Thank you. Good morning.

And welcome to our 2019 Q1 earnings conference call. I'm Danielle Royston, CEO of Optiva, and I'm joined today by our Interim CFO, Anin Basu.

As a following main point I'd like to communicate today on our call. We have completed another measurement period for customer success and we anticipate it will come in around the high-30s and we continue to invest heavily in cloud innovation and are focusing our sales and marketing resources to make us the leading vendor in the transition to the cloud.

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

Thank you, Danielle, and good morning, everyone. I will now take you through some additional details of our financial results for the first quarter ended December 31, 2018.

The Company’s first quarter revenues declined by 20% as compared to Q1 '18. The decline in revenues was mainly due to a continued decline in new software and services orders from customers as the company continues its stated focus on improving customer success and investing in cloud innovation.

Revenue from Support and Subscription remained flat as compared to Q1 '18. The company has adopted the new IFRS 15 revenue standard commencing October 1, 2018.

This adoption has impacted the accounting for certain customer arrangements containing software licenses for which the customer has the rights to pay for the software as it increases its capacity usage over a fixed term. Consequently, revenues related to these license arrangements that we had plans to recognize in 2019 and beyond were booked as part of the transition adjustment of $4.7 million by reducing our opening deficit as of October 1, 2018.

The Company’s gross margin for Q1 '19 was 69% as compared to 42% in the same quarter a year ago. The higher gross margin in Q1 '19 is a result of our cost optimization, product mix, as well as the reversal of a loss provision related to a customer contract.

If we exclude the impact of the reversal of the loss provision, our gross margin is approximately 63%. The impact of the Company’s restructuring efforts can also be seen in the reduction in our operating expenses and cost of revenue by $24.4 million in Q1 '19, relative to Q1 '18, while being able to continue our investment in research and development to improve code quality on existing products and invest in cloud innovation.

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 Q1 2019 expenses included $6.9 million spent with DevFactory and $6.4 million spent with Crossover.

The company consumed $1.9 million in cash from operating activities in Q1 '19 as compared to $16.8 million in the same quarter a year ago. We made restructuring payments amounting to $1.8 million in Q1 '19 as compared to $11.3 million in Q1 '18.

The company expects to complete this restructuring activities in 2019 with majority of cash impact tied to provisions recorded at December 31, 2018. I'll now pass the call back to Danielle.

Thank you, Anin. Last time I talked about our framework for 2019; first, drive the company every day towards attaining our Customer Success goal of a 100%; second, continue to invest heavily in cloud innovation and focus our sales and marketing resources on making us the leading vendor in the transition to the cloud; and third, accomplish the first 2 objectives without incurring significant losses or requiring additional financing.

We have finished another measurement cycle for our Customer Success program covering the period from June to December, and we anticipate we will come in around the high-30 percentage points the revenue reporting to us said yes, [ph] they feel out teams and our results are aligned to their success and we are helping them achieve their goals. This is several points higher than our previous measurement of 33%.

As I said before, this is a lengthy process where you have to fix each customer one-by-one. We continue to believe that revenue will converge with customer success, and while revenue will continue to shrink, we will continue to focus on customer success as we believe this is the best foreshadowing of our future success.

Next, let's talk about our transition to the cloud. I'm extremely proud of the exciting and compelling vision we have created for customers for the future.

We are seen as the leading-edge, most-aggressive Telco software player moving to the cloud. At the end of this month, we have our biggest event of the year Mobile World Congress held every year in Barcelona.

Our solution that is 10 times faster at a tenth of the total cost of ownership is creating excitement and interest amongst the telcos, and we have more new sales leads than at any time in my tenure. Given the progress, we are changing our third commitment which was to run at breakeven and not raise additional financing.

Based on the extremely robust interest in our cloud vision from customers, we are considering finding ways to accelerate our strategic plan, conservatively capitalized on the market demand and maintain our leadership position. In the interim, we are renegotiating our contract with DevFactory to accelerate our product innovation.

We are also deferring the dividend payment so that money can be invested in the cloud strategy, given we’ll yield return that far exceeds the cost of deferring the dividend. To deliver on our vision will require us to differentiate ourselves amongst the much larger competitors.

I believe we have an opportunity by being fastest and first to cloud and I want to capitalize on it. But I want to continue to caution you on this bold endeavor.

This will be neither fast nor easy. This industry moves slowly; adopts new technologies cautiously.

It takes 18 months to 24 months to close deals and we're having to educate everyone on why our vision is the right vision. Executing this vision is like threading the needle.

We have to execute flawlessly in an environment with very well less tolerance to failure. Our restructuring work that we did over the past 18 months has moved us from a highly fixed cost structure to more variable cost structure, and so we will leverage this capability to manage our spending.

We will continue to prioritize our goal of investing for cloud against other discretionary spending. I love what we're doing; it is exciting and infection.

And our customers, once they understand how we are differentiated, love the message. It is a tall task to execute, but we are building the teams and driving the message that our charging platform to the public cloud is a reality in 2019.

At this point, we're ready to open up the call for Q&A. And Louise, we are ready for questions.

Thank you, Danielle, Anin. One question I had was that you support revenues increase sequentially.

Can you help us reconcile this with the loss of customers and general reduction in orders?

Hi, Steven. The support revenues, although remained flat compared to Q1 '18, but sequentially, it increased very marginally.

That's a function of orders that come in for every quarter on support revenues. Certain quarters there are orders that come in slightly later and their catch-up is made in the following quarter.

So that could be -- and that is the main reason why there are these slight fluctuations quarter-over-quarter.

All right. But year-over-year, this year 2019, you'd still expect support to be down?

Yes. We would expect support to go down.

It depends on when the customer terminations take fully -- come fully into effect. This is not exactly in our control.

We don't specifically guide on support and subscription revenues, but the trend is trending downwards.

And then, if I look at your different geographic regions, APAC was really the only one that was down substantially. Any color would be helpful there.

No. These are -- again, APAC is a region where in the past we have had more software services revenue.

Those orders have not been coming in at the levels we are expecting and it is function of our customer success efforts that we're putting in. So we have seen a decline in that area, mainly because of that reason.

And then, maybe a question for Danielle. So if I exclude the restructuring disbursements, you'd be at cash flow breakeven about there.

But given your comments about accelerating the product innovation. So, through the rest of this year, would you then expect to be cash flow negative for the rest of the year?

Yes. I mean, like I mentioned in my commentary, we're making this tradeoff decisions in terms of investing for the cloud, running cash at breakeven.

As I mentioned, we're very thankful for the work that we did over the last 18 months with regard to restructuring to change our cost basis from being very fixed to being a lot more variable and so we'll pull on those levers. I expect it to jitter from quarter to quarter, it's kind of hard to manage it right and land right on the dot, cash flow breakeven.

And certainly, it continues to be a goal. But, again, if we have the opportunity to accelerate things to the cloud, we might make that trade-off like we're planning to, for example with the dividend to defer it, so that we can accelerate some spending-related costs.

And then, maybe a quick one, Anin, how much restructuring disbursements is left in 2019?

We have estimated disbursements of about $6 million in 2019. But remember this is the current portion.

In total, we have about $11 million to go.

I just want to continue on one of Steven's questions, on the support revenue. Did you essentially say that Q4 and Q1, should we consider those together?

I think Q4 is a bit lower and then Q1 a bit high, but the average would have been down. Is it just timing between the 2 that you're explaining there?

Yes. That's correct, Rob.

Okay. You're at, I guess, call it a $110 million run rate now.

You are saying that you expect to see continued declines, no change there, but is that -- that previous range that you'd been sharing $90 million to $120 million, is that still a relevant range?

Yes. That's our goalpost.

We're not updating that. We continue to hold to that, I think we've been using those numbers since about August of 2017.

We feel like, one of the most important things about our company is really having a graph of where this revenue is headed over the long term, right. We've shied away from giving explicit guidance but rather giving sort of a long-term view.

We, if you remember back in August of '17, we wanted to create a plan that accounted for the customer losses, because we knew it would take time before growth would set in. So it's really important to set our expense level relative to where we thought revenue is going to end up.

And so, Rob, I think you remember my goalpost better than anyone. You know it's kind of in that $90 million to $120 million range.

I'm not updating that, I'm still holding to that. And so, as Anin alluded to, we still feel that 2019 will be another shrink year just because assuming cloud kicks in, it just we're educating everyone, these are super long sales cycles.

It will just take time before that revenue growth starts to eclipse the shrink.

And you didn't see any customer churn this quarter but you're still expecting one or more customers to roll off in the future.

Yes. In a sense -- I'm coming up on my two-year anniversary.

I think actually next week, Valentine's Day, so that's easy to remember. And two years ago, we got the list of people who were planning a lead, right.

They had already purchased competitive systems, alternative systems to move to. We know it takes a long time to migrate from one system to the other, which is like a voluntary heart transplant.

But some of our customers had taken that decision and started those projects. Those projects are still moving along.

I am thankful that they are moving slowly. It means that we get to continue revenues that we otherwise planned to be gone by this point.

It gives us the opportunity to leverage those revenues into other investments. But I don't see customer's changing their mind.

I mean, they've spent millions on another system and I still see that they're going to switch. So I think what is going on is, it has slowed down because maybe people are not as worried about our long term viability, they're not -- such in a rush to get off of our system.

I think there are some other market pressures with our competitors that are causing them to really think through what they're doing. And I think our cloud message is causing us to maybe look over the shoulder.

I'm not seeing anyone really change their minds, but they're kind of looking back and say, wait, what did you just say about cloud? Why don't you come talk to me about that?

So, no one left this quarter. The people that are leaving think are still leaving.

No one has changed their minds, but I am seeing some people sort of tap on their break and that's kind of cool.

The shift that you talked about, that you shifted from a fixed towards a variable cost structure. I guess, we see that here this quarter, the R&D was quite a bit lower than the average over the last 4 quarters.

And so, looking forward here to 2019, just from modeling perspective, how do we think about quarterly R&D, we should have bounced back up to that $15 million level or are you expecting it to be lower in 2019?

I'm just really not ready to provide guidance on specific levels of R&D, right. Like I said, we want to have some flexibility to accelerate cloud innovation, product delivery.

We have some customers that are beginning to consider starting pilots and that'll cost money to get that going up in Google Cloud. So at this point, it's going to be quarter to quarter seeing how much we can put into investments versus our other priorities, our other spending and I think it's just going to be quarter-to-quarter as we navigate this exciting journey.

Okay. Let me put it just a different way.

I'm trying to reconcile what you said about accelerating the spend to take advantage of that cloud opportunity. And so I'm looking at the R&D drop here in Q1 and reconciling that with what you're saying about the spending environment going forward taking, advantage of that and so I'm assuming based on that, that I would expect it to grow from here.

I don't want -- not asking for guidance specifically but maybe just some help around whether it's going to go up or down or stay here.

So, Rob, on an average, our goal is to flow back cost savings into product innovation, and we do expect some variability in our spent from quarter-to-quarter. It's kind of difficult to answer the question without -- there are some moving pieces that we have to address and adjust, ratchet it up and down accordingly.

But on an average, obviously, the amount that we spent in fiscal 2018 was clearly an aberration. It was -- there were multiple things happening there.

We had product quality issues that we were fixing or future version releases. Those type of spends are declining as the product quality has improved.

And now the dollars that will be spend in R&D is more geared towards the cloud innovation. So clearly the allocation of our spent in R&D is going to be proportionately higher in cloud innovation than what we had in previous quarters.

Okay. And maybe I'll just ask you a couple of questions on this cloud win in Australia, I'll pass the line.

So it was an existing customer, but was it something where Optiva was responding to competitive cloud RFP or was it a migration of the existing business?

It's the latter; migration of the existing business. This customer has heard our cloud message.

They are not running one of our charging products, which is I think where I'm really stressing our cloud move is the real-time charging nature of the majority of our revenue, that's the part I talked that's very exciting about moving that to the cloud. But this customer was running a related product.

It's a telco and moved their entire estate with us into GCP and achieved some significant cost savings. So they were already at Google shop, so it's pretty easy to get them over that the harms of selecting Google.

They heard our message. We investigated how easy or difficult it would be to move their estate up into GCP.

It was pretty easy and we were able to do it within a quarter, and then we made the announcement. So it's really exciting and that is our first but I feel like there is a couple of early adopters that are sniffing around and really strongly considering moving to GCP or installing the hybrid cloud project.

And so it's starting. And as Anin was just talking about R&D, everyday we're making decisions of, okay we have to -- we freed up some cost, do we want to put into R&D and accelerate some product innovation, do want to put it into sales and marketing, maybe go bigger at MWC or maybe hire some more sales people to have a bigger footprint around the world.

It really is a month-to-month decision where we're going to deploy our resources.

And this is limited, like you said, to wholesale billing. So not the core charging product; but is this a baby step towards that do you think?

What is like -- I don't think a lot of people are very clear on what the differences are. So maybe you could just explain those and then I'll pass the line.

Yes. I guess, the main easy way to describe it is billing and settlements that is not required to be real-time and charging is real-time.

So think of -- it's billing, it's getting a bill 30 days after the event. The speed is not as quite as important as a charging where someone's waiting to complete a call or complete a transaction and until the charging engine is complete it won't go through.

So I think the timing is the easiest way to describe the difference. I think it is a baby step, right.

It's proving that it works. It wasn't that difficult, the cost savings are real.

What it doesn't really improve is the speed, right, you know because speed is not important in wholesale billing, but it's the beginning, right. So people are starting to dip their toes that really -- as I visit customers, my last 12 -- let's say 6 months ago, I was really fighting to say the word cloud and I would see everyone's initial response of like you're crazy.

And now people are like, wait what did you say? Talk to you more.

I'm getting a lot more positive response and a deeper conversation around cloud. So I feel like our message is getting out there, the education is working.

We still have a long way to go, still going to take a long time, but people are calling us back. They are asking for this, total cost of ownership analysis for us to do, so that they can understand what does this mean for them.

And so I wouldn't say the flywheel is spinning, but it is sort of moving, so that's really exciting.

This is Amy on for Todd. Just a quick one from me, I know you're not giving specific guidance, but can you give us an idea of how to think about gross margins going forward?

So, our gross margins, I think we have a note in our MD&A about the way that we are thinking about some of our R&D spend, right. As part of my work coming into Redknee/Optiva, really starting to understand, when we're deploying certain R&D effort, where is it going?

Is it really going to build future products that the customer base can leverage or is it going to a specific customer that only assists their implementation? And when I came in, we had a very, very wide base of installed versions across the Orga base, across the old Nokia base and even across the old Redknee base.

And so as we've gotten -- our process has cleaned up, we have a lot more visibility into the hours spent and the dollar spent to fix let's say a defect in the product. We know where those the defects are going.

And so, one thing that we've done is taking just a stronger look on what we are considering as R&D and what should be considered in our cost of goods sold. And so I think again, we don't really give guidance.

I think, high-50s, low-60s is kind of where we thinkish we should be, given kind of where -- what's installed out there in the actual real world. I think as people start to adopt cloud and start to get onto more current versions, adopting the latest version.

I think that's the opportunity for maybe an increase but until people do that, I think gross margin is going to stay in that sort of low-30s range is sort of a good way to think about it.