Danielle Royston - Chief Executive Officer Anin Basu - Interim Chief Financial Officer

Robert Young - Canaccord Genuity

Thank you. Good morning, and welcome to our 2018 second quarter earnings conference call.

I’m Danielle Royston, CEO of Optiva, and I’m joined today by our Interim CFO, Anin Basu. On today’s call, Anin will provide a brief commentary on our financial results, and then I will discuss my thoughts on our quarter.

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, MD&A, 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 for Q2 2018 has come in at $27.9 million with a net loss of $10.2 million. 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 provide you an update on our restructuring plan, loss provisions, the related-party contract, and the stock consolidation and name change.

Let me begin with our name change and stock consolidation. In our most recent annual general meeting in March, we received approval from our shareholders to change our name to Optiva Inc.

At the same meeting, our shareholders approved a resolution to allow us to complete a 50:1 stock consolidation, which was approved by the TSX in early April. Since April 5th, our stock trades under the ticker symbol OPT.

This rebranding is an integral part of our restructuring strategy and has been well received by our stakeholders. Upon restructuring, as we communicated in February, we recorded a restructuring charge of 47 million in Q1 and an additional charge of 2 million in Q2.

While most of the expense is related to severance costs to outgoing employees, it does include costs related to exiting offices and data centres globally. Our restructuring liability at March 31, 2018 is 39.5 million.

Most of our restructuring liability is payable within 12 months. We paid approximately 17 million in the second quarter.

Overall, we are making steady progress on our restructuring efforts, and we are expecting to complete this substantially over the next two to three quarters. On our loss provisions.

In Q1 and Q2, we identified certain contracts where we expect our total contract costs to exceed the revenue we will earn from these contracts by $7.6 million. Two of these contracts were terminated in March 2018, and we are in the process of negotiating a settlement, which may take up to one year, due to the complex nature of the arrangement.

To date, we have drawn down 4.1 million of the provision in settlement payments at expenses arising from contract execution. At this time, we believe that the provision we are carrying in our books relating to the settlement of these contracts or completion of our obligation under the contracts, is adequate.

Now I wanted to give you an update on our contracts with our two related parties, Crossover and DevFactory. Corporate costs incurred in this quarter with Crossover amounted to $7.4 million.

As for DevFactory, this quarter, we incurred a cost of 5.7 million. As I’ve said before, we believe both these investments contribute to our goal of having great products, great people, and enable us to be a leader that helps us to achieve our targets on customer success.

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

Thank you, Anin. On March 28th, we hosted our annual general meeting in Toronto.

In my remarks at the meeting, I stressed how we are maniacally focused on Customer Success, working with each individual customer to understand how they view us. Do they see us as a partner?

An advisor in their business? Or merely just another vendor?

Do we have world-class people? Or are our people indistinguishable from every other vendor’s employees?

Do we help our customers drive their business forward? Or do we hinder them?

Every day at Optiva, we wake up thinking about how to put our customers’ success first. But this last quarter, we lost two customers.

Time simply ran out for us to deliver. And as Anin mentioned earlier, this quarter, we took an additional provision of $2.3 million on projects where our costs will exceed the revenue we will earn from the delivery of these projects.

We clearly still have customers in the ditch that we need to fix. As you know, I’ve been pushing to get to cash flow breakeven by the end of our fiscal year.

With these setbacks, we’re not sure we’re going to make it, but we are going to push hard and get that. As I continually stress in my communication to you, fixing the Company will not be fast or easy.

Each customer will need to be fixed, one by one, until each one is successful. While we are in the middle of our reporting period for Customer Success, I do not have an update for you today on our progress.

Our next update will be at the end of our fiscal Q3. As we believe our customer success results converge with our long-term revenue prospects, we are working hard to improve our numbers and look forward to our customers’ feedback in July.

I believe a key part of our work to accelerate customer success is to build a unified operating platform around Customer Success and delivery, and throughout our company. When I first came into Redknee, we were three companies in one, with everyone doing their own thing and not aligned to repeatable, predictable customer experiences.

As a part of our restructuring plan, we are building an operational platform, which we call the One Optiva Way (phon). We know that by building this platform, not only can we retain customers but also deliver better financial results, improve renewal rates, and drive customer success.

It is early days, and we are just now laying the foundation of this platform, but this investment will go a long way towards building a strong, successful software company. As a part of this One Optiva Way (phon) platform, this past quarter, we transitioned out of two colocation data centres to Google Cloud Platform, creating more scalable, secure, and cost-efficient cloud environments for our customers.

We also closed six employee offices and four legal entities. Over the next year, we will continue to centralize work and simplify our processes in order to save costs and streamline our operations.

This past quarter, we announced our new name and new ticker symbol for a reverse split adjusted stock. These two actions go a long way with customers, causing them to sit up and take notice that we are not just restructuring.

We are completely rebuilding the Company from the ground up, one focused on Telco, on making them successful in their endeavours and positioned for long-term financial viability. In early March, we attended Mobile World Congress, where we launched our new product offering, the Optiva Charging Engine, powered by the Google Cloud Spanner database, and the Optiva Revenue Management Suite, offered on Google Cloud Platform.

We also announced our partnership with Google Cloud and in July, I will be speaking at the Google Next conference in San Francisco, talking about our exciting work with Google Cloud Spanner database, an innovation that improved the scalability and performance of the Optiva Charging Engine by 10x. I remain encouraged about our progress and where we are headed.

We must continue to focus and execute, but I feel we are on a great path. At this point, we’re ready to open up the call for Q&A.

Hi. Good morning.

I was hoping to revisit some of the goalposts you’ve talked about on revenue run rate. You’ve said 100 million would be a level where you thought you could be cash flow positive and maybe a scenario which was possible as 120.

It sounds like those are maybe a little bit optimistic, given the comments on the call. Maybe could you revisit those?

Sure. Yeah.

I’m happy to touch on that. So—and we haven’t updated the numbers, and we still stand by those two goalposts.

If you recall, we had given guidance, I think it was—well, not guidance, but it was a long-term revenue outlook in February of 2017, that our long-term revenue could end up around 120. And then I believe in August of last year, we said our plan works up to 25 percent down from that number.

Right? So that would give you kind of this like 90-ish goalpost.

We are still looking at that goalpost. We’re working towards that.

One thing that’s happened in this last year is we are noting that the customers that had indicated that they are leaving, their swap-outs are taking longer than we thought. So we are getting a couple of extensions.

Some of their extensions are one year or two years long. So that long-term low point is getting pushed off.

It’s further out in the distance. But I do believe it’s still coming.

These customers are not reversing their position. They have purchased other systems.

There’s other vendors are endeavouring to replace us. Some of them are struggling.

Not that we’re cheering for that, but that helps us a little bit, buys us a little bit more time. But I think that just—it kind of just puts that low point out into the distance, and that’s still what we think is going to happen.

So we’re still—plan still works, up to the $90 million number. And we’re working like crazy to recover where we can, extend where we can, and then certainly, grow the customers that are staying with us.

Okay. And so in the quarter, it looked—support revenue was a little bit higher than I expected.

Is that what happened there? Is that these two customers that are rolling off, the support’s continued when you might have otherwise expected them to drop off?

I was assuming that that would drop off with those two customers leaving.

Yes. Anin can comment.

So, Robert, the growth in or rather the stability in our support revenue had nothing to do with the two customers that are rolling off. The two customers that are rolling off, we didn’t even start support on them because the implementation phase was not completed.

The reason for the stability in our support numbers is predominantly the reason that Danielle mentioned, which is some of our customers, which were supposed to roll off, that had notified us they were swapping us maybe two years ago, have not been able to do so. They are continuing with our—renewing the maintenance for the time being.

Okay. So then the support revenue should drop below this level at some point?

Like your comments previously on that revenue taking longer to drop down.

Mm-hmm.

The support revenue would drop below this level. Right?

We still expect our revenues to drop. Like, I think, in December—I have to remember all the time frames I’ve said these things.

But in December, at our annual earnings call, we said that this year would be another down year compared to ’17, and we still believe that. But I think it’s just further off, right?

That drop, I thought maybe that drop would be in ’18, on maybe sort of the end of ’18. And it’s just getting pushed off a little bit because customers need more time and they—this is their revenue central system.

And they can’t switch off of us. They can’t cancel their support until their new system is up and running.

So they’re paying for potentially two systems at the same time. They just take a long time.

So think the strength in the support numbers is just, as Anin said, and as I said before that, customers extending, that we thought were leaving. But they’re still leaving; they’re just leaving later than we thought.

Okay. Understood.

And then the gross margin looks like it was strong relative to Redknee’s history. Certainly, starting off with Optiva a little bit better.

Is there anything you can talk about how that gross margin should trend going forward?

So, Robert, yes. Our gross margin is definitely, as you correctly noted, is better because once you adjust for the loss provision that is in those numbers, it is in the early 60s, which is better than what it was in the past several quarters.

That is directly an impact of the changes we are making as part of the restructuring process, part of reconfiguring the delivery process and the benefits arising out of that. We do expect the margin to be kind of in that region over the next few quarters, as we further stabilize and further expect efficiencies in our delivery.

And if we compare with historical reporting, is there anything in the gross margin that’s been shifted into R&D, that’s gone over to—a crossover of DevFactory—that would artificially make that margin a little bit higher? Like if you compare it over a couple years ago?

No. The gross margin—the cost of sales or gross margin calculation remains consistent with the way we have calculated it in the past.

Okay. One last question; I’ll pass the line.

The deferred revenue is up quite a bit. Is that the renewal season?

Or the effect of renewal season? Or is there anything else in there to think about?

And then I’ll pass the line.

Yes. You’re correct.

The December quarter, and more specifically the March quarter, is when we expect a significant number of renewals to take place. And as we said in the last quarter’s call, we were expecting a higher number at deferred revenue at March 31st, and this is exactly what happened.

Okay. Thanks.

I’ll pass the line.

Thanks.