Symbolic Logic, Inc.
Q4 2017 Earnings Call Transcript

Published: 4 Apr 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Evolving Systems 2017 Year-end Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Glenn Wiener. Sir, you may begin.

[Glenn Wiener:]

Thanks you, Sandra and welcome to Evolving Systems 2017 fourth quarter and year-end results conference call. Our apologies for the lack of earlier notice with respect to our conference call, as you saw, our Form 10-K was filed on time and our release was issued, timing for the call, however, was in question purely due to scheduling. We do not anticipate having such tight filing timeline in the future. Speaking from management today will be Thomas Thekkethala, Evolving Systems’ President and Chief Executive Officer, as well as Matthew Stecker, Chairman of the Board and our newly appointed Executive Chairman. Matthew will be taking on a more active role in executing the long-term strategy and we'll be working with Thomas and the team on a go forward basis. There was a lot of activity throughout 2017 and the company will be investing in its foundation, product development programs and in sales and marketing, with the long-term goal of generating growth and improved bottom-line performance in the years ahead. Additionally, Mark Szynkowski, Evolving Systems, Senior Vice President of Finance, is with us today and will be available during the Q&A portion of the call. Please note, the company will be filing a Form 8-K with an amended release as the non-GAAP diluted net income per share reported of $0.11 should read $0.01. We expect this filing to be made this evening. There is no impact on the P&L statement. 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. We appreciate your support, and at this time I would like to turn the call over to Thomas Thekkethala. Thomas?

[Thomas Thekkethala:]

Thank you, Glenn. 2017 was a transformative year for our company, as we completed two acquisitions; the first, BLS which closed in July, and the second Lumata, which we closed in September. Both transactions enhanced our product and service capabilities, expanded our customer base and added significant management expertise. As we noted with each of these deals, there were savings in synergies that we expect to realize, as we transition to the managed services business model and drive real time customer lifetime value for our customers. But the biggest impact will be from the new investments we're making in our solutions and our intent to build out an integrated global sales team. There are significant opportunities we see both with our installed customer base and with targeted mobile operator accounts in the geographies where we operate. That gives us confidence that we can and will build a much stronger business over the long-term. I'll touch upon this momentarily and Matthew will provide some color around our strategy. First, I'd like to address our 2017 performance. Total revenue in 2017 was $28.8 million, a $4 million or 16.3% increase over 2016. Both license and service revenues increased year-over-year, up close to 20% and 16% respectively. The growth we experienced was driven by the acquisitions. Note, that we realized contributions from BLS for approximately six months and four months from Lumata. Gross margins were approximately 70% in 2017, down approximately 900 basis points compared to 2016. This was expected as both BLS and Lumata had lower margins than our traditional business from Evolving, though margins are still high for both entities. Total operating expenses increased by approximately $800,000 year-over-year and this includes added expenses associated with the acquisition transactions along with one-time charges, totaling $1.8 million that are not anticipated to repeat in the coming year. To add, I know there were a lot of questions regarding one-time charges in Q4. The one-time charges in Q4 totaled approximately $1.1 million of which approximately $525,000 relates to write-downs in Nigeria. We are actively pursuing the matter to the Nigerian government and the EFCC, and this remains an open case in Nigeria. There were another $350,000 of write-downs related to projects that were put on hold and to be conservative, we took a reserve this quarter. Lastly, there was approximately $250,000 in restructuring fees and professional services related to these acquisitions. As you can see, excluding these one-time charges, our operating income would have increased and we would have reported positive net income for the quarter. Further, our total expenses will increase in 2018. As I mentioned earlier, we're making strategic investments in product research and development and business development, to drive growth over the long-term and to enhance our position with our existing customers as well as to reach out to new customers that we believe will help us expand our business. Total operating income of $5.4 million was down approximately $200,000 year-over-year and net income excluding the impact of foreign currency exchange losses were down approximately $300,000. The decline was primarily related to the added expenses and one-time costs associated with the acquisitions as well as the lower gross margins associated with both BLS and Lumata. Lastly, we reported adjusted EBITDA of$7.6 million compared to $7.9 million in 2016. With respect to our balance sheet, we ended 2017 with $7.6 million in cash and cash equivalents. The same as in 2016 and contract receivables net of allowance for doubtful accounts were$10.2 million, up 73%year-over-year. We have ample liquidity and working capital to fund our business and to support the level of investments we intent to make in the coming year, while continuing to look for synergistic and accretive acquisitions. Now, I'd like to provide some added commentary about our momentum in 2017 and what drove our business forward. We began the year with multiple managed service wins in the first and second quarters, a mix of both new and existing customers. Our solutions help our mobile operator customers accelerate their customer acquisition, customer engagement, upsell and retention of their subscribers. For example, one of our major carrier customers selected our customer acquisition solution to support their customer acquisition activation and retail distribution optimization. As a result, this carrier could start selling generic SIM cards, resulting in significant network and distribution savings. The solutions also significantly accelerated the carrier’s 3G to 4G customer upgrade initiatives, and also addresses customer retention by offering new features such as the ability to self-authenticate, browse upgraded tariff plans, select custom phone numbers, and consider upsell features and apps at the point of sale. So as I've discussed, the first phase of our transformation was to pivot to managed services, managed services engenders a much more collaborative and sticky customer relationship because it involves our teams working directly on site with each carrier, which better positions us to identify opportunities to further meet the customer's needs and help drive new revenue streams for the customer and for us. In July we made our first acquisition of 2017 when we acquired Business Logic Systems. The value of this transaction is that it brings us technology that rounds out our offerings further accelerating our managed service business model transformation, which started in 2016, with the acquisition of Sixth Sense Media. BLS also added potential customers and talented senior level talent. BLS specializes in data driven customer value management and customer engagement solutions that have been implemented in over 20 mobile operators throughout Europe, Africa, Asia Pacific, and Latin America. BLS solutions essentially turn customer data into actionable insights and personalized contextual offers, through their customer engagement solutions and customer value management expertise. The acquisition of Lumata in September, represents the second phase of our transformation from our position as a market leader in customer acquisition and development to next generation mobile consumer engagement and acceleration. This acquisition harnesses, Lumata’s next generation loyalty and customer lifecycle management software and services that helps businesses gain value from their customer data for relevant and contextual insights and actions are valued to both carriers and their partners. We are now well on our way with the third phase of our business transformation plans, which is the integration and expansion of the services that we offer through these acquisitions. This model now, which is the managed services model, is a model that generates a most stable recurring revenue stream over the course of multiple years. We are far more engaged with customers, which leads to more expansion opportunities. The model is also based on renewable annual multi-year subscription contracts with established customer budgets and it adds performance fees on top of the subscription fees we already generate, as we help drive tangible business outcomes for customers. We estimate that our addressable market for our solutions is well over 500 mobile operators worldwide, of which we have about 100 of our existing customers today. Carriers have invested significantly in licensing spectrum and building out 4G networks and now sell data and other value added digital and non-digital partner services, since their traditional voice and message revenues are migrating to over the top services such as Skype and WhatsApp to name just a few. In addition, since most of the markets outside the U.S. and parts of Western Europe are largely prepaid, there is fierce competition between the carriers because consumers frequently churn when enticed by the latest deal of lower price services offered by competing carriers. Churn remains one of the most critical challenges faced by a mobile carrier. As a result, marketers and brands are looking to extend the duration of the tenure of each customer, the dollars spent on transactions and the frequency of these transactions, which combined together is the customer lifetime value or CLV. Evolving Systems is now well positioned as a leading enabler of real-time digital engagement to maximize customer lifetime value, based on our recent acquisitions and transactions. We have had several other customer announcements throughout the year and have also had several programs that were executed with existing accounts. Here are a few examples. A major Tier 1 European mobile operator expanded their customer activation solutions for voice over WiFi and voice over LTE services. One of the largest mobile Pan Asia and Africa operator groups expanded their relationship with Evolving in 2017 for more software and services. In addition, one of the largest telecom equipment partners that we have upgraded two of our customer acquisition and activation solutions at Tier 1 operators in the Middle East and Southeast Asia. We also announced a three year extension of our services agreement with a major European carrier. A deal for the continued management enhancement and expansion of our customer loyalty programs. As we announced, this program enables the carrier to distribute over 2.5 million targeted rewards to their customers on a regular basis and significantly reduce the churn by 25% to 30%, increase the digital channel usage like mobile apps by 100% and offered and increased the offer open rates by 60 %, driving much higher customer lifetime value for the carrier. And since year-end into 2018, our momentum has continued. We recently signed three new digital engagement contract deployments, all of which are now going live, one of the largest mobile operators in Southern Europe and another is with a leading operator in the Middle East and a third is with a Tier 1 operator in Europe. You should anticipate further customer announcements over the coming months. I would now like to the call over to Matthew, for some additional remarks regarding our strategy and outlook, after which we will open the call for questions. Matthew?

[Matthew Stecker:]

Thank you, Thomas and good afternoon. I have had the pleasure of serving as the Director of Evolving since March of 2016 and as Evolving’s, Chairman since August of that year. Over the past two years I have seen the company deliver consistent profitability, while making several important acquisitions. I've now taken on the role of Executive Chairman, I intended to work with the leadership team and the Board very closely in the coming month as we seek to integrate our acquisitions, identify other opportunities that can enhance our overall value proposition, and as we invest in our future. As you saw from our 2017 results, the company is growing and is profitable. While the acquisition of BLS, Lumata gives us great confidence. We also know that we have a strong traditional activation business that has declined in recent years. Some of the past public comments have addressed and our expectations to continue to declines as the markets mature. However, after spending a lot of time with the team and speaking with some of our key customers, I believe we have the opportunity to reverse this trend and leverage our existing relationships to drive incremental revenue and profits for Evolving and for our shareholders. For years, the company has been focused on profitability and cash flow, which is what good for companies should focus on. However to an extent, we have also curtailed investments in R&D and frankly innovation is key to our business. We have over 100 operators that customers all of various sizes and there are probably another 400 or so that we do not do business with. Our strategy around operator expansion is to reinvest some of our existing products and taken the experience we have and the feedback from our customers to further evolve our offerings. For the past few years, we haven't talked to the 400 operators that we don't do business with. We're going to be doing a lot of that in 2018 and 2019. In 2018, we intend to reallocate some of the savings anticipated from the synergies of our acquired assets and increasing our spend in the areas of product development, sales and marketing and business development. We intend to increase our sales and services capabilities and add sales personnel to better service existing accounts and to seek out new opportunities. Some with operators we've been in discussions with and others with targeted accounts ranging from Tier 1, Tier 2 and Tier 3 operators and MVNOs around the world. One area of growth, we’ll be turning our attention to the North American market where today we have virtually no presence. We will also be working to strengthen our operations including finance, back office and administration. Because of these investments, profitability will be less than the prior year. However, these are strategic investments that we believe will result in a stronger foundation, a best-in-class solutions portfolio and more customer touchpoints, which over time should result in more meaningful top line growth and increased profitability. I say over time due to timing associated with sales cycles where some of our customers and prospects are in the network deployment than upgrade cycles. As we look ahead to 2018, we are anticipating higher revenues. While we expect to show year-over-year improvements in Q1 revenues anticipated to be down sequentially compared to Q4, based on seasonality in our business, we anticipate stronger growth in the second half of the year based on our pipeline of opportunities. The investments we are making in product development to positively impact our 2019 performance, and we may get some upside towards the end of this year as well. We also anticipate lower gross margins due to the full year impact of our 2017 acquisitions and due to the factor we are increasing our investment rather than cutting. The expenses, as we've noted throughout are expected to increase year-over-year so we will continue to manage our capital prudently and look for additional savings. We anticipate modest profitability, but we are going to invest with future in mind so that we're in a better position to drive meaningful growth, profitability, cash flow, and of course increased shareholder value. That's what really this is all about. Thomas and the team will continue to run the business, work with our customers, and identify areas of growth. My focus will primarily be centered around building the team, pursuing new growth opportunities, whether it's through acquisitions or strategic partnerships, and ensuring that we execute flawlessly. I’ll also take a more active role in Investor Relations, working with our communications partner, GW Communications to get out on the road and tell our story more widely than we've been able to in the past. In summary, I see a lot of opportunities to grow with our installed base, while concurrently investing in new offerings to provide our customers and future accounts with best-in-class products and services that will drive our collective success. I want to 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. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Kevin Tracey with Oberon Asset Management. Your line is now open.

[Kevin Tracey:]

Okay, thank you. So you say you expect to grow the business in 2018, obviously you'll benefit from the full year impact of having acquired Lumata and BLS. So just to be clear on that comment, in the 10-K there's a disclosure that shows that kind of pro-forma for the full year impact of Lumata and BLS, the revenue would have been around $35 million. So, are you saying that in 2018 you expect to have more than $35 million of revenue?

[Mark Szynkowski:]

Hi, this is Mark Szynkowski, I can take that question. So, yes, in the pro-forma it was close to $35 million. However, both Lumata and BLS had -- they were -- they had very strong 2016s compared with their 2017s. So their pro-forma probably would not quite have reached the same level. So meeting those types of expectations. But at this time we cannot provide full guidance.

[Matthew Stecker:]

This is Matthew really quickly. I think there are two pieces of growth we're looking at. One is leveraging the customers from the two acquisitions and getting the benefit of the full year lift. The other is getting the benefit from the investments we plan to make in 2018. As we know the bulk of the upside from the investments we'll be making in 2018, won’t really appear until 2019 due to the duration of our sales cycle. But we are, -- our -- the current plan calls for modest profitability and operating basis and we’ll provide updates, as the year goes on.

[Kevin Tracey:]

All right, so just -- sorry, just to make sure I heard you correctly. You are saying that the numbers reflected in those pro-forma -- that pro-forma disclosure in the 10-K reflect a very good year for BLS and Lumata in 2017. So you expect what pro-forma or the full year revenue to be less than that pro-forma number in 2018.

[Matthew Stecker:]

We're not giving specific guidance today. The companies, both acquisitions are currently at a slightly smaller run-rate than when we acquired them due to trimming synergies and consolidating the businesses. But we do expect them to be growing. We're not giving -- I think that would be a reasonable benchmark, but we're not getting guidance today.

[Kevin Tracey:]

All right.

[Thomas Thekkethala:]

Yes, hi, Kevin this is -- Sorry.

[Kevin Tracey:]

Yes.

[Thomas Thekkethala:]

This is Thomas. So, one of the things that Matthew highlighted and we just want to re-highlight again is that the traditional Evolving business has been in decline. And we are now really focusing about long-term growth and we are focusing not just on some of these new acquisitions, but also the activation business of traditional Evolving. Because as you know, there has been new technologies like eSIM, IoT, machine to machine or M2M communications, et cetera, which requires new investment. So we will be making investments there. And as you probably are aware, the acquisitions of BLS or Lumata were done at very advantageous valuations, they were not in high growth themselves. The primary reason was to get access to their customer basis, and also some very good talent at those companies. And so we are really focused on measuring growth holistically across a footprint of customers, which is 100. So today, if you were a BLS customer and you had one of their older products that you are considering sun-setting, if you will, we can now bring in these new eSIM, IoT capabilities that we had from traditional Evolving, by making investments there. So there isn't this sort of measurement of specific older company kind of customers because the sales teams have been integrated, the products had been integrated and in fact it is these integrated products that has turned to be kind of interesting for customers.

[Kevin Tracey:]

Okay, all right. So you mentioned that the expenses are going to up because of these long-term investments. So you've also called out $1.8 million of kind of one-offs in 2017. So you're saying you expect kind of the long-term investments in 2018 to be kind of greater than the one-off you report in 2017. Is that fair?

[Thomas Thekkethala:]

No, no, I mean, the $1.8 million, I mean, those were related to the acquisitions that we did, legal and professional fees and other such things and some reserves that we have taken to be very conservative in terms of some of these customer situations. Those are not expected to sort of repeat next year. We are making separate and unrelated new investments in both traditional Evolving technologies, as I mentioned, eSIM and IoT and such things as well as the digital engagement capabilities. Because, as you know, the carriers have built out all these 4G and 5G networks, but everyone is using Skype and WhatsApp for voice and messaging. So -- and even data is now becoming unlimited. So the carriers are expanding their footprint to go after services that they've never offered before, which includes IoT and with E-SIM, they're enabling automated cars and other such things and they're offering entertainment on demand, TV on demand, and all sorts of services, through partners and sometimes themselves. So we're providing an end-to-end life cycle from helping them acquire customers, engage them digitally and upsell and cross sell all of these services that they are lining up because their traditional services of voice and messaging are going away. So that's why you have to think of this holistically, because on an individual basis, trying to sell a campaign for more voice or more data services is kind of become antiquated now. It's all about these next generation services that the carriers are now bringing in. As you've probably seen on television, AT&T and Verizon are now talking about Netflix and Amazon Prime and all these services because that's the gateway to drive their network usage.

[Kevin Tracey:]

Okay.

[Matthew Stecker:]

This is Matthew, let me just inject one thing really quick to just to get to the concrete answer to the question. As it relates to operating expenses, we are going to increase our spend year-over-year, but it's too early to provide definitive guidance. Increased investments are primarily in product development and enhancing the sales and business development size and scope so that we can talk to this 400 operators we’re not talking to yet. We anticipate giving more guidance as the year goes on in terms of the scope and scale of the investments.

[Kevin Tracey:]

Okay, thank you.

[Operator:]

Thank you. [Operator instructions] I'm showing no further questions at this time.

[Glenn Wiener:]

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, by all means, please feel free to contact myself or Michael Glickman, realize you're looking for a lot with respect to 2018. There's a lot of aggressive plans in place and we're very hopeful for a strong year, more importantly a strong long-term future. So thank you very much. Operator, we're not ready to end the call.

[Operator:]

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