Symbolic Logic, Inc.
Q3 2019 Earnings Call Transcript

Published: 13 Nov 2019

[Operator:]

Thank you. And welcome to Evolving Systems 2019 Third 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 would 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. These 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 Web site, 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:]

All right. Thank you. Well, good afternoon and thank you for joining us. Just two years ago, Evolving leveraged the significant chunk of its working capital and just about all the debt it could raise to buy three companies. Through these acquisitions, it entered a new market, the telecom centric customer value management space. All three of these acquired companies were generally operating at a significant loss. Many of you will recall that the hope was to transition them to growth by redeploying these newly acquired assets to a new set of vertical markets outside of the boundaries of telecom at the time we were going to get them into retail and financial services.As many of you all also recall, I was Evolving's Chairman as those deals closed, and we were optimistic that this plan would unlock substantial value. What happened? Well Evolviong found that it ran squarely into strong existing competition into those targeted verticals, and was never able to deploy that software into new markets. As such, we were left with the much harder job, executing on the blocking and tackling necessary to integrate and turn these companies profitable without a significant increase in addressable market.On top of all this, all three acquired companies had proud that aging technology platform that had been deprived of R&D as their sellers shop to companies and tune them for sale. Evolving was left of having to do the investment necessary to integrate the companies while simultaneously rebuilding their platforms. I came on board as full time CEO with the breadth and scope of this challenge coming into new form.So here we sit two years as a management team to honor, and I want to report on where we are. We have managed to build the new platform known to the market as Evolution that is the flagship of the CVML business. I’ll talk a little bit about more about what Evolution does, why it’s different and why it matters after Mark's comment, but it's really, really significant to us. Also more importantly this quarter, we passed the milestone of having Evolution pass acceptance criteria into production in its first deployment.We now know it works at scale in the most demanding possible environment, and feedback from the first customers is positive. From the overall perspective of the business, we’ve managed this process while standing EBITDA positive. We’ve often said on these calls that our plan has been to titrate product development, such that we remain on the positive side of breakeven. And while this has been challenging, we’re pleased to have generally done that.Significantly, during this quarter, we announced the restructuring of our debt covenants with our lender and we now repaid a large part of principal on that debt, having fully repaid one of the lines. We are in a trajectory to largely retire the rest of that debt throughout 2020. So all-in-all, getting from where we were to where we are now, progress has been both measureable and tangible. Getting all this integration and product work done while paying down debt, and while remaining at or above great has been a significant achievement and I’m proud of what our people have been able to do within those constraints.So with that as background, let’s turn to the financial performance. While third quarter revenues have fallen little bit below our expectations, we did return to the cash flow positive performance in the quarter and for the year-to-date. Our cost remains firmly under control and our cash position is strong. Generally, I believe these numbers are strong underlying indicators that while Evolving’s journey has been longer and more difficult than we all had hoped, the company is heading in the right direction, the milestones that we’ve been notching off are significant. I truly believe that optimism about where Evolving stands is justified, and there's plenty of evidence to support this belief. Our strong customer footprint and decades of proven performance give us the credibility that is critical for positively influencing senior provider buying decisions.Just a few weeks ago, Evolving won one of the industry’s most prestigious prizes, World Communications Award for Best Customer Experience for our deployment at Orange, Belgium. Normally we can't talk about specific customers but occasionally when they’re winning award, we’re able to really proud of it. The panel of the industry expert judges noted that the metrics our solutions support the new standards, that's the new standard in the industry. The visibility of this recognition gives us is invaluable and an aid to our sales efforts.Our investments in product solutions, both in the market of the acquired companies of CVML space but also in our traditional activation and orchestration solutions continue to position us to better support our global customers. We’ve been very clear in recent months that the key to future revenues lies in driving innovation across our product set while simultaneously finding new opportunities within our existing customer base. In parallel, we aim to consistently be winning new engagements. There are clients that are traditionally wary of solicitor and software sales, thereby, often precluding us from announcing successes. In this quarter alone, we have closed three significant deals.As we look ahead to life beyond our debt covenants in 2020, we will begin to selectively seek new opportunities whether through potential accretive acquisitions, joint ventures, or strategic partnerships to drive both top and bottom line performance and over the long-term, to bring shareholder value. Our customer footprint around the world is incredibly valuable. There are lots of products out there that would be more valuable in our hand and acquisitions isn't only way to get that done.At this point, I’ll hand over the call to Mark Szynkowski for a closer look at the third quarter numbers. Mark?

[Mark Szynkowski:]

Thank you, Matthew. Good evening, everyone. Let me run through the numbers. Our revenue for the third quarter ended September 30, 2019 was $6.1 million, a $1.3 million or approximately 17.6% decrease over the comparable year ago period. Total revenues for the nine months ended September 30, 2019 was $19.1 million or approximately 19.6% decrease over the same period last year. Service revenue, which include revenues from the company’s preference for managed service over perpetual licensing, comprised approximately of 97% and 94% to total revenue for the three months ended and nine months ended September 30, 2019 respectively, and remains a significant part of our strategy as a method to engage closely and regularly with our clients.We reported gross profit margins, excluding depreciation and amortization, of approximately 67% for the nine months ended September 30, 2019 as compared with the gross profit margin of 66% for the nine months ended September 30, 2018. The increase in margin is primarily due to the decrease in client project hours as the staff has been used to support efforts and product development, and engaging with existing and new client opportunities, adding to our sales efforts.Total operating expenses were $4.3 million in the quarter ended September 30, 2019, a decrease of approximately $0.2 million as compared to $4.5 million in the corresponding period a year ago. We continually evaluate our costs and look for savings opportunities. The decrease was primarily related to the reduction in general and administrative costs, we incurred lower legal fees, as well as lower outside contracted services. These were partially offset by the increase in cost and product development fueling our ongoing product builds and enhancement, and increased sales efforts as part of our strategy to grow our client relationship.Total operating expenses were $20.8 million for the nine months ended September 30, 2019. However, excluding the goodwill impairment of $6.7 million recorded in the previous quarter, the operating expenses were $14.1 million, no change as compared to the $14.1 million in the corresponding nine month period in the prior year. Again, as increased cost and product development and sales have been offset by cost savings in other areas.The third quarter operating loss was $0.3 million as compared to $0.6 million operating income for the three months ended September 30, 2019 and September 30, 2018 respectively. The loss was primarily related to the decrease in revenues. The company reported adjusted earnings before interest, taxes, depreciation and amortization adjusted EBITDA of $0.1 million for the quarter ended September 30, 2019 as compared to $0.9 million for the same period a year ago.Our cash and cash equivalents as of September 30th were $4.3 million, a decrease of $2.4 million or 37% compared with $6.7 million as of December 31, 2018. This decrease was primarily related to debt repayments as the company generated positive cash flows from operations in 2019. Contract receivables net of allowance for doubtful accounts were $6 million, a decrease of $1.8 million compared to the December 31, 2018. Unbuild work-in-progress net of allowance for doubtful accounts, was $2.7 million and $3 million for the periods ended September 30th '19 and December 31, 2018 respectively.Working capital as of September 30, 2019 decreased on a sequential basis to $4.9 million from $8.1 million as of December 31, 2018 due to the decrease in our cash and cash equivalents from payments from our outstanding debt and interest. Working capital also was decreased by recording of the current liability of $0.4 million related to the adoption of accounting standards update ASU 2016-2 on Topic 842 for operating leases, which is new in 2019. In addition, we have recorded $1 million as short-term debt liability to account for combined prepayment amount due as part of the amendment agreed to with East West Bank, and updated our terms and financial covenants for our credit facility. These are less restricted to our investment and growth strategies. The company has made and continues to expect to make every loan repayment in full as originally scheduled, and we believe we have ample cash on hand and liquidity in our working capital to fund our business and continue to make strategic investments.Moving on to our business report. I’ll turn the call back over to Matthew.

[Matthew Stecker:]

Mark, thank you very much for that and I know there is a lot there and we'll have an opportunity for people to ask questions about the numbers as we wrap up. As I discussed earlier, Evolving’s journey has been more complicated and more difficult than we anticipated, and we decided to embark upon this path with the acquisitions two years ago. That said, we have had significant milestones and have achieved tangible progress.Our continuing adjusted EBITDA positive position our cash reserves and the evidence of a turnaround in both products and performance and the business itself are noteworthy. I’m going to take this opportunity to talk a bit more about evolution, what it does and what it means than it normally would on a call like this. I think it's important to in understanding of the business overall. Evolution is both critical to our future success, as well as demanding and resource trends to reach its final stages of its first deployment. It also turned out that the first Evolution customers are some of the largest and most complex across our existing user base. This has meant additional time and development effort to make sure the products have been that more compatible and to work at scale. But the good news is that it’s already been tested at scale. As we discussed, the quarter has seen Evolution operational for the first time on customer sites with live data. We’re now in a position to begin to reap rewards of over a year of hard thought product development.So I want to bring into clarity for a second of what evolution does. Generally it is a platform that looks at everything that happens within a telecom user space, both on the activity side, what are people doing with their handsets, what calls they've making, what websites are they looking, what kind of text messages are they sending, who are they calling, when are they calling, what is everything they’re doing on their handset. But also on the financial side, when do they pay their bills, how faster they’re using their balance, what's changing about their credit, what’s changing about their payment profile, what's changing about their demographic data.We then use this data and the knowledge it represents to overly marketing triggers to take actions to optimize the value of the carriers' user base. Sometimes these actions are simple promotions. We send an SMS for example that says now it might be good time to upgrade your handset or your plan, because we know that in that instant you have money, and are at that point in your customer journey where the specific offer is penalizing for you. This example is simple but you can imagine that the promotions we run can be incredibly complicated in terms of the numbers of variables and dimension that they look at with deals and offers tailored to individual users and also tailored to the individual business goals of that carrier customer.Additionally, all this data is also used to run a spectrum of loyalty programs in multiple flavors, ranging from simple points programs to multifaceted gamification exercises, like we won the award with just recently, that engage into later and users want delivering both values and loyalty. Now, if you think about the scale of all this data and the need to have it processed in real time, you'll project a challenge that saw us running up against the limitation of horsepower in the previous technology platforms that we inherited from the acquired company. A decade ago, when the predecessor systems were built, the state-of-the-art was to handle this kind of big data problem was to store and copy all that user data logs into big databases that were then cleared and triggered for actions.The challenge we faced with this store, copy and clearing method was running out of steam. The database engines themselves we were using were hitting the maximum theoretical limitations for their size. Performance is beginning to suffer such that we can only be really effective in smaller operators that had lower volumes. The reason is the footprint of this part of the business is concentrated in the emerging market.And while we built the strong capability of doing business in that sector, the truth is and it took me a long time to figure this out, their systems were also limited in the scale -- for the scale of the operators that were found there. We have to say no overtime to multiple opportunities to deploy in environments that were just too large to the system to handle. Evolution solved this problem by putting a real time analytical engine across the streams of carrier data that catches relevant triggering events in real time. A way to think about what it does is in this illustration. Think of Evolution as the policeman whose job is to hand out traffic tickets on Fifth Avenue. The previous systems stored everything about the behavior, every car that went by, recorded where it was in every position and time, had an engine that would analyze vehicle movement data offline and send its users speeding tickets in the mail. Evolution on the other hand, watches the flow of traffic and in real time flag just the cars that needed tickets. It records for each one why and what conditions married to the ticket.But as we're able to get the same result without storing all those huge databases, it doesn't have to store any information about the majority of traffic, we're not interested in. We leverage state-of-the-art techniques and technologies to do this and the result of it is that with his architectural shift, we can now handle carriers much larger than ever before. We still have in front of us the hard challenge of selling into those larger customers, but the technical barriers gone and from a strategic perspective it means significant new addressable markets for us.Within our existing footprint, the sales people had knocked on all the doors and were to knock on. But now that we can really handle Tier 2s and smaller Tier 1s and even larger Tier 1s, we have a lot of work in reconnecting with customers that we've ignored for a long time, because we couldn't technically support their needs for many years.On the traditional evolving side of the business, our customer activation and network services business has been through and has now emerged from significant transition in its product line up. Our newly repositioned (e)SIM Life Cycle Management Suite, a coherent set of offerings reflecting our unique ability to help carriers keep pace with the evolution of SIM functionality, particularly the SSIM, the (e)SIM is essential to the business that generates more interest to the market and by extension more hard means. In addition on top of all that, we have a new product called [chameleon SIM] in the early stages of development that allows MVNOs to seamlessly work on top of multiple network operators instead of being tied to just one.In terms of sales, the unfamiliar but positive problem thrown up by our work in the first half of 2019 is that the growing number of opportunities we're addressing and now stretching our resources as we strive to exploit them, our investment in marketing in 2018 is paying off with our first deal driven exclusively by market source lead closed that month and now have delivered. There is still no question that a great deal of work remains to be done to optimize our performance and continue to expand our revenues. But as I said before, there is more and more evidence that the foundations for success are firmly in place. The shift from rebuilding mode to growth mode is almost complete.Finally, over the last year, extensive work has been done to revitalize company's product and pipeline. With recent customer wins and industry awards and enhanced pipeline, I believe that market is taking notice. One consequence to the story is we're now starting to vote significantly more attention towards IR and telling the story of the company and what's happening here.So I want to thank all of you for your support, and look forward to updating you on our continued progress. I had the pleasure of speaking to many of you individually, and I've been especially happy during this quarter to have spoken to some new investors in addition to the main folks that have been following us for years. If you'd like to have a call with us or speak to management about the company and its journey, feel free to follow the links on the Web site and shoot a message to our IR team.At this point, I'd be happy to open the call to questions, cognizant that I have gone on longer than I traditionally would in a call like this. Operator?

[Operator:]

[Operator instructions] And we do have our first question on the line. Our first question comes from the line of [Mike Chadwick with Impetius] Capital.

[Unidentified Analyst:]

Thank you, gentlemen, and appreciate the continued mindset on keeping costs in check, while you were in the transition cycle. I have a question. I came in just a few minutes [Technical Difficult] apologies for that, maybe that's been already answered. So just bare with me. I wanted to go back to some of the contracts you were alluding to in the quarterly conference call. And if you have any updates there that we can -- that can be disclosed or discussed further at this time?

[Matthew Stecker:]

I’ll let Mark talk about the detail, this is Matthew. In general, we have moved away from way back going back a few years. We used to report bookings as kind of a predictor of where our future revenues might be going. We stopped doing that. And if you look at our business, there are -- in any given quarter, there are six or seven new deals that close ranging from small to large. And that is a distribution of deals, such that when you impose it over a quarter, doing the same line of work while in quarter you can close and the next quarter you close nine, depending on where the quarter boundary is. One quarter you might close six and the other you close six.And so it’s a little bit hard and that's why we don't report it, because it's been pretty lumpy. What I can tell you is subjectively we’ve been pretty happy with the state of deal closing. There was a lot of stuff that has shifted throughout the year. And so I expect in the fourth quarter, as I alluded to in the press release if you read, traditionally the fourth quarter is strong for us, because that’s when telcos have traditionally cleaned their budgets and they usually have to -- they also have a use it or lose it mechanism by the end.So what we don’t report on specific new contracts and where they are in terms of closing, we can say that we’ve been happy with kind of the pace we have at deal closure. It's always tough and we had -- I think when you take a look at the yearly cycle, we will do well. Every quarter, we always are chasing orders to try and get them closed by in the last days of the quarter and that’s why the fourth quarter is kind of clean up. Mark, I don’t know if can say anything more than, but I’ll let you have a crack at it.

[Mark Szynkowski:]

No, I mean other than like you said, taking out the specific they’re definitely range. I think also that they also that they range sometimes in the size you can have very large deals to very small. On average, we’ve seen the deal size somewhat shrink due to the competitiveness of the market. However, we do have some deals out there and it's all about ongoing and recurring revenue for us. And also as we reach certain milestones, that revenue could be recognized out over anywhere from a four to six, seven months, sometimes a year even past in recognition.

[Matthew Stecker:]

So just in summary, we made decision a while back that we announced revenue and that we were chasing our tails little bit trying to announce bookings and deals to be done. So we’ll talk subjectively about them as potential indicators. We’ll talk about having won some deals in a particular geography. But we do not try and make a promise to track hey we talked about three new European deals and let’s update you guys as to where they are. So when we talk about deals and progress, it's usually just as an example.

[Unidentified Analyst:]

So maybe we can think about it another then. If the business is such that you’re recognizing revenue, you’re saying four to seven months I think on average. Are we talking about the complete revenue recognition of the first year agreements? How should we be thinking about the duration of the contracts and what type of KPIs should we be thinking about then for this business in terms of understanding the recurring revenue model?

[Matthew Stecker:]

It's a good question, and we can give you some more detail offline and be happy to do that. But our customers paying -- one of the things that we've done is a couple of years ago we created a managed services offering. And when you think about what that did, it did not change what we sold in anyway really. But what it did is it created an alternate financing vehicle for our customers. So traditionally, a customer would buy from us instead of software licenses and then maintenance and support. So you see a big lump of revenue in year one when they bought the licenses.And then depending on the length of the deal, two, three, four out years of some relatively small revenue, maybe a 10th of that original size, maybe a quarter for ongoing maintenance and support. So our revenues would be very lumpy with the big hits during the quarter, that being -- our cash flow would be. But from a GAAP perspective, if it is always required us to amortize that license revenue pro rata across the life of the contract. So from a cash flow perspective, we would get that big lump in the first year. But from a revenue recognition perspective, it was essentially either that being licensed revenue would be taken ratably throughout all the years of the contract.So today customers either buy in that model, they will buy a license then service, or we will offer them a managed service fee, which sometimes helps them to get the project into their OpEx budgets. So instead of charging them a million dollars for licenses and $100,000 a year for maintenance, we'll just charge them $300,000 a year for flat out license to kind of everything and the tools they need in our toolkit plus all the support they need. Same results from our end. And whether we sell it as a CapEx project or as a managed service project, it's largely depending on the customers' environment and whether they have CapEx or OpEx dollars. But it's really the same product and program that they get.Almost all of our clients are multiyear engagements, so we just announced the breakdown of what is new and how many years they're under contract for, et cetera. But I said in previous calls that one way of understanding both sides of the business is that in any given year, about 70% to 80% of our revenue, if we didn't do anything, would continue in future years. 30% would end. And because carriers are either merging, they are integrating, they are moving on to new solutions, they are upgrading their underlying technology stack and don't need our stuff anymore. And so the tale of the tape is really if we can sell -- if we sell more than that on 30% replacement, we will grow. If we sell it exactly that 30% replacement, we stay at the same size. And if we sell less than that, we'll shrink a little bit.Now, obviously, there is a whole part of the company that deploy, that trying to reduce that churn rate as well, trying to make sure that there isn't 30% at risk. But in terms of what's at contractual risk any given year, it's probably about 30% of our underlying revenue where people would have the option to do something else. But we've been pretty good about getting a lot of customers to stay with us through that transition. There is always a price renegotiation of course, but that's kind of the metric. And again, because we don't give out detailed information about the aging of new contracts and where they sit and what's recurring and what's not, I know it can be frustrating to track. But give us a call offline and we can help you try and understand what you need to.

[Operator:]

And we do have another question. This comes from the line of [Alan Lee], Private Investor.

[Unidentified Analyst:]

I just had a question here. I notice your cash has gone down quite a bit over the last year, and you’re paying down the debt, which I understand. And you’re saying you’re -- Evolving is about to reap some rewards here very soon. So my question is, are you expecting the revenue to go up quite a bit over the next 12 months?

[Matthew Stecker:]

Well, it’s a great question, Alan. And so it's an astute view. What’s happen in the last year is that we’ve run a breakeven, and running a breakeven is meant that paying off the debts coming out of our cash. And so the good news is that that load ends in 2020, so we will finish paying off the debt. In terms of the projection of the business, everything we’re doing has been trying to set the stage for growth.That being said, if you take a look at the revenues, both the pro forma revenue of the acquired companies and Evolving’s historical revenue net of the acquired companies, there's been a multiyear downturn in the revenues. The telecom environment is smaller than it used to be. Projects that we would sell three, four years ago for a million dollars are now $200,000 projects, and that’s up because the work has changed, it is because we’re selling into a cost constrained environment. A couple of years ago, telecom operators would be asking us, hey how do we plan to grow with you? Now they work -- if they’re good customers, they reach out and say, how can you help me work in an environment where my top line revenue is shrinking, my budget is shrinking and my budgets are cut? And that’s just the way of the telecom environment.That being said, we’ve been working on everything we’re doing is around rebuilding revenue. And so the moment I think we’re in and to get from shrinking, which is where we’ve been to growth, you have to pass through staying the same size. It’s a little bit hard to tell whether you’re there or not yet, because we have a lot of seasonality. Q3 is usually down. Q4 is usually bigger as we’ve discussed. So given there's a lumpiness between the quarters, it’s a little bit hard to instrument and tell where you are. But the moment I think we’re at is passing through that flat spot.And so I think the first notch in our belt would be to say hey, we’re here, right? We can consistently pull off the same revenue performance. It’s not going to be shrinking year-on-year anymore, right? That will be the first milestone. And then we’ll start really turning our heads to monitoring growth. I mean I think we have everything we need in order to put the platform back on the modest growth. I think we could get back to being the same size that we were in 2018 and then 2017. There is nothing about the business [Technical Difficulty] kind of performance.So again, we’re not giving a prediction, but that is -- that’s what we’re trying to go, right? Investors have been very clear that they’ve been patient throughout this process, but no one could see us tread water eventually that doesn’t get us anywhere. And so they’ve been clear that we need to grow. And again, the first step for that will be proving that we stop shrinking. And I think we’re there but the next few quarters, we’ll tell that and then we’ll hope to start putting up some slow but consistent growth, and that’s from the organic business.So when I think about it is that once we’re done paying off the debt then we can start making strategic moves that augment that. So if you look at what these two businesses we have now, how they’re performing. I think, again, they’ve been shrinking for many years. I think they're probably at the end of their shrinking cycle. And given the product investment, we should probably see them pointed towards from straight line into some slight growth in the next year.And then on top of that, we’ll be able to start thinking, as I mentioned before, about what other kinds of products, what other kinds of partnerships we can do to make some strategic moves once our hands are basically untied from the bank debt in 2020.

[Operator:]

And we have no other questions on the line at this time.

[Matthew Stecker:]

Awesome. Well, I think I appreciate the astute questions. And thank you.

[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, please feel free to contact us and we look forward to communicating further progress and developments with you. and we're now ready to end our call.