Symbolic Logic, Inc.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Evolving Systems 2017 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Glenn Wiener, Investor Relations. Sir, you may begin.

[Glenn Wiener:]

Thanks you, operator and good morning to all of those joining us today, and welcome to Evolving Systems 2017 third quarter results conference call. Speaking from management today will be Thomas Thekkethala, Evolving Systems’ President and Chief Executive Officer. Also joining Thomas for the Q&A portion of our call will be Julie Gosal, our Senior Vice President of Finance; and Rick Dinkel, our former Senior Vice President of Finance, who continues to serve as a consultant to the company. Please feel free to ask questions when we begin the Q&A session, and should you like to speak with management afterwards please reach out to either Michael Glickman of my team, or myself and we will be happy to coordinate. Lastly and before I turn the call over to Thomas, 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. The company continues to make significant progress in its transformation. We are excited with what the future holds, and with that I will now turn the call over to Thomas.

[Thomas Thekkethala:]

Thank you, Glenn. I will start today with a quick overview of our quarter and year-to-date results, while highlighting some of the key developments that are driving our optimism. There has been a lot of activity over the past few quarters, and we are making significant progress in our business transformation, which I will touch upon momentarily. First starting with our financial results. I will provide updates on a sequential basis as it is more relevant to the progress we are making. You can see our year-over-year comparisons in our release and Form 10-Q. Q3 revenue of $7.5 million marked a 21% increase sequentially compared to Q2. Note that while Q2 revenues included the addition of BLS, it only included one month from the Lumata acquisition. Gross margins of 66% declined from 75% though the variance was due primarily to the acquisitions. As we demonstrated after the Sixth Sense acquisition, we believe we can improve the gross margins of these acquired businesses by migrating customers to our centralized managed service environment over the upcoming quarters. Operating expenses of $3.8 million increased by approximately $900,000 compared to Q2. However, the increase was driven by added costs associated with the acquisition. In fact, during Q3 we had approximately $600,000 of one-time expenses that we do not anticipate will recur. As we integrate the operations of BLS and Lumata, and further leverage the synergies between each of the businesses we believe we will be able to lower fixed costs further and drive more meaningful profits and improved cash flow. To that end, I'm pleased to report the third quarter marked our 38th consecutive quarter of profitability. We reported income from operations of $1.2 million, net income of $800,000, a significantly high cash flow from operations, and adjusted EBITDA of over $1.8 million. Taking a quick look at our results through the first nine months of the year, revenue of $19.6 million is up over 5%, operating income of $4.5 million is up over 18%, net income of $2.8 million is up approximately 32%, earnings per share of $0.24 is up over 33%, and adjusted EBITDA of $5.9 million is up approximately 2%. Moving onto our business, over the past few quarters I have discussed our business transformation strategy. The first phase was migrating from a traditional software product license model to a subscription-based managed service model, one that generates a more stable base of recurring revenues over the course of multiple years, even if it meant lower revenue growth in the short term. We have spent a great deal of time instituting best practices with a focus on operations efficiency as part of our new managed services model. We also started migrating our traditional license customers to this new model, which is expected to result in improving margins and cash flows over time. The second phase of our transformation was to leverage our historical customer relationships and know-how through decades of work in the telecom industry to evolve into real-time engagement and managed services. While the telecom industry will continue to be our primary market and we will continue to invest on behalf of our customers, we are also looking to expand to new markets and regions, and this is what drove our prior to acquisitions of Business Logic in July, and Lumata in September. Both these transactions have driven innovation and provide us with an expanded customer base and geographic footprint, and very experienced leaders that have become part of our executive leadership team. Both BLS and Lumata have expertise in real-time digital engagement beyond just the telecom industry, which provides us an excellent platform to expand into new verticals with our immediate focus in retail and financial services. Through these acquisitions, we have strengthened our team. Richards Lewis, former CEO of BLS is now responsible for sales in the global emerging markets; and Mo Firouzabadian, former co-CEO of Lumata, is leading our sales efforts in the developed markets. Additionally, Adhish Kulkarni, the other co-CEO of Lumata, has taken on the role of Senior Vice President of Solution and is intricately involved in solutions design, selling and new business development initiatives and marketing. So now, I consider us to be in phase 3. Phase 3 is all about integration and execution, while continuing to seek out accretive acquisitions that will improve our customer value proposition and our ability to drive more meaningful growth. I would like to spend a few minutes explaining what we do for our customers and why we have transitioned in the manner we have. As we know, Google, Facebook and other companies have experienced explosive growth in the mobile advertising business, as mobile advertising increases brand recognition, generates leads through banner ads, mobile web pages, videos and more. While it is helping the mobile advertisers and helping brands should in the short term, it doesn't necessarily need to long-term customer loyalty. In fact, in a recent study conducted by Google and PMG Marketing they found that today's top marketers are actually moving beyond thinking about success in terms of short-term store walk-ins and return on mobile advertising spend, and instead are focusing on long-term customer revenue growth. To do that, brand marketeers are making a shift to real-time digital engagement to maximize customer lifetime value, or CLV, as you will hear me refer to it. CLV in essence is the average monthly spend per customer multiplied by the customer’s tenure. So it is not just about a single transaction like a walk-in, marketeers and brands are looking to increase the dollar spent on transactions, the number of transactions and the duration of that customer relationship. The combination of that creates customer lifetime value. According to this Google PMG study, brands are greatly underutilizing their own data while paying a lot for inaccurate stale, third party data that really doesn't tell them much about their own customers. The key here is harnessing first party data, or data the customer owns that [arrives] in streaming data sets in terms of location, transaction, social, contextual, captured directly by the brand that can be analyzed and acted upon in real-time to provide a richer, more personalized interactive experience for customers. These data sets, in combination with some third party data, generate value-added insights about customers so that they can be offered the right product or service at the right time and through the right channel. Over time, the system learns and adjust the campaigns as it analyzes results, meaning that with each interaction the customer receives a more personalized offer than the last one, at every touchpoint. This is at the heart of our business today, and where we are taking it over the coming years. Retailers now are making customer personalization a priority this year, which plays very nicely into our business and strategy. We can help brands increase their customer lifetime value by number one, upselling more of the products and services they need through highly personalized real-time engagement over multiple digital channels retaining the same customers longer through real-time personalized loyalty experiences, and we can also increase the brand’s enterprise customer lifetime value by driving rapid increases in customer acquisition. So, I thought it might be helpful to provide just a few examples of what we do for our customers now as our solutions set has truly evolved. Let us take the example of movies and more. This is an evolving cloud-hosted solution template, including point of sale integration. For example, Orange, an European mobile carrier group, is using movies and more to launch a coalition marketing strategy with national movie theater chains in Europe. Through digital communication channels, Orange is engaging their customers with offers like a discounted two for one ticket, and concession stand items for any movie, anytime in any theater nationwide on Wednesdays, because Wednesdays is a slow day at the theater. Customers receive vouchers that they can swipe at the ticket booths and concession stands and avoid the lines. This real-time digital solution has engaged over 100 million Orange customers over time, increased their average spend, and increased their tenure by over 40%, driving significant enterprise customer lifetime value for the Orange brand. It also drove CLV up for the national movie theater chains. We in turn receive a monthly fee for providing the cloud service, as well as a performance fee based on consumer engagement and program participation. Another template I have referred to is called 4G is here. It is another Evolve solution being used by the largest mobile operators in India. India is a bring your own device market, where getting to a carrier store to stand in long lines for service is a very, very poor consumer experience. Evolve solutions enable carriers to flood the market with blank sims, where a customer can now self enroll anywhere at any time by simply installing a Evolve-powered sim, which then launches an app. The app navigates the consumer through the know your customer process, which is required by local law using fingerprint technology and others, upsells the customer a higher level data plan, and additional apps and services. One of India's largest carriers is now upselling 4G services to over 100,000 consumers a day, which results in higher priced 4G services that drives longer customer tenures, resulting in again higher total enterprise customer lifetime value. Another example in retail is the scan, compare and buy solution. This is an Evolve solution, where a customer using the retailer’s instant app powered by Evolve, scans a product barcode in a store, and now we use the customer’s product purchase history, and offer the customer spot discounts, as well as a host of other products, which creates more upsell and cross-sell revenues. The products are then added to the digital cart for digital check-out. This retail template is currently being evaluated by some of the major retail brands moving into Eastern Europe. So these are just a few of the examples of our new solution templates that increase customer lifetime value through real-time digital engagement. As we roll these out to more of our telecom customers and to accounts across new verticals we are operating in, we believe we will be in a position to generate more meaningful top line growth, without adding a lot of incremental expense, hence better profitability and cash flow and much stronger customer partnerships in turn. In the past we have not given formal guidance, but given the prior acquisitions, we felt it is important to provide some commentary on the upcoming quarter so you can see what the impact of these deals is expected to have in the near-term. We anticipate Q4 revenue will be in the $8.5 million to $9 million, representing sequential growth of 13% to 20%. Expenses are anticipated to be down as we will not have the one-time acquisition costs, and there is an additional approximately $400,000 of synergies that we expect would materialize in Q4 with more to follow throughout 2018. Adjusted EBITDA is expected to be up on a sequential basis with the range dependent on the top line, and we are expected to continue to generate more positive cash flow from operations. While it is too early to provide formal guidance for 2018, we believe we are well positioned for growth and improved profitability and cash flow. We have identified synergies on the margin and expense side, cross-selling and up-selling synergies are tremendous, especially when considering our customer base. And we are moving into areas that are not dependent solely on telecom CapEx spending, and into market segments that are growing. There is a lot of excitement at Evolving Systems, while we have a lot more work to do, we are confident that we are on the right path. We thank you for your support and look forward to updating you on our continued progress. At this point, I would like to open the call to questions. Turn it over to the operator.

[Operator:]

[Operator Instructions] And our first question comes from the line of Michael Potter from Monarch Capital Group. Your line is open.

[Michael Potter:]

Hi guys. How are you?

[Thomas Thekkethala:]

Good Michael.

[Michael Potter:]

Congratulations with a solid quarter, and I know you guys have been extremely busy kind of restructuring, for lack of a better word, our company this year. A couple of questions, you mentioned there were 600,000 of one-time expenses in the quarter, is that over and above the restructuring expense that is broken down in the adjusted EBITDA table?

[Thomas Thekkethala:]

I would have to ask Rick or Julie, whether that is over and above or separate. I mean, the $600,000 were charges related to a legal fees restructuring in terms of some of the employees that were being let go, etcetera, etcetera to senior level related to the acquisition. But for additional detail, Rick or Julie do you know the answer to that question?

[Rick Dinkel:]

This is Rick. Yes. So that is correct. Those were one-time charges, legal fees for the acquisitions. We should see those costs come down in Q4.

[Michael Potter:]

Okay. I'm still not clear. So the $600,000 of one-time expenses due to the acquisition is over and above the restructuring expense of $131,000 that is in the adjusted EBITDA table.

[Rick Dinkel:]

Over and above. Actually the 131 is included in that number.

[Michael Potter:]

The 131 is included in that number. Okay. The 131 is included in that number, so I guess in the adjusted EBITDA table why don't we include the entire one-time acquisition expenses?

[Rick Dinkel:]

Because that has not been our practice in the past.

[Michael Potter:]

To include the one-time acquisition charges.

[Rick Dinkel:]

Correct. We have not done that in the past. So we didn't do it this time. So it was just being consistent.

[Michael Potter:]

Okay, but it created some confusion there, right?

[Thomas Thekkethala:]

Yes. So, Michael. I think that is – the 131 is included in the 600 CLV, and as Rick said it wasn’t done in the past, but I can see where your point is.

[Michael Potter:]

Okay. Can you obviously you had two transformative acquisitions, what was the organic growth if we do not include the acquisitions?

[Thomas Thekkethala:]

Well, we’ve not been breaking these things out and I think it was somewhat flat or even potentially declining because as you’re switching from the license model into the managed service model as we’ve explained in the past, you take a $500,000 license and instead of taking it in the quarter you basically spread it out over 24 months to 36 months with a three year deal so as you’re doing that you will see a consistent increase in recurring revenues and a slowdown in at least the quarters when we’ve been doing this in terms of what we’ve had organically or what we’ve had historically.

[Michael Potter:]

Okay, fair enough. And then, we had a significant increase in doubtful accounts, I guess 10.8 million, an increase of 4.9 million is that correct?

[Thomas Thekkethala:]

Well, as one of the things there Michael is that when you take in these two acquisitions and they all happened during Q3 and particularly with Lumata happening in September, the finance team and the audit team, etcetera and I agreed with them we basically said let’s be very, very conservative in how we’re beginning to understand these customers that have come in, their payment practices and such things and until we get a lot of visibility and clarity ourselves let’s make sure that we categorize those correctly. Unless we’ve seen them making payments to us, we wanted to basically put them in that category to be on the conservative side.

[Michael Potter:]

Okay. So I’m assuming we’re anticipating this number to come down significantly going forward?

[Thomas Thekkethala:]

Yes, yes. And the other part of that I think also is again, I mean, is that when you’re dealing in the emerging markets, people don’t necessarily pay in 60 days and such things. So we know our own customers as you bring in these other ones, you want to put it there and since the commissions for the sales teams at least in the emerging markets is to basically pay them on collections, there is a tremendous incentive for them to collect and as you would see that a cash flow from operations has gone up quite a bit this quarter because of that very practice of making sure that the entire account facing teams are focused on delivering and collecting.

[Michael Potter:]

And just going for obviously, our stock is now performing well this year in spite of, I think a lot of positive work getting done at the company being a write-off of 52 week low, maybe you can give us some color into some of the near term catalyst that the investor should be looking towards at this point that we know that our company is continuing to progress and progress on plan?

[Thomas Thekkethala:]

Well, I mean, I think that we’re looking now to create growth. I think historically the company has been known for generating dividends etcetera, so you have investors who are dividend oriented rotating out of the stock I think. I don’t follow it carefully, but this is what I’ve been advised and the focus Michael is on creating growth. I think when you look at the history of our company and the fact that we’re processing billions of transactions for tens and millions of consumers that is first-party data, right. And so, if the brands that we’re working with can now use that through our systems to actually engage their customers more directly with much more personalized experiences then just using third-party mobile advertising, it’s starts to become game changing. So I look more at our movement into retail, breaking it into something in financial services and I think that’s when you really start to ramping the investment that we make in those areas because that can just be totally transformative for the company and you start creating tremendous growth there.

[Michael Potter:]

Do you anticipate that will break into, I guess, do we have any financial service customers currently?

[Thomas Thekkethala:]

Currently we’re in trials, banks tend to be much conservative, but retailers yes, and you saw some of those, these movie theatre houses and things of that nature and it’s really now a question of going deeper into those areas because we sort of un-know that the telecom industry in general is not going to have the kind of growth that retail financial services and other markets will have. However, we’ve this incredible experience of dealing with massive volumes of transactions and dealing in them in real time which is why this could become game changing because mobile is essentially a real time engagement.

[Michael Potter:]

Okay. Thanks Thomas keep up the good work, let’s keep, hopefully keep getting the word out.

[Thomas Thekkethala:]

Thank you.

[Operator:]

[Operator Instructions] This concludes today’s Q&A session, I’d now like to turn the call back over to Thomas Thekkethala, CEO, for closing remarks.

[Thomas Thekkethala:]

Well, thank you all. Since there are further questions, thank you for joining the call today and have a good day and will be in touch. Thank you.

[Operator:]

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