Symbolic Logic, Inc.
Q2 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Thank you, and welcome to Evolving Systems 2020 Second Quarter Results Conference Call. As you may have seen, our Form 10-K was filed after market close today and our press release was just issued. Joining us from management today will be Matthew Stecker, Evolving Systems' Chief Executive Officer and Executive Chairman; and Mark Szynkowski, Evolving Systems' Senior Vice President of Finance. On today's call, Mark will provide an update on the quarter and Matthew will update you on the business investment activities currently underway. Both Mark and Matthew will be available during the Q&A portion of the call. Before I turn the call over to Matthew, I'd like to remind everyone that the company will be making forward-looking statements based on the current expectations, estimates and projections that are subject to risks. Specifically, statements about future revenue, expenses, cash, taxes and the company's growth strategy are forward-looking statements. Listeners should not place undue reliance in these statements. There are many factors that could cause actual results to differ materially from our forward-looking statements and we encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information about the company. At this time, I would now like to turn the call over to Matthew Stecker for some opening comments. Matthew?

[Matthew Stecker:]

Okay. Good afternoon, and thank you for joining us. It's already turned out to be interesting. As you know we continue to find ourselves operating in unusual times. The coronavirus pandemic has ripped a path across the telecom economic landscape. And realistically, in the short-term shows no immediate signs of abating. Even a quarter ago, when I last updated you, we were making short to medium-term plans to handle an emergency that we thought would last several months. Now we are planning for the most intrusive aspects of the coronavirus to be felt through the calendar year, and for some of the market impact to even be permanent. That being the case and with the fact that we are now broadly six months into the change, the picture of how the pandemic is affecting our performance is becoming increasingly flushed out. We also now have half a year of numbers that enable us to assess more completely how we're doing, as we continue to move into a reality that will be different from the one we've known for the last 20 years here at Evolving. The headline news today generally is that Evolving is doing pretty well in this environment. No, it's not business as usual. Yes, the coronavirus pandemic has had some effects on our business. But as I noted a quarter ago, we were in many ways well-placed to adapt changed market conditions, hallmarked by telework, new ways of corporate and human networking, all against the background of restricted personal contact and movement. We continue to weather the storm and the headline numbers bear this out. Our second quarter revenue was $6.3 million and year-to-date revenues are $12.6 million. Year-to-date 2020, the company has generated positive cash flows from operations. Second quarter operating profit was $0.3 million, with a net loss of less than $0.1 billion. Adjusted EBITDA for the second quarter was positive $0.6 million. So despite operating in turbulent times, we've been able to maintain EBITDA positive performance. Our service revenues were slightly higher from the corresponding period a year ago, and we've generated positive cash for the year. By leveraging the ability and experience I referred to above and implementing and providing support to our clients remotely, the effect of the pandemic on our operations has been largely mitigated. Having underlined that the big picture of the first-half of this year is positive in the context of the global situation, we also have to be realistic. It has not been business as usual, though we have successfully avoided the trauma that many companies are facing. The pandemic has nevertheless slowed our growth. And as a result of that, we have looked and continue to look for ways to contain our costs, something the balance sheet shows we've done effectively in the first-half of 2020. As I said before, our initial plans for 2020 call for better top and bottom line performance, and more importantly, the demonstration of significant growth in both parts of our business. Overall, the effect of the global situation has been to delay that growth to 2021. Generally, operators are postponing the process of onboarding the kinds of new projects that are at the foundations of our growth. But the key for us long-term is that what we're seeing is postponement and not cancellation. I'll talk about this a little bit more, but we have every reason to believe that in 2021, we will be servicing a backlog of demand, as carriers have put new business initiatives on hold through 2020. Let me be crystal clear about what we're seeing. Our ongoing customer work is continuing. New deals, however, have literally had the door shut in many cases. Carrier policies dictate that no personnel can physically come to their campuses. New equipment and infrastructure changes are forbidden in those cases. Our customers have been in the mode of, "don't do anything that isn't a direct response to the emergency." Generally, this means that new product discussions regardless of the maturity has simply been suspended. Fortunately, however, our clients are coming to the moment where their businesses can no longer stay in emergency activities only mode. Macro demands of their businesses are forcing them to figure out how to make long-term competitive strides and increase their efficiency, and these activities can't be tackled through the strict filter of only work on emergency activities. Kicking and screaming, in some cases, our customers are having to slowly emerge from their shells, and turn on the activities that drive new projects and new initiatives, as the markets demand, they do so. For Evolving internally, we have been able to take advantage of the pandemic to reposition and fine tune our go-to-market, so that we're ready to meet that challenge. There's a very linear thread that runs through our past 24 months of activity. First, we addressed our marketing requirements, perhaps the two most obvious manifestations of which have been our new website, which is now attracting double the number of visitors who are staying longer and engaging more, slowly through nurturing these visitors, producing qualified needs. Secondly, you also have noticed that our media presence has expanded significantly. Articles published across leading trade magazines and newsletters, with an Evolving buy line once totally absent or now a regular occurrence. These would spread the word and establish the presence and credibility of our brand. Next, we're now close to the end of a period in which we've completed the revitalized our product line up. Our customer activation and network services division, they once have appeared to be a loosely assembled group of aging solutions. These have been woven together and repositioned through the last year into the (e)SIM Lifecycle Suite. Solutions with this offering continue to emerge and reach the market. The newest of these are SIM distribution module, which somewhat unsurprisingly helps our customers to plan and manage the process of distributing SIM, and our simple data solutions which help our customers efficiently manage lower ARPU SIMs and IoT devices, which is a significant growth area for us. Our customer value management and loyalty business unit, as you all know, reinvented itself with the launch of Evolution, our CVML platform. Today Evolution has now been deployed at its first four customer sites, and we hope to issue press releases drawing attention to this before the end of the year. The fact that the product is now in production in four places means, the burden of investment and its development that we borne over the last 18 months has now been largely removed. So the past 24 months have seen the jigsaw puzzle of new, much more competitive and better placed to succeed Evolving systems being put together. That despite a once in a century economic disruption, we remain profitable attest to the success of these efforts. We've become leaner and more self-reliant. We've started our messaging focus, and we've explicitly responded to the market needs with new technology. Our relationships with existing clients continue to expand as they leverage more and more of our services and offerings. The addition of new logos and customers is the next step to Evolving road to success, and I'll talk more about what we're doing in regard to new sales after the break. But for now, let's start with an overview of the quarter. And for that, I'll hand it over to our CFO, and my daily partner in running the business, Mark Szynkowski.

[Mark Szynkowski:]

Thank you, Matthew. Good evening, and thank you for attending the call. Let me begin with the revenue. Our total revenue for the second quarter ended June 30, 2020 was $6.3 million, which is less than a $0.1 million increase from three months a year ago. The change was primarily related to the increase in revenue from upgrades and new projects, partially offset by a lower one time licensing fee. Our total revenue for the six months June 30, 2020 was $12.6 million, a decrease of $0.3 million over the same period a year ago, predominantly related to a large one time licensing fee recognized in 2019. Service revenues that are multi recurring in nature were $12.3 million for the year-to-date, an increase year-over-year of $0.3 million or 2.7% versus the six month period a year ago. This increase is mostly related to new projects and upgrades that are ongoing in 2020. We reported gross profit margins, excluding depreciation and amortization of approximately 65% for both quarters ended June 30, 2020 and 2019. For the six months ended June 30, 2020, our gross profit margins were approximately 66%, as compared to profit margins of approximately 68% for the six months of last year. This decrease was primarily related to the licensing service and mix last year, inclusive of the aforementioned licensing revenue. Our total operating expenses were $3.8 million for the quarter ended June 30, 2020. The operating expenses in the corresponding quarter in 2019 were $11.1 million. This did include a goodwill impairment of $6.7 million. Excluding the goodwill impairment charge, the operating expenses were $4.4 million. This decrease was primarily related to travel and marketing costs that were reduced by $0.3 million, due to travel restrictions imposed during the global pandemic. There were also decreases in general and administrative costs, primarily related to lower legal and accounting fees than in the prior year period. Our total operating expenses were $8.2 million for the six months ended June 30, 2020. Total operating expenses were $16.5 million for the six months ended June 30, 2019. Excluding the goodwill impairment charge, the operating expenses were $9.8 million. This was a decrease of approximately $1.6 million. This is related to the reduction in product development hours, as delivery staff focused on customer projects, not product development as they did in the prior year, and the decrease in the use of third-party contractors. Also, there were the mentioned decreases in travel and marketing costs and general administrative costs mentioned before. We were pleased to report an operating profit of $0.3 million. The net loss was less than $1 million for the three months ended June 30, 2020, compared to an operating and net losses of $7.0 million for the three months ended June 30 2019. And excluding the effect of the goodwill impairment charge in 2019, the operating and net losses would have been $0.3 million. The operating profit for the six months ended June 30, 2020 was a positive $0.1 million, an increase from the $1 million operating loss excluding the goodwill impairment charge over the same six months in 2019. Our adjusted earnings before interest, taxes, depreciation and amortization was $0.6 million for the quarter ended June 30, 2020, and as compared to $0.1 million for the same period a year ago. Our cash and cash equivalents as of June 30 2020, was $4.3 million, an increase of 39% compared to $3.1 million as of December 31, 2019. Contract receivables net of allowance for doubtful accounts were $4.1 million, a decrease of 40% compared to the $6.7 million as of yearend 2019. Unbilled work in progress was $2.9 million for the period ended June 30, 2020, an increase of $1.8 million compared to December 31, 2019. Our working capital as of June 30, 2020 increased to $4.3 million, as compared to $3.8 million as of December 31 2019. This does include an AMT tax refund expected in this current year, and was previously recorded in our deferred tax assets at the end of last year. We have agreed with East and West Bank to amending our terms and financial covenants for our credit facilities. This included a waiver for all prior non-compliance. The loan is now on schedule to be retired by the end of 2020. We've made every loan payment in full. And as originally scheduled within our loan agreement, we anticipate making all future payments. And we believe there is ample cash on hand and liquidity in our working capital to fund our business and continue strategic investments. Thank you. And I will turn it back over to Matthew.

[Matthew Stecker:]

Mark, thank you for that. Okay, as I said earlier, I'd like to spend a minute or two addressing what's behind my confidence in Evolving Systems' future, and why I think we're well-placed to succeed in the coming years. I'll do that now, perhaps in a bit more detail than I usually might on a call like this, but I think it'll be worthwhile. All of you are doubtless familiar with, even tired of hearing the phrase digital transformation. But nevertheless, digital transformation is the primary driver of today's change within enterprise broadly, and for our wireless operator customers specifically. For our clients and prospective customers, the issue of how they transform themselves into effective digital companies is quite literally the largest singular focus of their overall efforts. But what is digital transformation? What does it mean and what does it involve and how does it impact us? If you indulge me in a minute or two to expound on this, I think it'll help you grasp by think of Evolving's future is bright. Part of the notion of digital transformation is instead of trends on the physical and logical network side, where we see a shift from discrete network elements to an independently managed virtualized communications and cloud infrastructure. The benefit to our customers here is a shift from expensive and hard to manage discrete network elements, to a virtualized network environment that's easily run at a far lower cost. The first manifestations of this transition were driven by network function virtualization and software defined networking. These network changes drive demand for our activation and numbering services, as well as the consulting and integration service we do in our CAM [ph] division, Evolving's traditional platform. We have built a reputation in the industry, as being a go-to-firm where multiple vendors and network elements collide, both as an integrator and with our software solutions. Our Tertio platform, for example is often the glue that can solve complex digital integration and are people more importantly are often the on the ground folks within the telecom operators that can align people, process and technology within a complex operator. The other aspect of digital transformation is the notion of just doing business digitally. This means telecom operators are expanding their service portfolio to offer new suite of services and addressing new vertical markets. It also means that the way the operator interacts with the customer over his lifetime is driven by algorithms and digital interaction, rather than by customer service reps, store personnel and physical promotions. For this to work, 360 degree omnichannel customer experiences must replace traditional more limited relationships. User expectations increase in the digital world and to meet that seamless integrated experience must be supported of our customers are to really accrue long-term gains and increase customer satisfaction. Evolving directly addresses operator needs here with our CVML tool, most notably the Evolution platform. Evolution is the conduit through which operators design their customers digital journey, is the platform that allows an operator to shape its user behaviors and scale through promotions, discounts, and omnichannel outreach, all orchestrated digitally and at scale. Speaking broadly, when you map the challenges and opportunities that digital transformation laid out against the new and expanding Evolving Systems product line up, you can immediately see why I'm confident about our future. Tapping and using big data, increasing customer value, operational excellence, partner management and service innovation, these are the benefits our products are designed to deliver. Benefits that with digital transformation are front and center in our customers' headlights today. For us, digital transformation is an enormous opportunity to reengage existing customers and acquire new ones, which brings me back to the plan discussed earlier. The next 12 months or so in our journey we will be focused on achieving new sales success. Here, while we sell on both sides of the business tools that help our customers with digital transformation, our customer acquisition process has historically been the most analog of efforts. Generally, our sales and marketing teams comprise seasoned executives, who have years of experience working in or with our customers. They are the kind of folks who can close their eyes and recite the high level work chart at any large carrier, along with each executives handicap and go to cocktail and meal preference. Historically, our sales did come from this team flying around the world and networking into these deep relationships in a very personal way. Obviously, with the current global situation, all that is changed. There are no more flights. There are no more business dinners. There is just our product portfolio, the clear economic benefits that it can drive and the challenges communicating these benefits to a set of known prospects. Thankfully, wireless operators have a hard time hiding through the limited apertures of telework and other electronic media. So, we're being forced to find new ways to sell. But to me the most interesting thing about that is that the new sales processes were forging out of that demand, or using the tools of digital outreach for the first time in Evolving's history. We instead of leaning only on personal relationships, we have built significant new capabilities in our ability to drive demand through digital analysis of our client base, automated outreach and an ongoing stream of two way dialogues with our customers and prospects. In doing so, we're just beginning to use the same techniques and strategies that our platforms afford our customers in our own business. Obviously, the scale is very different. Evolving selling to a few hundred operators is a different kind of problem that our operators selling mass market services to millions of end users. But the embrace of digital in our own selling is long overdue. And long-term, I have great faith that this internal digital transformation will drive more predictable and scalable funnel for us. It is still early days, but for us this is an extremely exciting trend, and gives us a reason basis to plan long-term increased sales and topline performance, other than just hoping for better luck. Finally, on a larger scale Evolving continues to fine tune our operations. As the balance sheet demonstrates costs are tightly controlled, thought leadership and brand recognition are increasing, we now have the Evolution platform and the repositioned and expanded (e)SIM Lifecycle Management Suite as mature products to lead our efforts. The second quarter has been encouraging for us in the face of historically challenging market conditions. Because of all the efforts you so patiently heard about today, once full normality returns, I'm confident that our performance will be hallmarked by consistent top and bottom line growth as the world reopens. So, I'd like to thank you for your support and for indulging me in a bit of a deeper dive than usual. And I look forward to updating you on our continued progress. So with all that said, at this point I'd like to open the call to questions. Operator?

[Matthew Stecker:]

Given we’ve expertly anticipated every possible question, that will bring the end to our call. Thanks everyone, for your continued support. We’re available to talk with investors throughout the week. There is a form on our website, if you would like to schedule an in-person discussion with management, you can fill that out and we’ll get in touch with you. So feel free to contact us and we look forward to communicating further progress and developments with you. Operator, we’re now ready to end the call.

[Operator:]

This concludes today’s conference call, you may now disconnect. Thank you.

[Mark Szynkowski:]

Thank you.