Danielle Royston - CEO Anin Basu - CFO

Todd Coupland - CIBC Steven Lee - Raymond James Paul Treiber - RBC Capital Markets Ralph Garcea - Echelon Wealth Partners Rob Young - Canaccord Genuity

Thank you. Good morning and welcome to our 2017 Q4 and fiscal year-end earnings conference call.

I’m Danielle Royston, CEO of Redknee Solutions and I’m joined today by our interim CFO, Anin Basu. I will be following a short presentation today.

If we haven’t already done so, I would encourage you to download it from our website. As the following main points I’d like to communicate today on our call.

We have finished our fiscal year and revenue continues to decline year-over-year. We have a strategic and restructuring plan that is designed to approach cash flow breakeven run rate by the end of the year at a revenue level as low as $100 million.

We will use $60 million of the recently completed rights offering fund on restructuring and we expect operating losses, excluding restructuring to moderate towards breakeven run rate by the end of the year. We remain maniacally focused on our customers and their success and we are investing to revitalize our products to position them as market leaders in the telco space.

So with that, I’m going to turn the call over to Anin. Anin?

Thank you Danielle and good morning everyone. Please note that our complete financial statements, management discussion and analysis and earnings release for the quarter are available on SEDAR and on our website and I encourage you to review them at your convenience.

As you can see from the release of the statements, our revenue was down year-over-year and we have a loss of $59 million in 2017. As many of you are quite familiar with the financial reports, I’m not going to go over the numbers on today’s call.

I would be happy to answer any specific questions during our Q&A portion of this call. Today, I want to spend my time discussing two points, where we are on our restructuring plan and where we ended up with our rights offering.

Let’s start with our rights offering. If you recall, we launched our rights offering process with the intent to raise $54 million with the backstop from ESW Capital.

We successfully completed the process, had great demand from non-ESW Capital shareholders and thus did not trigger the backstop. Because of the high demand and ESW Capital’s dilution rights, we raised $77 million, 23 million more than the 54 million planned.

There was a lot of dilution with this rights offering. The total of 261.6 million subordinated voting shares of Redknee are outstanding.

And if you include warrants, options and share units, it’s 324 million. On the positive side, we raised the money needed to restructure.

Unfortunately, it came at a high cost of dilution. The rights offering also increased ESW’s ownership.

Subsequent to the rights offering, ESW and its affiliates hold 28% of the subordinated voting shares or approximately 39.5% of the shares including the impact of the warrants. We plan to spend approximately 60 million on the restructuring paid by the proceeds of the rights offering.

We will be spending this money in 2018. There is a lot to restructure over the coming months, but we are trying to get to a state that by the end of 2018, we approach a cash flow run rate of breakeven.

That about covers it for my portion. And with that, I’d like to pass the call back to Danielle.

Thank you, Anin. As we look back on our performance during 2017, I’d like to provide some background to set the stage for what we are anticipating for 2018.

These next two charts show revenue and profit and don’t show a turnaround in 2018, another year of shrinking revenue and losses. From a financial point of view, 2018 is not going to be a great year.

However from an operational perspective, we are very excited for 2018. We are focused on three things, restructure aggressively, invest to improve customer success and invest to improve the products.

Starting with restructuring, we’re aggressively restructuring. Obviously, the biggest element here is employee related costs and we are making lots of changes.

The biggest one, we have made a decision to shut down all of our operating entities and work locations in Germany, exit our employee relationships and replace the work with DevFactory services at half the cost. Obviously, we like that price.

That’s a big win. Since the start of my involvement, we’ve been testing DevFactory and Crossover to see if they have the capabilities to take on telco and Redknee’s need.

And both have exceeded our expectation. For example, on a recent new project, one of our most senior technical leaders requested that the team be staffed with Crossover and use DevFactory services as opposed to using legacy Redknee employees, because the talent is demonstrably better.

So it’s really great news. Another example and I will talk about it when I talk about products, we are working with Google on making our system 10 times more scalable using Google cloud.

And then finally, one of Redknee’s largest customers, the Google team lead said, we love working with the DevFactory developers, they are Google quality. That is a great endorsement and reinforces to our customers the positive changes we’re making.

Moving on to customer success, this is our most important initiative. Our revenue will continue to decline until we can turn around customer success.

We’re actively working with each customer on a program to get them to success. These are long, multi-year projects that I expect that in 2018 you will see our customer success measure move up from the 20% we are at in 2017.

We have spent the last month resetting our customer relationships around success. The customers love the message.

Now, we have to execute and deliver in 2018. And finally, product.

We have huge investments to make to turn these into world class products. Most of our investments are all around quality and we are making progress there.

That said, we do have a scalability project to showcase to our customers the vision of what’s to come and remind our customers that betting on the Redknee horse is a good investment. Scalability and performance is one of the most important dimensions to a charging engine, how many subscribers can you handle.

Historically, Redknee has used an on-premise Oracle system to generate 50,000 transactions per second. We set out to talking with Google to create a system that can do 10 times that, 500,000 transactions per second.

We were able to demonstrate that system to our largest customer and show them that Redknee is making investments and moving the products back into a leadership position. While this is only a first small step, we are excited on what potential it holds.

So while we are anticipating another financial challenging year for Redknee, we have a plan in place that takes our recently acquired cash to aggressively restructure and get us towards cash flow breakeven by the end of 2018. Due the organization focuses on customer success for our customers and is starting to fix and rebuild our products.

I repeatedly said that this will not be easy and it will not be fast, but it can and will be done. At this point, we’re ready to open up the call for Q&A.

Could you give us a timeline on employee restructuring plans?

Sure. Yeah.

Like Anin and I both mentioned, we’re really trying – we’ve used the word aggressive restructuring, because we're trying to complete it in the next fiscal year, so 2018. So that is our timeline, the next 12 months.

I guess little bit less, next, already in the middle of our Q1, but hopefully completing by September 30, 2018.

Okay. And are you able to provide any color on like what the rhythm of that looks like?

Will it be front end loaded, back end loaded in terms of how it will play out during the year?

Yeah. I mean I think it’s pretty evenly spread out.

There's a lot of moving parts. As you would imagine, we're pretty global with lots of people in different locations and so in some cases we have workers’ counsel to work with, we have notice period to work through in different jurisdictions.

So I think it’s pretty spread out throughout the year.

Two other quick questions if I could. Have you had enough customer engagement to know at this point which customers you can hold on to and which customers are likely going to move off your platform over time?

Yeah. It’s a great question.

So that's really where I’ve been spending my time is trying to understand that revenue and sort of the risk profile of it. I think I have now been with the company for 10, 11 months.

And yeah, I think, we have a good read on where our customers stand. I think this has been a ride for them in the last 12 months, kind of the uncertainty around the original investment, the rights offering took a long time and so customers frankly have been on the sidelines, watching the game and I think they’re seeing that the movement and the signs of the investment, I think as Anin walked through the rights offering, not triggering the backstop, I think it’s an encouraging sign from our shareholders.

And so while I think some of them are still on the sidelines and we’ll see, time will tell as the story continues to evolve, I think we have a good read on where our customers stand.

Last question, so interesting comment on the Google speed up. What is that application, if you could just give us a little color on like what the speed up is going to be?

Sure. It is actually -- a pilot is probably the best description as a word.

It was a test to see, could we move this application, which historically has been on Oracle onto another database and Google Cloud Spanner database is a distributed database and we had some relationships, just from the ESW side. I know some of the Google people that have product managers in this space and we thought this might be a good way to test this new technology that Google has.

So, starting that is just an idea. Could we move to a different database and eliminate that dependency on Oracle?

Could it be faster and not just a little bit faster, but 10 times faster and could it be cheaper than the Oracle footprint and we were able to prove that and we took that to a couple of customers. Obviously, you probably read the press release announcing it and the excitement from our customers was palpable, right.

I mean, their eyes were lighting up. They were like, when can we get our hands on that and again, it’s just starting as this idea and just the test.

And to see their excitement about this kind of innovation was super encouraging to me. Right?

It’s just really motivating that we’re thinking in the right direction and our customers can and will be excited about the things that we’re innovating around on our products. Obviously, we have some of our own self inflicted wounds that we need to work through, but once we get through that, I think we have a lot of ideas that we can bring to market and really excite our customer base.

Danielle or Anin, your MD&A mentioned some late renewals that benefited your support revenues this Q4. Without these late renewals, would the support revenues have been down from Q3 or flat from Q3?

Thanks.

Steven, yes, it would have been slightly down from Q3, had we not had this pick up in Q4 because of late renewals.

Okay, Anin. And then, was there any FX impact, positive or negative, to support revenues?

So we are expecting or looking at a downward trend on the overall revenues, support revenues is no exception, not to the same extent as we're seeing in the software and services line.

I meant from an FX perspective, was there any positive or negative impact on the support revenues in Q4?

It was pretty flat. FX didn't have a very big impact at all.

And then last question for me, I might have missed it. How much restructuring disbursements is left to be made out of this $60 million plan, that was planned?

So the majority of the 60 million plan is going to be incurred in the quarters following. So it is yet to be spent.

We are spending what we had previously done in prior years, approximately 17 million of that is still outstanding and the restructuring that we're going to do, that we announced very recently in November is going to take place over the next four quarters.

So I saw there was a $7.8 million number that was paid in September. So that was still the old restructuring program?

That is correct.

I just wanted to follow-up on the question regarding the late renewals, did that involve a catch up from prior periods and then going forward, how should we think about the run rate in support revenue?

Yes. The late renewals are really the result of us receiving orders later than usual.

From an accounting perspective, obviously, we can’t recognize that revenue until we have the orders. So we have picked up some of that in Q4.

But once you eliminate the adjustment of the late renewals, we are seeing a declining trend in revenues as I mentioned. It is not at the same rate as what we have seen in the software services line because of fewer implementation being completed or fewer implementations that we’re seeing.

The support revenue obviously is a lagging indicator of that. So we are trending downwards on that.

So we should think about Q3 as sort of the normal trend rate for support revenue going forward as opposed to Q4?

I would say that would be a good way to look at it, but still we are seeing declines even further than that on a combined basis.

And then Paul, just to jump in on that, remember that this business unlike other enterprise software businesses that I’ve seen where a customer announces the departure and usually the impact to our revenue losses is sometime even with - easily within that fiscal year or within – pretty immediate. This business is very drawn out.

Right. The departure is multi-year and so as we said at the very top, we anticipate revenue to be down again in 2018 and that will be across all the buckets, categories of revenue and that isn’t something that is happening now and will be gone in two quarters.

These are from ‘15 and ‘16 departures that are just now kind of flowing through the revenue. So -- and that’s kind of the situation that Redknee was in, in those years, right, not necessarily what we're doing today.

And on that outlook and taking the revenue outlook from 120 down to 100, in comparison to your, I think the 20% customer success metric, has there been any downward trend in that metric that led to lower revision in your longer term revenue outlook?

No. I mean, that measurement, the customer success measurement is where we were through the end of, say, June, July.

We're going to take another snapshot as we measure it in six months terms. And so, as we head into December, we will begin to officially talk to our customers and get it to an investor.

So it’s not that it’s declining. We just haven’t got an update and we are educating our customers on what this program is, what it means to be considered not just a vendor, but a trusted partner and we’re really trying to elevate our status with our customers that way and I’m crossing my fingers, I think it will be up from that.

I think we’ve made some great progress, but until I measure it, I won’t know for sure.

And then lastly for me, basically the MD&A, it looks like the spending on Crossover and DevFactory increased quite a bit this quarter. Could you elaborate on what’s the nature of the work that they’re doing at this point in the engagement?

I think it’s -- for the most part, it’s the same, just more, especially in Crossover. So our agreements with Crossover were not officially sort of signed until the rights offering completed in September.

So we were really gated on, if you remember, if you look at the short term versions of those agreements, there was a cap on a number of people we could hire. There is a cap on the spend.

Once the rights offering completed successfully, we were able to hire per the budget and so that’s where you really see that big uptick in Crossover and so it’s nothing more than just more of the same without sort of the leash on us. With DevFactory, we have purchased more services from that and I spoke about it when we talked about the Germany decision, all right.

Germany has been kind of a big, significant portion of our operating expenses forever, very well timed. And so as our engineering center, that was a really, I think, big decision for this company to decide to exit that location and obviously there’s a potential risk.

You need to have a good plan on how you transition that work. And as we think, DevFactory, take on the work that we’re giving to them, both the scale, the volume and also the nature, right, the telco nature, they've been knocking out of the park, as I mentioned, a couple of closes, impressing people, both our legacy employees as well as external vendors that we work with and so we continue to grow that relationship.

They help us certainly with a lot of our -- I think, the majority is our quality initiatives that we're doing to standardize the way that we deliver product, improve our initiatives around quality and testing, improve the basic nature and quality of the code base, but I think also some assistance around product management, right, helping us develop blueprints and engineering level spend that we can pass through R&D so that they can just execute on those plans, on those decisions. So it is growing.

We are taking on some different services, but they, like I said, knocking it out of the park. We’re really happy with the relationship and getting tons and tons of value and in the case of Germany, huge, huge savings.

Just first on the headcount, where was the headcount at the end of September this year and where do you see it at the end of September 2018?

So the combined headcount is around 1200 people end of September this year and we see it going down to around 600 to 700.

Okay. And then on the late renewals, were they heavily discounted and on the other renewals, sort of over the last three quarters since you guys have sort of taken control of the company, have you had to discount heavily late renewals.

No. We haven’t had to discount heavily any renewals.

It’s pretty much the same run rate.

And then just on the sort of 100 million sort of new guidance I guess on the bottoming process on the revenue side, is it going to be a gradual decline over the next few quarters and then you sort of exit Q4 next year, at a 25 million run rate and hopefully be cash flow positive.

So that is where we are trying to get it. We still don't have 100% visibility obviously, a number of factors in play over here.

But the 100 million, I just wanted to clarify is not really a guidance. It is the assumption that we have made when we look at our side of restructuring that to achieve cash flow breakeven Q4, that would be the size of restructuring plan would help us get there, assuming even if revenue drops down to 100 million.

That's where the assumption is. It's not really a revenue guidance.

And then just lastly, I mean, I guess on some of the R&D spend or potential growth initiatives above and beyond the Google one, is there anything that you can sort of point to over the next 12 to 18 months that can re-accelerate growth after this bottoming process.

Yes. So on the product side, we have a lot of good ideas.

Certainly, Google is one of the first ones. We're going to spend 2018 as I mentioned, heavily investing to improve the quality of our products.

Our three main products, two came from acquisitions, Nokia and Orga. The third was our organic charging product.

They need some work, some investments to get it a good foundation, so that when we start to do things like the Google Spanner idea and it’s certainly – as we start to look towards the future and start to think about our market, focusing on tier 2 and tier 3 providers and we really do believe that that’s going to have a heavy cloud message. So we can’t necessarily start working on cloudization, that’s the word of our product today.

We need to get them into certain position quality wise, but as soon as we can, we are certainly thinking about what it would take to move this suite up into the cloud and provide a lowest TCO package to the tier 2 and tier 3 providers. We know that’s going to be an exciting message for them, when I talk to these guys, it’s almost always what they believe with.

Guess it’s packaged and installed very quickly, provide a system that’s easy to modify and may get lowest TCO. And so we think that’s going to be a heavy cloud component and we got, like I said, we have this house work that we need to do to position our company and our products, so we can begin that work, but as soon as we can and so I think, as soon as we can, we’ll start working on that and I think within the middle of ’18, we’ll start that and that will carry through to ’19.

Thanks for the color on that $100 million top line data point. The previous number you'd given, 120 million, which also Paul highlighted, is that still a relevant number for your planning process or is that – is everything you've said today just make that irrelevant now?

Yeah. It’s a good question.

So as you just sort of historically, just taking a step back, we gave that 120 number back in February, I think it was early March and the most important thing as a company, is understanding where this revenue ends up and creating a plan around that and business framework, so as you can make decisions around the people and the cost and the investments you can make and the cash that you have. And 120 was our number back in March and again we didn't really know and we didn't really have a good read on all the customers and over the course of the last 6 to 8 months, we've been getting a little bit of color as I mentioned earlier.

We see some of our customers just sort of waiting on the sidelines and not necessarily handing in a termination at us or purchasing another system but they are waiting to see how the story evolves. And I think there's risk in probably at least 20 million of that, of those customers.

And so we decided to less fill their plan, so that it would still work and we would end up where we wanted to be, as cash flow break even by the end of the year, approaching that. And so, we’re like, all right, let’s make sure our plan works, even in the worst case scenario that you’re at, below 100.

And so that's what we've done. I don't know that it’s necessarily an update, it’s just we really want to create a plan that works and not have to coming back to the table and either having to raise money or generate funds to do future restructuring, right.

It is exhausting to do, it is distracting to the organization. So like, let’s create our plan, let's go work that plan, make sure that plan will work in the worst case scenario and then build from there.

So that hopefully that understands kind of what we're thinking.

I know in the materials, I've seen this morning, I haven’t seen any backlog or booking figures. I assume we're not going to get that going forward, but I assume those are both headed in negative direction, given your commentary, but is there any color you can provide on that.

Yeah. I mean I think your assumptions are correct there, right.

Like I said earlier, this is the – it’s just rolling through these departures that were started 24, 36 months ago and so I think that is a safe assumption that things will decline in ’18.

And in the MD&A, there is – you’ve talked a little bit about provision related to an intellectual property matter and I was wondering, is there any other color you can provide around that or what the potential, what that could be in the future?

So, the intellectual property matter is really not our current issue. The issue belonged to a former customer and we had an indemnification clause there.

We are seeking legal advice and we believe the amount we have provided for relating to that is adequate and sufficient as far as our exposures are concerned. So we’re happy about that.

But we’re happy about the fact that we are adequately provided.

Okay. And just for modeling purposes heading into February, is there any – are you going change the amount of spending or into position going into Mobile World Congress, like, should we expect a low profile presence there or is there any change we should be expecting from that and then I’ll pass the line.

I’ll answer that question. So yeah, we’re changing our presence.

We’ll have a bigger, better booth. We’re really focused on that customer experience.

Our time at MWC is less about foot traffic of prospects into the booth, right, this is not one of those kinds of sales. We walk up to indemnification and get someone’s card and start the sales cycle.

These are built on relationships and networks and very long tail cycles, but rather I think MWC is a really great opportunity, especially given the global footprint of our customers, a great opportunity to meet people in one place, to shorten this travel time and really connect with our customers. And so our booths will be transformed.

It will be more of a comfortable experience to meet with the executive team of Redknee and fortunately, the executives of our customers travel, so meeting with senior people there and then certainly get our message up around our focus on customer success. We want to help our customers to become successful.

We want to have our teams analyze their rate plans and help them achieve their goal and subscribers or data growth or reduction in OpEx spend and whatever it might be. We want to showcase our innovative thoughts and ideas and we want to focus on the fact that we're moving towards the cloud and we're going to come out with a very strong lowest TCO method.

And so that will be our first opportunity to kind of come out with our new market message, super excited about that and excited about our booth, it will be beautiful and sizable and comfortable. So, yes, it will change.

Great. Well, that concludes our call.

I really appreciate everyone's time and thoughtful questions. Thanks so much.

Have a great one.