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Executives

Lucas Skoczkowski - President and CEO

David Charron - Chief Financial Officer

Analysts

Michael Urlocker - GMP Securities

Robert Young - Canaccord Genuity

Justin Kew - Cantor Fitzgerald

Scott Penner - TD Securities

Gabriel Leung - Paradigm Capital

Eyal Ofir - Clarus Securities

Todd Coupland - CIBC

Redknee Solutions Inc. (OTC:RKNEF) F1Q2014 Results Earnings Conference Call February 13, 2014 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Redknee Solutions Inc. Fiscal 2014 First Quarter Conference Call. At this time, all participants are in a listen mode only. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

Before beginning its formal remarks, Redknee 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 projected in these forward-looking statements. Redknee 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, February 13, 2014. I will now turn the call over to Lucas Skoczkowski, President and Chief Executive Officer of Redknee Solutions Incorporated. Please go ahead, Mr. Skoczkowski.

Lucas Skoczkowski

Good morning, everyone. And welcome to Redknee’s fiscal 2014 first quarter earnings conference call. I’d like to draw your attention to slide two of our presentation, where we have outlined the company disclaimers and caution regarding forward-looking statements.

I’m Lucas Skoczkowski, Redknee’s Chief Executive Officer and joining me on today’s call is our Chief Financial Officer, David Charron.

This morning we will be discussing the results of the first quarter of fiscal 2014, which were issued after the close of market yesterday. The press release and accompanying financial tables are available in the Investor section of our website. If you haven’t done already, I encourage you to download the slide presentation available in the Investor section of our website that provides further analysis of our quarterly results.

David and I will be referring to this presentation during today’s call. Following my opening remarks, David will review our financial results and then I will return to give you an operational update before we open up the call to your questions.

To start off, I would like to give you an overview of the quarter. During the first quarter of fiscal 2014 we made excellent progress existing on our operating plan, as well as and completing the integration of the BSS unit acquired from NSN.

Our focus remained on building and delivering high quality solutions to our current and new customers to drive quality recurring revenue in the form of support revenue from our customers, as well as subscription or SaaS software license fee.

The results of our efforts is visible in our growing business in the Americas, APAC and EMEA region, as well as in the announcement of several multi-million dollar contracts throughout the quarter and record $50 million three-year license framework expansion.

Our first quarter revenue came in strong at $60.4 and on trailing 12-month basis revenues of $188.2 million which includes three quarters of revenues from the BSS unit acquisition.

Our gross margin have improved to 55% both in Q1 fiscal 2014 and on trialing 12-month basis. This has resulted in an adjusted EBITDA of $5.4 million or 9% of revenue in Q1 and $15.7 million or 8% of revenue on trailing 12-month basis in line with our both acquisition plan.

As we have discussed, our focus remains on revenue quality and we have made progress in continuing to drive toward software product model, while minimizing low or negative margin items from our topline.

Our order backlog [reached] at $166.8 million, giving us strength in revenue visibility. For Q1 FY’14, our recurring revenues were at 55% of total revenue or $33.3 million or and more importantly, $104.4 million over the last 12 months. Our cash balance at the end of (inaudible) quarter was very healthy $72.2 million.

We are very encouraged by our progress on the integration of the acquired BSS unit. Our latest assessment put us at 95% completion of the integration process, giving us confidence we will be done before the end of the second quarter 2014.

I’ll provide you a more detailed operational update in a few minute. However, first, I would like our CFO, David Charron to walk you through the financial results for the quarter. David?

David Charron

Thank you, Lucas, and good morning, everyone. I would like to spend a next few minutes summarizing our financial performance for the first quarter of 2014 and to put this discussion in context, I encourage you to review the company’s financial statement, MD&A and earnings release, which are posted on SEDAR and also available for download on our website.

Please note that our financial results are presented under International Financial Reporting Standards and also presented in U.S. dollars. For comparative purposes, our previous year’s results are also shown under equivalent accounting standards and functional currency.

I would also like to remind you that we close the acquisition of the BSS business in late March of 2013 and have now completed three full quarters of operations with the acquired business.

So as we compare Q1 fiscal ’14 to Q1 fiscal ’13, we are in the last quarter of comparing recent post-acquisition quarterly results to earlier pre-acquisition quarterly results one-year prior.

Now on to our results, overall, core revenue for Q1 increased $60.4 million from the $14.3 million in the same year ago quarter. The improvement was primarily due to the increase revenues related to the acquired BSS business.

Recurring revenue which we define as revenue from support and maintenance agreements, term-based product licenses and long-term service agreements was 55% of total revenue in the quarter as compared to 50% in the same year ago quarter.

Gross margin came in at 55% as compared to 63% last year. The decrease over the prior period was driven by two primary factors, a shift in the revenue mix, which resulted in greater contribution from lower margin third-party hardware and a decrease in higher margin software revenue, as well as lower margin on support contract of the acquired BSS business.

EBITDA adjusted for the cost related to the acquisition totaled $5.4 million or 9% of revenue resulting an income from operation of $1.5 million. This compares to an EBITDA of $1 million and income from operations of 0.4 million in the same year ago quarter.

Net loss for the quarter was $3.1 million or $0.03 per share, compared to a loss of $1.7 million or $0.02 per share in the same year ago quarter. And as we presented in the Reconciliation of Net Income to Adjusted EBITDA in our press release, the Q1 2014 net loss includes $3.7 million of costs linked directly to the BSS acquisition. Specifically, amortization of the intangible assets, legal and professional fees incurred for the acquisition and the P&L impact of the revaluation of our earn-out liability.

Now looking a little more closely on revenues for the quarter, we saw software services revenue increased to $22.5 million or 37% of total revenue from $7.5 or 52% of revenue in Q1 of fiscal 2013.

Support revenue grew to $32.5 million or 54% of total revenue and this compares to $6 million or 42% of total revenue in the same period last year.

Sales of third-party hardware and software components in the quarter increased to $5.3 million or 9% of revenue from $0.8 million or about 6% of total revenue one year ago. And finally, recurring revenues increased to $33.3 million or 55% of total revenue from $7.1 million or 50% of revenue in the comparable period.

Gross profit in Q1 was $33 million or 55% of total revenue, compared with $8.9 million or 63% of total revenue in the same period a year ago, a 270% increase in gross profit was mainly driven by the additional acquired revenues, while the decrease in gross margin percentage were the result of two primary factors, a change in revenue mix over the prior period and a lower margins on the support contract of the acquired BSS business.

During the quarter total operating expenses adjusted to exclude acquisition costs, amortization and stock compensation was $27.6 million or 46% of total revenue in fiscal Q4 of 2013, compared to $7.9 million or 56% total revenue a year ago. This reduction in percentage term reflects the significant leverage we are able to achieve in our OpEx across the much large revenue base.

Next, I’d like to discuss each of the OpEx lines separately. First in the quarter, sales and marketing costs totaled $8.5 million, which is an increase from the $3.0 million in the same period last year. As a percentage of total revenue, sales and marketing expenses were 14%, down from the 21% recorded one year ago.

General and administrative costs increased in absolute terms to $8.2 million in the quarter from $2.4 million in Q1 of fiscal 2013. As a percentage of revenue, G&A expenses decreased to 14% of revenue from 17% of revenue in the prior period. Excluding amortization and stock compensation costs, G&A expenses would have totaled $6.0 million for the quarter representing about 10% of total revenue for the quarter.

R&D expenditures increased to $14.9 million compared to $3.2 million for the same period last year. As a percentage of revenue, R&D expenditures increased to 25% from 22% in the comparable period. The increase is attributed to the impact of headcount as a result of the BSS acquisition and the investment, Redknee is making in our business critical monetization platform.

Total cash cost related to the acquisition in the quarter was $0.9 million and the non-cash amortization of intangible assets and the depreciation of intangible assets was $3.3 million.

Now turning to the balance sheet. At December 31, 2013, cash and equivalent including restricted cash was $72.2 million as compared to $80.1 million as at September 30th. At December 31st, we’ve drawn a total of $45.9 million on the facility to fund the increasing working capital need as we finalized the integration of the BSS acquisition.

Looking at other balance sheet items, unbilled revenue rose slightly at the end of the quarter to $41 million, up from $39.4 million recorded last quarter. And as a reminder, unbilled revenue rise as a result of long-term multiphase software implementation projects from which revenues are recognized on what is known as a percentage of completion basis.

Moving on to other balance sheet items, accounts receivable increased to $78.9 million from $66.1 million as at September 30th, mostly due to timing differences between invoicing in the quarter and collection.

Days sales outstanding on an adjusted basis increased to 110 days from the 100 days as at September 30th and deferred revenue at the end of the quarter was $13.8 million, down from the $19.1 million recorded at the end of September and as a result, working capital increased to $110.9 million from the $100.1 million as at September 30th.

Once again, the increase was primarily due to the increase in trade and other receivables and the decrease in deferred revenues and is in line with our plan as we work through the integration of the BSS acquisition. Our order backlog increased to a record $167 million versus [$100.1] (sic) $160.4 million as at September 30. This increase is attributed to the impact of strong orders received in the quarter.

Of the $167 million backlog, approximately 60% is expected to be recognized as revenue over the next 12 months with the remaining to be recognized over a future period. This completes my financial summary.

Now we could turn the call back over to Lucas for his update. Lucas?

Lucas Skoczkowski

Great. Thank you, David. As David has mentioned, Q1 was the third good quarter following close of the BSS acquisition. Growth is important to the organizational results within the context of our overall growth strategy.

Here I will update you on three areas. Number one, I will provide an update on the progress of our integration. Number two, I would like to discuss our shorter-to-medium term management priorities. And finally, I would like to update you on our long-term growth strategy.

First, I would like to provide you with what I expect it will be the final update on the progress of the integration. We close the acquisition on March 29, 2013. The combined BSS employees approximately 1700 employees and service of 200 service providers was more than 2 billion subscribers.

Since closing, our revenue has increased substantially comparing to the current quarter to the same period one year ago. Revenue is up more than 320%. As I mentioned earlier, we see the integration being approximately 95% complete as of now. That we feel very comfortable that we will be able to complete all the remaining integration activities on or before our April 2014.

On the employee front, we have been working on as a single unified organization since April 1, 2013. I’m very proud of how the team has come together. We continue to receive positive feedback from our customers and our partners regarding our combined team.

They are pleased with the overall increased passion and engagement that they have experienced since we’ve closed the BSS acquisition. This is a great feedback and valued our approach.

On the product side, we are executing on our plans to provide fully integrated product while we are addressing all the customers’ priorities. I will elaborate on this further in a minute.

Thus far, we have retained all the customers from the acquisition and in fact, we have brought back two customers that were on a path to switch under previous management. Finally, as part of the integration, we are investing in our partners to help us accelerate and expand our access to market. And I’m very encourage by the level of business we look to generate from our partners in coming years.

We now have a dedicated organization to ensure our partner’s success and are working closely to drive support to existing customers as well as potential new customers. With regard to the short term-to-medium term management priorities, as previously discussed we see a large opportunity to build a significant value for our shareholders as a result of the BSS acquisition.

As a software product focus company, our immediate priorities remain, number one, improving support value from our acquired BSS customer base by elevating annual support and maintaining revenues for each acquired customer to unbundled industry standard pricing.

Here alone, we believe there is a significant opportunity to grow their occurring revenue streams through innovating the support contracts from NSN over to Redknee and aligning support value with current market prices. Number two, driving upgrades to latest version of our software within our current customer base. And final number three, upselling the additional features of our full product portfolio to our customer base.

During the first quarter, we continue to progress steadily toward achieving these objective. With regard to the support value, we made a good progress aligning support values with our existing customers. We’re in line and in some cases ahead of our plan on achieving the correct support values for our mission critical platform.

We remain encouraged by the progress here and have clear path with exiting on the opportunities within the next 24 to 36 months. Number two, we continue to close on upgrades to latest software release providing true validation to our customers that we are taking care of their investment by providing them with a comparative advantage to the latest version of our real-time charge and policy in billing software.

We are pleased with the traction we are experiencing here and have announced a number of high profile upgrade throughout the quarter. For some of these deals, we have achieved 30% higher upgrade value which bodes well for us to achieve our objective over the next 24 to 36 months.

Number three, we have shared our product roadmap with accelerated R&D investment to allow our customers to take advantage of our fully integrated product portfolio as a clear comparative and differentiated from the legacy provider in the space.

We have the diverse base of our integrated platform available and expect it to be deployed over the course of 2014. This accelerated product investment has provided us with an opportunity to engage new prospected customer. We are very much encouraged by the interest in the level of activity from both existing and new customers.

Finally, I would like to provide you with an update on our long-term growth strategy. These are comprised of three main elements which build upon the short-term objectives we discussed earlier.

Number one, continued evolution of our business critical software product offering. Number two, market share growth and leadership in our served addressable market. And number three, an increasing proportion of sustainable recurring revenue. Explaining on these, number one, on the product offering front, we are investing and building our product platform.

In the most recent quarter, Redknee has over 175 patents granted and another 65 patents pending. We have demonstrated fully virtualized real accountability in networks over 20 million subscribers who are scaling our social support of about 50 and 100 million subscriber service providers. Our cloud offering with need to attracting better interest from both Tier 1 service providers as well as marketing companies in both, Americas, APAC and EMEA regions.

On number two, on expanding our market share and leadership through our deployed systems, which are in place at over 200 service providers who support approximately 2 billion subscribers. We remain relentless about customer software approach to our business.

As I mentioned earlier, we have retained all of the acquired customers since we have closed acquisitions. And we are working to win back any customer who has previously intended on leaving, we are seeing the level of interest and engagement from the new perspective customers significantly ahead of our expectations.

We continued to make very good progress, engaging our perspective customers on the very large transformational opportunities. It is $15 million to over $100 million opportunities, especially for customers who are looking for product-oriented software.

In addition, we have advanced our strategic efforts with regards to the interest of things, which presents us with expanded market verticals where our solutions can be implemented to monetize the opportunities created by embedded intelligent modules either in healthcare, smart grid or automotive telematics.

We see this as a great growth opportunity for Redknee to expand into this space over the next three to five years. Number three on the sustainable recurring revenue front, our recurring revenues are primarily comprised of support and SaaS licenses. That together on a trailing 12-months basis comprised of $104 million or 55% of revenue. We see this opportunity to continue to increase the value of our support while providing more opportunities for SaaS through our hybrid approach.

It is on-site and in cloud implementations across our existing customer base over the coming 24 to 36 months. We continue to focus on sustainable growing our recurring revenues while progressively scaling our EBITDA margin. We see a long-term opportunity for us to grow EBITDA margin to 20% to 25% also the revenues, substantially higher than we are here today.

In summary, the progress of our team has made in completing our global goals is becoming increasingly more visible. While our revenues have grown significantly over the past year as a result of BSS acquisition, our teams have worked successfully to ensure that quality of the fundamentals of our business remain intact and in fact improve while we complete the integration. We are building strong recurring revenue stream, improving EBITDA margins and expanding into evolving market opportunities.

Before opening up the call to your questions, on behalf of the entire management team, I would like to say thank you for the continued support from our employees, our partners, our customer base as well as our shareholders.

Now with that, we are ready to open the call for your questions. Operator, please provide appropriate instructions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michael Urlocker from GMP Securities. Your line is now open.

Michael Urlocker - GMP Securities

What it is that you think that’s bringing those two back into the fold, and are there opportunities to expand significantly with those customers that were out risk?

David Charron

Michael, I think you were cutoff at the beginning, so could you please repeat your full question?

Michael Urlocker - GMP Securities

Sure. I’m interested to learn about the win backs that you’ve had with some of the customers that were looking to leave, and I wonder if you could describe qualitatively what’s attracting them, et cetera.

Lucas Skoczkowski

I think what discussion we had with both executive and the management teams of those companies has been really, they like the technology that we offer. They were very impressed about the roadmap and the combined offering that Redknee brings to market across acquisition. And I think we’ve been two to three quarters that we have been working with them. They have expressed much increased confidence, which they were lacking prior to the transaction we announced that we are a great company to work with and this is what we stand for.

We are delighted to playing this. We went head-to-head with much larger companies around this, but those companies are not solely focused on what we do. And interesting probably enough is the case studies that we already are putting together with customers of the last three quarter with a combined product offering, has been compelling enough that these customers felt that there is a premium and we have got a premium for our software in comparison to our less -- more legacy competitors in this space.

Michael Urlocker - GMP Securities

Okay. Thank you. That sounds good. And it’s not central to my investment thesis at this point that you win new customers, but I do think that’s an important long-term element of the business. I know you’ve had lots of engagements with telcos. How can you rate or determine the level of seriousness of these prospects and their willingness, frankly to give up on prior legacy systems because fear of changing has always been an important aspect of the business?

Lucas Skoczkowski

It’s a very good point. So, I think for us to create little value, we did create a lot of value from existing customer base. But the new customers will allow us to grow and create a lot of upside in our business. So on that what we have seen is actually customers -- number one, are inviting us to create the opportunities.

We are really becoming the fresh and very viable operative some of the like more boring peers here in our industry. And I say with all the respect for my peers. What now interesting is [NBS] offering service intensive approach, more customer software approach and provide the best product offering available in the market today.

And the way I judge it, I always have to be, as a CEO cautious about how we judge this aspect of customer engagement. But I think it’s very clear when customers are inviting us and when they are scoring out according to their evaluation methodology when we are gaining scores highest in dozen of opportunities we’ve been scoring highest in our product in our technical capability that gives me a lot of confidence that we can converged these processes from being a safe pipeline into close contracts over the coming 12 to 18 months.

Michael Urlocker - GMP Securities

Thank you. And Lucas in the past, to be direct I think some of the large telcos would have kind of acknowledge, okay, you might have interesting technology but you are too small to supply us. Now that you are a larger company, are there any new set of objections that you are hearing or did you just feel like you are now part of this potential group of suppliers.

Lucas Skoczkowski

So I feel definitely we’re part of potential group of suppliers. And as a matter of fact, we stand out as being probably more funded to do business with a lot more innovation than our peers.

Michael Urlocker - GMP Securities

Excellent. Okay. Thank you.

Lucas Skoczkowski

Thank you, Michael.

Operator

Your next question comes from the line of Robert Young from Canaccord Genuity. Your line is now open.

Robert Young - Canaccord Genuity

Hi, good morning. Can you hear me okay?

Lucas Skoczkowski

Yeah.

Robert Young - Canaccord Genuity

Okay. You talked a little bit about the opportunity to no wait or take NSN contracts, put them on Redknee paper and increase the support revenue to industry standard. And I was thinking here if we exclude the third party and hardware revenue over the last couple of quarters that shows it seems to me that the support revenues actually increasing as a percentage of revenue. And I was wondering if that’s correct and is that a sign that you’re actually already seeing some of these increases in service revenue?

Lucas Skoczkowski

I think Robert thank you for the question. We are seeing wisdom. As I think I have been trying to update is we are on plan. I want to remind everyone we are doing it over three periods. We want to create value for our customers. I think the value will be represented in increased topline revenue, especially around the recurring revenue for support. And to us it’s the journey. We want to make sure that we provide the best support for these complex services in the market. We are I think supporting their -- in effect their overall revenue in our customers business and it is a very important discussion we are having both with the technical aspect of our customers but also with their financial and executive management team and we have received very positive feedback. And I think there is a lot of support. We just need to make sure that we do it in stages so that everybody remains aligned.

Robert Young - Canaccord Genuity

Okay, fair enough. Second question is we only asked about the backlog, up a little bit quarter-over-quarter, but since the end of the quarter you’ve announced four deals combined worth $64 million. I was wondering are any of those deals in the backlog you reported today.

Lucas Skoczkowski

So some are, I also want to mention now the $50 million that we have announced we only put $11 million in order backlog as of end of December. So we will, we have been and we remain conservative of how we approach this. We are very excited that even with the $50 million expansion plan we’ve announced, we do see recurring into all the four license expansion. There is opportunity for us to do upsell, upgrade and expand our capabilities within this customer, so we see opportunity over the next two years to potentially to significantly increase maybe up to doubling this value of the contract. So we are very excited, but I would prefer to continue to remain conservative as when I speak to you guys.

Robert Young - Canaccord Genuity

Okay. And last question for me if you could talk about the regional shift in revenue, I imagine there is some volatility quarter-over-quarter but EMEA down while Asia Pacific was up, just talk a little bit about that?

Lucas Skoczkowski

So I think, we didn’t comment anything, we see a lot of growth, continuous growth and momentum in Asia Pacific. Obviously from EMEA perspective we see opportunities, we actually engaged with classic customers to support both upgrades that we will be looking to announce over the next 6 to 9 months, but we’ve seen a lot of expansion growth in APAC. What’s interesting also for us Americas remains a great opportunity for us, so I think I mentioned before over the next 12 to 24 months we typically do at least double our Americas vision because we see rate traction with some large service providers who really have been struggling to find alternative to some of their legacy providers.

And in the recent process I would say that we have advanced steadily through sales process where we gained very high marks for our technology, for our capability and also the work we are doing with our partners to make those things available in the marketplace.

Robert Young - Canaccord Genuity

All right, okay. I hop back in queue.

Lucas Skoczkowski

Thank you.

Operator

Your next question comes from the line of Justin Kew from Cantor Fitzgerald. Your line is now open.

Justin Kew - Cantor Fitzgerald

Great, thank you. Thank you for taking my questions this morning. Good morning, Lucas and David. First question just on the guidance or the outlook that you’ve given in the past just to kind of mid-single-digit EBITDA range for the first 12 months and then mid-teens for the following months. Is that timeline kind of set aside because I think I heard in the prepared remarks just talking about a longer-term goal of 20% to 25% EBITDA margins?

Lucas Skoczkowski

So I think our outlook is really remained consistent. We had to put first 12 months. We look to remain in a high-single-digit EBITDA margin. From April 2014 to next March we look to move this up to mid-teens EBITDA margins. And then we for the following 12 months as we move into 2016 we look to move it into 20% to 25% EBITDA margins.

And I think our effort is really just want to recall this it is all about adjusting and improving our mix which will result in improvement in gross margin which will drive improvement in EBITDA margins. We feel there is very little to do around OpEx. As I mentioned in December, we are very confident and disciplined about making the investments in R&D, but R&D as a percentage of revenues will by 2015 start to be in line with our objective and long term by 2016 we see R&D in kind of a 20% range. Does that helpful, Justin?

Justin Kew - Cantor Fitzgerald

Yes.

David Charron

Maybe just to reiterate the things that we said we were doing regarding the value and support and driving upgrades really is going to impact that gross margin, getting us from where we are today to a level that is more representative of software company running the business and is in that -- approaching that 70% range as we talked about. And historically what we’ve seen in the Redknee business and that delta would fall straight to EBITDA.

Justin Kew - Cantor Fitzgerald

Okay, understand. And just to clarify, kind of alluding to Rob’s question just on the support revenue, so we did see a 3% lift sequentially. And I just want to understand, is there any -- was there any pricing increases it included in that growth or is the pricing really a kind of the 12 to 24 months prospect as a little further out?

Lucas Skoczkowski

So I think its early days.

Justin Kew - Cantor Fitzgerald

Okay.

Lucas Skoczkowski

We obviously see some -- there are some -- we need increases in contract which will now start over the coming quarters. Also we have some folks which we ramped down up off of the platform as expect in 2014, but overall we feel very much on plan maybe slightly ahead, so we are hitting our objectives with respect to their increases that we look to convert into EBITDA improvement.

Justin Kew - Cantor Fitzgerald

Okay, good. And last question David just on the DSOs and the AR, how does this unwind in Q2 or how does it kind of play out?

David Charron

I think I made similar remarks in previous calls and my expectation and according to our plan it’s going to work through the next couple of quarters. As we get into the second half of ’14 and exit ’14, I expect that we will be generating net cash and therefore DSOs settling down to the level of around the 100 to 110 day range which is lower than the DSOs from the customers we’ve acquired, but I think we can make good progress going forward.

So again AR was up sequentially from last quarter. Again as I mentioned in my remarks timing differences between when we invoice and the collections again you’ve got the December holiday period which frankly is never a great time for collections. But over the next couple of quarters, I expect that to settle down.

Justin Kew - Cantor Fitzgerald

Okay. Thank you very much, David. Thanks, Lucas.

Lucas Skoczkowski

Great. Thank you.

Operator

Your next question comes from the line of Scott Penner from TD Securities. Your line is now open.

Scott Penner - TD Securities

Thanks. Just, David, one question on the back-to-back arrangement with NSN, what is the, I guess, the dollar value really in receivables related to that, how many customers are we talking about, so I would assume that’s one aspect of the working capital that will roll-off completely over the next couple of quarters?

David Charron

Exactly. Absolutely, Scott, and as I mentioned in previous calls, and I didn’t specifically call out my remarks, but the receivables that we have during this back-to-back relationship is approximately 80% of the total. And so, while we are working very, very closely with NSN with weekly calls with their team, we have a great relationship and there is good understanding of how the deal flow work with the temporary arrangement and as we know the contract and as we get that direct end customer contractual relationship we’ll be in a better position I think to negotiate, probably better terms and facilitate collections in a more timely manner.

Scott Penner - TD Securities

Okay. I guess, according to you and your answer to Justin’s question, the DSO really, I mean this is kind of a level of 100 to 110 days, is that right?

David Charron

Yes. It’s going to remain around that level. I think the opportunity, pre-acquisition we are at 75 to 80-day level, I think I don’t expect that to be the case in the steady state Scott. But my target is to get at 100 and sub-100 level. But over the next couple of quarters we’ll get better visibility into it.

Scott Penner - TD Securities

Okay. Next one is just, also David, one of things like, I go asked over on MD&A just the, what to read into and what not read into the change in your earn-out assumptions?

David Charron

Yeah. There is no change in the assumptions there and the fact that we had that P&L impact is really just a basis of two things, Scott, and thanks for bringing that up. That liability on our balance sheet has to be re-measured every quarter, just the kind of rules we need to follow here and there is two elements that factor into that re-measurement.

First is, any changes in FX because that liability is in euros and we report in U.S. dollars, so any movement there got to re-measured. As well as that liability represents the present value of our expected future cash outlays and even if my assumptions remain the same, every quarter you move forward changes the present value. So there is a re-measurement aspect and account impact because of it.

Scott Penner - TD Securities

Okay. That’s helpful. I also wanted to ask if there is a way, I mean, you guys are moving the support value and prices up towards market rates? Is there, do you have a number that sort of represents what the support revenue would be if all of those legacy customers were on market rates right now, I understand that’s a multi-year process but just a curious whether you have a figure.

Lucas Skoczkowski

The theoretical, in order to bring out in line with the rates that we may have charged historically, the theoretical number not what our target is, just for clarity is right now we are about $104 million and we’ll have been about $3 million so three times really today. So that’s a staggering number.

But our objective is as I mentioned before, if you can drive this to $150 million to $175 million over the next 24 to 36 months, which creates very big impact -- positive impact on our EBITDA and would help us achieve a lot of operating leverage.

This is obviously excludes lot of the new customers opportunities that we are also driving. I think we are trying to be remain realistic. As we progress, we continue to be very encouraged by the support we get from our customers on that front as well.

Scott Penner - TD Securities

I appreciate. One last one, Lucas, and that is just the, the integrated product that includes some of the functionality from the Redknee side? Is that -- just remind me is that GA right now and then when you talk about the “deployment” of that throughout the year, is that in reference to that increment product that you are pitching to the new prospects?

Lucas Skoczkowski

Correct. So what we have done is, there are a couple of things. We made GA last quarter, we are continuing to improve the product, we are agile development process, proud to say we have the best R&D in the world in our space today. But what I mean by that is this product every month is getting improved and we actually have every month an update to it which makes customers very excited.

We will be demonstrating it in our test both at Mobile World Congress as well as at our AGM. So we hope for our investors to at least have a peek at it. But we are very excited about the offering which I would say is a very compelling and way ahead of our competitors what they had to offer.

I would say our investment in R&D that we spoke quite a bit at length at the last conference call is proving that even though it’s wide, I think our competitors are -- letting our customers down, that’s the feedback I get from the CEOs. They feel that that lot of the peers in our industry has taken it easy and may be are a year or two behind us, which I think creates a very compelling capability for us over the next window over the next 12 to 24 months.

Scott Penner - TD Securities

Great. I appreciate it. Thank you.

Lucas Skoczkowski

Thank you, Scott.

David Charron

Thanks Scott.

Operator

Your next question comes from the line of Gabriel Leung from Paradigm Capital. Your line is now open.

Gabriel Leung - Paradigm Capital

Thanks a lot. There is a couple of questions on the P&L. I guess David or Lucas, you mentioned that you have about 95% of the way there in terms of the integration of the acquisition. So should we expect the operating expenses to show another step down as we go into the -- whilst we exist the March quarter or is the current level where you think, you are going to be running over the next few quarters?

David Charron

I wouldn’t expect to see, Gabriel, to see a significant drop. I think in previous discussions we have mentioned that the integration activities that are going on are in the operating cost. We haven’t put the results and try to be equip with those to be frank. But I think rather than seeing a drop in our OpEx, we will just be redeploying people on future opportunities that we see. And we wouldn’t expect the significant drop because of that.

Gabriel Leung - Paradigm Capital

And just specifically on the G&A line, I am sorry if I missed in the beginning but just talk about why it seems kind of high $0.2 million relative to where you were last quarter ex that largest stock based comp charge, did you make a comment on that?

David Charron

What I did comment on, Gab, was G&A, if you exclude the amortization and if you exclude stock comp, we had about 9% to 10% of overall revenues.

Gabriel Leung - Paradigm Capital

Okay. That’s great. Then one last question on the cash flow, would you expect specifically on the differed revenue side to see that lift sequentially just I guess sort of depends on the timing of one, some of your maintenance contracts renew but would you expect to see a more meaningful lift in deferred revenues quarter-over-quarter in the March quarter?

David Charron

Yes actually I do. I think you raised a good point which I didn’t have in remarks. I think deferred revenue is not at the steady state level that we had normally would have expected. A large part of that is due to the back to back nature, how we operating through NSN. And the pre-acquisition days, we would at times invoice our customers to say you are an event and that would give rise to higher deferred revenues but also assess with our working capital. And then the back to back arrangements those tend to be not as evident to us. And I am very confident that once we’re operating contractually with our end-customers, we’ll start to see that come to more normalized levels.

Gabriel Leung - Paradigm Capital

And may be going back to the OpEx result, once you get that arrangement directly with the customer, would you then expect some sort of drop in the operating expense side? And that’s from me, thanks.

David Charron

Yeah. Thanks, Gab. I actually don’t see a huge drop in OpEx because of that. I think that we are going to leverage the investment we have in OpEx today and to drive our gross margin upward as we discussed.

Gabriel Leung - Paradigm Capital

That’s great. Thanks.

David Charron

Okay.

Operator

Your next question comes from the line of Eyal Ofir from Clarus Securities. Your line is now open.

Eyal Ofir - Clarus Securities

Thanks. Congratulations on the quarter guys. Just one question for you on the accounts receivables to clarify number of things. I mean, you talked about how you had some payments that came in I guess earlier in the March quarter, is there a specific number you can give us or point us to?

David Charron

Well, I wasn’t indicating that payments came in. I think the point I was trying to make here, Eyal, was that in the December quarter, there is timing differences between when we invoice and when we collect. And given the holiday season in December, we saw collections that were lighter than what we typically would expect. And so that gave rise to the increase in our cash receivable.

Eyal Ofir - Clarus Securities

Okay. Okay. That’s fine. So we expect that to come down I guess in the coming quarter. Another question, so you talked about obviously in ARs, as you continue to convert the clients from NSN directly to Redknee. Obviously, you are going to have more control over that. What stage are you at right now? Can you give us like a percentage indication or percentage of revenue indications, or some sort of metric we can understand?

David Charron

It’s a good question. I don’t have it readily available. I think we’re making good progress on the contract innovation and as Lucas mentioned, as we get through next quarter or two, we should be mostly in good shape to be operating directly with that customers. Well, Lucas?

Lucas Skoczkowski

I think it will kind of a little bit. Our view has been that from March 2013, we will take up to 24 months to transfer the contract. Because of that dynamic, we feel that there is actually-- we believe time works for us, so that negotiation is very important. But also we believe customer want to take the time to appreciate us, which I think they’re doing much faster than I expected. I believe large portion of it will be done in 2014.

There will be spillover into early 2015, once again that’s very much in line with our original plan. And I would say that original plan probably was bit more conservative, so probably ahead of that right now. And we’ll probably work in order to provide an update on that in May of how we make the bulk of the contract transfers happen. Okay?

Eyal Ofir - Clarus Securities

Okay. That’s good. And then just on the larger client side that you have converted most of those guys over?

Lucas Skoczkowski

Yeah, interesting to note, the big large contracts will be announced including the $50 million contract, that was done directly. So that’s actually -- these are customers, top five of our customers, one of the largest in the world, probably top 10. And they decide to do a contract clause with us, which I think validates a thought that we have arrived and that we are on the scene.

So, I think from our perspective, we are getting a lot of very good support from our customer base, both rate but also what it conveys is to potential customers, there is a lot more confidence given that we have a broad range of large customers that they are testing day in and day out and they’re relying on our systems and our services to drive their business. So, I can tell you I’m very happy and way ahead of my expectation that 12-months of this time of the journey, so good start so.

Eyal Ofir - Clarus Securities

Okay. Thanks. And then just my final question before I pass the line. It’s actually a good segue for my next one and obviously, you’ve signed some big contracts here, can you identify some of your product roadmap that’s really getting clients excited or you excited about that’s helping close some of these contracts?

Lucas Skoczkowski

So, I think, our convergence was a factor and also for show, how we are helping our customers not only in mobile but across also cable, video-on-demand, ability to provide a monetization for some of the change that is happening in the broadband on monetizing video are very same to me. The work we’ve done with Facebook, I think is very exciting and we’ll be showing that at MWC and also at our AGM.

And I think from our perspective, the full virtualization, we are way ahead of anybody with respect to the level of virtualization and connectivity we have available for systems over 100 million subscribers. We got scored by probably the three largest group operators that we talked to, marked us the highest on the quality of our engineering. So those combined, I’m very confident that we would be showing up in the ranking in much higher over the coming quarters.

Eyal Ofir - Clarus Securities

Okay. Great. Thanks. I will pass the line.

Lucas Skoczkowski

Thank you.

David Charron

Thank you, Eyal.

Operator

Your next question comes from the line of Todd Coupland from CIBC. Your line is now open.

Todd Coupland - CIBC

Good morning, gentlemen.

Lucas Skoczkowski

Good morning, Todd.

Todd Coupland - CIBC

Two questions for me if I could. Firstly, so the messaging on operating expenses, cash operating expenses, it sounds like you are going to hold those on a cash basis at around $28 million, $29 million, is that what you’re saying?

David Charron

Yeah, I think we see at being relatively constant to levels you’re seeing right now.

Todd Coupland - CIBC

Okay. And then just on a gross margin. Is there any seasonality going into the March quarter so should pace of improvement slow for any seasonal reasons or will your efforts for price increases and upgrades, etcetera continue to improve the mix sequentially as we go through ’14?

David Charron

Yes, Todd, I don’t think we see any reason for there to be seasonality. We do want to get four quarters post-acquisition behind us to actually demonstrate that to the market, but there’s nothing that we’re seeing, I think they will indicate that.

Lucas Skoczkowski

Yeah, and I think Todd, we mentioned that on last conference call as well that we see, I think we drive it a bit differently than maybe the previous owners at least from the acquisition perspective. Even in the last quarter, we didn’t see a steady seasonality. We do expect that the level that we see, revenues achieved in last quarter, we want to see this as maintaining steadily over coming quarters as well.

So we don’t see any silly and big ups and down. When we do we will mention it basically, but our view is that we continue to build on top of the achievement so far. And we’re very encouraged by the traction that we’re getting both of existing and new customers.

Todd Coupland - CIBC

Right, thanks a lot.

Lucas Skoczkowski

Thank you, Todd.

Operator

Your last question is a follow-up question from Robert Young from Canaccord Genuity. Your line is now open.

Robert Young - Canaccord Genuity

Hi, just a follow-up on Coupland’s question. Seasonality, the carriers, last quarter you said that they typically freeze implementations in the December quarter and it’s also short a quarter. Are you seeing -- now in the February are you seeing some catch-up there, surprise a little bit of positive seasonality in Q1?

Lucas Skoczkowski

No, I think from our subject, we’ve been steadily implementing. Some of our customers’ implementations we do in -- we have to do it in parallel. Our customers are really unfroze from the state of vigilance of a debt a wholly period really mid to late January. But our customers will continue to implement both in December and in January some major expansions because of their growth that they seeing subscribers and transaction especially on the data charging, which seemed to be a good problem to have as our customers are growing on that side.

I think also the way we represent revenue 28% completion demand there, I think it continues to avoid the seasonality and probably lower some of the one-time items that will be our accuracy.

David Charron

Yeah, very well said.

Robert Young - Canaccord Genuity

Okay, great, thanks. And one last question is just on the -- you said that you’re moving customers on the latest version of the software. One of the big problems with upgrades in your industry is the migration of data and really, really cranky upgrades. Now I think you’re on agile on this combined version, are customers looking at that as a real opportunity to get away from that problematic upgrade process?

Lucas Skoczkowski

Definitely, that, probably if I have more insight than most of our investors, but I’ll say the following. We just -- over the last nine months we done some amazing upgrades of 20 million, 30 million and over 50 million subscribers to demonstrate our profit ability. Some of our customers have moved or we have to move free to our agile where they’ve taken a new load of software latest app on a monthly basis.

And what we are trying to really drive is to be to allow our customers to be agile and responsive to their marketing needs. And what’s interesting with products, we give them less with higher quality and more value and it’s another super big differentiation in our industry. I’m a big believer that value for the customers equals speed down its quality. And we’re trying the best on speed. And I can tell you that on a ranks and quality we’re probably one of the highest in the world as well. So it’s great, and thank you for very good question.

Robert Young - Canaccord Genuity

Thanks.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Lucas Skoczkowski

Great, thank you for participating on today’s call. We appreciate your question and your ongoing interest and support of Redknee. I look forward to reporting back in few months time on the result of our second quarter fiscal 2014. In the mean time, I hope to see you all at our Annual General Meeting that will be held in Toronto on March 6th, 2014. Thank you and good bye.

Operator

This concludes today’s conference call. You may now disconnect.

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