Optiva's (RKNEF) CEO Danielle Royston on Q4 2019 Results - Earnings Call Transcript

Optiva, Inc. (OTCPK:RKNEF) Q4 2019 Earnings Conference Call March 10, 2020 8:30 AM ET

Company Participants

Ali Mahdavi - IR

Danielle Royston - CEO

Anin Basu - Interim CFO

Conference Call Participants

Todd Coupland - CIBC

Robert Young - Canaccord Genuity

Steven Li - Raymond James

Operator

Good morning everyone. Welcome to the Optiva, Inc. Full-Year 2019 Financial Results Conference Call. I would like to remind everyone that today's conference is being recorded.

I will now go ahead and turn the call over to Ali Mahdavi, Investor Relations. Please go ahead, sir.

Ali Mahdavi

Thank you, Operator. Good morning everyone and thanks for joining us for the Optiva financial results conference call for the three-months period ended December 31, 2019. Joining me this morning are Optiva's Chief Executive Officer, Danielle Royston; and Interim Chief Financial Officer, Anin Basu.

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

Following the commentary, we will conduct a question-and-answer session with analysts only. Instructions will be provided at that time for you to join the queue for questions.

Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Optiva, Inc. and all of its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially.

Any information regarding forward-looking statements are made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and Risk Factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call and management does not anticipate providing guidance in future quarterly or interim communications with investors.

Additionally, you may be aware that company is currently subject to a proxy contest that could see two of seven board members replaced at our Annual and Special Meeting to be held on May 12 of this year. While the proxy contest is pending, the company is constrained in its ability to undertake financing transactions, including transactions that require TSX approval. While the contest is pending, the company may be delayed in executing on previously announced plans that require additional external funding through the issuance of subordinated voting shares.

I will now turn the call over to Anin for his financial review of the quarter. Anin?

Anin Basu

Thank you, Ali. Good morning everyone.

A reminder that Optiva's results for the quarter and for three-months period ended December 31, 2019, resulting from the change to a calendar year-end were released yesterday. Our results are presented in accordance with the International Financial Reporting Standard and presented in U.S. dollars unless otherwise noted. The comparison of our quarter ended December 2019 is against the quarter ended December 2018.

I wanted to discuss the following three items regarding the December 2019 quarter on our call today. One, declining revenue trend and the gross margin; two, the loss for the quarter; and three, an update on our related body transaction.

The company’s revenue during the quarter was lower by 26% to $20.5 million and continues to show the declining trend we have talked about in previous calls. The port and subscription revenues were lower than compared to the same period in 2018 mainly due to the discontinuation of support to customers who have previously notified as other expense. And the company gross margin for the quarter was 72% as compared to 69% during the same period a year-ago. That higher gross margin was mainly due to a one-off on-premise software license delivered in the quarter.

While operating expenses in the quarter decreased by 20% to $13.8 million when compared to the same period last year, overall we had a loss of $16.9 million. This loss was mainly due to two reasons, a charge of $7.4 million recorded within the finance costs for the quarterly revaluation of a Series A warrant and an incremental $5.1 million charge for income taxes related to certain foreign subsidiaries that are in the process of being reorganized. While our total costs including research and development have reduced as compared to the same quarter in fiscal 2018, we remain focused on specific projects that improve customer success and cloud innovation, where we rely on the services of two of our critical vendors which brings me to the discussion on our related body transaction.

During the quarter, the company incurred $5.7 million of costs towards R&D on cloud innovation with DevFactory, which is an affiliate of ESW, Optiva's largest shareholder. During the quarter, the company also incurred $3.8 million in costs associated with its active to skilled workforce to Crossover another affiliate of ESW.

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

Danielle Royston

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

Over the past few years, Optiva has been on a mission to aggressively turnaround the business and change its strategy to become a cloud company. With brands and having the rest of the company from secured lenders, reducing our annualized operating expenses by $94 million. We've gone from a loss from operations of $53 million in fiscal 2016 to income from operations of $11.6 million for the 12-months ended December 31, 2019.

And we announced the plan to focus solely on the Telco industry and pivot from on-premise enterprise software to public cloud SaaS offer. And a $100 million investment to revamp and revitalize the company's BSS products to become cloud native.

We truly believe that over the next 10 years, everyone in the telco industry will be selecting or be using public cloud-based BSS and hedging system. Cloud concept and our presence in every RFP and we see competitors selling strategic partnership with a major public cloud vendor which is further validation that we are heading in the right direction.

The flip side of that and the primary reason for a pivot to the cloud is that we also believe all the legacy on-prem baremetal revenues at Optiva will eventually shrink to zero. Unfortunately, we don't know exactly when each customer will leave and cannot predict when the cloud growth will kick in and think that we have made the difficult transition to our flexible cost structure, while we alluded to the revenue decline associated with this transition period with departing customers and even with the Cloud.

Recently, we were excited to announce a successful deployment pilot with the renewed largest Telco Vodafone Idea Limited to deploy Optiva's charging engine on a universal private cloud. This is not any ordinary pilot. The pilot is key into four million subscribers, inserting 1,000 transactions per second on zero time day charging transaction. It is a great example of that our technology work that we were delivering and our customers are receiving the benefit.

We continue this progress with other customers as well. Truphone, our fully public cloud deployment running on Google Cloud Platform, and Google Cloud Spanner went live as well and we expect yet another customer deployment to the public cloud to go live in the coming month.

Having the biggest telco of the year, Mobile World Congress held annually in Barcelona is cancelled due to the fear of the coronavirus. Many vendors and operators orient their sales and marketing talent around this event and then having approved safety of all our communities is a paramount importance to a notable marketing opportunity loss for us this year.

We finished another cycle for our customer success program, having the period through June to December and we're turning to finish just over 50% of the revenue reporting to us that API our objectives and goals are aligned with the ultimate success and year key component of our growth. This continues to improve, in a positive sense, provides us with great confidence that we are on the right track. As mentioned on previous calls, we will take time to get to our ultimate goal of 100% and I remain encouraged by our forward momentum as we continue to put each customer on our quest to achieve 100% customer success.

So our migration to the public cloud strategy with major Telco this year-end results in gaining momentum, and that it will take time that if the early adoption of this transition to the cloud we have to benefit the most.

And finally, to address the elephant in the room, we suggested everyone is wondering about what is going on with the proxy site and what will happen. For now, my response is, I am operating on all of these assumptions and hope that this will all be resolved, and I continue to focus the operations of the business on bringing the cloud.

At this point, we're ready to open the call for a Q&A. Claire?

Question-and-Answer Session

Operator

Thank you very much, ma'am. [Operator Instructions].

Our first question today will come from Todd Coupland from CIBC. Please go ahead. Your line is open.

Todd Coupland

Hi, good morning, everyone. I have a couple of questions if I could. With the results in the quarter seem to be roughly in line with your sort of lower downside revenue scenario. Just wondering if you could update with your thoughts on that, that downside case for the company over the next couple of years?

Danielle Royston

Well, Hi, Todd it is Danielle. So we had this number out there for a while with sort of growth rates driving down on sort of long-term revenue got, and the reason why we put the number out it's not so much of guidance and more expectation setting around, how low this revenue could go before it flattens out and that if can grow.

And so, my most recent FDA, is, I think in the analyst presentation that we put out in January. Previously we spoken about $75 million, but we do see continued downward pressure, especially as we start to consider things like exiting non-core asset especially as you start to consider the transition into more of a SaaS model where we feel that a confection of services revenue will eventually be eliminated, right, and it won't go completely to zero but it will be a lot different as we start to really enforce more of a product outlook and raise to enforce more of a new customization sort of perspective. And so we put that out in January, is kind of a different way to start to think about transitioning into SaaS. Professional services will go away, with the renewal of non-core assets to really focus the business on the cloud business. And so I think we have it in the 30s -- mid 30s.

Todd Coupland

My second question had to do with the pilot. So I think Vodafone India started fairly recently. So judging by your comments it's up and running, processing, or supporting 4 million subs and 4,000 transactions a second. What are their learning would you say would be useful for us to understand that that, I guess mid-transition pilot giving us not full public cloud? So any further comments on that would be appreciated?

Danielle Royston

Yes, I mean I think they are really big telcos and has a natural nervousness around the public cloud. It's a really good transition for them, right. I can't stress enough, I don't think people will be able to realize, it's not -- it's not akin to changing like iPhone versions, or even Blackberry to iPhone. It's really like there is some iPhone to iPhone kind of transition from a technology perspective, right? Today they run it on-premise themselves. They have region and thousands of people supporting their IT operations.

And you sit there and say, "Hey, we are going to hand it over to Optiva." You think it's going to run and has a managed service and we're super cool with that, it's very scary for them. So I think the bigger they are, the more likely they're going to take a journey through private cloud. The private cloud is, as you said, it is not public cloud, it is more of on-premise, right, and so the pilot is a) successful it's running now and they want to run it on -- they want to run it for 60, 90 days and kind of have all the other wonderful experiences that you have with running a system like this, like capacity increases and decreases, outages, rolling out plans, rolling out a feature and kind of experiencing the new technology and the new way of working. At the end of the day it's still on-premise software.

It's going to be more expensive than even what we're running today. There was -- and it is not really sort of what I call hard savings. Like we still have to buy all the machines, they still have to have a lot of people; they're still paying to other data centers. They might have, what I'll call, soft ratings, which is, for example that used to take months to do and plan for an upgrade. Now it takes a minute, an hour and you're starting to see the operational feedback and so it's software kind of market. And so I guess there's little cost in that, but it's not necessarily bottom line hitting.

So they still do these project for us, I can't stress that enough. This customer was more than 30 versions behind our main related version of the product. We've had to go through that and they're such a massive customer. India is 700 million subscribers at least our portion of it running six different global sites around the country with the mirror of disaster recoveries of 12. So for us, it's like 12 different upgrades. And they're not -- everyone actually think that they're exactly the same; they're not exactly the same. So it is two separate upgrades that we had to do.

And we did that first to mitigate the risk to such a significant shift in technology to the private cloud. I think that we did the private cloud pilot as we funded that, they did not pay us for that for that pilot. It was a risk that we both took on that, obviously up to the task to succeed, given the history of the company, given the size of the company, but I'm super grateful that literally the entire team pulled together management, engineering, finance, everyone, working model, working project, the team on the ground to make it successful. And I think we shocked the road and we're really excited about it.

Todd Coupland

Great. That's great color. One last question if I could, just on the announced desire for capital raise should our assumption be that gets put on hold until you sort out the proxy issues?

Danielle Royston

Unfortunately, yes, I think that's a good assumption and you're just a little bit concerned what's going on.

Operator

Our next question today comes from Robert Young from Canaccord Genuity. Please go ahead.

Robert Young

Hi, good morning. Maybe just to continue Todd's question. Are there any other things that you highlight you're prevented from doing? Can you monetize some of these non-core assets or like what other things that you have in your roadmap that you outlined recently that you might not be able to do until then.

Danielle Royston

Yes, I think always a portion of the script describes that we're doing our best that we can. We hope this gets resolved as quickly as possible. Yes, putting some constraints on it. And it was unfortunate.

Robert Young

Is there anything specific that you wouldn't be able to do I mean that would all the other potential for selling, say, the GSM-R business or something like that as all that is put off until after its results. Is that correct? Do you think that?

Danielle Royston

Yes, and just again, difficult to discuss during -- pushing as much as I can where I can think like, whatever business might be a little bit easier to close as to the BSS business might be a little bit harder.

Robert Young

You said that you had lost marketing opportunity with the Mobile World Congress cancellation? Maybe is there anything you can say about the momentum on the cloud side, anything about your pipeline of sales calls, RFPs interested sort of phone Idea pipeline pilot is created. Is there anything you can talk about that?

Danielle Royston

Well I think -- yes, I think there's a lot of in-time issue. I think we believe this is the easier move and sale is more the operator is or they are similar. They're sort of on that MD&A kind of path, where they don't have the large operations and scale already, and they're not really experts in any mission-critical revenue centric application. And so we're seeing a lot of traction around that, and those sales cycles grew a little bit faster and a little bit easier. The bigger you go sort of moving up market to the two to one.

I think the pilot's opening doors. I think people are really watching this project to see if it was going to be successful. Competitors, we're watching it, either large Telco groups and seeing that success. I don't think it's a surprise for us. We knew at least we could do it. But I think it was surprising. So it’s opening doors and with its sightseeing and it's kind of creating the opportunity to do new kinds of businesses. So we're doing that in video conferences right now and just trying to keep that business moving forward. I think it's impacting everyone equally kind of sort of the global pandemic impacting business. But yes, we're just trying, it's opening doors at the bigger side, and it's bringing some of the smaller guys to us and is that sales grows a little bit quicker.

Robert Young

Okay. And then just something clarify some for me the pilot that you're running four million subscribers, that's on the private cloud of Vodafone Idea. And so the next step would be to open it up into the different circles. But how easy would it be to port that on to your public cloud GCP-based engine if the decision was to go that direction?

Danielle Royston

Yes, what is the latest idea, what is it in the sort of -- maybe just idea to make a decision to move the private cloud into a technology years ago, right. I first spoke to them about the pilot in late 2017, 2018. And so they are really committed to their private cloud and the super big private cloud version the same multi-year agreement with IBM and Red Hat. And so I mean I'm probably going to the undue the face, I keep telling them, you should really get a public cloud is going to reduce your cost and they're struggling for various reasons in their own marketplace. And I really think that they should do that, not just connecting to what I've seen but because they can do better help them. And they were committed to the private cloud.

So I think we're going to do that and roll that out. And that's a pretty significant project as well, right, that's deploying the private cloud in India that would not be our work that would be IBM's work to set up this -- all these different sites across -- there is lots of new areas in India. I mean once that's setup, we would start to roll out our piece. And I think that's a multi-year effort.

To answer your other question in terms of how easy it is to shift? It is pretty easy. I mean, I'll throw it out with a star because this is a pretty significant deployment. So it's not going to be, I wouldn't say month, but it would be probably a year and then if you want to get full benefits for our teaching databases from oral courses, TCB, to types of scanner. Obviously, that's going to be a pretty shocking and that let's take some time as well.

Operator

Our next question comes from Steven Li from Raymond James. Please go ahead.

Steven Li

Yes, thank you. Hey, Danielle, in terms of customers that have indicated they are leaving the platform, how much more of the support revenue is at risk?

Danielle Royston

I mean, I think you can just, given my words around future revenue, you can still just do a straight line on the percentage, the mix of -- as revenue what we have today to kind of with that support piece. I think I'm at 70%, 80% of support. So 76% -- 80% of that number is pretty in line in the end, it's not outside. I hope you understand.

Steven Li

So all of these customers have already indicated to you, they are leaving or you talking about listening to cloud?

Danielle Royston

Those are decided customers who are just leaving. And I think they're just set of customers that are at risk, right. I think customers listen to these calls, I understand what's going on in the business. See what's going on with the letters that are tying around from our various investors. And it's difficult to make a five to 10 year decision with that given that situation, right. It puts pressure on making the decision. So there was a good chunk of revenue that was to bring that these issues with me, as we're trying to solve them, so I'm going to characterize that revenue at risk. So it's not necessary a big group that are saying, we're leaving, there is termination notice, but that they continue to be concerned with our business and a decline in revenue makes them nervous. All these things are great excuses if they like to leave us for -- like if they make a decision they can't move forward.

Operator

We have no further questions. At this time, I'd like to call turn the call back over for any closing remarks. Thank you.

Ali Mahdavi

Thank you, Claire. On behalf of the Optiva team we would like to thank you for joining us for today's call. We look forward to further reporting on our results in the coming months. That concludes today's call. I'd turn it over back to Claire to wrap things up. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation today. You may now disconnect.