Symbolic Logic, Inc.
Q4 2016 Earnings Call Transcript

Published: 29 Mar 2017

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Evolving Systems' Fourth Quarter and Year End Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host, Mr. Dan Moorhead, Chief Financial Officer.

[Dan Moorhead:]

Good afternoon, and welcome to Evolving Systems' 2016 fourth quarter and year-end 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 risks. 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. Good afternoon everyone. Evolving Systems' reported solid financial results of the fourth quarter and full year in our news release this afternoon. It was our 35th profitable quarter during which net income was up 19% year-over-year and adjusted EBITDA was up 12% year-over-year. In addition, full year adjusted EBITDA was up 38% and cash flow from operations was 210% compared to the prior year. Dan will cover this in more detail in his financial update. We are particularly pleased with our level of profitability for the quarter and the full year because it validates two important strategic initiatives that were put in motion in late 2015. The first was our acquisition of Sixth Sense Media that initiated our pivot from selling software products and technology to selling outcomes like rapid customer acquisition. By bundling our software solutions with our industry expertise and experience. The second initiative was the transition away from the one and done software sales business model to a managed service recurring revenue business model used by Sixth Sense. The managed service model creates more predictable recovery revenue growth through fixed monthly fees for services and variable upside for performance. The model also generates higher profitability through the use of shared resource pool instead of customer specific implementation and support teams we used in the license model. Based on the success of these initiatives we are off a fast start with the main services win announced in first quarter with major carrier customers in Asia and Latin America. We won this business against some stiff competition with compelling managed service operations that leverage our expertise in helping carriers accelerate that customer acquisitions, upsell of new services, increasing loyalty and monetizing consumer behavior. This is a seed change for our business. With the move from managed service and few perpetual license sales, we are modifying our reporting to reflect the new drivers of the business. First, customers that historically required licenses and paid an annual customer support of CSVs are now being upgraded to manage service relationships with additional services beyond the customer sport. The new reporting structure rolls up our historic managed service and customer support categories into a single new category called services which will also include the variable fees based on performance of services. The other new category license will only contain one-time license and license upgrade revenues. Bookings and backlog growth will no longer be representative of the performance of the business. Since a typical multi-year win results in an increase in the booking and backlog value in the initial quarter that decreases each subsequent quarter thereafter until the next renewal date; so we will continue -- so we will discontinue reporting them publicly like most of our peers. As we've discussed, revenue growth will be slow initially due to the absence of new one-time license sales but the recurring revenue baseline will provide a solid foundation for future growth and acceleration from additional new service upsells and performances. Our focus will be growing revenue, EBITDA, cash flow from operations and increasing the base of recurring revenue quarter-over-quarter. Let me give you a hypothetical example of how our new revenue model works and why it's superior to the older model. I'll use the five year timeline in each example. Under the old model, a carrier might buy and license of $5,000 plus $75,000 in annual support fee for years two through five. That equals $800,000 in revenues for us for the five years. Under the new managed service model, we will have a combination of on-site and off-site expert resources at a rate of $25,000 per month which leads to a total of $1.5 million over five years. So that's $1.5 million under our new model compared to $800,000 under the old model. And keep in mind that the incremental performance fees will drive the $1.5 million much higher at very high margins. The key to this new model is the team we have both offsite and onsite with the customer, being a constant presence, engaging the customer on a day-to-day basis, attending the key meetings, lending expertise and adding value. We develop a very tight relationship and have a much better opportunity to upsell additional managed services to that customer which had increased our monthly recurring fees and open up additional performance fee options. In addition, as I've mentioned before carriers are focused on next-generation value added services such as mobile banking, mobile entertainment, etcetera which creates new opportunities for customer acquisition, upsell and monetization of these services. Our efforts of positioning managed services have been paying off. The first carrier win was a new customer in Asia, a member of one of the largest Tier 1 global carrier groups with more than 200 million subscribers. It was a highly competitive RSB, however, the customer agreed that our expertise and experience from over 25 carrier implementations was an overwhelmingly positive factor when compared to our competitors even though they had significantly lower license fees and prices. There remains several upsell opportunities here at this customer. The other three carrier wins in Asia and Latin America were existing Tier 1 customers who had previously purchased a software solution but generated only a limited amount of ongoing revenues. These three multi-year deals will now create increased engagement and upsell opportunities of all our other managed service offerings. Going forward, we expect continued organic growth from our managed services but also growth through small acquisitions. We continue to look at these players who can add new customers and revenue streams and augment our own solution portfolios and team. In closing, we're very pleased with our continued progress on all fronts and after often speak [ph] about of course we've chartered which is one that will deliver maximum value to our customers and shareholders. With that I'll turn the call over to Dan to a more detailed recap of financial results. Dan?

[Dan Moorhead:]

Thanks, Thomas. Fourth quarter results; total revenue was $6.1 million in the fourth quarter compared to $7.1 million in Q4 last year. The lower revenue was attributable to two factors; first, the weakening of many foreign currencies, primarily the British pound, although keep in mind the negative impact of the weak pound works in our favor on the profitability side. The second factor was our transition to a managed service model which generates lower upfront revenue in favor of more total revenue over the long-term. Total cost of revenue and operating expenses in Q4 declined by 28% year-over-year to $4.3 million from $6.1 million last year. The improvement included lower or essentially flat spending in all expense categories as a result of the restructuring and business model transition we implemented following the Sixth Sense Media acquisition in 2015. Profitability continue to improve in fourth quarter as it had throughout the year. Gross margin increased to 78% from 73% year-over-year. GAAP net income increased 19% to $1.3 million, diluted earnings per share increased to $0.11 from $0.09. Q4 was our most profitable quarter of 2016 and our 35th consecutive profitable quarter overall. Also note during 2016, our net income increased in each successive quarter. Adjusted EBITDA in Q4 was up 12% year-over-year to $2.1 million despite lower revenue which illustrates our focus on lean operations. Adjusted EBITDA margins grew to 34% from 26%. Efficient operations and improved collections drove cash flow from operations to $1.4 million in Q4 from a negative $700,000 a year ago, a 301% increase. Full year results; our 2016 full year revenue was $24.8 million versus $25.6 million in 2015. Once again, the pounds weakness and our business model pivot played major roles in this. Total cost of revenue and operating expenses for the full year declined 10% year-over-year to $19.2 million from $21.3 million in the prior year. Since the Sixth Sense Media transaction approximately 18 months ago, we have taken more than $7 million in annual cost out of the combined business through headcount and other expense optimization. Gross margins in 2017 increased to 79%, up from 75% in 2015. GAAP net income was up 4% to $3.4 million from $3.3 million with diluted earnings per share of $0.29 versus $0.28 year-over-year. Adjusted EBITDA increased 38% to $7.9 million from $5.8 million year-over-year and adjusted EBITDA margins increased to 32% from 22%. Due to increased profitability and efficient operations, our cash flow from operations jumped 210% to $6.9 million from $2.2 million in 2015. On the balance sheet we reported cash and cash equivalents of $7.6 million at December 31 compared to $6.9 million at the end of the third quarter and $8.4 million at the end of 2015. Working capital was $8 million at year end, up from $7.7 million in Q3 and $3.5 million at the end of 2015. I'll close with the usual reminder, that a single order can have a significant impact on our quarterly results. Accordingly, we continue to advise that it's more accurate to judge our performance on an annual rather than quarterly basis. With that we thank you again for joining us today and we're now happy to take your questions. Operator?

[Operator:]

[Operator Instructions] I have Robel [ph], your line is now open.

[Unidentified Analyst:]

My name is Daniel [ph]. I'm an individual investor. I came in a little late, so if you've covered this, I apologize. I was wondering if you're going to start paying a dividend again or if you have an official dividend policy?

[Dan Moorhead:]

Daniel, this is Dan Moorhead. You know, we -- when we paid a dividend it was a quarter-by-quarter decision and so that's been the policy. And we're not paying a dividend now and any future dividends will be decided as the quarters come upon us. But as Thomas mentioned, you know, the plan right now is to invest in the business and possibly some small M&A.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

[Operator Instructions] And we don't have any further telephone questions right now. I will turn the call back over to Thomas Thekkethala.

[Dan Moorhead:]

It's Dan. Thanks for joining us today. We appreciate everybody's support and look forward to speaking with everyone next quarter. Thanks a lot.

[Operator:]

And this concludes today's conference call. You may now disconnect.