Symbolic Logic, Inc.
Q4 2019 Earnings Call Transcript

Published: 31 Mar 2020

[Operator:]

Thank you. And welcome to Evolving Systems 2019 Fourth Quarter Results Conference Call. As you may have seen, our Form 10-K was filed after market closed 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:]

Good afternoon and thank you for joining us. When we do this call that includes the year-end financial results, it always marks the longest time since we have done an update. And since it's been some times we have done it, the world has been a little bit busy. So, we have a lot of updates for you today and my go a little longer than we traditionally have. So, hopefully you will be patient with that.But we anticipated at the end of the third quarter the headline today is, as the fourth quarter revenues rose from the preceding quarter. Based on a lot of hard work behind the scenes, it has been our expectation that our business will begin an upward trend after a lengthy period focused on internal investment and consolidation of our multiple acquired companies. The project is improving Evolving Systems remains ongoing and we continue to execute our plans to consolidate and leverage the leadership position we have within the two product families we sell to wireless carriers around the world.As a key milestone, we're proud to be able to announce today that we have generated positive cash flow from our operations in the year 2019. While the revenues for the year were down from 2018. Our fourth quarter rose to the third quarter which as I said, reflects our new trajectory. I did want to emphasize before I turn it over to Mark that the operating loss of 7.9 million in net loss of 9.7 million for the year ending 2019 that we're reporting today was almost completely related to the goodwill impairment we announced in the second quarter of the year. Excluding the goodwill impairment operating loss would have been 1.2 million and net loss would have been 3.0 million for the year ended December 31.So what does it mean when we say that the goodwill impairment was triggered solely due to the market capitalization of our common stock? We look at the value of these intangibles from multiple aspects, and all the fundamental valuation test would not have required an impairment. In other words, we think the value of the acquisitions we've made remains strong. That said, there are various rules and guidances that make it hard for a company and for the auditors to allow their company to carry goodwill in excess of a company's public market cap. So at the end of the day, rather than spending our time finding auditors and accountants, it was easier to write down those assets then our cycles focused on our products and our customers. We've now written off all the large tranches of goodwill left making it unlikely that we will have to repeat this exercise. And so going forward it is likely that the headline numbers are more closely tracked with our actual operating results.I bring up the goodwill impairment because it obscures the underlying progress we've made this year and the tangible evidence in the fourth quarter of an upward turnaround in our performance. I said in previous investor calls, we're starting to see concrete signs of a turnaround in the business and all this have taken about six months longer than anticipated, is now starting to show on the balance sheet. There's good reason for optimism about the company's future. The impairment has no impact in our business, its outlook, or prospects.The investments we made in the company between 2016 and 2018 now should have returned but deals now in the later stages of the sales pipeline, some close during closing, You will have noticed a number of media announcements recently that attest to that fact. It's a frustrating feature of our business that the carriers we've worked with tend to be reluctant to have their names publicized in press releases. So it's often that our press releases are necessarily anonymized. Nevertheless, they represent good news and they also backup the well founded optimism about where the company stands today.I appreciate that it's hard for you guys as investors to judge the impact on our stock value when we haven't released it says we want to contract with an unnamed large operator whose size is defined. Usually we can't give either of those pieces of information out. Generally though, I would take the flow of these announcements as indication of the ongoing health of the company's deal flow. If a particular deal has a transformational quality, we'll call it out. Still, however, frustrating these anonymized releases are, I hope you'll agree that they're preferable to a background of silence.From a fundamental strategic perspective we are nearing the completion of retiring the debt taken on to purchase Lumata, BLS and SSM. Looking forward if we were able to continue executing we see a path towards the continued debt free, profitable Evolving Systems within our current products and profile.Reflecting on 2019 we overcame a large number of challenges and milestones operationally. The major and complex rebuild of our offering and customer value management loyalty was time consuming. But the result of that work the Evolution platform has now been implemented at its first customer site. Turning four products with four complicated code bases into one updated fully functional solution was not straightforward, but we can now market and still are coherent and unified offering capable of supporting multiple relevant in demand use cases. Interestingly, several of these are highly relevant phase of the ongoing coronavirus pandemic and we'll talk about that in a bit.Our activation and network services solutions were as we have previously discussed, repackaged into a package we call the ECM Lifecycle Management Suite in 2019. And its component products are updated with significant new version releases for tertiary, smart dealer and DSA. Our investment in marketing last year has yielded multiple opportunities including an annual new customer plan.Over the past 24 months, we have built an Evolving Systems that it can continue to compete in telecom market today. Digitization, the advent of ECM and other trends are including the ongoing -- and even including the ongoing global situation all influence operators buying decisions when it comes to enabling software that we can address often for the first time. As a result, I'm confidently anticipating the 2020 we'll see a continuation of the upward trend started in the fourth quarter.Finally, I'd like to take the opportunity to discuss the viral elephant in the room and touch on how the global coronavirus outbreak is impacting us. The good news is that we're a company that has been built on a distributed foundation. Our people serve a global footprint of operators and are themselves vastly decentralized. Our global footprint is much larger than most companies are sized because the nature of our work. A positive effect of this existing profile is that we've been both running our own business and interacting with our key customers through telework and other remote technologies for years, our key meetings and internal processes that for a long time been designed for remote participation.In recent weeks, we've leveraged this internal ability by extending it to provide support remotely to our clients and prospects. And such, the present global situation has had a relatively limited effect on our existing operation. We've had some staff offices that have had to move to remote work, including in India, in New York and in the U.K. But this is caused simply extend rather than create prophecies for supporting network. I'll talk more about this, after Mark run through the numbers. But in general, we've been on the low end of the spectrum of impact of the current situation, all of us at Evolving remain focused on growing our business and creating long-term value while continuing to meet our clients needs.Again, I'll discuss these developments in a little bit more detail from a different aspect later in the call. But first, let's start with an overview of the year and the quarter at this point to do that, I'll hand it over to Mark.

[Mark Szynkowski:]

Thank you, Matthew. Good evening, everyone.Let's run through the numbers. Let me start with the fourth quarter. It was good as Matthew mentioned to see revenues trend up from the third quarter. But looking at the quarterly comparison over the same three-month period of last year 2018, the total revenue for the fourth quarter ended December 31, 2019 was 6.7 million as compared to 6.9 million from a year ago, a decrease of 0.2 million or just 3.4%.[Yearly driving] [ph] decrease was the higher revenues associated with the project work and clients acquired from the acquisitions at the end of 2017 and the work went on through 2018 offset by this year new implementations and upgrades that we have begun.Total operating expenses for the fourth quarter 2019 were 4.2 million compared to the 4.5 million excluding any other goodwill impairment from the fourth quarter of last year. The decrease was mostly related to a reduction in product development as staff has begun working on the project deliverable work and shifted away from the product development work.The company reported an operating income of 0.1 million for the fourth quarter ending December 31, 2019, compared to 0.2 million operating income, again excluding that impairment loss from the prior year. Adjusted EBITDA for the fourth quarter December 31, 2019 was 0.4 million as compared to the adjusted EBITDA 0.6 million in the fourth quarter ended December 31, 2018.Moving on to the year-over-year results, let's start with the balance sheet. Cash and cash equivalents as of December 31, were approximately 3.1 million as opposed to 6.7 million last year. Net allowance for doubtful accounts receivable and the net allowance for doubtful accounts was 6.7 million, a decrease of 1 million or approximately 13.2% compared to last year. Working capital decreased 4.3 million or approximately 53% to 3.8 million from 8.1 million.As of the decrease in the working capital is related to the decrease in the cash, the contract receivables, the unbilled prior work in progress partially offset by the decrease in the current term loan payable and accounts payable and accrued liabilities. Also to note is there's very little long-term debt left as when we updated the amendments with the bank and we had a $1 million payoff making that loan near repayment.Working capital has also decreased by recording the liability of 0.4 million related to the adoption of accounting standard ASU 2016 on topic 842 about accounting for leases. The company continues to generate positive cash flow from operations and has made timely all of its schedule loan payments to East West Bank.Moving on to the results from operations, total revenue for the year ended December 31, 2019 was 25.8 million, a 15.9% decrease compared to last year. Most of this decrease was in the services revenue. As we discussed earlier, many of the ongoing project work was completed from the acquired companies as well as some of the client relationships after the acquisition ended in 2018.The company reported gross profit margins excluding depreciation and amortization of approximately 66.3% as compared to a gross profit of 66.2% for the years ended December 31, 2019, 2018, respectively. The company continues to assign staff when they're available to work on support efforts internally and product development.As noted earlier, as a result of the significant decline in the market capitalization this year and in prior years, there was a significant non-cash charge for impairment of goodwill for the remaining carry value of 6.7 million in the second quarter of this year. And as noted previously, it was 17.8 million in the fourth quarter of December 31 2018.Total operating expenses were 25 million for this year and excluding the goodwill impairment to cover the company's operating expenses were 18.3 million, which decreased approximately 0.2 million or 1.4% as compared to 18.5 million in the corresponding year ago, excluding that 2018 goodwill impairment. The decrease was primarily related to the reduction in professional fees, lower legal fees, and lower incentive compensation as compared to the prior year, but was offset by our increased focused on product development and growing our global business development team in tandem with additional marketing efforts.The highlight again, the company excluding any goodwill impairments from both '19 and '18 had an operating loss of 1.2 million and a net loss of 0.3 million for the year ended December 31, 2019 compared to operating income of 1.8 million and net income of 3 million for the same year period of year ended December 31 2018.The company reported adjusted earnings before interest taxes, depreciation and amortization, EBITDA -- adjusted EBITDA of 0.3 million compared to 3.6 million for the respective year and last year. The company has strategically invest the portions of its profits and continuing initiatives to foster long-term growth.Now, I will now turn it back over to Matthew, thank you.

[Matthew Stecker:]

Okay, Mark. Thank you very much. So with these results in mind and to underline what I said earlier, I'm confident the company has been passing through an inflection point in terms of performance and the track we're on will continue to deliver the upward trend and revenues we saw in the fourth quarter. The turnaround of the past 12 to 18 months isn't totally complete, but the hard graft is now largely behind us the foundation or lead.Of course, as we move into 2020, there are still some unknowns with respect to the coronavirus situation. I previously discussed how we as an operating entity are continuing business largely as usual. Our customers continue to use our products and paying for them, and we continue to service them with the excellence we become to be known for. For us, the largest practical impact has been to our traditional modes of sales and business development. New sales for us has historically meant sending highly trained specialists [indiscernible] to airplane and to have them converse with telecom operators spread out around the world. That traditional process has obviously ground to a temporary halt. Still we aren't sitting on our hands. We are quickly working with our current and perspective clients to find new ways to communicate about to sell and to service our products.There are cases where remote activation really can help operators whose retail operations have blinked out of existence. Our CVM platforms can help our operators communicate rapidly changing offers and programs to their customers in real-time. Look out for a media article to appear shortly describing the specific ways that operators can use our tools to address novel COVID-19 related needs.We've also developed a marketing literature addressing this topic that we are communicating to our clients even as we speak. All that said, however, while the good news is that our existing product and revenue streams continue to run at full speed, we have seen in many carriers a blanket freeze on new initiatives. In some cases where implementation and installation work has scheduled new products requires people to be on site physically, to wire or install equipment or to be in labs et cetera or where we need the support of carrier personnel, those initiatives are being delayed because of the length of our sales cycle, it will take some time to understand the impact of the coronavirus on our sales and business development and the effectiveness of the mitigations we put in place.As we sort through our business development challenges, we're simultaneously just beginning to look at the impact of various government programs and opportunities specific to the COVID situation. Frankly, with the earnings release now behind us, we planned certain significant horsepower towards understanding and evaluating how recent legal and regulatory changes as well as new government programs can benefit us across the many countries that comprise our footprint. My hope is that by the time we speak again with you next quarter, we will have some concrete updates about this.Returning for seconds to the more regular part of our business. Our 2019 released Evolution platform about which I spoke about often is now live and contributing to the bottom-line. This year we will see it proliferate both to existing customers as they migrate to new technology, and as new ones arise. Our go-to-market for this new offering positions Evolving as leading partner in digital innovation. Our customer activation network services business also transitioned to the product line of 2019. The ECM Lifecycle Management Suite now clearly articulates our unique ability to help carriers keep pace with the Evolution and SIM functionality, including the advent of the [indiscernible] both central to their businesses and as a result is resonating with clients and prospects alike.In terms of sales we continue to work and represent our new product lineup to the market. Clearly coronavirus adds to the challenge of closing deals and decision makers no longer closely assembled. And though this is a store of my said, will rather and pretty effective from an operational perspective, it's probably reasonable to expect sales cycle to be somewhat extended in 2020. As I already said, however, received a number of win announcements, and we expect that trend to continue.So to summarize, 2019 ended on a good note for Evolving. As ever much work remains to be done to optimize our own performance. We have strong foundations to build off. In this new world where movement is temporarily restricted the coming months we'll see an increased focus on digital marketing with investments and search engine optimization, and traditional as well as social media efforts as we fine tune operations to accommodate the present operational realities. I'm confident our performance will continue to trend in the right direction. We are in growth mode, and that is good news for all of us.I previously said that the plan in 2019 was solely to work internally on the company's products and pipeline. We've done that and now we see the market starting to respond. There is however a significant gap between how we see the company's performance and prospects and the way it is viewed by the market. But we expect that gap to begin to close in 2020 as that trend backs in. As a result we will start turning increased attention to finding places to tell the Evolving story to large and small audiences, the investor community.I know there's been a lot of pains built around decline in our stock price, in particular, the volatility around the COVID situation hit and what for us is the longest period where we're quiet while we wait to file our year results. It also forces a blackout period hasn't allowed any of us as management to individually take advantage of the stock price being so low. With no information the market is seems the worst. Hopefully, after this call, once you've made it clear that the business is relatively resilient to the pandemic and is trending in the right direction from our perspective, we can claw back some of the ground we've lost due to the uncertainty.In short, we have everything we need in the toolbox that if we wielded very precisely we can continue to see organic progress and begin moving towards sustained results. This is not an easy enterprise to run. Our clients are demanding. They're dispersed and our products are highly specialized. We've learned how to make those ingredients work together and I think the future allow us to continue demonstrating that. While we're assessing the COVID impact, we still have a place -- we have come to a place where a well run Evolving Systems can start being consistent about performance.I want to thank all of you for your support and look forward to updating you both as a group and individually in our continued progress. At this point, I'd like to be able to turn the call and open it to question, operator.

[Operator:]

Thank you. [Operator Instructions]

[Matthew Stecker:]

I will take that as high compliment for the comprehensive job we did in addressing all anticipated questions.

[Operator:]

We do have one question from the line of [Mark Stegill with Anfield Capital] [ph]. Your line is now open.

[Unidentified Analyst:]

Yes. Hi, guys. Thank you. I'm glad I'm not leaving you too lonely on this call. Couple of questions. Logistically, you have these big offices in India. I understand India's it looks like on lockdown. How are all those guys working? Who are normally in that 5000, 6000 square foot office?

[Matthew Stecker:]

Thanks for the question. So, we have not one but two offices in India. The traditional part of Evolving has kind of main operational office in Bangalore. And the former SSM had an office in Calcutta that we still operate for our CBM group. As I said before, we had been because most of the rest of our offices around the world do a lot of telework. Most of our people who are not in India, telework on a daily basis and so for us we were able to prepare for those folks doing telework by increasing the bandwidth we had to especially at the Bangalore office, we did a day of trial tests where we asked everyone to stay home before it was mandated. So we can make sure that people could work from home.And notably, we have not closed or put our office on lockdown. So our policy there is that we are encouraging everyone to work from home, if they need something, or they need to reboot a server. They're welcome to come into the office. And as a result, and we've been kind of keeping a tight eye on how, as I said, the few offices that had been physical have transitioned to remote work, we have not experienced a decrease in productivity as a result.

[Unidentified Analyst:]

So those people are working from home, is that what you're saying?

[Matthew Stecker:]

That's correct. They're also doing the same programming jobs, they were in the same software quality and monitoring, depending on whatever they were in QA testing, they all have the tools to do what they're doing remotely.

[Unidentified Analyst:]

Okay, great. Good. Thank you. So one more question. This is a much bigger picture question. And you probably get this all the time. And by the way, we're relatively new investors here. We've been buying this for the last maybe three months or so. And we're still losing money like everyone else, but it hasn't been horrible. But this is my question. I mean, you have this tiny little company, you're probably doing, I mean, just call it a million a year in free cash flow ballpark, it probably costs you and correct me if I'm wrong, but to be a standalone public company with all the legal stuff and the accounting stuff, and then a C suite and all that, that could cost 2 million a year.I mean, it seems that you would be such an obvious strategic acquisition for somebody looking to pick up 65% gross margin revenue. And at $2 a share, there are more than $2 a share. They'd be paying only one times revenue for you. And then and yet that would be a triple in the stock price. So, at what point is there a strategic process and you sell this thing to some company looking to pick up cheap revenue, which for us as shareholders is a massive percentage increase in the stock?

[Matthew Stecker:]

It's a really good question. And one thing, I'll tell you is that when the stock price went from, $6 bucks a share, down to $0.80 a share for essentially the same business. The difference really was us paying a dividend versus not. We got a lot of -- when we continue to generate a lot of unsolicited strategic input. It's often hard, I think for people to as much as you'd like to tell them. Listen because of some very complicated factors, the public markets have beat us up. But if you valued this on any traditional valuation -- set of valuation, metrics, right? Where would you come to? What is the business that's doing these metrics worth?And I'll give you some guidance, depending on -- we run a pretty tight ship, both in terms of our public accounting and all that rough numbers, it's probably about a million dollars we spend in direct costs for being a publicly traded company. So acquire and potentially either lose all of that or lose half of that if they still needed audited financials. I mean, those are rough numbers of course.

[Unidentified Analyst:]

But then there's another number, another million from having a C suite, right. So, ballpark, so that's 2 million, and then there's a million of free cash flow, so call it a million. So you've got a $3 million company, right? If a guy came in and paid, I don't know even $2 a share here. He'd be buying this thing for what like, 8x, it would be a steal for him, but it will be a hell of a good deal for shareholders who now have a $0.70 stock, I didn't mean to interrupt you. I'm sorry. But yeah…

[Matthew Stecker:]

No, look, it's a point well taken, right. I mean, I think you'll get no argument at our size. We spend -- this thing would clean up a lot and become a different business if we didn't have those public costs. And that thesis is out there and there have been people who have explored it from time to time. And, look I think that from us from internally, right where we've been for the last 18 months, two years is repaying the debt that we had for having done the acquisitions that we did. Now that's ending and the debts almost retired. I think it's going to be a moment in the business where we can kind of turn our attention to think more strategically about what we do -- what we want to do going forward.Because practically speaking the debt covenants we had and continue to have through later in the year; they haven't really allowed us to do anything other the business as usual. But again, we do see some interest in time to time. I mean, if you're asking rhetorically why there isn't more interest people who have a thesis like that, and I probably would argue about the extra overhead in our C suite, other than me and Mark that that is the C suite, we're both super active day-to-day in keeping our business going.But look I think there could be some synergies there for someone who wanted to do that, a lot of Evolving investors have been on it for a long-term and they currently, I do the rounds speaking to big investors and there are some folks who have the same piece as you do. Hey, why don't you go and try some of the take this out for a quick hit. Some folks have been along and want to see a long organic rebuild back up to the levels were a few years ago. And so I think that's a good discussion that we'll continue to have. And it's good to be able to have it.

[Unidentified Analyst:]

Yes. I mean, look, I don't know if I'm big investor, but I guess we have around 500,000 shares of stock. So, it's a meaningful percentage of the company, even if it's not that much money. So, there's my vote right there, you know.

[Matthew Stecker:]

I appreciate that perspective. And by the way, I would encourage you, if you want to reach to our Investors Relation line, we'd love to take some time and meet with you and answer your questions privately as we do for any investors who want to take advantage of that. And certainly would love to continue to get your input.

[Unidentified Analyst:]

Okay. All right. Thank you very much.

[Matthew Stecker:]

Thank you for the question.

[Operator:]

Thank you. [Operator Instructions] We are not showing any further questions on the phone line and back to Matthew.

[Matthew Stecker:]

All right. So I think everyone -- I lost a little -- if I have a little piece of script to end [Technical Difficulty]. Thank you everyone for participating. And we look forward to speaking with you soon. Anyone who wants to ask more detailed questions, there are instructions on our Investors Relation page on how to get in touch with us and set up a private call with management. We encourage people to do that and take advantage of that, if they would like it.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect