Good morning, everyone, and thanks for joining us for the Optiva fourth quarter 2019 financial results conference call. Joining me this morning are Optiva's, Chief Executive Officer, Danielle Royston; and Interim Chief Financial Officer, Anin Basu.

If you have not seen the news release, it is available on the company's website at optiva.com as well as on SEDAR along with our MD&A and interim financial statements. I would also like to remind you that a replay of this call will be accessible via the Investors section of the company's website.

Following the presentation, we will conduct a Q&A session. Instructions will be provided at that time for you to join the queue for questions.

Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Optiva Inc. and all of its representatives on this call today.

Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially.

Any information regarding forward-looking statements are made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the following forward-looking statements and risk factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ.

The company will not provide guidance regarding future earnings during today's call and management does not anticipate providing guidance in future quarterly or interim communications with investors. I'll now turn the call over to Anin for his financial review of the quarter.

Anin?

Thank you, Ali. Good morning, everyone.

A reminder that Optiva's fourth quarter results were released yesterday. Our results are presented in accordance with International Financial Reporting Standards and presented in U.S.

dollars, unless otherwise noted. The company's fourth quarter revenues declined 15.3% to $23.1 million.

The decline in revenues was mainly due to lower software and services orders as we continue to focus on customer success and invest in our cloud strategy. Support and subscription revenues were lower when compared to the same period in 2018, mainly due to the discontinuation of support to customers, who had previously notified us of their exit.

The company's gross margin for the fourth quarter was 65% as compared to 67% during the same period a year ago and is comparable to previous quarters after normalizing for loss provisions that were taken in prior quarters. Total operating expenses in the fourth quarter of 2019 decreased by 53% to $11.3 million when compared to the same period last year.

Excluding depreciation, amortization and restructuring costs, total operating costs decreased to $13.8 million or 60% of total revenue compared to $21.5 million or 79% of total revenue for the same period last year. The decrease in overall operating expenses is mainly attributable to streamlining our general and administrative costs by continuing to reduce professional fees, facilities and offices globally and closing down legal entities in various jurisdictions.

While our total costs in research and development have reduced as compared to the same quarter in fiscal 2018, we remain focused on specific projects that include Customer Success and cloud innovation. During the quarter, the company incurred $6.3 million of costs towards R&D and cloud innovation with DevFactory, which is an affiliate of ESW, Optiva's largest shareholder.

During the quarter the company also incurred $5 million in costs associated with its access to skilled workforce through Crossover another affiliate of ESW. As a result of the ongoing cost optimization and efficiency efforts, the company generated $1.2 million of cash from operations when compared to the $14.2 million used in the same period in 2018.

Cash and balance sheet management remains a priority. As of the end of the quarter, cash balance including restricted cash was at $37.7 million.

I will now turn the call over to Danielle. Danielle?

Thanks, Anin and good morning, everyone. Thank you for joining us on today's call.

2019 has been a very exciting and dynamic year, as we continue to successfully execute our strategic objectives. We finished another cycle for our Customer Success program covering the period from January to June with close to 50% of the revenue reporting to us that they feel our objectives and goals are aligned with their ultimate success and that we are a key component of their growth.

This positive trend provides us with great confidence that we are on the right track. As mentioned on previous calls, it will take time to get to our ultimate goal of 100% and I remain encouraged by our forward momentum, as we continue to fix each customer on our quest to achieve 100% customer success.

We continue to invest heavily in cloud innovation and remain focused on our sales and marketing resources to maintain our position as a leading vendor in the transition to the cloud. During the quarter as part of our $100 million cloud transformation plan, we invested $3 million on our transition to the cloud.

Each quarter we balance this discretionary investment spend against our stated objective of ensuring operations remain cash flow breakeven. Consequently, the investment spend can vary by quarter and it really highlights our variable cost structure we've implemented with our related party partners of DevFactory and Crossover when compared to our previously highly fixed cost structure.

Our sales leads and opportunities continue to grow and we're encouraged by the robust interest in our cloud vision from our customers and new prospects. Our flow of RFPs into the company is significantly increased as compared to the number of RFPs we received in 2018.

And so far this year we've completed more than 20 TCO analysis. We announced a new customer win with a customer who will be using our multi-tenant BSS platform on the public cloud.

This is the first new logo we've added in close to three years. And we announced that we are engaged in a pilot program with the Vodafone Idea Ltd, India's leading telco service provider to deploy Optiva's charging engine on VIL's universal private cloud.

Longer term, Vodafone Idea has plans to move to the public cloud and I believe the large telcos will choose this route. First to move to private cloud to mitigate risk and adjust the new technology before making a leap to the public cloud.

Public cloud will remain the ultimate destination for those who want to attain 80% TCO savings. We are obviously excited and thankful for this great opportunity to prove not only that our software works but we can deliver to the world's largest telco.

In summary, our migration to the public cloud strategy with major telcos is showing results and gaining momentum. Remember, it will take time but with our first-mover advantage and early adoption of the transition to the cloud we will stand to benefit the most.

While we are building strong relationships with our customers every day, as mentioned previously we continue to review all the known departing revenue customers who have purchased another system and are planning to swap us out and I will reiterate that I believe runway of our core business is closer to $75 million. For the known departing revenue, we don't know exactly when each individual customer's will roll-off.

Our Customer Success program ensures that while, they're a customer we are focused on their success coupled with continued poor performance from their new vendor, keeps departing customers renewing well past their expected tenure with us. As we don't have clear visibility when the cloud growth will kick-in, it's an important reality of our business to understand and while we are fortunate to have a flexible cost structure to ensure we remain cash flow breakeven, while we live through the inevitable revenue decline associated with this transition period with departing customers.

During the past number of calls, I've discussed our ambition and desire to raise additional capital to invest in accelerating our cloud strategy. We continue to research the possibilities on this front, should we elect to move forward.

We will continue to prioritize our goal of investing for cloud against other discretionary spending. Focusing on customer success, managing our expenses and getting to the cloud, as quickly as we can remain our top priorities.

It's an exciting and ambitious strategy and we're excited to make this transition. At this point, we are ready to open the call for Q&A.

Hi. Good morning.

So with customer satisfaction steadily moving upwards that $75 million of baseline revenue, are you getting more confident in that number? Or are you getting more confident that you can stay above that number?

Just trying to get a sense of how realistic that $75 million scenario is?

Hi, Rob. It's Danielle.

Yeah. That $75 million number what we did is we took all the known leaving revenue in – across the company of all the customers, and basically just subtracted it from – we've sort of bundled it up and figure out how much that is and subtracted it.

And that assumes everyone leaves on one day. And so it's a pretty pessimistic view of our business, and that's kind of the way, I like to plan right kind of worst case scenario, and make sure you have enough cash, your expenses are in line, you have a good plan and move forward from there.

If it never gets that bad then you're great, you're in good shape. It maybe the case that we never see that low that would be wonderful.

But you always have to plan for the worst case that, it happens all at once and you're not surprised and you're prepared for it. So customers sometimes say that, they're renewing and then they surprise you and so it doesn't really account for any surprises.

But again, we took a pretty pessimistic look and we can touch the low water mark here. And then, we have a plan against that.

Okay. And then maybe backing-off of that very pessimistic view would you still say that 2020 is going to be a shrink year in the non-cloud business?

Yeah, I do. I do believe revenue will shrink again in 2020.

I wish, I didn't have to say that. It's a bummer.

But it is – it's just a reality. The cloud revenue the time for that to kic-in, it's just a different kind of revenue, right, we're transitioning from a perpetually licensed model with a lower maintenance percentage that's charged into annually recurring revenue, and its licensing and support all baked in.

And so the numbers are really going to change, right? You're not going to see the sort of like big one-time revenue recognition.

You're going to have a more steady and we're excited about that that's like more repeatable dependable revenue. I think that, the big dollars, we will have a higher average sales price than your average SaaS company, let's say just because of the nature of what we're doing.

But I don't believe the super big telcos are going to move to the public cloud first, right? So it's going to be the smaller players and therefore it's going to be smaller dollars.

So, to build up to replace millions of dollars, $5 million, $10 million that's going to take a little bit of time to get that momentum going. I mean, I think that it will be cloud growth.

I just don't think it will eclipse the growth. And so as a result, yes, it will be another shrink year.

Okay. And I think a couple of quarters ago you said that, a baseline kind of market sizing for the cloud might be about 5% of telcos might consider it.

Are you seeing that number changed? Like you said, you're getting a lot of incoming RFPs and a lot of interest you've had some great announcements recently and so would you say that baseline is maybe a little higher now or carriers getting more open to the cloud?

You know what – yeah, I don't even remember saying that, not if you mention it to me. But if you would ask me, again, I think yeah, it will be a higher number.

And the reason just to give you evidence of that is really in our RFPs, we've started to see – at first RFPs were pretty much like they were in the old days, right? We need a system deployed on premise integrated to blah-bidy-blah with 15 integration – 15 customizations.

And just this year, I'd say in 2019, my sales department is telling me, we're starting to see RFPs with cloud requirements. Is your cloud – is your software cloud native?

What public clouds do you support, right? Do you use containerization?

What other databases do you support? And so it's kind of nice to have the messages that we've been saying for what feels like two or three years of me talking about public cloud kind of come back to be and repeated in the form of an RFP.

And so I do think more people are – more telcos are thinking about the advantages of cloud they're really starting to investigate it. This year, when I travel, I'm running into IT departments that are starting to analyze how to shift all their applications into a public cloud.

And so I really thought this transition will be sort of a linear transition where we will keep talking about it, and gradually telcos will get on board, but I see more of a step function kind of adoption, where there was like not a lot of talking, and then one day all of a sudden everyone was talking about Kubernetes. And then no one was talking about public cloud, then everyone's asking me about GCP.

So it's really like the step function adoption. And yeah, I would say, it's greater than 5% for sure.

Okay. And then, when they go through the step function upgrade cycle starting their own private cloud can they get the benefits of GCP in that deployment, or like there's lots of other technology to bring it to bare.

But can you prove, the whole TCO in this case and in their private cloud?

Yeah. That's a great question.

It's really difficult to achieve TCO savings on the ground in a private cloud. Private cloud is almost like fake cloud.

It's fancy on-premise system. It's pretty expensive to install.

You still have to buy all the machines. You still have to have all the people.

And you don't really get the software benefits of the public cloud, right? You can't really use elements of GCP on the ground.

And so I would say, there is no savings, especially hard measurable, right where you just sort of see it fall to their bottom line. You might get some soft savings.

I call them soft, they're harder to measure, but for example you might get more utility out of your -- the capacity of your servers on the ground because you're using a containerization system where you can schedule jobs on to unused compute power when you need it. So there are some savings, which are still -- it's still -- the cash is still spent.

So I would not call it true savings. The one exception on using GCP technology on the ground, I'd say is, Anthos which was announced at this year's Google Next by Thomas Kurian, CEO of Google and what it is, is this great little system that you can install in a private cloud and it allows you to manage the compute resources in any cloud, whether it's your private cloud or any of the other multi-vendor public clouds, Google's, Amazon's, Microsoft's.

And we are building our technology on Anthos, because like I said in my script, we believe public cloud is an ultimate destination. And if it is, this is the right technology to pick if you're going to go private cloud, because it allows you to begin with the private cloud in a closed environment and then when you're ready, literally sort of like open up a portal and start to leverage GCP resources, and it makes that transition very seamless, very easy.

And so that's like the only component, for example, you can't use Spanner on the ground, you can't use the elastic computive GCP on the ground, but if you're using Anthos it starts to open that up and so we're a big fan of that.

Great. That's a lot of great information.

Thank you. And then maybe last question for me would be around, you said you're scaling the R&D spend based on your quarterly cash flow breakeven.

Are you seeing enough market adoption that you'd like to accelerate that a little bit now? Or are you still going to stick with that scaling of the R&D spend using a crossover and the other vendor?

Yeah. Yeah.

No. If I had more money to spend I could spend more money in product sort of this -- and I mentioned it again in my talking points that we continue to look at raising additional capital, and we're looking at all different ways to do that.

We have a little bit of the luxury of time, right? We're not like in dire need of it.

We're managing our own expenses. We're self-funding our investment.

But yeah, if I had more money I would probably spend it in two areas, right? Accelerating my product investment, right, getting product out faster and then I would probably spend it in sales and marketing, right?

I'd have a bigger sales team. I would host more webinars.

I would go to more shows. So there's a lot of things that sort of are on the DRS shopping list that I wish I could spend more money, but right now we are running cash flow breakeven.

We're serving off some discretionary spending that we would otherwise return as profit or using that profit to invest in our future. I think our vision is pretty strong and sound.

It's well received and starting to get traction. And if we had more money I think we could go faster.

Okay. Maybe the last little one.

The cash on the balance sheet. How much of that we need to keep there?

I mean, you're trying to sell to big telcos. They like to be a strong balance sheet and presumably need some for operations.

How much of that balance sheet cash can you spend? And then I'll pass it on.

Yeah. I think in this year we need a little bit extra cash more than usual to -- for working capital.

We had open litigations, we had some trapped money in certain countries that take a long time to get out. And we're simplifying our operations and a big part of that plan is, as Anin mentioned is, reducing the number of entities which is shockingly takes forever to do, you'd be so surprised how long it takes to, to unwind an entity in some of these countries.

And I believe actually starting this quarter, we're going to start to see that cash balance kind of reduce, we've simplified some things and cleaned up some stuff, and we're going to use it to run an efficient business pay off some debts that we have, a payment here and there that's overdue, and maybe spend a little bit more on dev and sales and marketing, right? We're going into MWC next quarter.

So I will see you there. Hopefully, I'll see you there again, but the end of February, we'll be at MWC.

And so we're right in the thick of should we buy a banner in the hallway? Should we do a digital truck outside of the south entrance kind of stuff?

And I'd say, yeah, we'll use some of that cash and we think we can take it down a little bit, and we'll continue to be really conservative on that to make sure that we have enough cash to run our business, don't want to run out of money, but then using it for our investments.

Thanks. I’ll pass line.

Great to hear the positive attitude and it’s still rational but more positive. Thanks.

Yeah. Thanks.

Great. Thank you, operator.

On behalf of the Optiva team, we'd like to thank you for joining us on today's call, and we look forward to speaking with you again on our next quarterly conference call, and keeping you up-to-date on the developments in the company. That concludes today's call.