Symbolic Logic, Inc.
Q3 2018 Earnings Call Transcript

Published: 13 Nov 2018

[Operator:]

Welcome to Evolving Systems 2018 Third 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 release, and Web site for more information about the company. At this time, I would like to turn the call over to Matthew Stecker.

[Matthew Stecker:]

Thank you, and thanks to everyone who has joined us today on this call and webcast. I'm looking forward to giving an update on our business trajectory and initiatives, but we should start by walking through our numbers. So, I'll turn it over to our CFO, and technically, our SVP of Finance, Mark Szynkowski, to discuss our numbers. Mark?

[Mark Szynkowski:]

Thank you, Matthew. Even though our third quarter revenue decreased by 2%, to $7.4 million, our year-to-date revenue is up 21% year-over-year to $23.7 million. Service revenues increased $5.4 million or 31% year-over-year, and remains approximately 96% of our total revenue as we continue the migration to managed service solutions, and away from traditional one-time license models. Gross margins were approximately 68.2% in the third quarter of 2018, compared to 66% in the third quarter of 2017, as a result of improved delivery efficiencies which also helped us redirect resources needed by the product development team. Our total operating expenses for the quarter were $4.5 million, an increase of approximately $700,000 year-over-year, from $3.8 million. Our total year-to-date operating expenses were up $4.7 million to $14.1 million for the nine-month period, from $9.4 million for the pervious year. This is directly related to additional expense associated with the BLS and Lumata operations of $1.4 million and $2.1 million respectively, as well as one-time costs of $700,000 that incurred in the second quarter. Total year-to-date operating income for the nine months ended September 30, 2018, was $1.6 million, a decrease from approximately $4.5 million reported for the corresponding nine-month period ended September 30, 2017. Net income for the quarter was approximately $549,000 or $0.05 per share versus $1.2 million or $0.10 per share reported a year ago. The reason for this is that the company continues to invest in product development, sales, marketing, and business development initiatives to improve its market position and our competitive offering. Lastly, reported adjusted EBITDA of $911,000, as compared to $1.7 million in the same period last year, again due to the higher expenses in product development and investment in sales and marketing. With respect to our balance sheet, we ended the second quarter with $8.5 million in cash and cash equivalents, an increase of over $900,000 or 13%, compared to the $7.6 million reported at December 31, 2017. Contract receivables net of allowance for doubtful accounts were $7.6 million, down approximately $2.5 million compared to December 31, 2017. Working capital decreased to $7.8 million, from $9 million as of December 31st. The company continued to generate positive cash flows from its operations. We believe that based on these results we have 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 other strategic partnerships. Now, I'd like to turn the call back to Matthew at this time to discuss our business outlook.

[Matthew Stecker:]

Thank you, Mark. So guys, in some ways this quarter has been the Tale of Two Evolvings. While we continue to hard work of refreshing the company's offerings, integrating the 2017 acquisition, and tackling the rebuilding and repositioning of the company, we were obviously faced with a significant of our share price. I'll tackle both of these topics head on. Behind the scenes, this has been an incredibly active quarter. When we completed the acquisition of BLS and Lumata, we were faced with multiple integration challenges. Financial integration and compliance were obviously the first mandatory orders of business, and we achieved those goals partially by running the delivery of those acquired businesses in discreet business units. This was necessary not only for expediency, but also because of earn-out clauses that required us to be able to calculate the revenue accruing to several of the acquisitions discreetly. The time has now come to take these four companies and turn them into a single global enterprise. In the past quarter, I've had the opportunity to drop in on many of Evolving's offices as I have visited customers and prospects around the world. I'm truly impressed by the high caliber of our delivery and sales personnel distributed, not only across our offices, but also across the dozens of carrier sites where Evolving personnel work every day. Today, because of our business unit structure, many of those resources still work in clusters aligned with the source of their corporate patronage. We have an opportunity to gain efficiency and also accelerate the cross-polonization of the brain power across all levels of Evolving by accelerating the word transform into an integrated business. This integration work is both the bottoms-up process and a top-down process as we change the way we are structured and we are to make the best use of our resources. While a difficult problem, I believe we have an opportunity to leverage technology to solve this integration in a way that wouldn't have been possible in the past, while we can wave the magic wand and change the geographical distribution of our people, we can and are using best-of-breed collaboration software to allow the teams we deploy become geographical neutral. Success in this regard will transform legacy of dispersion into a strategic asset. Practically speaking, we can hire and employ the right resources for any project globally regardless of location with development centers in Calcutta, Bangalore, Cluj in Romania, and France, we can distribute work to get the most bang for a buck depending on the local talent market. Each one has unique strength in their local talent pool for delivery and support. Our ability to optimize across this footprint will help us to achieve real competitive advantage. Looking towards the broader trajectory of the business, I think this is a good moment to pause and evaluate where we are from the highest level. Three quarters ago, when I came to this call with an announcement that the company would began a series of investments targeted at stemming the long-term decline in revenues. Our stated plan at that time was to hire more sales delivery in order to increase penetration with our existing product set as advertise we did bring on a class of sales teams and began a global marketing program, those sales resources were hired in spring and hit the ground in the summer. The teams have churned what was the blank page in some regions, North America in particular, into a measurable pipeline and will generate enough revenue in 2019 alone to more than provide a positive two-year return on this investment. Still the impact on that effort on our top line finances that we report on calls like this will not be felt until well into 2019 at the earliest. Simply put, it was a proven investment and we will continue it, but it alone will not be game-changing, nor can we simply expand its scale to increase its effect. Our customers are well-known wireless carriers and a relatively small group of sales pros can really blanket the addressable audience. Doubling the size of the sales force does not -- in other words double the return we get from them. Our longer-term vision for Evolving must be [ph] simply cracking up the sales lever and address the fundamental propositions we offer to the marketplace, today these propositions fall into two distinct categories, the telecom infrastructure product and activation and numbering that has been Evolving core business as well as digital marketing assets we acquired last year. I will briefly discuss both the respective markets and their medium and long-term prospects, looking first at the digital marketing businesses, we have invested substantially in a new platform that takes the best in breed features and the BLS, Lumata, and SSM platforms and converges these into best of breed platform that we call Evolution, Evolution is on track for a release around year end and it's been a significant investment for us, there are customers right now who have pre-ordered Evolution and we will be able to deliver it to them as day one customers. In 2019, we will have a very shiny new product that will be a force in the market going forward, we understand however that wireless carriers choose their partners not solely on the strength of the software and platforms. In this regard, we have been working with some of the world's largest carriers to develop innovative market proposition that leverage our software. This is why we announced the recent award that we were nominated for. Usually we cannot describe the work that we do, because it's so highly sensitive, but the award setting allowed us to shine a light on a great example the business value we create in this digital marketing product with the Orange Thank you program in Belgium. In this market, we compete with both smaller providers who focus on cost as well as large global integrators who can create bespoke programs for the largest carriers. While competition is hand-to-hand and fierce in both new and existing account, there are really exciting discussions emerging where carriers are contemplating significant new programs that could be transformative to both them and for Evolving. On the historical Evolving business, the activation and numbering product, the emerging picture we want to change, while we have a variety of products in these spaces, the simplest way to think of them are as a set of optimization that allow carriers to run their BSS and OSS systems more efficiently as a general rule, carriers how prefer not to have to implement point optimization, they would prefer to outsource these operations to a single large vendor, we hear every day carriers that, "Hey, I get how implementing your product would produce a positive return," but that return isn't large enough to become one of the or three projects we'll tackle this coming year. So, armed with that feedback, we begin the process of modernizing our offering, an effort that hasn't been done since we acquired or developed most of these products. Modernizing our offerings means not only engineering work, but changes to how we position our products. We are enhancing our partner sales capabilities so that we come in with an integrated offering with the largest BFF and OSS providers, overcoming the objections I mentioned a moment ago. We are also pivoting the way we position ourselves from selling tools to selling of solutions in business outcomes that are powered by our tools, and in some cases partnering for an offside share in that business outcome. In some ways we catch a lucky break, because the emerging implementations of both IoT and eSIM are two in which our optimizations are particularly useful. We have worked with many of the world's lowest cost operators where every efficiency is mandatory. If you're going to run a wireless operator on revenue from customers of $1 a month, these optimizations are not optional. While many of the higher revenue western operators could afford to skip some of these optimizations in the past, IoT and its lower price tag require them. We are having a number of conversations today with operators who had previously turned us down flat who have now called back to say that these trends have made them reconsider our expertise and the need for the tools already in our toolbox. Looked at holistically, it is too early to say whether these positive trends will counter the historical downward pressures on our revenue. 2019 will be a street fight spread across a hundred battlefields to preserve our existing revenues while we retool for growth. Lastly, I wanted to discuss the trajectory of these businesses relative to one another. As we break down our internal structures, we are also working on converging the products themselves. At this point I'll simply say that the hooks Evolving has into its carrier's infrastructure seed seamlessly at data points into their digital marketing efforts. As we structure internally to achieve integration we'll be moving the end of the line product into an integrated offering. Lastly, I want to say a few words about the share price. I've had the opportunity to speak with many large and small investors over the last quarter as they've expressed their frustration about the stock's pricing direction. I will reiterate now what I've said on many of these calls that our plan at the moment is to continue putting almost all of the management's efforts into the hard work that I just walked through, the blocking and tackling inherent in the rebuilding of our product portfolios and the underlying integration and transformation of our business. There will be a time to turn our attention outward, to spend time telling the story of our company and its underlying securities. The Board has been supportive of the notion that efforts to tell our story will yield greater rewards if undertaken as we had clearly made progress on the business fundamentals. That said, we continually evaluate opportunities to use our strong cash position to take advantage of the historically low share price. I'd like to thank all of you for your support and look forward to updating you on our continuing progress. At this point I would like to open the call to questions. Operator?

[Operator:]

Management will be available to talk with investors throughout the week. If you have any questions, by all means please feel free to contact us through the investor relations link on our Web site and we look forward to communicating further progress and developments with you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.