Optiva Inc. (OPT) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Optiva Inc. Fourth 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, and good afternoon, everyone. Thank you for joining us for the fourth quarter 2021 financial results conference call. Joining me this afternoon are Optiva's Chief Executive Officer, John Giere; and VP of Finance, Dinesh Sharma. If you have not seen the fourth quarter earnings news release, which was reported earlier today, it is available on the company's website at optiva.com and 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 on the Investors section of the company's website. Following the 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.

Thank you, Ali. Good afternoon, everyone, and thank you for joining us on today's call. Let me begin with a brief summary of our activities and performance as well as provide my view on what we are seeing in the marketplace. Then I will hand the call over to Dinesh, who will provide us with the financial summary of the company results for both Q4 and the full year. The fourth quarter represented a successful continuation of the strategic work we initiated when we launched our revitalization plan for Optiva back when I arrived in December 2020. We've made tremendous progress in every area of the company over the course of 2021. During the period, we continued to further stabilize and rebuild the trust of our incumbent customers and the associated revenue base. We invested in sales and it is paying off. We significantly increased new bookings year-over-year while maintaining business discipline in our commercials and operational control over our cost structure. This resulted in strong gross margin and a [ better ] performance. The company has turned positive on the Rule of 40 metric, the first time since 2015. The combination of our business activities coupled with our financial performance during Q4 and the steady progress throughout the year provided further validation that all of our efforts towards stabilizing revenues while executing on the early phases of our growth strategy are tracking extremely well. Our R&D and sales teams are understanding, educated and solving for the cloud migration needs of our existing and prospective customers, which resulted in Q4 bookings of $26 million, a 12-fold increase over Q4 2020 and a robust customer pipeline entering 2022. On a full year basis, we saw a fivefold new bookings increased to $50 million compared to full year 2020. This success is primarily due to the solid in-house bench strength that we have built and invested in, in terms of our sales teams, which combined with our customer-first approach is showing, and I believe will continue to show results as we build for the future. While we believe we are adequately staffed and invested in our sales structure, I'll note with increased coverage this quarter in APAC and North America, we continue to invest in the future by expanding our R&D talent. A critical element of our strategy includes creating R&D centers of excellence in key locales. To this end, in Q4, we announced that we've established a second R&D center of excellence in Bangalore, India, to accelerate telecom BSS innovation. With our local leadership team already in place, we aim to grow our head count rapidly with high-caliber engineers across a number of disciplines. Since my arrival at Optiva, our R&D team has grown significantly and continues to do so through I'll note the careful selection of our talent. In 2021 alone, we increased our R&D talent by 47%, growing with highly skilled individuals who are significant contributors to our recent successes. We have augmented our current key skill sets in the areas of DevOps, digital experience, micro-service and agile development. Thanks to our investment, we are on track to release a steady stream of products over the course of this year, which will bring to market innovative technologies, 5G capabilities and a full update and refresh of our current product portfolio. Needless to say, we are living in an incredibly exciting time at Optiva. As every day passes, we are becoming more confident with more conviction in the market opportunities ahead. Looking forward, our strategic path remains very clear with a continued focus on completing our business stabilization work and pivoting to becoming a leading software vendor in our domain. We will drive growth through leveraging cloud technology and the underlying economics it brings, 5G adoption as well as focusing on software license growth, which will all contribute to top line and improved gross margin levels in due course. Regarding our customer wins, we won both incumbent upgrades, 5 as well as new logos 4 over the course of this last year. I believe this is a strong endorsement of both our stability and future direction. As an example, we signed a multiyear agreement with Omantel to upgrade Optiva charging engine to a cloud-native architecture in Omantel's private cloud. This upgrade represents the next phase of Omantel's digital transformation strategy to use our technology and automation to drive superior customer experience and significantly improve time to market for new services. The upgrade will support new 5G business models and as well introduce our Optiva test framework into the market, which we believe will reduce deployment times up to 70% of our current metrics. To further strengthen our market position and customer reach, we announced in January a multiyear strategic partnership with Google Cloud to increase telecom customer success by enabling faster time to market, a more flexible 5G monetization capability and deliver operational cost savings. Our collaboration allows customers to accelerate their digital transformation and journey to the cloud, be it public or private and deployment on the edge with Optiva products that are available via Google's cloud marketplace. As many of you are aware, one of the key objectives has been to determine when and at what level revenues will settle and when do we ultimately enter a phase of increased visibility into steady and long-term revenue growth. Based on the combined efforts of our sales, marketing and R&D teams in understanding our customer needs, problem-solving our issues and developing solutions that fit these needs, we are seeing very positive and encouraging customer momentum. As such, we are cautiously optimistic that in the latter half of 2022, we could very well be in a position to talk about growth on the back of revenue stabilization. Our level of optimism is a result of our customer-centric approach, which is accelerating our success on various fronts. We are hearing more and more from our customers telling us that we are their strategic long-term solution provider of choice, and there to help them navigate through complex strategic decisions that will chart the course of their respective businesses in the cloud future. The impact of our actions in Q4 resulted in a revenue demonstrating stability at $16.2 million, our fourth consecutive quarter of $16 million, record-breaking bookings of $26 million, which is, again, a 5-fold increase over last year's quarter. Continued strong gross margin at 75% and adjusted EBITDA of $3.6 million, representing the core strength in our business and a healthy balance sheet with $30.4 million in cash to support our ongoing growth. We are extremely encouraged by the continued progress in our overall fourth quarter and full year results. We continue to build on the decisive steps we took early in the year to stabilize our operations and our customer base. Through our responsive and focused efforts on operational efficiency, cost savings, good capital expenditure management and working capital optimization, we are very well positioned to work closely with new and existing customers to be their premier choice in the marketplace as they look for a partner to solve their 5G monetization requirements. I strongly believe that we're in the early innings of what Optiva is capable of doing in terms of gaining market share. Before I hand the call over to Dinesh for his financial review of the quarter, I want to touch on a subject and a situation in Ukraine and acknowledge the resulting pain and suffering it has caused the Ukrainian people. And I also want to be clear that we stand with the global international community in support of the brave people of Ukraine, who are defending their homeland as well as our customers, employees and partners who are either directly or indirectly affected by these tragic events. Our thoughts and prayers are with the people of Ukraine. And we sincerely hope that all parties can find a peaceful solution very soon. Now, I will turn the call over to Dinesh for a review of the quarter.

Thank you, John, and good afternoon, everyone. A reminder that Optiva's fourth quarter results were released earlier today. 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 ended December 31, 2021, the company's revenues were $16.2 million, the fourth quarter in a row of $16 million plus. Revenues declined by $2 million from the previous year's comparative period. The change by revenue type for the quarter ended December 31, 2021, is a $2.3 million decrease in support and subscription revenue, $0.5 million increase in software and services revenue and $0.2 million decrease in third-party software and hardware revenue. Gross margin for the fourth quarter remained strong at 75% compared to the same period in 2020. The strength in gross margin is primarily due to company's cost structure optimization plan and reduction in third-party costs. The gross margin for the full year was higher at 77% compared to 74% in the full year 2020 as there were fewer customizations with lower margins, higher license revenue. And there was still a high percentage of revenue from support and subscription revenue, which has a higher margin. We expect our gross margins may fluctuate as we prove our cloud-native model and product capability to new and existing customers when they onboard the public or private clouds in the future period. The operating expenses in 3 months ended December 31, 2021, increased to $10.7 million as compared to $10.5 million in the same period last year. Excluding depreciation, amortization and restructuring costs, total operating costs in the quarter ended December 31, 2021, increased to $10.3 million or 64% of total revenue compared to $8.7 million or 48% of total revenue for the same period last year. The increase in overall operating expenses, excluding depreciation, amortization and restructuring costs is mainly attributable to higher sales and marketing costs and higher R&D costs. Sales and marketing expenditures slightly increased to $2.6 million or 16% of total revenue compared to $1.7 million or 9% of total revenue compared to the same comparable period. G&A expenditures decreased to $4.8 million or 29% of total revenue from $6.2 million or 34% of total revenue compared to the same comparative period. The decrease is mainly due to lower legal and advisory costs related to activities of the Special Committee of the Board incurred last year, lower amortization cost, offset by higher stock-based compensation and higher compensation costs. R&D expenditures increased to $3.3 million or 21% of total revenue from $2.7 million or 15% of total revenue as compared to the same comparative period. The increase is mainly driven by continued hiring and investments being made in our roadmap. The team has now grown 47% from the same time last year. As a result of the foregoing, adjusted EBITDA amounted to $3.6 million during the fourth quarter of 2021, while net earnings were impacted by $3.2 million of finance costs related to interest and debentures and the increase in value of warrants. As a result, the company reported a net loss of $3.3 million in the fourth quarter of 2021 compared to net income of $1.7 million during the corresponding period in 2020. Last year's net income included finance cost recovery of $2 million related to a decrease in value of bonds offset by interest and debentures. We'll now open the call to questions. Operator, please?

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

I'm just going to work up and down the P&L, if I could. So you've had $16 million of revenue for 4 quarters. Can you just talk about what still needs to flow through the system, which would allow you to get to that stable environment that you talked about in the second half of this year?

So Todd, quite simply, we're finishing up the work of customers. I think we've said this before at the risk of being too redundant, but it is true. The remaining customer attrition that's taking place is -- I think what we're confident now is we have a good handle on who they are, pretty good handle on the timing. It does tend to vary sometimes by a quarter, early quarter late and a good idea on the ones that we can -- we have already begun turning the tide on. In fact, we were recently notified by a customer. They've gone and extended an additional year and put on hold a change on project. So we're hopeful that there's a couple of more of those in the system, Todd. We think we've got an eye on a few that we can settle out. That will allow us then to really have stabilized the puts and takes. The growth will come both by increasing the services we can provide to incumbent customers. But the real key is the new projects that we're signing and bringing on. We announced one just a few weeks ago, a week ago, been Mobile World Congress. Those projects take about anywhere from 9 to 12 months to roll out, get customer acceptance. And we're trying to shorten that timeline, but that's a typical cadence. And with our customer acceptance, our maintenance and support or ARR kicks in, and that will start backfilling some of the attrition we've been experiencing.

And are you able to comment on sort of ex-attrition, what the underlying growth of the business is at this point?

Not at this point. I did want to indicate that we think we see good signs in the latter part of the year where that growth will be routed. But I'm taking at this point providing some indication. But I do want to make -- just make it clear there are these puts and takes that change things by a quarter here and there. So while we think we have a really strong visibility on it and how it's going to roll out, I want to be mindful that we don't want to misspeak or misspeak too early in the events before the events completely take place. But we feel confident as we look into the second latter part of the year. We can see where the stabilization is pretty well predicted. I don't expect any more surprises. And then some will be the timing of these new projects rolling in, Todd. They are predictable from our perspective. We have a project plan, but how they roll out on the customer premise can sometimes be a result of how the customer themselves project manage things.

Okay. And you're calling out bookings in $25 million and $50 million in Q4. And I guess for the last year, will you be getting to a point where bookings will actually run ahead of, I guess annual revenue? So I don't know how long the bookings are for if it's a year or a few years, but will you get to a point where that's like a reliable indicator to say, hey, okay, now we've got whatever the number is, if it's $60 million, growing $75 million, like whatever that number? Can you just talk about like what's in bookings and how we should think about that once you start to move into that growth phase?

So as I've noted before today, our bookings is predominantly incumbent customers. And I think as I shared with previous calls, first goal is to get them to renew and stay with us. And we've been through a full year cycle on that. So we know what that looks like. The second goal is to renew on a multiyear agreement. And one of the things that we're starting to see and we'll start sharing the data as it becomes more of a trend rather than individual data points, but the length of our revenue, our top 50% revenue is growing. So multiyear is starting to take on. And ultimately, it's multiyear with an upgrade. As I indicated, this quarter alone, we signed 3 upgrades, 5 for the year. That's a very good sign that our customers are going to sign an upgrade and a multiyear support agreement. That's what we really want from the incumbent customers. We're just getting our first new orders. They're relatively modest, given where we're started from. So those orders and the revenue impact starts to get felt this year in 2022. And as we get a better sense of that going into the year, we'll start sharing with you a little more granularity on how those deals are coming together and what their relative impact will be on our -- both our ACV and as we already keep track of the TCV level.

Great. And just a couple more for me. When you think about the I guess catalysts for these new orders, you talk about 5G monetization and saving time of implementation going into the cloud, et cetera, private cloud that is. Are those the primary catalysts to coming on board for your charging engine, et cetera?

So there are -- as I noted in the press release, I gave a little color to it is there are a couple of factors in -- largely in this order. First is the migration to cloud. And it's the technology as well, but it's also the underlying economics. It sharply reduces your OpEx requirements even if you don't use it on a SaaS basis or a consumption basis, which we are trying to encourage customers to consider, the operational load is quite a bit lower. I mean maintenance windows that typically take 3 or 4 evenings to do can be done in one evening, the upgrades that the back of the releases are all much quicker. That's because of a second factor that we've really put an emphasis on. But I think the market is starting to come around too, which is automation. Today, we have a charter across the company to automate everything we can do. And the goal is in the course of the year is to be able to automate 90% plus of a typical deployment, at least the first office deployment 1.0. That would significantly cut lead times and significantly cut the overhead required for new customers. It will be more difficult for legacy customers, but for new customers. So cloud, automation and then comes 5G where the 5G is going to introduce new technology capabilities, lower latency, broadband access, fixed wireless access is an area we're seeing some interest in. So that's going to change the traditional billing environment and compel operators to create new packages with new attributes, new permutations, which can often lead to at least an upgrade, if not triggering a complete change out of the system.