Optiva Inc

TSX:OPT

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone. Welcome to the Fiscal 2018 Second Quarter Earnings Conference Call for Optiva Inc. [Operator Instructions] Before beginning its formal remarks, Optiva would like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events. 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.I'd like to remind everyone that this call is being recorded today, Thursday, May 10, 2018.I will now go ahead and turn the call over to Danielle Royston, Chief Executive Officer of Optiva Inc. Please go ahead.

[Danielle Rios Royston, Chief Executive Officer]

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?

[Anindyaraj Basu, Interim Chief Financial Officer]

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're 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 5, 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.On restructuring, as we communicated in February, we recorded a restructuring charge of $47 million in Q1 and additional charge of $2 million in Q2. While most of the expense is related to severance cost to outgoing employees, it does include costs related to exiting offices and data centers 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 2 quarters to 3 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 1 year due to the complex nature of the arrangement.To date, we have drawn down $4.1 million of the provision in settlement payments and 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 2 related parties, Crossover and DevFactory. Total 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 help 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?

[Danielle Rios Royston, Chief Executive Officer]

Thank you, Anin. On March 28, we hosted our Annual General Meeting in Toronto. In my remarks, at the meeting, I stressed that we are manically focused on Customer Success, working with each individual customer to understand how they view us. Do they see us as a partner and adviser in their business or merely another -- just another vendor? Do we have world-class people or are our people indistinguishable from every other vendor's employee. Do we help our customers drive their business forwarded or do we hinder that? Every day, at Optiva, we wake up thinking about how to put our customers' success first. But this past quarter, we lost 2 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 revenue we will earn from the delivery of this project.We currently have -- still have customers in the dish 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're going to continue to push hard and get better. As I continually stress in my communications to you, fixing this 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 converts to our long-term revenue prospects, we are working hard to improve our numbers and look forward to our customer 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 3 companies in 1 with everyone doing their own thing and that aligns repeatable, predictable customer experiences.As a part of our restricting plan, we're building an operational platform, which we call, the One Optiva Way. 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 as we are just now laying the foundation of this platform, but this investment will go a long way for instilling a strong successful software company.As a part of this One Optiva Way platform, this past quarter, we transitioned out of 2 co-location data centers, 2 Google Cloud platforms, creating a more scalable, secure and cost-efficient cloud environment for our customers. We also closed 6 employee offices and 4 legal entities. Over the next year, we will continue to centralize work and simplify our processes in order to save cost and streamline our operations.This past quarter, we announced our domain and the ticker symbol for our reverse split-adjusted stock. These 2 actions go a long way with customers, causing them to sit up and take notice they will -- that we are not just restructuring, we are completely rebuilding the company from the ground up.We're focused on telco on making them successful in their endeavors and position 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 improves scalability and performance of the Optiva Charging Engine by 10x. I remain encouraged about our progress and where we're headed. We must continue to focus and execute, but I feel we are on a right path. At this point, we're ready to open up the call for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Robert Young of Canaccord Genuity.

[Robert Young, Director]

I was hoping to revisit some of the goalpost you talked about on your 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 is $120 million. It sounds like those are maybe a little bit optimistic, given the comments on the call, and maybe could you revisit those?

[Danielle Rios Royston, Chief Executive Officer]

Sure. Yes, I'll be happy to touch on that. So as we haven't updated the numbers and we still stand by those 2 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 million. And then I believe in August of last year, we said our plan works up to 25% 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 have indicated that they are leaving, their swap-outs are taking longer than we thought. So we are getting a couple of extensions, so those extensions are 1 year, 2 years long. So that long-term ropeway is getting pushed off. It's further out in a distance. But as usually, it's still coming. These customers are not reversing their position, they have purchased other systems. Those other vendors are endeavoring to replace us. Some of them are struggling. Not that we're cheering for that, but that helped us a little bit buying us a little bit more time. But I think that just -- it kind of just puts that little point out into in a distance and that's still what we think is going to happen. So we're still -- plan still work up to that $90 million number. And we're working on it crazy to recover where we can, extend where we can and then certainly grow the customers that are staying with us.

[Robert Young, Director]

Okay. And so in the quarter, it looks support revenue was a little bit higher than expected, is that what happened there? Is that these 2 customers that are rolling off, the supports continued when -- that you might have otherwise expected them to drop off? I was assuming that would drop off with those 2 customers leaving.

[Danielle Rios Royston, Chief Executive Officer]

Yes. Anin can comment.

[Anindyaraj Basu, Interim Chief Financial Officer]

So Robert, the growth in -- or rather the stability in our support revenue had nothing to do with the 2 customers that are rolling off. It's -- the 2 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 2 years ago, have not been able to do so. They are continuing with our renewing the maintenance for the time being.

[Robert Young, Director]

Okay. So then the support revenue should drop below this level at some point, like, your comments previously on the revenue taking longer to drop down. So support revenue would drop below this level, right?

[Danielle Rios Royston, Chief Executive Officer]

We still expect our revenue to drop, I think, in December. I can't 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, maybe towards the end of '18, and just getting pushed off a little bit because customers need more time and they -- this is a 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 2 systems at the same time. But this takes a long time. So I think the strength in the support numbers is just -- as in it's sad and as I said before that, customer is extending that we thought were leaving, but they're still leaving. They're just leaving later than we thought.

[Robert Young, Director]

Okay, understood. And then the gross margin looks like it was strong relative to Redknee's history, and certainly starting off with Optiva, a little bit better. Is there anything you can talk about how that gross margin should trend going forward?

[Anindyaraj Basu, Interim Chief Financial Officer]

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 work, 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.

[Robert Young, Director]

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

[Anindyaraj Basu, Interim Chief Financial Officer]

No, the gross margin -- the cost of sales or gross margin calculation remains consistent with what the way we have calculated in the past.

[Robert Young, Director]

Okay. One last question, I'll pass the line. The deferred revenue was up quite a bit, is that the renewal season -- the effect of renewal season or is there anything else in there to think about? And then I'll pass the line.

[Anindyaraj Basu, Interim Chief Financial Officer]

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 31, and this is exactly what happened.

[Operator]

[Operator Instructions] There are no further questions at this time. Thank you for attending today's conference call. You may now disconnect.