Symbolic Logic, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Evolving Systems 2016 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference call, Mr. Dan Moorhead, Chief Financial Officer. You may begin.

[Dan Moorhead:]

Good afternoon, and welcome to Evolving Systems 2016 first quarter earnings call. I am Dan Moorhead, Chief Financial Officer and joining me today is Thomas Thekkethala, Chief Executive Officer. During the course of this call, we will be making forward-looking statements based on current expectations, estimates and projections that are subject to risk. Specifically, our 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. We encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information about the company. With that, I’ll turn the call over to Thomas.

[Thomas Thekkethala:]

Thanks, Dan. Welcome and good afternoon. We’ve started 2016 off strongly. We had four new customer wins in Q1, the best we’ve had since 2011. Two of the new customers were new Dynamic SIM Allocation or DSA wins, which takes our total DSA customer list to about 22, by far in a way the highest in the industry, establishing us as the clear leader in the segment. One of the new DSA wins was the eighth [ph] from a large carrier group. The other new DSA win significantly was done through one of industry’s largest OEMs, which bodes well for future deals through that channel. We also won our first new deal in the next generation mobile gaming segment, involving our Real-time Lifecycle Marketing called RLM product. We also upgraded our license and services to existing RLM customers. And finally, we also won a new customer for our Total Number Management or TNM solution. This resulted in License and Service or LS bookings for Mobile Marketing Services, which is MMS, grow by about 70% year-over-year. And the total LS bookings grow by 11% year-over-year. This was also our 32nd consecutive profitable quarter and we announced the second quarter dividend of $0.11 per share. Dan will cover some of this in more detail in his update. The acquisition of Sixth Sense Media, SSM, has accelerated Evolving Systems entry into the high-value mobile marketing space, and also initiated the company’s transition from a traditional software license model to a recurring revenue model based on managed services. Here is an example of this transition. I just returned from a two-week trip to meet customers and partners in Europe and Asia, and here is an example of one of my meetings. The carrier, I was meeting with had their marketing team establish a goal to accelerate their conversion of 3G customers to their 4G network by 10,000 subscribers a day. In our old model, our sales team would have proposed for example, a license of $400,000 and implementation service fee of $200,000. I explained to the carrier’s marketing executives, that any supplier could provide them software, but were they sure that they could actually meet their goal of 10,000 subscribers converted per day with just software. I advised them that Evolving has the software, but more importantly, the expertise and experience to help them convert as many as 30,000 subscribers a day, which is what we are doing for other carriers around the world. And it’s this expertise that they need not just the software. So we proposed that instead of a license, they sign up for the same implementation service fee of $200,000, plus managed service fee of $20,000 per month for a team of our experts to help them increase subscriber acquisition, and an additional performance fee for activations above 10,000. They like this model, because they gained our expertise and a very high return on investment, because at 10,000 activations a day with an average revenue of $10 per month in incremental revenues, that turns out to 10,000 times 30 days times $10 or $3 million per month. And assuming the lifespan of the customers in average of six months that translates into $18 million in value for them, relative to of fees of about $25,000 to $30,000 per month. So in this model, in year one, we appear to be giving up $400,000 in license revenue, and exchange for $240,000 in our managed service fee, plus the potential performance fee of $60,000, which is 25% lower in year one. But in year two and beyond the managed service model continues to accelerate to more than $300,000 per year, whereas the old license model would not be generating additional revenues. This is the beauty of the new managed service model that we’re adopting. Greater and more predictable recurring revenues and profitability over the life of the customer relationship. As I’ve mentioned before, over the past decade carriers have invested billions of dollars in acquiring licenses and customers and building mobile networks. Only to watch the over the top players like Google, Facebook, WhatsApp, Skype and others, leverage those networks to their own benefit for delivery of voice messaging and other services. Carriers are now very focused on catching the new wave of next generation services, such as mobile banking, mobile gaming, mobile entertainment and mobile advertising. These services also drive a better usage, which provides carriers a dual source of revenue. In order to monetize these next generation services, carriers are turning to companies that have software solutions, but more importantly the expertise and experience to create these new revenue streams, which is where EVOL has the major advantage. We have the expertise and the experience. The SSM transaction raised our combined customer base to 75 carriers in 50 countries touching 1.3 billion consumers, which has created many, many cross-selling opportunities. The integration of RLM, but the company’s existing software solutions initiated for us a three phase strategy designed to help carriers accelerate their customer acquisition. Upsell more services to these consumers and monetize the consumer information. So in Phase 1, RLM is offered as a feature of our traditional DSA and TSA products, which gives carriers the ability to engage their subscribers in real-time, beginning with the device is first powered on, all the way through the life of their relationship. In Phase 2 which is now underway, we’re working with carriers to upsell new mobile services in areas like mobile banking, mobile commerce, mobile gaming and entertainment. In the third phase will involve helping the carriers convert their subscriber information into new revenue streams through personalized mobile advertising app downloads and such. These solutions together are enabling Evolving Systems to transition to a software as a service managed service model. So in summary, we’re moving from selling technology like TSA, DSA and RLM to offering business solutions. Our offerings are geared to help the carrier drive up customer acquisition like 3G, 4G conversion that I described earlier. Upsell services like selling consumers, higher level data services, mobile gaming, mobile money, mobile commerce and consumer information monetization, by monetizing consumer text messages, app downloads, browsing and search. In addition, our value proposition is moving from cost savings to measurable revenue increase for the carriers. And our internal business model is moving from the classic capital expense, license and service model to an operation expense model based on managed service and performance fees. These models will enable the company to generate predictable recurring and growing monthly revenue and profitability, and greater overall value for each of our customers. We expect 2016 to be a transition year, as we complete the integration of SSM solutions and we continue transition from a non-recurring software license fee model to a recurring revenue model based on managed service. This will generate lower revenue in the first year of a relationship as I outlined, but greater revenue and profitability from each customer over the long-term. And now, I will turn the call over to Dan Moorhead, who will discuss Q1 2016 results in more detail. Dan?

[Dan Moorhead:]

Thanks, Thomas. First quarter financial results. First quarter revenue was $6.5 million versus $6.7 million in Q1 last year. LS revenue was $3.9 million and customer support or CS revenue was $2.6 million. Q1 revenue was negatively affected by the British pound as the rate decreased at the end of 2015 and continued in Q1. Total cost of revenue and operating expenses increased 14% year-over-year to $6 million from $5.2 million. The increase included Sixth Sense Media operating expenses and $941,000 restructuring charge. Our profit metrics remained solid in the first quarter with 78% gross margins, and 28% adjusted EBITDA margins. Adjusted EBITDA increased 10% year-over-year to $1.8 million from $1.6 million. Q1 was our 32nd consecutive profitable quarter. GAAP net income was $427,000, net of the restructuring charge or $0.04 per share compared with $860,000 or $0.07 per share last year. On the balance sheet, we’ve reported cash and cash equivalents of $3.7 million at the end of the first quarter, down from $8.4 million at 2015 year-end. Working capital was $8.3 million, which is up from $3.5 million at 2015 year-end, because as you may recall in the fourth quarter, the $10 million balance on a revolver was classified as current debt. Then at February this year, we paid down $4 million on the revolver and converted the balance to a term loan. Of which approximately $500,000 is now classified in the current liability and $5.5 million is long-term. The loan is interest only through the remainder of 2016, and then it’s paid off over 36 months beginning in January 2017. During the first quarter, we continued headcount reductions following the SSM acquisition. The $941,000 restructuring charge in Q1 followed $533,000 restructuring charge in Q4. We expect the actions that led to those two charges to result in annual cost savings of approximately $3.5 million. Booking and backlog highlights, we define bookings as sales orders that are expected to be recognized as revenue during the following 12 months. Total first quarter bookings increased 7% to $6.9 million from $6.5 million in the first quarter last year. Q1 LS bookings grew a 11% year-over-year to $4.7 million from $4.3 million. MMS LS bookings were up 70% year-over-year to $2.9 million from $1.7 million. Total CS bookings were flat at $2.2 million. Our total backlog at the end of Q1 was up 21% year-over-year to $12.6 million from $10.4 million. LS backlog grew 27% to $7 million from $5.5 million. The $7 million total was comprised of $5.3 million of MMS, up 48% year-over-year and $1.7 million in TSA. Dividend update, as Thomas mentioned our Board of Directors declared second quarter dividend of $0.11 per share, payable July 1, 2016 to stockholders of record on June 3, 2016. I’ll close with our usual reminder that a single order can have a significant impact on our quarterly results. Accordingly, we continued to advice that it’s more accurate to judge our performance on an annual rather than quarterly basis. With the caveat that, with our transition to a recurring revenue model based on managed services, model that designed to give us more revenue predictability and eliminate some of the uncertainty, we hope to be able to phase out this remainder in the future. With that, we thank you again for joining us today. And we’re now happy to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Brian Kinstlinger with Maxim Group.

[Josh Seide:]

Hi, this is actually Josh Seide for Brian. Thanks for taking the questions. Can you comment a bit on your sense of the overall spending environment? Are we still seeing status quo in terms of spending on the part of carriers?

[Thomas Thekkethala:]

Well, I think, Josh, at various - no, different geographies, I think for example in some geographies, particularly in Asia, where the emerging market in the consumer uptake has been a lot higher. Are you seeing a lot more spending by the carriers to take advantage of those opportunities compared to some of the traditional Western European and North American markets where things are not moving as fast as they are in some of the emerging markets.

[Josh Seide:]

Thanks. That’s helpful. And would you mind elaborating a bit on the new RLM sale you discussed? Was that to a legacy DSA customer, Aviva [ph], or was that an entirely new logo in RLM?

[Thomas Thekkethala:]

It was a new logo.

[Josh Seide:]

I see. Okay. And then, can you elaborate a bit on the cross-selling effort into the install base of DSA customers, would that entail some sales investment to sort of retrain the sales force to target RLM and specifically the managed service model?

[Thomas Thekkethala:]

Right. We’ve been doing that now for over three months. We started with the sales kickoff, where we had multiple workshops that occurred where the product managers got the solution consultants and the sales teams region by region and went through all the cross-selling opportunities between RLM, TSA and DSA. And then did the same with the top ten accounts in their pipelines to look at specifically how these can be structured for each of those particular carriers, what the return on investment would be, what the revenue upside would be etcetera. So that they would have custom offers ready to be delivered to those customers, which they’ve been now doing for the last couple months.

[Josh Seide:]

Okay. And regarding $0.06 contribution to revenue in EPS, without giving definitive numbers, was the revenue contribution and margins about in line with the expected run rates when it was acquired?

[Thomas Thekkethala:]

Yes. I think it was pretty close and we actually - I don’t have it in front of me, but if you read this, the 10Q it breaks those out for you.

[Josh Seide:]

Right. Okay. Thank you for the questions.

[Operator:]

[Operator Instructions] And I’m not showing any further questions at this time.

[Thomas Thekkethala:]

We just like to thank everyone for joining us today. And we will catch up with everybody with our Q2 results later in the year. Thank you very much.

[Operator:]

Ladies and gentlemen, this does concludes today’s presentation. You may now disconnect and have a wonderful day.