Redknee Solutions' (RKNEF) CEO Lucas Skoczkowski on Q1 2016 Results - Earnings Call Transcript

| About: Redknee Solutions (RKNEF)

Redknee Solutions, Inc. (OTC:RKNEF) Q1 2016 Earnings Conference Call February 11, 2016 8:30 AM ET


Lucas Skoczkowski - CEO

David Charron - CFO


Eyal Ofir - Dundee Securities

Michael Urlocker - GMP Securities

Robert Young - Canaccord

Paul Treiber - RBC Capital Markets

Steven Li - Raymond James

Todd Coupland - CIBC


Good morning, ladies and gentlemen. Welcome to the Redknee Solutions, Inc. Fiscal 2016 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at this time for you to queue up for a question.

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 would like to remind everyone that this call is being recorded today, Thursday, February 11, 2016.

I will now go ahead and turn the call over to Lucas Skoczkowski, Chief Executive Officer of Redknee Solutions, Inc. Please go ahead, sir.

Lucas Skoczkowski

Great, thank you. Good morning, everyone and welcome to Redknee's first quarter conference call. I'd like to draw your attention to Slide 2 of our presentation, where we have outlined the company's disclaimers and cautions regarding forward-looking statements.

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

Today we will be discussing the results for the first quarter of fiscal 2016, which were issued after the close of markets yesterday. The press release and accompanying financial tables are available in the Investor Section of our website. If you haven't done so already, I encourage you to download the presentation, which 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.

The first quarter saw continued progress on our near-term priorities, highlighted by gross margin expansion, improving cash flows, and growing our order book. We achieved this during a period of typical lumpiness in our software license revenues, was exaggerated by a number of purchasing decisions being delayed, particularly in the Asia-Pacific and EMEA markets. I want to be clear that these are ongoing opportunities that remain active and therefore, which we expect a forthcoming decisions by customers.

We are encouraged by our continued engagement with these operators, and we believe that we are well-positioned to secure these orders over coming several quarters.

It is worth noting, that our results for the quarter is not only the full quarter contribution from Orga Systems, which we acquired during the fourth quarter of last quarter, but also the total cost. Our model around this acquisition was built around the recurring revenue base, and we continue to exit in line with our expectations.

We are making progress, we're engaging with customers on license revenues. So, as mentioned before, this will take time. As we announced in our earnings release yesterday, with the integration of Orga Systems substantially complete, we're moving quickly forward with our planned cost structure optimization after our acquisition strategy. We expect cost savings of $20 million to $25 million annually will further contribute to long-term cash flow and profitability. We will discuss the details and expected impact of the plan later in this call. We continue to expect the acquisition of Orga to be accretive in fiscal 2016.

Turning to the key numbers for the quarter. Total revenue came in at $50.1 million down from $62.6 million for the prior year, primarily due to the impact of asset provision as well as the inherent lumpiness in the software license sales that I mentioned earlier. Importantly, gross margin remained strong at 59%.

It was good that adjusted EBITDA line was relatively healthy at $4.8 million or 10% of revenue in the context of the softness in the top-line. On a trailing 12 month basis, which we view as a more meaningful reflection of the performance of the business given the quarterly inconsistency of license sales, we generated revenue of $210 million with gross margin of 59%, and adjusted EBITDA of $28.3 million of 13% of revenues.

Our focus remains on revenue quality and with each quarter we are progressing further towards software product model, while minimizing low or negative margin items from our top-line.

Recurring revenue for Q1 increased to 52% of total revenues or $25.9 million, is up from 44% for both Q1 last year and Q4 last year. Importantly, we have now finished ramping half of this continued customers from the business acquired from Nokia, and will start to build our recurring revenues moving forward.

Our order backlog at the end of the quarter was $166.8 million increasing quarter-over-quarter. Our cash and equivalents at the end of the quarter was $49 million and available liquidity was $89 million.

As I mentioned at the outset, the quarter was again negatively impacted by foreign exchange rate fluctuations on our financials. Accounting for the fluctuations in foreign exchange rates, on the constant currency basis, adjusted Q1 revenue would have been $54.8 million, of which $28 million were recurring. Our order backlog would have been $173 million.

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

David Charron

Thank you, Lucas, and good morning everyone. With the following discussion of our first quarter fiscal 2016 financial results in context, I encourage you to review the company's financial statements, 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 are presented in U.S. dollars. And for comparative purposes, our previous year's results are also shown under equivalent accounting standards and functional currency.

Now on to our results. Total revenue for the first quarter was $50.1 million compared with $62.6 million in the same quarter last year. The decrease in revenue resulted mainly from the impact of softness in telecom spending including delays in decisions around a number of potential orders particularly in the Asia-Pac and EMEA markets that impacted the quarter as well as the impact of foreign exchange variation.

Those factors were partially offset by the contribution of Orga Systems which was acquired during the fourth quarter of fiscal 2015. And as Lucas mentioned on a constant currency basis, total revenue was $54.8 million.

Recurring revenue, which we define as revenue from support maintenance agreements, term-based product licenses, and long-term service agreements, was $25.9 million or 52% of revenue in the quarter as compared to $27.4 million or 44% of revenue in the same year ago quarter. On a constant currency basis, recurring revenue was $28 million or 51% of total revenue.

Adjusted EBITDA for the first quarter was $4.8 million or 10% of revenue compared with $11 million or 18% of revenue in the same year ago quarter. Again I will note this includes the forecast structure for Orga Systems.

Net loss for the quarter was $4.3 million or $0.04 per share compared with net income of $2 million or $0.02 per share for Q1 of last year. And as presented in the reconciliation of net income and loss to adjusted EBITDA in our news release the Q1 2016 net loss includes $0.8 million of cost resulting directly from the acquisition.

Gross margin for the first quarter was up slightly to 59% of revenue versus 58% in the same quarter of last year, while gross profit declined 19% to $29.7 million in Q1 from $36.6 million one year ago primarily on revenue decline.

Now looking a little more closely at revenues for the quarter, software and services revenue decreased by 33% to $22.7 million or 45% of total revenue from 33.7% or 54% of total revenue in the prior year quarter. This decrease is mainly a result of lower software license revenue as Lucas described at the outset, and the overall softness in the Telco spending market was further compounded by delays in decision making around a number of potential sales as well as the impact of foreign exchange.

Breaking down the software and services revenue into its component parts, the estimated split in Q1 of 2016 was $9.7 million for software, and $13 million for services compared to $20 million for software and $13.8 million for services in Q1 of 2015.

Support and subscription revenue increased to $25 million or 50% of total revenue and $24.6 million or 39% of total revenue for the same period last year.

Sales of third-party hardware and software components decreased to $2.5 million or 5% of total revenue from $4.2 million or about 7% of total revenue for Q1 of last year. And during the quarter, total operating expenses adjusted to exclude acquisition and restructuring cost was $28.4 million or 57% of total revenue compared with $28.9 million or 40% [indiscernible] and the year-over-year decrease is primarily a result of the impact of our continuing cost reduction efforts we done in fiscal 2015, partially offset by the additional headcounts and costs associated with the acquisition of Orga Systems.

Now looking at each of the OpEx lines individually, sales and marketing costs totaled $8.4 million a 12% decrease over the same period last year. And as a percentage of revenue, sales and marketing expenses were 17%, up slightly from the 15% recorded one year ago. The decrease in absolute dollars is the result of lower headcounts in professional fees.

General and administrative costs increased 3% to $7.3 million from $7.1 million for Q1 of last year. And as percentage of revenue, G&A increased to 15% from 11% of revenue. Excluding stock compensation and amortization, G&A decreased 4% to $4.9 million or 10% of revenue from $5 million or 8% of revenue in Q1 of last year. And the decrease is mainly due to the continuing cost reduction efforts in G&A.

R&D expenditures increased to $12.8 million from the $12.3 million for the same period last year and as a percentage of revenue, R&D expenditures increased to 25% from 20%. The increase in R&D cost is primarily the result of the additional headcount associated with the acquisition of Orga, partially offset by our continued cost reduction initiatives over the past 12 months.

Total cash cost related to the acquisition was $0.8 million compared with $0.4 million for Q1 of last year and the increase was due to the legal and professional fees associated with the Orga acquisition.

Now turning to key balance sheet items for the quarter. Cash and equivalents, including restricted cash, at the end of Q1 totaled $49 million down from $61 million at the end of fiscal 2015 primarily due to the following. First, payments against the earn outs of about $6.6 million which we expect to make in Q1, restructuring cost of about $1.7 million, and the share buyback.

And as a reminder on December 7, we commenced the Normal Course Issuer Bid under which we can repurchase up to just under 9.4 million of our common shares over 12-month period. As at December 31, 2015, we had purchased and canceled just under 518,000 shares investing 1.1 million Canadian cash. And as we stated in our results press release last night, as of February 10, we have purchased approximately 1.2 million shares for total of 3.5 million Canadian.

During Q1, cash from operating activities, excluding the cash used for restructuring was just shy of breakeven at a use of $0.1 million. And while this is below our plan year-to-date I'm confident that we will see increased cash flow from operations in the coming quarters sufficient to meet the needs of the remaining earn out payments and the cash required for restructuring.

And let me take a moment to summarize what these cash requirements will be for the remainder of fiscal 2016. First final earn out payments of approximately $4 million and restructuring cash requirements for both the previous and the newly announced restructuring initiatives of $14 million in fiscal 2016.

On a trailing 12-month basis, we have generated cash from operations excluding the cash used in restructuring of $15.1 million.

Moving on to additional balance sheet items, accounts receivable at the end of Q1 was $65.2 million, down 3% from $67.4 million at the end of fiscal 2015. However, on declining revenues our days sales outstanding increased to 99 days from the 96 days we reported last quarter, but still remains at the low-end of our target range between 100 and 110 days.

Unbilled revenue was $40.2 million, up $1.6 million or 4% from the $38.6 million at the end of fiscal 2015. Our plan is to significantly reduce unbilled revenues throughout fiscal year '16 and subsequently reach levels of prior quarters as project milestones are achieved and invoicing occurs.

Deferred revenue was $13.1 million, down $1.1 million from the $14.2 million last quarter, and again, I'm confident that we'll see a steady increase in deferred revenue throughout fiscal year '16 as support renewals we receive are invoiced and paid.

Overall, working capital was $85.1 million, down 4% from the $88.3 million at the end of fiscal 2015. Our order backlog at the end of Q1 grew 5% to $166.8 million from the $158.5 million at the end of fiscal 2015. And, as mentioned earlier, on a constant currency basis order backlog was $173 million. Of the $166.8 million order backlog we expect approximately 60% to be converted to revenue in the next 12 months, remainder converted in future periods.

This concludes my financial review and I'd like to now turn the call back over to Lucas for his operational update.

Lucas Skoczkowski

Thank you, David. I'd like to come back to context of our core businesses that is focused on business support system for communication service providers. As discussed with you last year, we continue to see a pull back and delay in spending by the carriers who we have been engaged with. Our near-term focus is maximizing our profitability and cash flow generation while growing our current revenues and refocusing our R&D on areas where we serve the communication service providers and our IOT customers will need to invest in years ahead.

Clearly, economy contributed to the success in those first two objectives is optimizing our overall contracting by driving efficiencies and cost synergies from our acquisition. As I mentioned at the start of the call, in our six months post-closing of the Orga acquisition we've initiated our planned restructuring program.

We expect to close certain offices as we focus some of these activities in certain regions resulting in a headcount reduction of between 200 and 300 full-time equivalent globally. We expect this restructuring will cost between $25 million to $30 million and result in a annual savings of between $20 million to $25 million. We look to execute this plan on a timely basis and this plan will be subject to the necessary consultation processes where required by local laws. We are confident that we have executed as we have done this in the past while continuing to improve value and support to our customers.

In tandem with this new cost initiatives, we remain laser focused moving forward on our short-term to medium-term priorities, extending our software business model margin, disciplined cost management to maintain profitability, and cash flow generation.

On the software business model, as discussed earlier, on a trailing 12-month basis, our gross margin is a healthy 69% but there is still meaningful upside as we look to continue to drive gross margin improvement while growing our current revenues.

On profitability, in addition to the new initiatives I just mentioned, we continue to relentlessly pursue cost efficiencies across our business through our ongoing cost management program.

On the trailing 12-month basis we have generated $50.1 million excluding restructuring of cash from operations. We look to continue to improve hereby focusing our working capital optimization and disciplined collection.

In terms of long-term growth strategy, we continue to be encouraged by our progress across the three focus areas. One, continued evolution of our business critical software product offering, number two, manage the growth and the leadership in our served traditional market, and, number three, an increasing proportion of the stable recurring revenue.

On a product offering front, during Q1, we continue to secure contracts for our core telecom business with a particular successful quarter in terms of bookings. As operators continue to recognize the value of our products in delivering enhanced customer experience, driving revenue, and increasing profitability. Notably, during the quarter we improved our standing in Gartner's 2015 Magic Quadrant for integrated revenue and cash flow management for communication service providers. We remain to keep challenging our markets and both customers and partners have engaged us in discussion and evaluation to support their business transformation initiatives.

During the quarter, we also launched the latest version of the Intelligent Network for GSM-Railway for Redknee Connected Suite to Prorail, a leading Dutch rail operator. This upgrade is demonstrative of how we are supporting our partner Nokia, as well as how we are pertaining to expand the connected digital economy and drive innovation across multiple verticals, transportation, utilities, smart cities telecommunication and Internet-of-Things.

In addition, as discussed on our last call, the Orga acquisition expands our product portfolio in both telecom and non-telecom markets. We remain steadfast in our commitment to invest in our portfolio to advance our position as the provider of choice for monetization and subscriber management for service provider worldwide.

We expect to extend our market share and leadership with our most recent acquisition we are currently installed in approximately 250 global service providers supporting well over 2 billion subscribers. All customers continue to rely on our software and our support for their revenue. We continue to execute in line with our customer for life strategy.

[Indiscernible] booking revenues, as a reminder, our recurring revenues are primarily composed of our support services and SAAS or term licenses. As discussed earlier, this number has increased to 52% of total revenue in Q1, up meaningfully on both year-over-year and sequential basis. As previously mentioned, following a nearly a three-year process we have completed the ramp down of discontinued customers acquired from Nokia BSS transaction. Moving forward we expect to see further improvement in our recurring revenue while continuing to deliver stability with a medium term goal for annual adjusted EBITDA margins of 20% to 25%.

To conclude, the first quarter of fiscal 2016 still continue to make steady incremental progress on each of our priorities. Alongside the integration of our most recent acquisition, we continue to strengthen our offering for both telecom and Internet-of-Things market. All of these positions Redknee to drive long-term sustainable value creation for our shareholders while creating continued value for our customers and partners.

On behalf of the entire management team, I would like to once again express thank you to our shareholders as well as our partners, and customers for your continued support, as well as to each and every one for our employees for their tireless efforts.

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

Question-and-Answer Session


[Operator Instructions] Your first question this morning comes from the line of Eyal Ofir. Your line is open.

Eyal Ofir

Thanks for taking my question guys. Just looking at the weakness here in the market as you guys described on the call, how long do you think it will take for a recovery to happen in the base business? And then also can you just talk about the restructuring with Orga, how long that will take? Thanks.

Lucas Skoczkowski

Thanks Eyal, it’s a good question. I think we see over the next several quarters to be in similar range where we are right now. But we do see the orders potentially strengthening as we move through the year which should then translate into improving the revenue towards the end of calendar year this year. And this is based on our view and our discussion with customers where we are trying to through the inflation of our software that we are bidding for, we are trying to solve real problems or real objectives of our customers which will give them meaningful return and they need to do that over next year or so, which means to us like some of the synergy to be made for them to achieve those objectives.

With respect to restructuring, which is Orga and our core business because we operate it on the combined basis, we have started the process, we expect that most of the consultations will take between now and probably early summer, maybe in the spring, and we expect that all those activities should be finished probably towards the end of this calendar year with respect to [indiscernible] before separated from the company but we do expect to start seeing probably savings sooner. Maybe David can comment on it.

David Charron

Yes. On that note, our expectation here is that the savings we talk about will start to materialize gradually and we'll see the full impact either in Q4 of this fiscal year or fully baked in Q1 of next fiscal year.

Eyal Ofir

Okay, and then before I pass the line just a question on backlog how much of that do you expect to recognize this year? And then from the pipeline perspective like you said you haven't any lost anything, got pushed out, but what we are seeing in the pipeline? I know you are still seeing some of these larger [indiscernible] opportunities you have spoken in the past? Thanks [indiscernible].

David Charron

So on backlog we said 60% would be over the next 12 months, I can't take it down any further than that, but in terms of the pipeline maybe I'll let Lucas comment.

Lucas Skoczkowski

Yes. So I think for the pipeline we continue to see I think a good distribution of opportunities both the larger ones and there we see those are strategic but also some medium size being $5 million to $10 million which I think some of the decisions we'll see probably happen faster because we are -- we continue to be in the discussion at either at a late stage or at a stage we will do contracts or negotiation.

Now that being said, as a reminder, our customers do not work on quarterly basis. They see a quarter or two in negotiations being reasonable given that they want to have systems with a life time of five to 10 years, so just put it in context. So I think we want our customers to do the right deals and make them successful in the process. But if I look at the pipeline year-over-year I am probably more so encouraged than I was in December. We're expecting to seeing some of those things mentioned discussed probably [indiscernible] the strongest operate to [indiscernible].


Your next question comes from the line of Michael Urlocker from GMP Securities. Your line is open.

Michael Urlocker

Good morning. Thanks for taking my question. Lucas, as outsiders, when we look at the revenues that was achieved here, down 20% year-over-year despite an acquisition. You know the kind of props a natural question as to whether Orga generated any revenue at all. I suspect it is not 0 but can you shed some light on what is going on there?

Lucas Skoczkowski

I think obviously -- thank you, Michael. So a couple of things. I would point to you as opposed to looking at over a number obviously look at the split between software services and recruitment revenue. So recurring revenue has grown both from a support perspective so we assume that Orga's positions being still intact and that it is against the perspective between revenue basis.

As I mentioned I think over on last several calls that we expect the license and service pick up to be slower given where we picked up that organization, where the customers were in the process. I think from our perspective was where we saw overall the business is, one, is obviously we continue to see the last three years the impact of FX that is compounding, we have seen obviously customers making slow decisions on licenses which is, as I think I explained in December, not fairly unusual given that they want to delay investment, given that allow them earn their profit in currencies other than US dollars and allow our license revenue is either in Euros or US dollars and to offset that those currency have trans-engaged the lack of clarity on the world. So they have -- they need to make a judgment of well they will pursue this purchasing decisions.

Now I think the customers continuing to expand and relying more on our software that gives the encouragement that we will see some of those pull in into our business throughout the year by my ability to call it on with precision of quarters is probably not easy as I would like or maybe I think most of our shareholders would like.

Michael Urlocker

Sure, okay, thank you. I understand that. I think some investors would calculate the cash from operations during the last 12 months on a different basis than Redknee does because restructuring is a regular part of the business it seems. So by that measure, cash from operations in the past 12 months I think is around $1.8 million and if we look at the longer history here going back to, I think it's not since mid-2012 that Redknee's had any consistent cash generation. So in that kind of a context what do you think is the real issue that is causing an absence of cash generation in this business or this industry?

Lucas Skoczkowski

Well, I think number one -- I think you highlight some point but also I would point out there -- May 2012, we transformed by the business by contemplating it and also we had drastically increased adjusted EBITDA. I mean we -- particular business which was quite damaged I think most of the investor community analyst felt that we probably didn't done too much. But at the same time or similar, I would argue today we're in a strong position we've ever been. We've done right now since 2000 -- beginning of 2013, we've done two major acquisitions and at least one tuck-in acquisition.

The two major acquisitions required to work and took in cash and the customer contact we have received were favorable especially from Nokia, were favorable towards customers using our balance sheet for their purposes. I think that's been gradually rectified and we continue to rectify it. And I think even if you look at Orga there is improvement there. But David do you want to comment?

David Charron

Yes, I think, what I would add -- what I would also add here Michael is that the leisure's that we're taking and have taken to improve cash flow from operations don't happen overnight. There is activities that have happened over the last 12 and 24 months that we're going to start to see improvements in. We have a very detailed plan looking and we've already made some changes to the items that will improve cash flow from operations going forward in the future. And that's why in my comments I was quite confident that over the next several quarters we're going to see that improvement.

Lucas Skoczkowski

And last but not least, don't reiterate the company and the management team are paid on EBITDA targets and on cash at the end of our fiscal year. I think that's important we are less driven by just driving our top-line which obviously we've been lot on discussing; our view has been really we need to make sure that we generate cash profits in the business. So I think we're aligned both internally but also with the long - medium to long-term requirements of our shareholder -- expectation of our shareholders.

So I think as we go through that, we continue to make sure that we're not leveraging our balance sheet for the purpose of our customers and we expect that if customers cannot support us, they're probably not in our private customer base.

Michael Urlocker

Thank you. I appreciate it. And I do know that there is an alignment and thinking and financial rewards. So if we kind of hone in on the issue of the company needs to generate cash profits, Lucas, in your view what needs to be done to achieve that?

Lucas Skoczkowski

I mean number one we continue to make sure that our cost base has the flexibility and is in line with the prices and the expectation of what customers have. Our customers -- all of our customers, the big majority of our customers are lowering their cost base and expect us to do the same.

Number two, we have to make sure that we have that third contract with our customers where the pricing is affecting the value we deliver. And I think we've done a very good job and making capturing management software, and we continue on that aspect to capture the value that our software and our services deliver. And if somebody wants to do any last minute things on uncommercial terms, we will pass on the business and look to continue to grow in other areas where we can capture the value.

But I think we have to start from basics and making sure that we are driving and achieving where our key milestone in my mind is however next 18, 24 months get over $50 million U.S. in annual EBITDA. That's now that what I see as a primary target, less so the supply.


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

Robert Young

Last quarter you had said that you're expecting lower flat growth in 2016 and you just said that you expect next ever quarters to be roughly in the same range as the quarter you just reported. And is that a market outlook or is that a specific Redknee outlook and should we be thinking of I guess $50 million per quarter run rate for the remainder of 2016, because that would imply a 10% decline, may be if you could wrap all that up and push me in the right direction on that that would be very helpful?

Lucas Skoczkowski

I'm glad to no pushing, Rob. But let me try to answer it. A couple of things. I think, we see over the next couple of quarters probably being a similar range. We look at EBITDA and if there is any upside, we will bring them out, as being roughly slightest expansion. But to me the view over next couple of quarters is in what we've seen in first quarter.

Number two, I think we do take into consideration the FX impact, we continue to see probably about 10% impact from FX, which would compress our top-line. So why should we continue to not miss that as recurring fees continue to move I think, again affected especially by the divergence driven by the [indiscernible].

Number three, I think, from our perspective; we continue to expect to see growth for annual fiscal 2016 in our order backlog, which means to me that we continue to grow the business and take market share in our space.

With respect to our outlook or industry outlook, I think I need to be cautious. But I -- if I look at our peers and our competitors, I haven't seen someone who prospects much more than we do with respect to rapidly growing. I think some companies have advantages at a large -- have a large contract in U.S. They're probably seeing less compression, probably see as a result, better result.

So I think globally it's a no growth industry especially because our customers are going to finish a figure that they adjusted as new realty that they're operating in, in a fairly mature market. I do see pockets of growth and opportunities that we look to continue to capture. And also, I do expect that some of the efforts that we do, broader efforts beyond our core telecom business, will start adding up, with respect to orders that would translate into revenue.

But I remain, I think, as I stated and I think I got comments that I was quite contributed for may be negative. My view is remain conservative, make sure we drive profit, remains make sure that we growing our bottom-line. We generate cash to meet our restructure obligations. And I do see restructuring as being a normal course of business. But as we do acquisitions we need to make sure that we drive synergies from that.

So hopefully that gives you enough color, Robert.

Robert Young

Yes, that's great. Just one, may be one clarification. The medium sort of $5 million to $10 million opportunities and some of the bigger ones that you talked about in the past, those would be upside to the scenario that you just described. Is that the correct way to think of it?

Lucas Skoczkowski

If I look at the second half, there probably we see them building in. But if I look at -- if we're able to close it at our next quarter, this might be an upside. But I'm right now, cannot call it or cannot close it next quarter. That's why I'm probably bit more, out, call them out, if they're upside, how is that, as we go through the process.

Robert Young

That's great. And may be an update on your churn. Have you seen any churn? The last cutter is expected to roll off on the Nokia acquired basin. To my knowledge I don't know there is no churn identified related to Orga. So could you update that? And then I've one last question.

Lucas Skoczkowski

Okay, thank you, Robert. So I think, number one no customers identify us of termination. We're engaged with all of them. The last customer from NSN just said a new customer did roll off at the end of last quarter. That's why, I think, we mentioned that, but we do feel that some of that trending will less, I think harass our communication with our view with overview with that creating some transparency on how or managing how we can grow the business.

And overall, if I look at spoke to classic customers, last quarter, beginning of this quarter, we continue to engage, I think customers want once are discussing to see how they can leverage us more or they do want to a quit their assets which means really leveraging us for more than one opportunity in their business. And I think well because of the larger the effort of last few years, I think we will benefit in this process by getting some additional business. That's probably as of result of them shifting those dollars from smaller suppliers towards us.

Robert Young

All right. And may be just a quick summary of the competitive dynamics, you've already talked a little bit about this on the call. But just given the inevitable concern given the top-line weakness, you've got some larger cost competitors; the smaller number out there some consolidation. May be if you can just summarize what's going on as you see inside of these corporate actions and whether they're coming at you a little more aggressively now that Redknee is as you said climbed up a little bit in the Gartner? And likely your brand is better now. Just talk about that competitive dynamic. And I'll pass line.

Lucas Skoczkowski

Yes. So I think competitive we continue to -- I think priced above our weight class. But I think I would say that if I look at the large companies, we continue to face [indiscernible] probably into a smaller extent, some of the market representatives small extent from the likes of MDOGS. I think from our perspective we continue to have the platform and credibility to market to be able to have access to the opportunities.

And from a technology perspective, what I'm encouraged by is customers are looking for us to actually spend our scope and expect that over next probably several quarters you would see us probably do more of the multiplayer operators who want us -- who want our system to be deployed across mobile, but also there I see be on demand security business and so on are all in one converted business. So I think I'm very encouraged by the division that we've been driving and the investor we were driving we're seeing translating into customers they're willing us to do a lot more with respect to our platform.

Robert Young

Okay. And just any competitive -- you haven't seen any higher competitive focus on Redknee from the larger vendors?

Lucas Skoczkowski

I haven't necessarily increased, I mean both the vendors I mentioned. I think continue to be very -- I think on one side it's disciplined on the other side it's quite aggressive. So I think we have what it takes to compete against MDOGS. And I think from problem perceptive, we have enough differentiation scale in our markets to compete against MDOGS on the real-time side Amdocs.


Our next question today comes from the line of Paul Treiber from RBC Capital Markets. Your line is open.

Paul Treiber

David, you mentioned some of the cash outflows that you expect over the coming year. Just in regards to the $25 million to $30 million in restructuring cost at Orga, what's the expected timeframe for the cash payouts?

David Charron

So as I said, there is probably of the existing and the newly announcement about $14 million within the fiscal year and the remainder will be throughout 2017 and later, right. So in the -- even in the previously announced restructuring we had negotiated some of the payouts to be over the course of five years. And so we're actively managing our cash outflows in that regard.

Paul Treiber

Okay. Thank you. That's helpful. And then just Lucas, when you did the business case for the Orga acquisition, did you anticipate this level of restructuring?

Lucas Skoczkowski


Paul Treiber

Okay. And then the 200 to 300 headcount reductions that you announced does that solely relate to Orga or some at the legacy or traditional Redknee business?

Lucas Skoczkowski

See it actually is very much on a combined basis. We actually have been fortunate to get some skill set and resources from Orga in the geographies that we want to leverage. So it actually helps us. And I think what it does, on a combined basis we got combined opportunity to effectively on the rolls and positions we got there. So I think that's kind of a -- the whole big process has been really the synergies from a combined asset, right.

And really what I want you think about is, we got the technology platform which is I think investment has done really well. We also have the people platform and that has been from a geography present and skill set would match the displays and -- given the Orga transaction and integration process. And to us we see some -- this probably obviously is people, I want to make sure that we're clear on that. We feel it's the right thing for the business, because it gives us the flexibility and gives us ability and agility to be able to respond to customers deal better on one side and the other side really drive more cash flow which we could then that is an area of growth.

Paul Treiber

Okay. Thank you. In regards to the expanded credit facility that you closed on the summer are there any relevant covenants that we should pay attention to going forward here?

David Charron

It’s just a standard covenant, Paul. Typically debt-to-EBITDA and fixed coverage those are standard and likely many of the credit facilities. We had sufficient room in our covenants to operate the business. So I’m not concerned whatsoever about tripping any of those covenants.

Paul Treiber

Would you mean willing to share any of those levels?

David Charron

I'm not able to share the actual covenant levels but we will be consistent in providing an update in our financial results as to the progress there. But I will tell you now based on the visibility we have for the next 12 to 24 months, I don't see any risk at all tripping those covenants.

Paul Treiber

Okay. Thank you. And then just one clarification I don't know if I caught it but what was your contribution to revenue from Orga in the quarter, thank you and after that I will pass the line.

David Charron

We didn't disclose that specifically in the quarter just on a combined basis. But as Lucas mentioned in his remarks, the Orga business is going to plan.


Your next question today comes from the line of Steven Li from Raymond James. Your line is open.

Steven Li

Thank you. Lucas your comment on the next couple of quarters being similar range to Q1 from a revenue perspective, does this also apply to your EBITDA margins or can you still see high-teens EBITDA margins with the restructuring, thanks.

Lucas Skoczkowski

I think we expect in our visibility to continue to increase the EBITDA margin per share as we advent a cost restructuring. So I think that perspective we continue to see ability for us to execute. And I think, as we specifically also -- as we continue to adjust the mix to make sure that in our revenue to make sure we drive the higher margin asset business. So on EBITDA level which obviously we are very much focused on, we continue to see improvements throughout -- gradual improvements as revenues picks up probably more improvements in our bottom line. Does that answer your question?


And our final question today comes from the line of Todd Coupland from CIBC. Your line is open.

Todd Coupland

So if I think about the restructuring and I just run rate to current EBITDA now it puts you at $40 million to $45 million of EBITDA with essentially no change in revenue. Is that the way you’re thinking about it and then any improvement in the top-line will get you to that $50 million level?

David Charron

Yes I can’t necessarily reconcile the number, Todd. But I think that we’re seeing the improvement in our margins based on the restructuring when it’s fully baked in to be incremental to a current rate. That's the entire intent of the plan, okay.

Todd Coupland

Okay. Now that's helpful. And then when I think about the market conditions, the delays that you're seeing, does it relate to a number of the 4G upgrades already happening. So the program that carriers are thinking about now are nice to have that are not absolutes and that's causing the slowness in closing deals?

Lucas Skoczkowski

So I think carriers have few pressures in the business at least once the carriers that we've been discussing with. One is they obviously seek the priorities being one is paying whatever consultancy they have in U.S. dollars or Euros, and obviously a lot of them have been compressed on the profits because of the lot of currencies. So they -- but they continue to spend in under hardware infrastructure.

We I think the intent the clarity needs based on their growth and based on change in marketing comparativeness in their markets that they need to invest and transform some of their legacy IT systems which for many of the new customers we engage with they have continued to delay to a point where I think is affecting our ability to operate the business.

That being said, they continue to put a lot of pressure on the legacy systems while they try to transform their businesses and those process will take one or two years if they start now, a lot of the new systems with training will take now at least one to two years to transform.

We have very good discussions -- we’ve been shortlisted in both big and medium-sized deals. We are in fairly prolonged negotiations in some of those deals. So we see sufficient activity that we're very encouraged by couple of things. One is we get very high marks on customers doing us references, by our performance in the business. Number two, when you operated or learning about us or we've been in discussions with see they mark us highly for technology, for innovation and flexibility of the platform and we do get high marks for being present in the region to be able to support them.

I do expect that some of the deals will happen. But I was in recent discussion with one customer we had LOI as an example. The CEO told me this is very important to them. They're committed to us. They see it as opportunity for us to control their business. But they're not -- they don't see affiliate pressure because this quarter they might close, next quarter in terms of contract and have a delivery. So in that context my view I remain conservative to make sure we continue to grow EBITDA while we continue to capture these IPOs. Also that gives better cost results.

Todd Coupland

No, that's helpful Lucas. Actually if I could just circle back to the restructuring, I did want to follow-up on one point. So if I think about the Nokia deal, you didn’t restructure right away but then when you did that EBITDA improvement that you generated I think really the following quarter and then that continued for a few quarters until the FX headwinds pulled the business in. That was very much in your control. Should we be thinking about this in the same way, I mean seems to me this is also in your control, if you don't see further revenue deterioration from the current level?

Lucas Skoczkowski

Correct. So I mean, I think you hitting a nail on the head, in terms of we will do whatever is right to make sure our business improves and what's in our control. We cannot control customer decisions but we feel we are well-positioned but we can definitely control our cost, well, I think also positioning ourself as an organization to be relevant for years ahead.

So I think we could be transparent and continue to make sure that we execute to make -- our -- I think our customer successful and obviously that should create low shareholder value.


And we have no further questions in queue at this time.

Lucas Skoczkowski

Great, thank you operator. I want to thank you for participating on today’s call. We appreciate your questions as well, the ongoing interest and support of Redknee. I look forward to reporting back on our results of our second quarter fiscal 2016 in May and I also look forward to continue to update you on our progress through press releases throughout the quarter. Thank you.


This concludes today's conference. You may now disconnect.

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