Danielle Royston - Chief Executive Officer Ken Taylor - Chief Financial Officer

Rob Young - Canaccord Brad Hathaway - Far View Steven Li - Raymond James

Before beginning our formal remarks, Optiva would like to remind listeners that today's discussion may contain forward-looking statements that reflect the current view of the company's outlook objectives and strategy. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those presented in these forward-looking statements.

Optiva does not undertake to update any forward-looking statements except as required. More details with respect to the cautionary nature of forward-looking information can be found in the company's fiscal 2018 MD&A, dated December 12, 2018, and the company's annual information form.

All disclosure documents are available on the company's Web site optiva.com and on sedar.com. I'll now pass the call over to Danielle Royston.

Thank you. Good morning and welcome to our 2018 Q4 and fiscal year-end earnings call.

I'm Danielle Royston, CEO of Optiva, and I'm joined today by our CFO, Ken Taylor. The following four main points, I'd like to communicate today on our call: We’ve finished our fiscal year and our revenue continues to decline year-over-year.

We have used our rights offering money to fund our restructuring which is now substantially complete. We are focused on our customers and delivering customer success.

And we are investing $100 million in our products to become the leader in telco charging in the cloud. So with that, I'm going to turn the call over to Ken.

Ken?

Thank you, Danielle, and good morning everyone. I will now take you through some additional details of our financial results for the fourth quarter and fiscal year ended September 30, 2018.

The company's fourth quarter revenues declined by 19% as compared to Q4 '17 due mostly to the timing of renewals of support contracts as support and subscription revenues declined by 18% in the quarter, but by only 4% in fiscal 2018 as compared to fiscal 2017. The decline in total fiscal year revenues of 12% was due mainly to a continued decline in new software and services orders from customers as the company continues its [Technical Difficulty].

The company will adopt the new IFRS 15 revenue standard commencing with its first quarter 2019 results. The company expects that the transition adjustment associated with adopting this standard will be between $4 million and $5 million of revenue mainly related to term license agreements that we had planned to recognize in 2019 and beyond.

The adjustment will be recognized as a decreased opening deficit in shareholders equity. The impact of the company's restructuring efforts can be seen in the reduction of total expenses which declined by $8.3 million in Q4 '18 relative to Q4 '17 while being able to increase our investment in research and development to improve quality on existing products and invest in cloud innovation.

The company spent $2.8 million and $14 million on cloud innovation in Q4 '18 and fiscal 2018 respectively and we expect to invest all of our earnings otherwise generated for the next two to three fiscal years on cloud innovation initiatives. Most of the company's investment in research and development including cloud innovation is supplied by DevFactory which is an affiliate of the company's largest shareholder ESW Capital and the majority of the company's personnel are contractors sourced from Crossover which is another ESW affiliate.

The company's Q4 '18 expenses included $7.9 million spent with DevFactory and $6.7 million spent with Crossover. In fiscal 2018, the company incurred costs of $31.7 million and $28 million with DevFactory and Crossover respectively.

The company consumed $14.2 million in cash from operating activities in Q4 2018 as compared to $10.8 million in the same quarter a year ago due to increased restructuring payments which amounted to $12.2 million in Q4 '18 as compared to $7.8 million in Q4 17. The company expects to complete its restructuring activities in 2019 with the majority of the cash impact [types] [ph] provisions recorded at September 30, 2018.

I will now pass the call back to Danielle.

Thank you, Ken. So 21 months ago I joined Redknee.

At that time our revenues were shrinking precipitously and had shrunk 46% from its peak. Customers were concerned about our future and swapping us out and people were saying, is this company going to make it?

To course correct, we first raised $80 million in preferred shares from ESW Capital to pay [Technical Difficulty] And then we completed our rights offering to raise another $77 million to fund our restructuring [Technical Difficulty]. Number one, [Technical Difficulty] customer success and installed based customers.

Number two, [Technical Difficulty] to revitalize our products, and number three, aggressively execute a restructuring plan to [Technical Difficulty]. First, let’s talk about the restructuring.

[Technical Difficulty] completed the restructuring such that most of our earnings otherwise generated can now go towards our investments in [compute] [ph] in customer success and cloud data solutions in 2019. What’s important to note about our restructuring work is the transformation we went through.

As you know in many people intensive businesses like enterprise software we have to take big severance charges in order to shrink expenses and because we use our restructuring plan to move our company to use DevFactory and Crossover, severances that are essentially on-demand, we can now just stop using these services and these expenses go away without any severance charges. This is a very important trait since our revenue is still shrinking.

We continue to believe that our revenue will stay between the guideposts of $120 million and 25% off of that number, but anticipate that revenues will continue to decline in fiscal 2019 relative to fiscal 2018. And so now that the distraction of restructuring is largely behind us with the remaining burden primarily on our administrative teams to wind up most of our legal entities around the world, our focus is now on the future and two other elements of our plan, customer success and product.

So let's talk about customer success. This past year we've moved customer success up to 33%.

I will repeat that we believe that revenue will converge long-term with customer success. And while revenue continues to shrink we will continue to move customer success up and we will continue to improve it.

Because the systems we offer are important mission critical system, we are showing our customers three ways that Optiva truly is a partner that carriers can count on. First, it's the credibility that we can deliver successful systems and the installed base is experiencing that.

Second is that we are financially viable. While we expect to invest heavily in cloud innovation we anticipate doing so without generating significant losses and without requiring additional financing to do so.

And third, we have created an exciting compelling vision for the future. And I daresay this is where we have made the most progress from where I started 21 months ago.

We are now seen as the leading edge most aggressive telco player moving to cloud. The last part of our plan was our commitment to invest $100 million in product.

When I started my thought was that we needed great product. And as I got into it, it became very clear that we had to be the leader in the cloud.

Twenty one months ago, I was told by everyone including the outgoing CEO, the founders of the company, the entire management and engineering staff and most of the analyst community that telco was not going to move to the cloud. And that's how I realized it was the perfect opportunity for this company that needed to turnaround that the cloud was the perfect place to plant our flag.

And so thanks to our leveraging of DevFactory, we were able to re-architect the products for cloud. We developed a strong relationship with Google cloud as well as our Android group to put us in a position where we are now the leader in telco charging in the cloud.

We are presenting at all the Google conferences. We do joint sales calls with Google and we are the only ones that can show a telco charging system that can be 10x more scalable than an on-premise Oracle system at a tenth of the cost.

And so here is my framework for 2019. Run at cashflow breakeven, invest whatever is required to improve customer success to 100%, and with whatever money is left over invest in both sales and marketing and product, so we can be the leading vendor in the transition to the cloud.

And so at this point, we are ready to open up the call for Q&A.

Hello. Is that me?

I think so.

Okay, great. So you said that you're going to spend $100 million in R&D over the next two to three years, $86 million that's still to be spent.

I think you said that you don't expect significant losses in 2019. In fact, I think you just said that you expect to be cash flow breakeven.

And you expect revenue to shrink in 2019. So I'm having a hard time understanding where the confidence is coming that you can fund this from earnings and existing capital, which is I think what you said in the press release and so I mean maybe if you could try to bring those things together for me that would be very helpful.

Yes. I mean we spent basically.

Sorry. I didn't catch your name.

Rob Young, Canaccord.

Hi, Rob. How are you?

I was like, is this Rob.

I'm sorry. I'm not used to having to say who I'm -- I thought maybe it might have already been said on the call anyway.

Go ahead.

No. No.

Hi, Rob. Thanks.

Thanks for joining. And thanks for your question.

Yes. So in 2018, like I mentioned in my remarks is that we substantially have completed the restructuring.

We've spent approximately $50 million. And if you recall from previous calls, we believe it’s a dollar spent for a dollar generated roughly.

And you're pretty familiar with those guideposts that we've given over the course of the last 21 months of $90 million to $120 million of revenue. So when we put together a restructuring plan, we put it with that in mind with that amount of revenue shrink long-term and what did our expense level need to be on that kind of revenue basis.

And so that really helped us shape the design of the restructuring plan, the funding, the restructuring plan what we needed to ask for. And so we have run very aggressively in 2018 towards that plan.

As I mentioned it's substantially completed and from those essentially expense reductions that's what's helping to fund our plan for investing in basically two primary areas, which is customer success and our products. And so we believe this is a self-funding investment plan and we will not have the need to raise additional capital from here on out.

Yes. I would just add to that.

I mean the flexibility and Danielle alluded to this in her comments that we get by using DevFactory and by using Crossover. We have good flexibility in our expenses, so that we can match with revenues and maximize the investment that we have going forward without causing major issues on the bottom-line, so that's what gives us the confidence as we move forward.

And then just to add one more thing to what Ken said is, and it works both ways with DevFactory and Crossover. If we have an unexpected surprise on the revenue side and it does go lower as Ken mentioned you can crank down those expenses pretty much on a dime within a few days.

But on the flip side, let's say things were going extremely well. We had unexpected additional orders that we weren't planning in 2019.

On the flip side, we can also crank it up really easily. And so that's the beauty of this plan that really the related parties as much as much questions and concerns I get from people about these two partners of how critical they are to our success that if we were in the same position 12 months ago or if we were in that position without having these partnerships, we would sort of be kind of I'll say old school managing the company with just legions and legions of people whereas in both directions cutting costs or increasing capacity takes a long time and is usually very expensive.

And so that's the beauty of this model and it works and we're really excited about it.

Okay. So if I think of it from a modeling standpoint, I guess it's a little bit tricky, but you're going to balance the R&D spend that you have through these variable cost resources to tune that to whatever your revenue is.

And that's why you're saying that you don't expect significant losses because you can essentially adjust the business so that's the way it's offering. Is that a good way to think of it?

That's a good way. It's very dynamic at this point right.

I think 21 months ago, we had a lot of burden with a lot of people where releasing them was very expensive. We're now out of that situation.

And so yes, I mean it's a really good way to model it.

Okay. Gross margins were stronger than I was expecting.

Last quarter you had some accounting change where you pulled forward or not pulled forward you put some customer loss provisions in previous quarters and so, but you again have strong gross margins above where you thought you would be and so I was wondering is that the restructuring hitting better? What's causing that?

Yes. I mean look our -- overall our efforts to reduce costs have an impact on margin, but I wouldn't read too much into margin fluctuation up and down.

I mean a good chunk of our margin of our costs are people costs, right. So there's not as revenue moves up and down, we mentioned the flexibility earlier, but you can't get some variation in margin from period to period.

And it's not necessarily tied to any particular trend and it's really related to our cost reduction. So in terms of reading too much into it, I wouldn't read too much into it at this stage.

I mean I think our mix of revenue has been changing, right. We've talked about kind of a slowdown in orders that we've had over the last several years.

We are delivering projects and getting them across the line and kind of clearing that. And so the mix of revenue, I think is changing and so that also influences that gross margin.

But I would expect that as professional services for example projects tick up as you start to get more work that would change and influence that number as well.

Exactly. Yes.

Okay. So we should continue to think of gross margins maybe in the mid 60s or low 60s as opposed to where it's been in the last two quarters?

Yes. I mean we don't guide on the specifics.

I think the thing to think about is in terms of where we have provided any color is really on that top-line range that Danielle spoke about earlier. And where we would anticipate being on the bottom-line which was without significant losses we mentioned right.

So there can be some variability in between but we're not going to guide specifically on any of the items.

Okay. In the release you said that you'd completed a number of projects, I think eight in total.

Maybe if you give it a little bit of color on that, was any -- I don't suppose any of those are related to the Optiva charging engine in the cloud would be the first question. Then the second piece, I know is that the deferred revenue declined despite the completion of these projects and so I would have expected some of that to move into a service subscription agreement or something like that.

And so it's despite the fact you've closed so many projects and deferred revenues tick up. So maybe if you can help me with us two.

Yes. We've had several long running projects.

I think the longest project that we've just completed was I think four years old. If you can believe that and that's Phase 1 delivery of something.

We had a lot of projects when I first came in that I have described this -- I describe them as being in a ditch. My colorful language I always like to use and they were, they were just, they were late, they weren't aligned to the customer, they were over budget, some of them were unprofitable and they just weren't -- we weren't delivering.

And we've spent pretty much this entire fiscal year doing what we need to do to get them back on track. Now they're still late, we can't really change that.

And some of them are have overspent relative to the original estimates. But they're done and that's great.

Now we recognized revenue on a percentage completion basis. And so we've been recognizing revenue on these projects all along in some cases over the course of four years or multiple years.

And so you don't really see that up tick even though they're done you might see our unbilled revenue balance go down. And so what's nice is that we're getting it.

And this is in my remarks as well. We're getting them across the line and customers are beginning to believe yes we have the capability to execute on the things that we said we would do.

This will lead to changes in answers on customer success which I am definitely looking forward towards. And then it builds that belief that we can execute against our cloud plan in the future.

You're correct. None of them were around the cloud product.

That's still pretty new. They're really more around what was sold.

I mean pretty much even prior to my tenure. So these projects are longer than I've been here they've been in progress ever since I joined.

So it's really just kind of cleaning it up getting across the line. As I've mentioned customer success is a one by one, customer by customer, long journey.

And so it's nice to get them across the line and it kind of frees us up to do more things and start to sell cloud -- sell the vision.

Yes. On the deferred revenue side, I mean that really is related to the timing of renewals on our record.

So I mean you will see that where variability on that is when there's a lot of renewals that obviously spikes up and then revenues recognized during the year.

Okay. And last one for me and then I'll let other people ask questions.

Ken, for me the phone blanked out when you were talking about the IFRS changes. So just in case, that was for everybody maybe if you could just quickly go over that again and then I'll pass the line.

Yes, sure. We think the impact is going to be about $4 million to $5 million of revenue that we would have otherwise recognized in '19 and beyond that will be moving back essentially as a reduction in our opening deficit.

So sort of income but move backward and so it's pretty limited. We're still completing our work on it, but that's what our estimate is right now and it really relates to our term base licenses and under IFRS 15, it's really -- it's determined at what point if you really pass control.

So that would have had us recognized revenue earlier on those particular contracts. Fairly limited like I said and we'll give more color and there's more color in our disclosures as well.

So that's revenue that you would have recognized in the future that you're just taking out of retained earnings.

That's right.

Okay. Thanks.

This is Brad Hathaway from Far View. Thanks for taking my call.

So two questions for you and I'll just do them one at a time. The first question is, again, I'd like to dig into that $100 million a little bit more because I guess there's 86 still to go.

That's a big number over the next 2, 3 years and you're not really that profitable right now and you expect revenue to decline. So I guess I don't see even with the flexibility of DevFactory and whatnot, how you can afford to invest that that 86 million or cash or breakeven.

So what am I missing there?

Hi, Brad. This is Danielle.

It's great to hear your voice. Yes.

So as I was describing with Rob we've invested substantially in our restructuring. We leveraged our rights offering rate to fund that restructuring.

And our view is kind of a good rule of thumb is the dollars spent on restructuring is a dollar saved on expenses. And I think that holds true for what we've done.

Most of our restructuring money was spent on severance and you can see in our annual circular, the reduction in the employee levels and the worker levels that we have across our company. And so that's been great.

And so that essentially turns into an opportunity to invest right. We could choose to flow through to the bottom line or take those what would be earnings and invest in this vision.

And so if you participated in our call last time I talked about this is that, while we would like to be a little bit further along on customer success, we would like revenue to be not declining. This opportunity around cloud is so exciting that we feel and it's also timely that we need to start investing now.

So the savings that we would generate from our restructuring were essentially just funneling into continued investment and customer success and investing to our growth strategy of sales and marketing and revitalizing our products towards, so it's being coordinated. And so that'll be self-funding from the earnings we would have otherwise put up -- put out.

So that's how it's come in.

I guess just a quick follow up on that because you're not that profitable in Q4 of '18. So are there…

I would say not at all profitable.

We are going to be delicate. The restructuring savings that have not flowed through the numbers yet that we really haven't seen.

I would have thought most of them would have kind of gotten into the number.

We're continuing -- I mean, our comments I guess regarding forward-looking are the ones that we've made so far. It's when we look at our cost certainly, yes, we will focus our costs on our investment and it can mean reductions in other line items to make that happen right.

So some of that is restructuring and incurs charges, some of it's not some of it is just recurring spend that we've spent this year that we would spend another year.

And then, just the restructuring process didn't -- it wasn't all complete on October 1 of fiscal '18. It really did take the full year.

And I'll take you back to a call that we had maybe with the last call or maybe even the call before that where we discussed eliminating for example, our Germany engineering staff. That process if you know anything about labor laws in Germany, so lengthy negotiation process with works council to exit people in that country.

And so for Germany, for example, those people didn't exit until six months into the fiscal year. So in terms of seeing earnings or profits as you are describing them.

Yes. It's been it's like -- we've been pretty aggressive and we move pretty quickly, but everything didn't happen in the beginning of the year.

And so it hasn't been fully realized on an annualized basis. So now you haven't seen that.

Got it. Okay.

That helps, so there's still some more kind of jump, okay, that makes sense. Thank you.

Correct. Yes.

And so yes go ahead.

Great. And then, the second question was -- we would be changing gears, but you obviously this seems to be some excitement about what Redknee could be in three years, [indiscernible] kind of a big -- different three years kind of about to happen.

But once you can step back and say over the mid-term, kind of how you view Redknee just big picture strategically -- I'm sorry, I'm using the old name. How view Optiva strategically where it is today kind of how you see the big picture evolving over the next few years for Optiva.

Yes. Thanks Brad.

I was about to correct you. Yes, Optiva.

I love the new name. It's so fresh and our colors and the logo it's super exciting.

I think our vision is really exciting. So again, I think I talked about this pretty extensively on our last call, but I'm always happy to talk about it again because I think it's really exciting.

And I talked about it today in my remarks. So whenever I hear something is impossible or no one's going to do it or you're crazy, it actually makes me more excited that maybe I'm onto something really good.

And when I started it, I'm not from telco if you know anything about my background, I'm new to this industry, since I've been in this role it's pretty much the sum total experience I have in telco. And so I've been learning on the job and I've been learning mostly by talking to customers right.

That's always the best way to learn about the business, learn about their experience. Why do they use our products and what do they wish it was different.

And a couple of things were bubbling up and mostly it was, how do we make this very complicated stack of an application easier to manage and less expensive, right. And when we looked at the total cost of ownership of managing the system, the Optiva portion was a small fraction right.

Our customers are spending and lots of other areas. And I would call it frankly dumps them like hardware or database spent with Oracle right.

Oracle is famous for getting their claws into you and then jacking up prices and then you're pretty much stuck. And so that kind of started my wheels turning.

And a trend that we see in pretty much every other software application space is a trend towards public cloud. And so I started to ask people about it.

And again, everyone's like you're nuts you're crazy. It'll never work.

Telco will never do it. But like I said, I felt this was a perfect place for us to plant our flag.

It was differentiated enough in a way that competitors can easily pivot to copy us. And it was exciting enough to customers with a vision to becoming more scalable and reducing the total cost of ownership by multiples of what we were doing.

And so I just started talking to people about it, talking to customers and the customer reaction was pretty strong and it was pretty strong pretty quick. And so it's been it's kind of evolving journey as I learn more and kind of deepening my understanding of working with the engineers, can this really work, what do we need to do with our products, forming this deep relationship with Google that I talked about.

Talking to the different cloud vendors that really settling on Google because I think that the Google Public Cloud platform is uniquely positioned for telco because they have their own private network to span our database is differentiated as well as the Android operating system runs about 80% of the handsets in the world. And so I just thought that this was the perfect mix.

But I've got a couch start in terms of setting everyone's expectations. It's not like they're going to go to our Web site and click buy add it to their shopping cart and check out for a couple million dollars right.

These sales cycles take a very long time without this transformative shift to the public cloud, which I'll talk about in two seconds. Normal sales cycles take 18 to 24 months just running an old school on premise.

Now what I'm bringing to them is a completely different way of the point, it's a different deployment model. This is new to them.

People really don't know about how public cloud works and what the benefits are in telco. And so I have the benefits of being the leader because I'm first and my message is getting out there and people think public cloud they think Optiva.

But the downside of that is, I'm the one that's having to educate everyone. So I'm bringing Google with me on sales calls right.

Mostly technical resources to explain about public cloud how it works what are the benefits. And so you know I'm hoping it's still 18 to 24 months, but it could be longer.

And so I want to couch you mentioned sort of this long-term. This is where we're going.

I think this is a really exciting message, I'm getting great feedback from customers. But I'm going to couch that with expectation setting in that -- this isn't going to be kind of like -- I don't think 2019 thing.

I mean we're obviously going to invest pretty heavily to get there on sales and marketing and we're doing that today. But it could be 24 months before we start really seeing things impact the numbers.

Great thank you. Much appreciated.

It seems like there's some good excitement. I'm looking forward to seeing how Optiva could you develop.

Thank you.

Thanks Brad.

Thank you.

Yes. Can you hear me clearly?

Okay. Thank you.

Hi. It's Steven Li from Raymond James.

Hey, the support revenues declined due to timing of renewals. Does that mean, it might pick up next quarter once these renewals come in?

Yes. I mean we don't give quarter to quarter guidance on that but yes, as you are write there's timing I mean the biggest thing on the year-to-year comparative was that a year ago there were some that were later that artificially inflated Q4 '17 if you want to call it that.

So yes, we do get some variability there. Obviously our sales team works real hard to make sure that those come in as expected and we don't have delays but you can get some bumps in that.

And as I mentioned in my remarks for the year, we're pretty consistent year-to-year. So those support revenues have been pretty stable for us.

Right. And has there been any customers that discontinued the support during the quarter?

Who gave notice or something? Off the top of my head, I don't think so.

As I've mentioned in other and previous calls, we have some customers that have given us notice even before my tenure that continue to remain a customer of Optiva. We keep thinking okay this is the last year, let's plan for the revenue to decline and then for example, we just had two customers that we thought we're going to end in actually this coming quarter and they've decided to extend for another year.

And so, I believe that these customers are still leaving they've purchased another system they're implementing it they're not going to just not sort of paid for it. So right currently they're paying to vendors and so their plan remains to switch to the other vendor.

But our other competitors struggle, they are late. And so that is -- their struggles are my benefit at least in the short-term as customers continue to renew.

Though, I do believe that they will eventually leave. And so we got to make hay while the sun shines and take advantage of this opportunity to replace the revenue before it leaves.

And so that's what we're trying to do.

That's helpful. Thanks Danielle.

You are welcome.

All right. Thank you, everyone for joining and have a great new year.

See you soon.

Thanks everyone.