Symbolic Logic, Inc.
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Thank you and welcome to Evolving Systems 2018 Second Quarter Results Conference Call. As you may have seen, our Form 10-Q was filed after market close today, and our press release was just issued. With us, from management, today will be Matthew Stecker, Evolving Systems’ Chairman and Chief Executive Officer; as well as Mark Szynkowski, Evolving Systems’ Senior Vice President of Finance. On today’s call, we will provide an update on the quarter-end and update you on the business activities currently underway. 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 turn the call over to Matthew Stecker. Matthew?

[Matthew Stecker:]

Thank you, and thanks to everyone, who has just joined us today on the call and on the webcast. Obviously, this has been a quarter full of news, particularly with the announcement of our CEO change. At the same time, internally, it’s really been a quarter of staying on track with regard to our plan and progress. So first of all, let me take this opportunity to say how happy I am to be leading Evolving as Chief Executive. Since taking up the role, I’ve had the chance to speak individually with many investors and I’m looking forward to speaking to the ones that I haven’t spoken to yet. And there have been several common questions. I’ll answer just a few of them today. One of them, and I’ve been asked a lot in different ways, is whether I’m here in an interim or a caretaker role. The answer is a resounding no. Evolving is my only full-time paid position and I’m planning on being here as long as I can help the company stabilize and grow. Since coming on board as the Executive Chairman late last year, I spent much of my life in airplanes and hotels, visiting Evolving’s customers, employees and offices globally. I plan to continue doing this for the years to come, because I see enormous potential for the company to grow. Our geographically dispersed workforce is really a great competitive advantage as it allows to respond quickly to the needs of carriers worldwide, many in geographies that are difficult or even impossible to access for our competitors. This diversity is part of our DNA. I hope to spend the years ahead honing that strength introducing it to operators around the world. Aside from charitable and board work, Evolving is my only responsibility, and I’m pleased to be part of the next chapter of its future. As I traveled and spoken with Evolving’s customers, some common themes have emerged. Evolving serves two largely discrete markets. We are a global leader in activation and SIM and number management software for telecom operators. And with the acquisition last year of Lumata and BLS, we have also become a leader in digital marketing platforms and services for the same company. In each of these markets, our customers tell us that they’re happy to have us onboard and that we are the clear leader in each segment. This feedback has reinforced the strategy we’ve discussed on previous calls, the goal of honing these capabilities and introducing them to the geographies and operators, we do not yet have the pleasure of supporting. I’ll quickly turn it over to Mark Szynkowski to discuss our numbers. Then we’ll go into a more detailed discussion of the business. Mark?

[Mark Szynkowski:]

Thank you, Matthew. Good afternoon. Second quarter revenues increased to $8.1 million or 31% year-over-year, driven largely by additional revenues from BLS and Lumata acquisitions. Q2 revenue is consistent with revenues from the previous quarter. Since revenue increased $15.7 million or over 43% year-over-year due to approximately 96% of the total revenue, we continue – in service revenue, we continue to migrate away from the traditional one-time license model. Gross margins were approximately 64% in the second quarter of 2018 compared to 75% for the second quarter of 2017, continuing to reflect the lower overall margins we are expected as we continue to integrate BLS and Lumata into our product mix and price. Consistent with our ongoing investment in new sales, total operating expenses were $5 million, an increase of approximately $2.1 million year-over-year. We included the additional expenses of $0.4 million directly associated with BLS and Lumata operations. We also incurred, during the second quarter, non-recurring expenses related to additional legal costs of $400,000 relating to the settlement of a dispute arising from the SSM acquisition and the write-off of uncollectible fees of $300,000, mostly related to one project that was terminated prior to completion. The remaining expense is primarily our planned investments in sales and marketing, staffing and product development. We also incurred some one-time charges through our other income and expense line items. BLS exceeded projected revenue targets for the year, and, therefore, we had an increase of earn-out payable of approximately $400,000. We also incurred a legal settlement fee of $100,000 related to the SSM matter mentioned above. Finally, this was offset by a $500,000 write-off of a liability that had been in our books since 2014, relating to the final payment and indemnification claims as part of the Telespree acquisition in 2013. Total operating income in the quarter decreased 75% to approximately $200,000 from approximately $800,000 recorded for Q1 2017 due to nonrecurring expenses I already mentioned. As a result, net income for the quarter was approximately $200,000 or $0.01 per share versus approximately $1.1 million or $0.09 per share recorded a year ago. Lastly, we reported adjusted EBITDA of $600,000 compared to $2.2 million in the same period last year due to the higher expenses related to cost of revenue, product development and investment in sales and marketing and cost from the acquisitions. With respect to our balance sheet, we ended the second quarter with $9.3 million in cash and cash equivalents, an increase of $1.7 million or 23% compared to the $7.6 million reported at the end of Q4 of 2017. Contract receivables net of allowance of doubtful accounts were $9.3 million, down approximately $900,000. Working capital decreased as compared to the year-end to $8 million and the company continues to generate positive cash flows from operations. So, we believe that based upon the results, we have ample liquidity and working capital to fund our business and support the level of investments we intend to make in the coming year while continuing to look for synergistic and accretive acquisitions and other strategic partnerships. I’d like to turn the call back to Matthew to discuss our business outlook.

[Matthew Stecker:]

Thanks, Mark. Beyond the numbers, let me provide the update on several initiatives our team has been working on throughout the quarter. We continue to remain strong relationships with our telecom operator customers really through the high value of the software and solutions we deliver. This is evident from continuing investments in our products made by customers across different global regions. Our support and managed services business renewals included multiple customers this quarter. Some of our larger deals were from Nigeria – Nigerian and European operators including renewable, where Evolving’s business-to-business platform that’s helping Northern European operator attract and grow a complementary partner ecosystem. Three European deals alone this quarter are worth over $3 million. Renewables accounted for about a third of our business this quarter by count, while our overall sales span into Southeast and South Asia, Eastern Europe, Mediterranean, Scandinavian and CIS regions, the Caribbean, the Middle East and other regions including South America. Our solutions continue to be relevant across both developed and emerging markets. We are seeing a strong demand for our solutions from our recent acquisitions, which account for almost half of our wins this quarter. As we mentioned previously, our strategic focus remains on integrating our acquisitions and exposing our solutions to a wider global audience. We still have a lot of work to do internally to rationalize the three separate platforms we have on the marketing side of the business into one, which we are calling Evolution. This project is targeted for completion this calendar year. Building on our comments from last quarter, we now have added sales teams in North America, the Middle East as well as a global partnership sales team. Sales to telecom operators have a long cycle, but we should see activity generated by this strategy and these new sales investments begin to ramp up this year and into 2019 and beyond. If we time it right, the technical resources that become available as we finish our platform integration will be ready to deliver the customer-facing work that we are selling today. With regard to our overall strategy of investing and growing our current products, we will reiterate that while we provide new guidance, we intend to fund these new investments gradually and incrementally, while we continue to streamline operations and expenses with the goal of remaining profitable during the investment period. Our aforementioned investment in marketing is already seeing the profile of Evolving Systems proliferating our target markets. For the first time in the past quarter, a number of articles about the company and our products have appeared in a leading trade publication. This trend is continuing. We have also fully briefed every leading industry analyst firm about our products and activities. Combined, these activities are increasing our profile and we continue to look for ways that we can help them solve their problems around the globe. I would also caution that our revenues traditionally reflect a high degree of seasonality throughout the year. It has not been uncommon for us to have a dip in Q3, reflecting a seasonal low in summer operator activity, but it’s more than offset by a strong Q4 as we finalize sales into closing operator budget windows. I want to thank you for your support and look forward to updating you on our continued progress. At this point, I’d like to open the call to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Warrick Jervis of Fundamental Insight. The line is now open.

[Warrick Jervis:]

Hi, good afternoon. I was wondering, I go back to Evolving 10, 12 years ago, back to the bad days, and have just picked this up again. I was just curious on sort of the legacy business, the old Evolving. Is there a potential for some of these really high-margin license expansions in the pipeline? And what’s the outlook for the overall activation side of the business?

[Matthew Stecker:]

Hey Warrick, this is Matthew. Thanks for your question. There’s good news and bad news when we kind of look at how the legacy Evolving portfolio has changed over time. The good news is that the products remain highly relevant. Operators around the world have tended to move more into prepaid than move away from prepaid, and many of our solutions around activation deal with problems really unique to prepaid operators, who distribute through a multilevel strategy. The challenge we’ve had is that some of our products that we saw a real surge in a decade ago, things like Dynamic SIM, have become standards in the industry. So compared to a decade ago, we don’t have a surefire special soft hit that every operator around the world must buy right now that kind of had that flavor. During those days, we are basically taking tickets to sell this as fast as we could. Today, our products deliver a lot of value, but in combination and it’s based on the core of the same foundation, really, helping people with number and activation. But we’re really fighting for kind of more nuanced percentages of their margin, right? Our solutions help them more incrementally. They help them streamline. And probably the best way to think of it is that the state-of-the-art in numbering and SIM management has gotten better, right? So we’ve – a decade ago, we had a solution that was – a) when the industry was at an app. Today, we have a solution that’s, a) when the industry is acting like a C+. And so the good news is that the operators we work with still love the technology. They acknowledge the fact that we’re the leader in the space. And what we’ve done really is transition from selling those licenses to distributing the licenses in conjunction with teams that helped use our experience to solve the problems. So instead of recording onetime big license hit from a new operator. Well, usually – our products have really changed the character, and so we’ll much more frequently now sell them a small bundle of licenses with a set of managed services that tend to grow over time. So the software is still there. We’re still leaders in it and it’s a very active business for us. We don’t even call it a legacy business anymore because we want to be doing this since 20 years. We have some cool new products. We have some multi-levered – level activation that program called Smart Dealer that’s really leading edge, it allows people to activate new SIMs right on the spot in countries that have detailed know-your-customer rules where they need to collect fingerprints and identification in order to turn up lines. So we stayed relevant in that space. But again, with the acquisitions now, we bring in second market to it. But I wouldn’t think of it as moving away from that market at all. We’re still the leader here as we continue to serve it. And we have to pitch for just every operator out there.

[Warrick Jervis:]

Okay, great. And then I have another question. You said you’re in the process of integrating the various sales forces. Are you aligning those by geography? Or by product? It sounds like geography, but can you talk to that?

[Matthew Stecker:]

Sure, Warrick. The answer is geography. So the – we’ve been working for a year on cross-training our sales people so that the people who come in from the acquisitions can sell the activation products and the people that have been legacy – that has been around for a while can sell the marketing products. So they’re organized entirely by geography and our new investments are putting a seat back in geographies where we haven’t been, so probably in North America again as well as some other region.

[Warrick Jervis:]

Okay, great. Thank you.

[Operator:]

Okay, great. Thank you. [Operator Instructions]. Our next question comes from the line of Jerry Binmaski [ph], a private investor. Your line is now open, sir.

[Unidentified Analyst:]

Yes. A question regarding Apple. The possibility of them coming out with the eSIM cards in their next phone line. And I was just wondering how would this affect your customers business and yours.

[Matthew Stecker:]

Thank you for the question. It’s a really interesting question. And Apple has kind of given us a preview of this by the fact that in the last generation Apple Watch, they built that in with an eSIM capability. We are helping more than one customer today, handle Apple Watch activations that use the new eSIM architecture. So our products have already been updated to support an eSIM framework. We are – it just gives you a flavor. We’re one of the partners that are where we’re doing business already. They tend to reach right to us because they know and we have the specific expertise in eSIM. So I have no inside information as to whether or not Apple is going to roll eSIM into its next generation of handsets. I think it’s a smart move and I think it’s a move ready to embrace. I think they’ve kind of clearly indicated where they would like to go by what they’ve done with the Apple Watch.

[Unidentified Analyst:]

Okay, great. Thank you very much.

[Operator:]

Thank you. And I’m showing no further questions at this time. We will now close the call. Management will be able to talk with investors throughout the week. And if we have any questions, by all means – I do see a follow-up question by Mr. Warrick Jervis. Your line is now open, sir.

[Warrick Jervis:]

Thank you. I was just wondering about the gross margins. So they’re lower in the consumer engagement. I think it was 65% last quarter, 64% this quarter. What do you anticipate going forward?

[Matthew Stecker:]

We don’t issue projections, but that being said, it’s an interesting concern. As – there are two things that are impacting our margins and we’ve tried to give some guidance from previous calls that we expect them to come down. And I think you’ve seen, they stabilize at kind of the level they are. One is that the marketing businesses we bought last year have historically lower margins. It’s a competitive space. You’re really trying to spell through a discrete business case. And in each case, we’re just squeezed. However, for us, those are really strategic relationships. They tend to last for many years. And once we enter them, they tend to have a lot of recurring revenue. So what our margin mix has been brought down by being – by just being in a different market, the digital marketing side has lower margins. In addition, we are in a cycle now of growing our customer base. Our stated strategy is to try to get to the 400, 500 operators who are not using our services to these days and convincing them to use it that, in some cases, involve discounting, but more it involves taking on the cost of people to be in the new geography. One of our main advantages over our competitors is that the work that we do is very intimate with the customers. We’re either involved directly in their activation pipeline or with their most sensitive marketing plans. And they’re reluctant to use people that are not physically in their geography. So when we want to do business in a new geography, we really have to do some investing in people who are literally on the ground, not contractors. We’ve gotten good at doing this at the lowest possible cost but we need to invest in the region. And as we’re investing and growing, those margins will stay down for a while just because of where we are in trying to promote sales. Again, the good news is the customers remain long term, and we issue guidance before – that in the long-term, we expect margins to increase back to their historic levels.

[Warrick Jervis:]

Okay. And another question. On the digital engagement, so I think you can tie into the carriers – obviously, using their data for upselling plans or adding features and other – or renewing a contract and so forth. But it sounds like there’s an advertising component. And within that, I mean, are you actually going to an ad broker and buying the ads? I mean, how does that process this work if you’re going to deliver out a promotion or an advertisement to someone that’s not related directly to their service with the carrier or from those – through the carrier.

[Matthew Stecker:]

Thanks, again, for the question. I would say, just for starters, that 95% of the work that we do is focused on changing the customer’s relationship with the carrier. So while – what we – while everything we do is almost entirely focused on upselling the customer plan, keeping customer retention up, sometimes – but the one caveat to that is, as operators start to do more and more, as operators start to get into video-on-demand, as they start to get into selling hardware, as they start to get into having retail partnerships, we often advertise those partnerships. And one of the reasons that people have seen a reason to do digital marketing to their customers is to help populate these product categories that they are adding on. So while we don’t typically – we won’t help carriers advertise Coke. We will help carriers advertise their video-on-demand service with the new handset they’re pushing or the new relationship with the movie theater chain that they have.

[Warrick Jervis:]

Okay. So, it’s very specific and driven by the customer not necessarily the underlying demographic information or location – so I guess, location, but not – okay…

[Matthew Stecker:]

I mean it’s actually an area – I’m just going to finish into saying it’s an area for growth. I mean today, we have access to an enormous customer information. So we help the carrier use to upsell its services. There is an opportunity for us in the future to use that data to make it available to third party advertisers, not something we’ve been keenly exploring with some of our largest carrier customers.

[Warrick Jervis:]

All right. And how do you tie in then with some of the network intelligent guys kind of the – sidelines of the world who are collecting all that data? I mean, do you tie into specific – the EPI guys?

[Matthew Stecker:]

I have to leave let and then we can get back to you on a case-by-case basis. But in general, we owned the primary systems that collect data from us. So we have become expert over the years in the kinds of network information databases that the carriers natively have. There are lots of different people that harvest data from the sources. But we tend to work primarily with the – starting with the HLR and everything moving out from there to call it the EPI reference, and then moving out. We tend – it’s not infrequent. It’s not infrequent that a customer will ask us to work with other partners to rationalize multiple people viewing that data and using for different purposes. But we usually looked at the source data itself.

[Warrick Jervis:]

Okay. Okay, great. Thank you very much.

[Matthew Stecker:]

Thank you for your questions.

[Operator:]

Thank you. And with no further questions, we will now close the call. Management will be able to talk with investors throughout the week. And if you have any questions, by all means, feel free to contact us through the Investor Relations links on our website and we look forward to communicating further progress and developments with you. Thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.