Symbolic Logic, Inc.
Q1 2019 Earnings Call Transcript

Published: 16 May 2019

[Operator:]

Thank you and welcome to Evolving Systems' 2019 First 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 first quarter, 2019 results 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 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 on 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 like to now turn the call over to Matthew Stecker for some opening comments. Matthew?

[Matthew Stecker:]

Thank you and thank you everyone who has joined us today on this call and webcast. Let me start by acknowledging that the first quarter results we’ve announced today underline the ongoing complexity of the corporate and product transformation that has been our focus over the past twelve months and the fact that the process is not yet complete. The new strategy was initiated because we identified a trend of revenue decline in our core business that had to be addressed, indeed could only be addressed, by broad changes in our approach to the market and our products themselves. As we expected, we continue to feel the pinch of historical revenue decline now but, frustratingly, we are not yet reaping the benefits of the corporate and product changes and innovations we have invested in due to our long sales cycle. In the second half of this year, I am confident that our performance will begin to show positive effects from our ongoing sales and investment activities. I’ll address in some detail in this call where we now stand with regard to our progress towards building “the new Evolving” – a focused company with an updated product line formed from multiple acquisitions over the past two years – but it is fair to say at the outset that the transition has taken longer than when those investments – particularly the acquisitions – were contemplated. When we began a journey that required consolidating three products with three code bases to create one, state-of-the-industry Customer Value and Loyalty offering, when we started the transition from a license to services business model, and when we began investing in our human resources infrastructure we knew well that there would be a number of difficult hurdles to overcome. But while our progress has been slower than we would have liked, our core activities remain very much on- track. Products that we sell today realize revenue between two and four quarters into the future. We expect improvement in top line financials in the later part of this year and the early part of next. With that said, let me re-assure you once more

[Mark Szynkowski:]

Good evening. Let me review the numbers. Total revenue for the first quarter ended March 31, 2019 was $6.7 million, a $1.5 million or approximately 17.9% decrease over the comparable year-ago period. The decrease is related to $1.3 million in lost service revenue or pricing pressures to existing accounts. Various reasons for the decrease include changes in regulatory compliance rules or customers acquired by larger firms, causing customers to change platforms. First quarter 2018 had many large projects, mostly related to the contracted work from the acquired companies, that were completed causing a decrease of $0.7 million as compared to the same period a year ago. These were offset by an increase of $0.4 million revenue for new implementations and new incremental licensing of $0.5 million. We reported gross profit margins, excluding depreciation and amortization, of approximately 71.0% for the quarter ended March 31, 2019 as compared to gross profit margins of approximately 65.0% for the quarter ended March 31, 2018. The increase in gross margin was primarily related to product and service mix that includes the additional licensing revenue. We have also gained efficiencies with the full integration of the acquired workforces with existing delivery team, contributing to higher margins. Total operating expenses of $5.4 million in the quarter ended March 31, 2019 increased by approximately $0.9 million, as compared to the corresponding year-ago period. We continue our investment and focus on product development and growing our global business development team resulting in higher costs in those areas. Further, there were approximately $0.3 million dollar increase in professional fees. Mostly related to unforeseen additional charges associated to complexities in the completion of our year end audit. We also invested in non-repeatable accounting services to update our global transfer pricing policies to include the acquired companies and completed our re-submission of prior year tax returns to claim R&D tax credits for our United Kingdom subsidiary. Recently we announced our transition to a new independent audit firm for 2019, Marcum LLP, and look forward to working with them to gain efficiencies in our processes. The Company reported operating loss of $0.7 as compared to $0.8 million operating income in the quarter ended March 31, 2019 and March 31, 2018, respectively. Net income per share, both basic and diluted were a negative $0.09 for the quarter ended March 31, 2019 as compared to net income per share, both basic and diluted of $0.04 in the comparable year-ago period. The Company reported Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a negative $0.3 million in the first quarter of 2019 as compared to $1.4 million EBITDA in the first quarter of 2018. Cash and cash equivalents as of March 31, 2019 was $5.6 million, a decrease of 17.6% compared to $6.7 million as of December 31, 2018. Our contract receivables, net of allowance for doubtful accounts were $7.6 million and the unbilled work-in-progress, net of allowance for doubtful accounts was $3.0 million for the periods ended March 31, 2019 a combined decrease of $0.1 million compared to December 31, 2018, as we continue to focus on our collection and invoicing procedures. Working capital as of March 31, 2019 decreased 3.4 million since December 31, 2018. This was primarily due to the reclass of our long-term debt to short-term debt as we are are noncompliant with our current loan covenants but are working on restructuring terms that will allow us to continue to execute on our strategic plan or look to alternative resources. The Company has made every loan repayment in full and as scheduled within our loan agreement and anticipate making all future payments as we believe there is ample cash on hand and liquidity in the working capital to do so. Other factors effecting working capital was the decrease in our cash used predominantly for the reduction of our outstanding debt and payment of interest. Also there was an additional current liability of $0.4 million recorded with the adoption of ASU 2018-1 on Topic 842, updating the accounting of operating leases. We believe there is ample liquidity and working capital to fund our business and to support the level of investments we intend to make in the coming year while continuing to look for synergistic and accretive acquisitions and/or other strategic partnerships. Thank you and I’ll turn the call back to Matthew at this time

[Matthew Stecker:]

In concluding, I’d like to underline some of my introductory comments – that though the first quarter 2019 has been difficult, the upward trajectory of Evolving is now very much established. This is not to say that challenges don’t remain or that as we finalise our new operating model that the balance of the year will be plain sailing, but it is to briefly focus on why the leadership team’s belief in the company is now stronger than ever. Evolution, our new Customer Value and Loyalty technology is here and the first tangible results in terms of sales are being recorded. Again, I cannot stress enough that this is a key milestone for us. Furthermore, the activation side of our business is also seeing product renewal with a new version of our Smart Dealer offering that is leading to a number of sales opportunities and new positioning around Managing the SIM Lifecycle. Taking three different platforms with three different code-bases and turning them into a single, new technology that retains the best features of each has been and remains extremely difficult. Not only the technological but also the human challenges of this undertaking are time-consuming. We have been able to complete the task successfully, but we were perhaps too optimistic initially about the time it would take. That reality has impacted first quarter results. We had anticipated being able to start reaping the rewards of Evolution in the first half of this year. Realistically, it will now be the third and fourth quarter before the revenue benefits are felt. The point, though, remains that Evolution gives us the ability to handle the processing volumes demanded by the world’s largest operators and in doing so it opens the door to new customers for Evolving. In terms of sales, we continue working the channel. As I’ve noted already, the sales cycle is long, more so with a new, flagship product but as I’ve already demonstrated, there has been a notable upsurge in pipeline that, in the coming months, we expect to convert into deals and revenue. We still believe that with a strong second half, 2020 will be even greater in revenue than 2019. I’ll conclude by noting that I said in our last call that 2019 would again involve a good measure of blocking and tackling, that our internal focus would remain on increasing our efficiency and expanding our bandwidth. That prediction is proving to be accurate. However, the multiple steps we took in 2018 to re-orient Evolving Systems’ operating structures are bearing fruit at an accelerating pace and I believe the second half of this year will see a significant turning of the corner on the balance sheet. I want to thank you for your support and look forward to updating you on our continued progress. At this point, I would like to open the call to questions. Operator? Ladies and gentlemen, I want to thank you again for your continued support. Management will be available to talk with investors throughout the week. And if you have any questions, by all means, please feel free to contact us and we look forward to communicating further progress and developments with you.

[Matthew Stecker:]

I see a bunch of familiar names and again, I encourage -- I know that some of you guys will be calling to set up one-on-ones and we certainly encourage both the folks that have done that before and anyone else who haven't, to take advantage of that if you have specific questions. It's often a format that makes it easier for us to address them. And there is information on our website about how to contact our investor relations to do that. Again, thanks for your continued support. Operator, we're now ready to end the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.