprise company.

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

In summary, our orders have grown significantly over the past 12 months and we are seeing improvement in margins and in cash as we execute on our three-step plan. We continued to work to ensure the quality of fundamentals of our business remain intact.

We’re building strong quality revenue streams, improving gross margin and EBITDA margin while improving our cash flow. Before opening the call to your questions, on behalf of the entire management team, I would like to say thank you for your continued support from our employees, our partners, our customers, as well as our shareholders.

Now with that, we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.

Hi. Good morning.

The recurring revenue decline seems to be driven by support and licensing decline, but you also mentioned that there is some customer churn update. And I think you said that there were 10 customers who were considering leaving, three had left, two reconsidered which leaves five.

I wondered if you could update on that metric and let us know what happened in the quarter?

Yes. So these are the customers – just for clarity, we have lost no other customers that we obviously acquired with acquisition that did not declare intent to leave.

And in the quarter, we had one customer that has rolled off the platform and we also reduced some, what I’ll call, third party support that we historically have been providing through the acquisition to some of the customers where we had, I would say, low to negative margin contribution to our business. So in this context, we felt it was important as I communicate over last two quarters.

Number one, as we seek to really improve and focus on quality of recurring revenues and to counteract that what we have done is we’re moving customers to term licenses, so we signed a multimillion dollar contract with a large Tier 1 operator in EMEA to term license and they’re coming on line in second quarter fiscal 2015. And also we see the enterprise deal that we have announced this morning will be also long-term term license.

And these obviously are of much higher margin compared to some of the revenue that we have seen roll-off off of that business. Is that helpful, Rob?

No, that’s great. Thank you.

So you had some very good trends across the balance sheet with accounts receivable, unbilled revenue, deferred increase despite decline in support revenue. How sustainable is that?

So what should we expect Q1, Q2? Should we expect continued cash flow from operations and should we expect continued improvement in accounts receivable and unbilled revenue?

So, I’ll take that question, Rob, and the way to go at it is we’ve talked at length about this in the past and we’re focused on it. Cash flow from operations is a focus for us and managing properly accounts receivable and other balance sheet metrics.

It may bounce around quarter-over-quarter as you’ve seen in the past and that’s just the nature of our business. But for the annual trends are going to start to move in the right direction here.

Okay. And just two more for me.

The $9 million contract, it slipped last quarter. You said you expect it in Q1.

Is that still the case? And if you could just summarize the margin impact, I think that’s 100% margin or close to that, maybe just update there?

David, you want to take that.

Yes, sure. So the 9 million capacity increase which we announced is not in the Q4 numbers.

We are expecting it, as we said, to hit in Q1, that crescendo quarter. That is the capacity increase and of such of the very, very high margins.

Okay, great. And then lastly, any other details on that 13 million win this morning.

Is there anything you can tell us about what vertical it is? I think you said it was real-time loyalty and rewards.

Is this like a credit card? What is it exactly if you can let us know?

I’ll pass the line. Thanks.

Yes, that’s a good question. I think – we have already said it – this is for a retail environment.

We’re going to provide real-time experience and loyalty for shoppers both for the high-end stores as well as corner stores in one of the Tier 1 countries in Asia Pacific. We’re very excited about that.

We are going head-to-head with other large companies. I think really the power of the – flexibility of the software platform, the capability and ability for us to handle all transactions has really helped us clench the deal, and we look to build on that.

As I expect some of other deals that we are working on will I think follow, but I think once again with our focus what you will hear a lot moving forward is really focusing on fundamentals. We want to converge all these capabilities into strong margins and cash flow improvements so we can continue to consolidate the industry.

Thanks, guys.

Yes. Good morning.

David, I wonder if you could just describe the status you have with Nokia in terms of collections? Previously, this had been a problem.

It appears you’ve gotten into a normal collection and payment cycle with Nokia. I just wondered if you could elaborate on how you feel about the stability of the payments underlying that relationship?

Sure. That’s a good question, Mike.

So as I’ve mentioned on previously calls, there were some process challenges that we had. The relationship with Nokia is relatively strong both at the corporate level and as Lucas knows at the channel level.

We’ve kind of broken the back of some of those process issues. We’ve opened up entities in countries and we’ve opened bank accounts to facilitate, I’ll call it, local, country to country cash payments and because of that we think – I’m confident we’ve turned the corner on the challenges we’ve had in the past.

Okay. Thank you.

And I guess my next question would be a little bit for Lucas on kind of high level strategic business development basis. Just to take one example that’s visible, I think Nokia itself, your sort of business partner but former owner of this business, Nokia has had some big success I think with Sprint with some big contract wins.

I just wonder if you could describe whether Nokia’s success in hardware has any prolonged effect for the billing system business, which they would know well and understand well whether that’s generating leads or opportunities for you and maybe if you could put that in a larger context of the company has been pursuing some large opportunities. I think you’ve made inroads in Latin America, but if you can flush out your expectations of that business, that would be helpful?

So I think number one, I think Nokia is doing really well and really continues to I think pursue a very sustainable profitable business. Especially, they are the leader in LTE.

We are working with some of their larger customers together to address both the VoLTE or what’s called Voice over LTE and oversee massive movement to data where we’re deploying our both real-time charging and the policy functions on a combined basis through the Redknee Unified platform. And I think from my perspective, I continue to be very encouraged by the opportunity we see both with Nokia but also directly.

I’m actually right now on the road to visit CEOs and sign – do some signing of contracts, interview, ceremonies and I can tell you that from even discussion this morning that one of the customers who – the two biggest suppliers to their group, they mentioned to me that they see Redknee as being a key capital that can really transform their business where our competitors are multibillion dollar companies but they see our expertise and our platform as being the one that they’re pursuing to have them capitalize their business. But I want to make sure that we are focused on fundamentals and I think from an investor perspective, we’ll continue to probably speak to you more about how we’re driving in a gradual but sustainable fashion translating those strategic opportunities into improvement in margin and improvement into obviously profitability and cash flow.

And I do think from my perspective that we will in 2015 see improvement in overall mix. I’m not actually chasing the top line but rather really want to grow our recurring license streams in our business and obviously get into our target what we talked about for a while in terms of historical target EBITDA margins as being mid-teens.

I believe that we will show quarter-by-quarter a path to demonstrating that and I think that hopefully will provide encouragement to our shareholders.

Thank you. Lucas, if we look at the company’s financial position, you’ve improved the cash, your net moderately but it’s a substantial reversal from cash burn.

The share price is down substantially. I think previously the company and the executives have been blacked out from buying shares.

Would Redknee at this stage be in a position whereas a company it would seek to buy back shares or is that – is it too early for that?

I think we always have opportunities to do that otherwise we’re not in a position of any information they put for us aside. I do believe Redknee shares obviously are a great investment and I do feel that if we can – have opportunity to buy some back, I would definitely be very encouraging of that.

I also want to balance that with the reality that the market in our business, there’s a lot of opportunities to do additional consolidation in 2015 and we want to drive additional acquisitions and we see a lot of targets throughout 2015 that are becoming available and we want to make sure that we have the cash flow, profitability so that we are eligible to be able to continue to consolidate this marketplace. Is that helpful?

Yes. And it would raise a further question if you’ll allow me.

Do you think that you can get to stability and growth on the maintenance revenue such that the business is strong enough to consider further acquisitions or is that still a gradual work in progress?

I think what I see is continuing improving margin, especially in our support business. I think some of – I still look to optimize some of the recurring revenue which I believe does not add to our bottom line but rather add costs.

So to me, we got a good opportunity. We’ve got a great team and plan in place.

And from a visibility perspective, I’m very comfortable that we have the required necessarily stability to both drive the required margins and to execute on the plan so that we can start considering looking at additional transactions in 2015.

Okay. Thanks very much, Lucas.

It’s very encouraging to see the reversal of the prior cash trends. I think that’s a really good indicator.

Thank you.

Thanks. First of all on the non-telecom deal, was this done direct through a partner?

And then Lucas, what is the partner involvement in some of the non-telecom deals that you talked about in the pipeline?

So number one, this deal was done directly. We’ve been working – it’s really from a perspective of trying to apply and demonstrate to our partners that our solutions actually were applicable to some of these markets.

We are working with system integrators and I think I’ve mentioned some in the past; Accenture, IBM on both telecom and non-telecom areas. And I think the Internet of Things market with respect to connected enterprises being interested and transform their business is an evolving one and our value is not to provide connectively, is to really monetize the new opportunities that without more connectivity becoming available.

And I expect that – stay tuned. To us, as I said, it is a three-year journey which I believe that over next three years we’ll also make additional acquisitions to bolster this organic thrust that we are looking to drive there a second engine of growth over the next three to five years.

Is that helpful?

Yes, it is. On the support revenue, if we were to just sort of in terms of setting expectations and levels – if we were to assume that the balance of the contracts that you’re working on novating do not come over and/or the other customers roll off the platform.

What is the potential additional downside to the support revenues you see it now?

It’s interesting. In our plan we don’t see any sort of downside.

We do see optimization but I think that our existing deals are improving the margins and we are adding term licenses, which obviously the business we acquired been happening, and these are kind of – some of the contracts we announced are $1 million to $2 million per year of term license which obviously are very, I would say, lucrative from our perspective. So I think what I can do is I focus – I think we got clearly a target on EBITDA for the year and we drive it quarter-by-quarter.

The discussions are ongoing and our view is we want to drive quality recurring revenues. If I don’t make a margin on the recurring revenue that might have been good for the previous owners, it’s not relevant to us.

And I do see from these same customers being able to sell them a new term license with much higher margin and selling that to the IT organization as opposed to maybe the network organization. So last, I would say, give us the room to make those moves with our customers so we can drive the right EBITDA margin in the business.

Is that answering your question, Scott, in a concluded way?

Yes. No, I appreciate it.

On the delayed deal that’s expected to close this quarter, just to be clear, as I understand it. You really don’t have perfect visibility on whether this will close.

It’s kind of out of your control. So do you know it’s closed or it’s still just the expectation that it will close this quarter?

The deal is fine. We’re bringing the customer live and the customer – I said the customer will go live very shortly.

Okay. And then the acquisition charges, the 3.3 million.

Is that the final acquisition charge that we’ll see and related to the acquisition?

We might see some small charges come through, Scott, but as I point out in my comments, there are some sort of, I’ll call it, final settlements that flow through there.

Okay. Last question, I appreciate your answers, is the aging of the DSO in the quarter.

I noticed that there was a higher percentage that was over 120 days. Is there any concern related to bad debts within there that you can speak of.

Well, we took a small charge and you’ll see that in a few statements in the MD&A of 0.5 million dealt to accounts, but I think the quality of our receivables is very high and I said that many times. So the remaining balances are very collectable in our opinion.

Yes, appreciate it. Thank you.

Thanks, Scott.

Thanks, Scott.

Thanks. Congrats guys on a good quarter here.

First question from me just on the restructuring charge. Maybe Lucas, you can walk us through where should we see the benefit here from these charges?

You talk about a $30 million to $35 million savings, so is that only primarily in costs or is that going to be across volume including [indiscernible]?

Maybe I’ll start with that. Lucas and I are in different locations here, so I’ll start and Lucas you can jump in.

So as we discussed last quarter, the expected savings we’re going to see from the restructuring fall into two main areas. First is in the sort of cost to sales area, second is in the R&D and that’s primarily because – frankly that’s where the bulk of the people are in our company.

And second, that’s where we in the past have used – we had heavy reliance on external subcontractors for doing some of the work. So we’re removing some of those subcontractors and we had final agreements with respect to settlements with some of the severances and so we’ll start to see those come through in those two lines.

Okay. So do you have any targets in terms of like – I guess beyond 2015 for R&D in terms of as a percentage of revenue?

Well, we haven’t disclosed that level of detail. What we said is that we’re going to see $30 million or $35 million of annual savings start to be fully baked, if you will, if you want to use that term in 2016.

And if you were say that it would be half and half between R&D and cost of sales, it’d be directionally correct.

Okay, that’s perfect. And can you also just update us on where you guys are at, at the restructuring?

Obviously you negotiated this towards the end of the quarter, but where are you as of today in terms of actually cutting headcount? How many more do you have to do?

And how should we expect it to roll through 2015?

I would say that we are on track with the plan. Just to give you context, it’s been a very good process with the workers’ council in Europe.

We’ve been working very collaboratively and done this on a voluntary basis. I think the problems right now we’re going through is we were hiring in some of our centers, in our local centers to bolster our capacity as we transition and it’s going to be actually fairly spread over next three quarters of employees roll off.

They’ve already signed agreements and they’ll be rolling off gradually from their organization. But in terms of – I would say a lot of the heavy lifting has been done by the regional management teams.

I’m very appreciative for the support we have received out of all the ranks in the company. So as you can imagine not sailing [ph] straightforward but it’s been very collaborative and I would say we have also received positive feedback from customers that we are taking care of the employees and also increasing our capacity in the process.

So it’s been tricky but I think very well executed. David?

Yes. No, I completely agree with that.

Okay, good. And then just on the – I remember that last quarter you guys were doing some work for a client that was either looking to renew or was already like signed with another vendor that you were trying to win back.

Can you just talk about like what happened with client? I think it was in the APAC region and were you able to secure them and where the process is going there.

Yes, I think it was the Americas region and I think – the one that we were investing in Q3, Eyal, that customer we’re going live with. We see additional opportunities.

So we are very excited about the opportunity to increase that. It’s something that long time ago was a former customer of NSN and we’ve been able to really demonstrate that where we got the platform, and we see opportunity over the next three years to re-grow market share.

And I think – I’m right now actually visiting with another group operator that’s in I think about eight, nine countries and my meeting is with the executive team. I think we do see opportunity, once again multi-country opportunities.

And I want to be here cautious coming back to perspective because obviously investors don’t have as much appreciation of the complexity they involve in telecom. So my view is I think we are well positioned and it would be a great opportunity and traction with customers.

But we as executive management team are really focused on helping to translate that into tangible metrics, which is obviously the gross margin, EBITDA margin, cash flow so that we can continue to make it relevant to all of our shareholders that we are prudent and then this way we can grow the business. As a result, obviously our cash flow should continue to grow.

So that’s probably kind of our [indiscernible] for me to come back because I do feel from a strategic perspective we are positioned in an excellent way to do more of existing customers and attract some new ones. So I’m very comfortable on that side, but I’m sure that all the people on this call and our shareholders are comfortable with how this translates into our profitability in our business.

Okay. And then just a quick one.

I remember – I think in a signing of a small initial contract. So you believe – I guess as you can expand into other countries, you’re going to have a significant revenue opportunity there.

So are you displacing another incumbent here in this situation?

In this situation, yes we are. And discussions I’m having here right now – Europe, we’re doing the same.

It’s interesting. The other thing, as I mentioned, more and more executives are telling us that they see us as a very viable alternative, very focused company that delivers with quality.

And we do it both directly, we do it also working with Nokia and expect us to actually work with additional partners to really help folks as they move to LTE, they move towards data, as they acquire broadband assets that we will be more and more relevant to these service providers that’s becoming obviously an opportunity for us on enterprise companies which we are controlling that growth. Because my opinion is we want to demonstrate profitability not just top line.

And as we see opportunity growing, we expect to have double-down with accretive acquisitions to make sure that we can continue to scale the business to the next milestone.

Okay. So before I would pass the line just because you touched the M&A side, if you do look to another acquisition, would you be looking for a point solution after the current Unified platform or would you be looking just to get more leg-grab [ph] and just get clients?

I think no. When I look at combination – there’s a lot of assets available and to acquire something that we can make accretive that doesn’t put a drag on our cash flow but also adds – expands our, what I’ll call, portfolio of solution of some breadth with customers.

So we do look for customers with recurring revenue and I would say that we have a very good queue of potential opportunities and the question becomes, can you over the next 12 months negotiate the right deal that is accretive and helps us continue to bolster where we want to be as a business? And we don’t have over the next five to eight years to get to over $1 billion with $200 million in EBITDA.

So that’s how I think about it. So to me it’s very, very important that we start getting our EBITDA, so we have access to debt because obviously I am cautious about using our stocks.

Obviously we haven’t earned yet the vote of confidence from shareholders to use our shares as a currency.

Okay. Thank you.

I appreciate the answers. Thank you very much.

I’ll pass the line.

Thanks.

Thanks for taking my questions. I just wanted to go back to something that you mentioned earlier that the margin on the terminated support contracts is very lower, even negative.

Is that gross margins or net margins? And then could just help explain like typically software support gross margins are in the 70% range.

Why are the margins on these contracts so much below that?

Number one, yes, it’s both on the gross and net some of these statutes [ph] were – I would say from a software business perspective not economical and maybe they made sense from a perspective of integrated business that the previous owners operate within. And I think it comes down to that maybe at that time, when commitments were made in the context of much bigger hardware deals with hardware level of the margins.

So I think – it’s obviously very different from our perspective of what we operate in the software environment. So to us some of these deals are too old or might be too entrenched to address in the portfolio actually for the deals that we have rolled off, those deals actually customers made decision prior the previous two, three years prior to the acquisition being announced that they decided to go front of the platform.

We do see those customers still being opportunities to upsell them on a cloud term solution, but to us it actually does provide some release because what it does, it both lowers the drag as well as lowers the repetition risk because otherwise irrespective of the value, we have a responsibility to make sure that we’re seen as being incredible vendor in the industry. So it’s bit of a, I would call it clean up.

In this case, it can clean up [indiscernible] for us prior to us acquiring. And what I’m really excited about is the fact that with the customers who see value, we are driving increased margins to get to the 3% benchmark and we see customers taking term licenses which obviously we’ve been very adamant about supporting prior to acquisition and we’re back in the groove to kind of drive more and more term licenses to help us scale the profitable high margin recurring revenues.

Is that helpful, Paul?

Yes, very helpful. And just this may be a hard one to answer but I’ll try it.

Your 80% of the contracts novated right now. What’s your sense on the risk of the remaining 20% in terms of losing those customers?

Or maybe another way to ask it is, has the potential risk changed over the last several quarters?

So I think that the customers that we are retaining they are meaning – we feel we’ll get a chunk done between now and end of the year and we have probably a handful of those left for the first calendar quarter in 2015. Plus those discussions are going very well.

We still are reviewing all the contracts to make sure we are driving value and we really do not want to be reselling third party support at no margin. I mean, this is actually very important to us; our drive, our support and for our software.

And as you heard, we tripled the licenses year-over-year. It’s something that as we [indiscernible] we really focus on what value we have to offer, and we’re doing the same thing in support.

And I think in my discussion with customers, our customer obviously are themselves under different pressures but they do see value of what we have to offer. And the customers that were key benchmarks for us we’ve made a lot of great progress which gives me a lot of confidence that you will see gradually – as I said I think next six quarters gradually be driving more and more the margins towards where we need to be while signing up more high margin term licenses and new software support from the new upsells and new customers.

Okay.

So coming back, I don’t see a risk on the remaining contract. In terms of losing it, that’s not an issue.

The question becomes an issue that we drive the right margins.

Okay, makes sense. Just one last one.

Just in regards to the $9 million, have you already collected the cash on that deal yet?

No. That’s hasn’t been recognized as revenue nor is it in our receivable.

Okay. Thank you.

I’ll pass the line.

Hi. Good morning, everyone.

Good morning, Todd.

Question on the $9 million deal, just how will that get booked in Q1? Is that just an incremental 9 million on top of what the Street is generally expecting in terms of revenue?

Well, I’m not going to comment, Todd, on what the street is expecting but we know the accounting treatment for the 9 million is a capacity increase. It would fall under that software and services line in our P&L.

And as I mentioned previously, it’s a capacity increase meaning the customer is already licensed to use our software and to respond with additional capacity.

Okay. I’m still not sure if it all get recognized in Q1.

The expectation that we had set prior we’re still on track to have that revenue recognized in the December quarter. And I’m not sure what else I can say about it frankly.

Okay. And if I can just step back from that, you’re growing your business at 6% this quarter.

You’ve talked a lot about – like I get the restructuring point in terms of bringing the margins up to mid teens. But I thought the story over a couple of years was that year-to-year the growth in EBIT margin would be coming from top line and not cost cutting.

And so I get you’ll get there partially with the cost cuts but what needs to happen to accelerate the revenue growth into the double-digit range to sort of get that incremental EBIT margin above and beyond the cost cuts that you’ve already announced?

I’m glad you said retail. Actually the key behind our growth in margin is a change in the mix.

We’ve acquired a company that had a 29% gross margin. Today – last quarter we finished at 59%, so we more than doubled the gross margin.

And the idea is that we need to sell more software. When we sell third party, when we sell hardware, when we sell some of the other services, we make zero money.

And so it’s empty calories. To me, what’s not visible and we were trying to find a way to best communicate that is we are really focusing on selling Redknee software and Redknee services and not sell third party software, hardware and services.

And that mix is improving. We have year-over-year increased 230% Redknee licenses.

I am very happy about moving the licenses both into – in some market on a perpetual basis and wherever I can on term basis. And I think from our perspective, we are seeing really a shift in the mix.

So I think we expect again year-over-year to increase Redknee software license sales within our business. So internally I see kind of about 10% to 15% growth internally within our business as we are growing our content sales.

And if it means that our envelope stays the same, so we stay a quarter below in the revenues but improve the margin, that will drive significant improvement in the margins on the bottom line. So I don’t need to fairly grow my top line drastically if I sell more of our stuff.

And I think we’ve done good progress and I expect that we will do a lot more licenses. So the mix will be changing and you should start seeing that flowing to bottom line.

David?

Yes. No, I completely agree.

Is that helpful, Todd.

Yes, that’s very helpful. So just to put a finer point on that.

So should we actually expect flat revenue but improving mix over the next year, year and a half?

We haven’t given guidance because I want to – we kind of gave the long-term guidance almost two years ago now and we’re sticking to it and with the targets. But if you think of how I think about the business, if I can grow internally our business and change the mix to drive the mid-teen EBITDA and improve the mix to improve our gross margins to high 50s and touching 60, I think we’ve great tons of value.

And from our perspective when you think about how I get compensated from my performance perspective, that’s really driven today in terms of EBITDA and cash flow. So you have to understand from my perspective, I want to create quality, sustainable business.

And if it means that revenue remains around the same level right now, I’m very okay with it because to me it’s important to make sure that we sell our content.

Very helpful, Lucas. One last follow up.

Just remind us how the compensation math on EBITDA and cash flow to yourself? Thank you.

Thank you. So do you want me to explain it or…?

Just explain it.

I think we have targets for both how much cash we have at end of fiscal 2015 and we’ve got a target for EBITDA. My primary drivers in addition to the KPIs that I need to improve in the business, but everything in there needs to translate that we need to meet minimum threshold EBITDA margin and cash flow target.

And based on that, I get my compensation – my performance compensation gets assessed. So obviously, the key KPIs that we need to translate all of the strategic improvements in business we need to translate down to significant movement in EBITDA generation and obviously in continuing cash from operations.

David, is there anything else you can add?

I’ll just add because I think it’s fair to say that that is just a lot to our strategic objectives and what we’ve been saying about the last several quarters where our focus is on profitability and cash flow. And those objectives are not only aligned across the executive team but they’re actually pushed down to all of our staff.

And so I think we’re in complete alignment internally from what we’ve been saying externally. I mean that’s the really important part here.

Great. Thanks, gentlemen.

That’s all I had.

Thanks, Todd.

Thank you, Todd.

Hi, guys. Thanks for taking my questions.

Just a couple. For the non-telco deal, is this going to be realized equally over the full seven years or is there some kind of upfront license that’s going to be recognized?

Yes, maybe I’ll just take that one, Lucas. So we did announce a seven-year term license and so typically that revenue gets recognized ratably over the term.

That’s the definition. There may be some additional services that get recognized sooner rather than not, but the bulk of it is recognized ratably over the term.

And for the support revenues, are you expecting those to stay about this range through 2015 or you think it’s going to bounce back a little bit?

As I said before, we’re going to – we got – some customers, there’s few customers still that we’ll roll off. Those are the customers that had it before us acquiring the asset.

But in terms of – I still feel that there is room for us to improve on some of the empty calories. But these are decisions that will happen quarter-by-quarter, so we’ll provide a little color as we go through.

But the key thing for me to continue to translate it into a positive EBITDA and gross margin improvement. So I think – it’s still in play.

I have a visibility I feel very good about the level of recurring revenue that we are building up on and there are few areas where I feel that these are still two empty calories that we need to deal with and we’ll use 2015 to deal with that as we drive our margins into mid teens.

Then the target date of April for finishing all the novative contracts, is that kind of going to be in line with where we’re going to see the bottom or the support?

I mean just two things. I think one is that this is where we are finishing our old innovations.

It doesn’t end our process of improving our business, right, because my view is we still have a lot of discussions with customers making sure that we can drive improvements in the engagement we have with customers. So that process is finally on our paper.

We will get improvements I think as they move to Redknee agreements, but some of the improvements will stand three years. So we’re at now about year, year and a half under the belt and as we move each agreement every year I think is being improved as I’ve been discussed with you guys.

So to me, we’ll continue to I think put emphasis on the right metrics in our business so that we can continue to invest in our customers support to make sure they have the right resources. And if somebody is giving us zero margin, I think it creates more risk than value.

So then I prefer to use the resources to deploy a term license where I can create much more value for the business. So, I will be probably by quarter-by-quarter providing that, but I do feel that this will be contained within all that parameters in terms of our envelope on business and revenue as well as our targets for the margins.

Okay.

David?

No, I think we should move on to the next as we’re running a bit late here on time, guys.

Yes, I made it. Good morning, Lucas and David.

Thank you for taking my call. So a quick question just on the restructuring, it was higher than anticipated and came in, I was expecting kind of to be spread over a couple of quarters.

So a two-part question. The first question is, do we see any more restructuring next quarter?

And then the second question is the savings from the quarter kind of stayed in the band of 30 to 35. With a higher than expected restructuring, should we see savings being at the higher end of the savings range?

Yes, I’ll take that. Good question, Justin.

So I’ll take that in two parts. So first of all, last quarter when we were talking about it, I said that we were still in discussions with the workers’ council and that I expected the charges to come partially in Q4 and partially in Q1 of fiscal '15.

I think what we’ve said on our comments here today is that we were able to actually negotiate final agreements with the parties and that’s been faster than planned and as such, we had from an accounting perspective, we had good visibility on the charge booked for the fourth quarter. So that is actually quite positive.

It has come in higher than the high end of the range that we gave. And frankly it’s not because we’re taking or doing more restructuring, it’s not that at all.

It’s just when we got down to the details, it did cost more than we had originally estimated. And it’s not necessarily a bad thing.

It’s just frankly the actions that we’re able to take I think leave the company in the best shape possible going forward. So I won’t comment on the range of savings.

The 30, 35 is still our target. We’ll provide updates, Justin, as we start to get throughout fiscal '15, as we start to get into '16, I’ll be able to provide more clarity there.

But I think to reiterate, the increase in the restructuring frankly was just due to final agreements rather than the estimate that I made, which was too low.

Okay, good. Thank you.

And then just in terms of how the cash disbursements from these charges will roll out? Is there linearity at all, is there frontend or backend loaded, how should we think about the cash?

Yes, at this point it is going to be fairly equal across the quarters throughout year. If you look at the liabilities on our balance sheet, you’ll see what’s current.

The current liabilities for the restructuring provision and frankly the current liabilities for the contingent liability both of those are expected to be paid out within fiscal '15. That’s why it’s booked as current.

And I think for purposes now, again I’ll update you throughout the quarters throughout next fiscal, but for now I would assume equal balance across the quarters.

Okay, excellent. And Lucas, just the last question, just in terms of pipeline.

I mean you talked about 60 deals that have come since the acquisition in terms of upgrade and whatnot. How does the pipeline look going forward and how comfortable are you in terms of the cadence of deals like this?

Should it be increasing, staying stable where it is or how would you categorize it? Thanks.

So the 60 deals were in the quarter by the way. We had many more obviously in the year.

So I think the cadence of deals is that we want to drive book-to-bill better kind of above 1, preferably 1.1. To me some deals we’ll obviously spend a couple of quarters, but for the year the idea is to continue to build out order backlog.

And I would say feel very good about the pipeline. And in terms of opportunities, I’m continuing to see that it’s an opportunity rich territory, but it’s important to make sure that we are picking the ones that help us with our strategic direction and obviously with better focus on becoming sustainably driving improvement in margins and cash flow.

So we are picky, disciplined and we want to make sure that we end up being the consolidator in this marketplace because we are in a disciplined way executing on the plan. Some of us think our competitors may be more eager to do business but my view is empty calories don’t help you grow strength in the business.

So, is that helpful?

Yes, absolutely. Thank you very much.

Excellent.

Yes. Thank you for participating on today’s call.

We appreciate your questions as well as your ongoing interest and support of Redknee. I look forward to reporting back to you in a few months’ time on the results of the first quarter of fiscal 2015.

In the meantime, I’d like to wish you Happy Holidays and Happy New Year. Thank you, everyone.