Optiva Inc. (OPT) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Optiva Inc. Second Quarter 2021 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.

Thank you, operator. Good morning, everyone, and sincere apologies for being a few minutes behind schedule. Thank you for joining us for our second quarter 2021 financial results conference call. Joining me this morning are Optiva's Chief Executive Officer, John Giere. If you've not seen the second quarter earnings news release, which was reported yesterday after the close of market, it is available on our company website at optiva.com as well as on SEDAR along with our MD&A and interim financial statements. I would also like to remind you that a replay of this call will be accessible via the Investors section on the company's website. Following management's presentation, we will conduct a Q&A session. 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. I'll now turn the call over to John. John?

Thank you, Ali, and good morning to everyone, and thank you for joining us on today's call. It's good to be back, resuming our phone calls and look forward to engaging with you here and going forward. Let me begin by highlighting some of the key financial metrics we've achieved this quarter. I'll be adding some color on the business during the quarter and how we saw things progress. And then I'll hand this call over to Ashish, who will drill further into the numbers. Let's start by highlighting the efforts of our employees during these extraordinary times -- extraordinary and challenging times in which we are living. Our team's steadfast focus, combined with solid execution on all business fronts, resulted in positive quarterly results that, first and foremost, highlight Optiva's success and commitment to listening to and understanding our customers' needs, best-in-class product innovation and responsive customer service and disciplined capital allocation. Having spent over 25 years in the telecom industry, I can assure you that after being in the seat for about 8 months and having the opportunity to spend time talking with customers and understanding their needs, it is abundantly clear that we have a great market opportunity ahead of us, and the time is now. We are seeing early indications of opportunities converting to long-term relationships and ultimately into our revenue. I am focused on rejuvenating our company across all facets and, in particular, our customer base. Prior to my tenure here, the strategy appears to have been one of take it or leave it in terms of our product offering. This is not the Optiva of today. We have global customers with complex needs, who are very willing to invest in the future of their business and transition into the cloud in terms of an environment and a solution that best suits their business goals, which could be a private, hybrid or public cloud option. Our job is to engage them in ongoing dialogue establish trust, solve problems, present solutions and strategies to support the evolution of our global telecom partners for decades to come. We are not in the business of a short-term investment. We're very much in the business of a long-term relationship. To this end, we continue to invest in our R&D and sales force as you saw in this quarter's results. On a year-over-year basis, we fully internalized our R&D bench strength with an increase of 200% in the team size and invested in a sales team, which has grown now by 70%, and they are all serving our customers flat out. We made these investments in talent while reducing our operating expenses 61% when compared to the first half of 2020. These recent investments in headcount bring me to my next point about how imperative having best-in-class product and customer service is. Year-to-date and during the second quarter, we have seen a dramatically positive change in our customer interactions, which is leading to increased conversations and engagement with a growing number of global telecom players. To put this in perspective, these new actions alone have resulted in new bookings that have increased 90% when compared to the first half of 2020 and 492% when comparing the second quarter to the first quarter of 2021. I've noted in the past that customer upgrades and new customer wins will be a marker of our success. In addition to the significant increase in bookings and RFP activity during the quarter, we were successful in closing a new customer logo with a leading Middle East telco provider, where Optiva's BSS platform was selected to enable the customer's new MVNO business strategy. Along with this success in securing a new customer, and very importantly, we have completed contracts for 2 customer upgrades during this quarter. One with Digitel, a leading mobile network operator in Venezuela, where we have signed a multiyear support renewal and upgrade to our state-of-the-art, next-gen convergent online charging system to accelerate their digital business transformation and significantly expand their monetization capabilities. The second incumbent upgrade was completed with Mtel Banja Luka, a leading provider of digital services and telco solutions and a member of the Telekom Srbija Group, for a private cloud upgrade and multiyear support renewal, whereby Mtel will deploy Optiva's charging engine that ultimately accelerate Mtel operational agility and service velocity, supporting its next-gen 5G and IoT use cases while reducing the total cost of ownership. Albeit -- we are in the early innings of our company's rejuvenation. However, I'm very pleased to report that during the second quarter, revenues increased on a sequential basis to $16.3 million. We achieved a gross margin of 78%, which is our highest in recent years and on top of our previous quarter's 77%. We continue to hit the bar of an EBITDA margin at 25%. The balance sheet remains solid with $33.5 million of cash, which enables us to make investments as we continue to identify opportunities where we can generate a return on capital in line with our strategy. We are extremely encouraged with our second quarter and year-to-date results and continue to build on the decisive steps we took early in the year to stabilize our operations and rejuvenate our customer base. Through our responsive and focused efforts on operational efficiencies, cost savings, capital expenditure focus and working capital optimization, we're well positioned to work closely with new and existing customers to be their premier choice in the marketplace as they look for a long-term partner to address their monetization requirements. So with that, I'm going to turn the call over to Ashish for a review of our quarter.

Thank you, John, and good morning, everyone. Reminder that Optiva's second quarter results were released yesterday. Our results are presented in accordance with International Financial Reporting Standards and presented in U.S. dollars, unless otherwise noted. For the 3-month period ending June 30, '21, the company's revenue declined by $3.6 million from the previous year's comparative period to $16.3 million. The change by revenue type for the quarter ended June 30 is $3.3 million decrease in support and subscription revenue, $0.1 million decrease in software and services and $0.2 million decrease in third-party software and hardware revenue. Gross margin for the second quarter increased to 78% compared to 74% in the same period in 2020. The improvement in gross margin is primarily due to company's cost structure optimization plan and lower third-party costs. The gross margin this year is higher as fewer customization with lower margins were ordered by customers that required fulfillment compared to the previous period, higher license revenue and there is a high percentage of revenue from support and subscription revenue which has higher margin. We expect our gross margin may fluctuate as we improve our cloud-native model and product capability to new and existing customers when they are on board the public or private cloud in the future periods. Total operating expense in the 3 months ended June 30, '21 decreased to $9.8 million as compared to $20.5 million in the same period last year. Excluding depreciation, amortization and restructuring costs, total operating costs in the quarter ended June 30 decreased to $9.3 million or 57% of total revenue compared to $18 million or 90% of total revenue for the same period last year. The decrease in overall operating expense, excluding depreciation, amortization and restructuring costs, is mainly attributed to lower R&D cost and lower G&A cost as further explained by the function below. Sales and marketing expenditure slightly increased to $1.9 million or 12% of revenue compared to $1.7 million or 9% of total revenue compared to the same comparable period. G&A expenditure decreased to $4.5 million or 28% of total revenue from $10.1 million or 53% of total revenue compared to the same comparable period. The decrease is mainly due to lower legal and advisory costs related to activities of the Special Committee of the Board of Directors incurred last year, lower amortization costs and lower provisions. R&D expenditures decreased to $3.2 million or 20% of total revenue from $8.7 million or 45% of total revenue as compared to the same comparative period. The decrease is mainly moving R&D as an internal function and eliminating relationship with DevFactory and Crossover. As a result of foregoing, adjusted EBITDA and income amounting to $4.1 million and $900,000 during the second quarter of 2021. We will now open the call for questions.

[Operator Instructions] We'll take our first question from Todd Coupland with CIBC.

I had a question on the market and Optiva's, I guess, revised product positioning. So in the past, Optiva was looking for upgrades into the cloud and sitting on the Google Cloud, and they were going to work with customers. I think there was a high-profile test in India for stage conversions into the cloud, and this was going to be a long-term trend. Just -- I know you said in your prepared remarks you're there to do everything now, premise, private, public cloud. When I hear that, it sounds like a transition phase. Maybe it slows growth opportunity. So -- in terms of having to be all those things to the customers as opposed to a pure cloud play. So just to sort of reset our thinking on the opportunity and the pace of transition, I guess, in those revised areas where you're going to have the offering and how you expect that to play out over the next 2 to 4 quarters?

Okay. Todd, this is John. Thank you for your question. So the previous position of the company was, as you rightly noted, heavily focused on the cloud. But it had a distinctive flavor to it, the public cloud. That was the selection to offer that as the single choice you had if you were going to upgrade from Optiva. The difficulty there is if you look at the -- if you have the engagement with the customers on a basis as we're doing now, on a regular basis, many of them face either regulatory, privacy or financial issues as to why the public cloud might not be the correct option for them. So our philosophy is going to be about build it once but deploy it in any of those 3 environments. We, by the way, went live this quarter with a customer, an MVNO in the U.K. on the Google Cloud platform, the project that had begun prior to my arrival. And so we would continue to offer that option to operators. And there are certain instances where it may make financial or business sense and work out for them in the public cloud would be a suitable option. But I think you're seeing in general in the telco environment, if you note, most telcos are selecting the option of either a private environment, where they run a cloud -- a similar cloud operation but are in their own private data centers; or what they refer to as a hybrid, where they keep some of their operations in a private cloud data center and some running on Amazon Outposts or other types of hybrid offerings. And most of the big hyperscalers are pushing that particular option quite heavily toward telcos. So in terms of our growth, this isn't -- this won't be a factor to our growth in that regard because if you look at cloud in general, this is going to be the predominant force or a market inflection point that's going to lead many, many of our customers and customers in the industry across the billing and charging industry to upgrade their platforms. For the operational efficiencies you can achieve, the service agility you can increase, the CI/CD methodology, continuous integration, continuous development, is going to become a prerequisite for operating your platform so you can do automated testing, regular upgrades on a routine basis, very much, of course, looking like how the hyperscalers operate their data centers, be it the Amazon, Microsoft, Google. So the business is moving in that direction for business reasons. But as we go along there, there'll be different choices for different operators.

And if I could have one follow-up. Just to help us understand what the -- there's big, big players in mobile billing software. So just help us understand the competitive edge of reset Optiva as well. Again, if I -- my memory serves me correctly, the argument for pure cloud is a dramatic reduction in operating costs. I understand logistical issues you highlighted as a gating factor for telcos that don't move that fast. But that being said, what is the competitive edge that Optiva is going to bring?

Sure. Well, similarly, a part of our competitive edge follows along that we are a software-based company. We're working to provide a productized solution where today, if you look at most of the competitive landscape, it's heavily customized and heavily services focused. That's how the business is done today and, to some degree, required. We're focused very much on building a productized version. There'll still be aspects of customization that are necessary. There'll still be some aspects of installation deployment. But we're very much focused on reducing those so that it's ease of use, ease of integration and also having a greater level of service flexibility, both in terms of how we care for our customers. We will work with speed and aggressiveness to get them up quickly and fast and to also provide them new versions of the software in a more -- with a regular cadence versus just having big large projects that take place every 2 to 5 years.

Okay. Sorry. One last question, if I could. So you're new in the role as CEO, resetting the company's objectives here. Are there public financial goals that you're willing to share with us at this time? And if so, what are they?

No. At this time, we haven't been -- we haven't set out certain specific goals. We've talked -- right now, as you noted, this is my -- including my second quarter. And so where I've been putting a lot of my focus is making sure that we have secured and rejuvenated our customer base across all aspects of our operational model that we're optimizing that model to have both high-quality software as well as timely software development as well as excellent support and services, which is part of where we generate our annual recurring revenue, as you know, through the support side. So very much the focus today is on those particular aspects, which we've made very good, good progress in doing.