Optiva Inc. (OPT) Earnings Call Transcript & Summary

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.

Thank you, operator. Good morning, everyone, and thanks for joining us for the Optiva Financial Results Conference Call for a 3-month 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 the company is currently subject to a proxy context -- contest, that could see 2 of 7 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 expected -- executing on previously announced plans that require additional external funding through the issuance of subordinate voting shares. I will now turn the call over to Anin for his financial review of the quarter. Anin?

Thank you, Ali. Good morning, everyone. A reminder that updated results for the quarter and 15-month 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 Standards 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 3 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 Related Party Transactions. The company's revenue during the quarter was lower by 26% to $20.5 million and continues to show the declining trend we had talked about in previous calls. The support and subscription revenues were lower than compared to the same period in 2018, mainly due to the discontinuation of support to customers who had previously notified us of their exit. The company's gross margin for the quarter was 72% as compared to 69% during the same period a year ago. The higher gross margin is mainly due to a one-off, on-premise software license delivered in the quarter. While operating expenses in the quarter decreased by 22% 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 2 reasons: a charge of $7.4 million recorded within the finance cost for the quarterly revaluation of the 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, included research and development have reduced as compared to the same quarter in fiscal '18, we remain focused on specific projects that improve customer success and cloud innovation where we rely on the services of 2 of our critical vendors, which brings me to the discussion on our Related Party Transactions. During the quarter, the company incurred $5.7 million of costs towards R&D and cloud innovation with DevFactory, which is an affiliate of ESW, Optiva's largest shareholder. During the quarter, the company also incurred $3.8 million in costs associated with its access to skilled workforce through crossover another affiliate of ESW. I will now turn the call over to Danielle. Danielle?

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 turn around the business and change its strategy to become a cloud company, we've gone from having the rest of the company from secured lenders to reducing our annualized operating expense base 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 a public cloud SaaS software. 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 will be using public cloud-based BSS and charging engines. The cloud concept is now uprising in every RFP, and we see competitors selling strategic partnerships with the major public cloud vendors, which is further validation that we are headed in the right direction. The flip side of that, and the primary reason for our pivot to the cloud is that we also believe all the legacy on-premise fair model revenue at Optiva will eventually shrink to zero. Unfortunately, we don't know exactly when each customer will leave and we cannot predict when the cloud growth will kick in and think that we have made a difficult transition to our flexible cost structure, that we alluded to the revenue decline associated with this transition period with departing customers having them move to cloud. Recently, we were excited to announce the successful deployment pilot with one of the world's largest Telco, Vodafone Idea Ltd, to deploy Optiva's Charging Engine on the universal private cloud. This is not any ordinary pilot. The pilot is catering to 4 million subscribers and serving at 1,000 transactions per second on VSM-based charging transaction. It is a great example that our technology works but we are 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 to get another customer deployment to the public cloud to go live in the coming months. Having the biggest Telco of the year, Mobile World Congress held annually in Barcelona was canceled due to the threat of the coronavirus. Many vendors and operators orient their sales and marketing plans around this event and having approved the safety of all our candidates is of paramount importance. It is a notable marketing opportunity loss for us this year. We finished another cycle for our Customer Success program, having deployed through June to December, and we're turning to finish just over 50% of the revenue reporting to us, so basically our objectives and goals are aligned with the ultimate success, and in the year, a key component of that growth. This continued to improve, and the positive trend 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 fix each customer on our quest to achieve 100% Customer Success. So our migration to the public cloud strategy with major Telco this year in result is gaining momentum, and that it will take time but with the early adoption of the transition to the cloud, we have to benefit the most. And finally, to address the elephant in the room and to address what 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 these assumptions and we hope that this will all be resolved and I continue to focus on operations with the business on winning the cloud. At this point, we are ready to open the call for Q&A. Claire?

[Operator Instructions] Our first question today will come from Todd Coupland from CIBC.

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 us with your thoughts on that downside debt case for the company over the next couple of years?

Yes, we had -- Todd, it's Danielle. So we've had this number out there for a while with sort of growth rates dropping down as sort of evident, so this long-term revenue -- Todd, the reason why we put the number out, it's not so much guidance and more expectations coming around how long this revenue could go before it flattens out, and we start to see some growth. And so my most recent update, I think, it was in the analyst presentation that we put out in January. Previously, we've spoken about $75 million, but we do see continued downward pressure, especially if we start to consider things like exiting noncore assets. Especially as we start to consider the transition into more of a SaaS model, where we feel that a concession of services revenue will eventually just be eliminated, right? And it won't go completely this year but it'll be a lot different as we start to really enforce more of a product outlook and rise out to enforce more of a new customization to this perspective. And so we put that out in January. It's kind of a different way to start to think about transitioning into Saas. Professional services will go away with the renewal of noncore assets so they focus the business on the cloud business. And so I think we have it in the mid-30.

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 other learnings would you say would be useful for us to understand with that, I guess, mid transition pilot? Given it's not full public cloud. So any further comments on that would be appreciated.

Yes. Yes. I mean I think the really big telcos had a natural nervousness around the public cloud. It's a really big transition for them, right? I can't stress it enough. I don't think people will be able to realize. It's not okay to changing like iPhone versions or even BlackBerry to iPhone, it's really like there is some [ Verifone ] to iPhone kind of transition from a technology perspective, right? Today, they run it on-premise themselves. They have reach and thousands of people supporting their IT operations and to sit there and say, "Hey, we're going to hand it over to Optiva, I 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 fiber cloud is, like you said, it is not public cloud. It was more of on-premise, right? And so the pilot is successful. It's running now. We want to run it -- even want to run it for 60, 90 days and kind of have all the 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 where they 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 saving, which is, for example, that used to take months to do and plan for an upgrade, now it takes a minute, an hour, and they're starting to see the operational through that, and so it's softer kind of market. And so I guess, there's a little cost in that, but it's not necessarily bottom line hitting. So they still do these projects for us. And I can't stress that enough. This customer was more than 30 versions behind our main related version of the product. We had to go see that. They're such a massive customer. India is 200 million subscribers, at least our portion of it, running 6 different urban sites around the country with the mirror, the disaster recoveries of 12. So for us, it's like 12 different upgrades. And they're not -- everyone actually thinks that they're exactly the same. They're not exactly the same. So it is 12 separate upgrade that we had to do. We did that first to mitigate the risk with a significant shift in technology to the private cloud. I think we did the private cloud pilot as we funded that, they did not pay us for that pilot. It was a risk that we both took on that. Obviously, Optiva has 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 models, working projects, the team on the ground to make it successful. And I think we shocked the world, and we're very excited about it.

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

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

Our next question today comes from Robert Young from Canaccord Genuity.

Maybe just to continue Todd's question. Are there any other things that you'd highlight you're prevented from doing? Like can you monetize some of these noncore assets? Or like, what other things that you have in your -- the road map you just outlined, Danielle, recently that you might not be able to do until then?

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