Symbolic Logic, Inc.
Q2 2014 Earnings Call Transcript

Published: 6 Aug 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to Evolving Systems' 2014 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And I would now like to introduce your host for the conference, Vice President of Finance, Dan Moorhead. You may begin.

[Daniel J. Moorhead:]

Good afternoon, and welcome to Evolving Systems' 2014 second quarter earnings call. I'm Dan Moorhead, Vice President of Finance, and joining me today is Thad Dupper, 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 Thad.

[Thaddeus Dupper:]

Thanks, Dan. Welcome and good afternoon. Over the last few quarters, we focused our discussion on our improving license and service or LS bookings results, which for the quarter grew by 25%, year-over-year. For this quarter, I'd like to turn our attention to our revenue and profitability. For the second quarter, revenue grew by 37%, gross margins were 75%, up 4 points from Q1. Adjusted EBITDA margins were 36%, up 15 points from Q1. And operating margins more than doubled at 33%. These all represent new records for Evolving Systems, since we sold our numbering business in 2011. Dynamic SIM Allocation, or DSA, revenue for the quarter was up 76% to $4.3 million from a year ago, as customers increased their usage of the product and continued to expand their systems. In the quarter, we recognized our largest DSA license expansion ever. As you know, these license expansions are what we refer to as First Used Activations, or FUAs, are high margin and we saw the positive impact of that first hand in this quarter's results. Also during the second quarter, we announced several important enhancements to our DSA product. First, we announced our app promoter and loader modules for DSA. To briefly explain what they do, during the activation experience, the app promoter prompts the subscriber to download an app from a specified list. Industry experience strongly suggests if an app doesn't ship pre-installed on the phone, the effort to get the subscriber to download it later is significantly harder, making mobile customer acquisition one of the biggest opportunities and priorities based in businesses today. Take Uber for example. Getting a wireless user to download their app is a critical step in onboarding a new customer for them. Social media is another area where we can play a significant role. As a data point, when I received my iPhone from AT&T, it didn't come with Facebook, Linkedin, Twitter or Salesforce preloaded. Being able to promote and download popular apps like these when the subscribers attention is focused on the devices initial activation, represents a very compelling use case for DSA. And we believe app promotion will become an integral part of the activation experience. Since announcing this feature in late May, I've had conversations with C level executives in North America, Europe and Asia, and their interest in app promotion has been very positive. The app promoter and loader also fits into the broader context of how carriers want to be viewed. Carriers clearly want to be viewed more than just a pipe and providing value-added services, such as app promotion and downloading is just one of the ways carriers can overcome this moniker. As a result, we believe this new capability can become an important part of DSA. And given how we plan to price it with a small fee per promotion and then a larger fee for the download of the app., we believe the app promoter and loader can help us along with our FUA license expansions, accelerate our transition to a usage-based recurring revenue business model. The second major enhancement we released during the quarter was our new number management solution which we've named total number management, or TNM , which can run either as an integrated module of DSA or as a standalone solution. As background, carriers are facing increasing challenges in number management, specifically number shortages, due to the proliferation of connected and un-SIM [ph] devices. TNM can address these issues effectively by offering a complete SIM and number lifecycle management solution, encompassing number inventory, number selection and number recycling. It enables service providers to reliably and efficiently manage their entire number inventory. Turning our attention to our cloud DSA solution, during Q2, we completed the first phase of a campaign for our DSA fast solution and are following up on those leads. On Telesprees front, we continue to generate revenue from our relationship with Sprint as well as our U.S. MVNO customers. In addition, we're actively promoting Telesprees mobile device enablement solutions to our international customer base. Last quarter, I mentioned, we had 3 DSA trials underway. One of the trials has been put on hold due to budget issues. As I've previously said, DSA's biggest competition isn't from a look-alike product, though rather it's a carriers budget that can become the issue. And this was one of those cases. This carrier determined that didn't have the funding in this year's budget to move ahead with DSA. So we agreed to suspend the trial until their budget visibility becomes clear. Our second DSA trial, one in which we did a lot of prep work, has now concluded confirming that our prep work paid off and we're expecting to enter commercial discussions shortly. And the third, our most comprehensive DSA trial to-date is set to conclude in the coming weeks. I just personally met with the customer and the feedback from their C level was very encouraging. Based on the customer's interest level, we plan to begin parallel tracks to finish up the trial and commence contract negotiations. This trial was also noteworthy because it focused on the high-end subscriber experience of smartphones, both iPhones and Android phones as well as tablets -- Our recent experience with trials has been a topic of discussion at Evolve. Typically, we've resisted doing trials because for one thing, with our sizable installed base, we believe our DSA technology is well-proven and established. Beyond that, trials tend to consume a fair amount of technical resources, both ours as well as from the carrier staff. That said, the upside that can come from a successful trial is that it allows us to demonstrate to the carrier exactly how DSA will work in their network, including the personalized activation experience. Going forward, we may change our thinking on trials, particularly if we find that they can significantly shorten the DSA sales cycle. We will continue to study this topic and time will tell. In closing, Q2 was highlighted by second quarter LS bookings growth of 25%, with growth coming from both DSA and Tertio Service Activation, or TSA. Record financial and operating results with across-the-board double-digit growth for all metrics. That grows by an EPS of $0.14 up from $0.05 in Q1. Introduction of important new functionality to DSA with the release of our app promoter and app loader in total number of management solution. And SIM activation rates that continue to increase and as a result, we are seeing the benefits of record levels of FUA license expansions on our P&L. Based on our Q2 performance, we remain confident that we are well-positioned for 2014. To that end, we're pleased to announce that our board has increased our quarterly dividend to $0.11 per share. With that, I will now turn the call over to Dan.

[Daniel J. Moorhead:]

Thanks, Thad. First, I'll review our second quarter financial results. We reported record Q2 revenue of $7.9 million, which was a 37% increase over revenue of $5.8 million in the same quarter last year. License and services revenue grew by 47% to $5.2 million from $3.5 million year-over-year while customer support revenue increased 22% to $2.8 million from $2.3 million. Total cost of revenue and operating expenses increased 17% in Q2 to $5.3 million from $4.5 million last year. The increase in expenses is largely due to the operations of Telespree Communication, which we acquired in Q4, 2013. In spite of increased expenses, our record revenue pushed operating income up 109% in the second quarter to $2.6 million from $1.3 million in the same quarter last year. Q2 GAAP net income grew by 84% to $1.7 million from $900,000 in Q2 a year ago. Diluted earnings per share was $0.14 versus $0.08 a year ago. This is our 25th consecutive quarter of net income, a milestone we're proud at Evolve. Adjusted EBITDA reach to a record level of $2.8 million in the second quarter, a 93% increase over $1.5 million in the same quarter last year. 6 months financial results. Revenue through the first half of 2014 grew by 17% to $14.5 million from $12.5 million in the same period a year ago. That included a 19% increase in license and services revenue to $9.5 million from $8 million last year and a 12% increase in customer support revenue to $5 million from $4.4 million. Total cost of revenue and operating expenses in the first 6 months increased 15% to $10.9 million from $9.4 million a year ago. Again, the majority of the increase in expenses is related to the operations of Telespree. Similar to second quarter, our increased cost in the first half were more than offset by our solid revenue increase and as a result, operating income increased 20% to $3.6 million from $3 million a year ago. Net income in the first half increased 12% to $2.3 million or $0.20 per diluted share from $2.1 million or $0.18 per share a year ago. Adjusted EBITDA grew 22% in the first half to $4.2 million versus $3.5 million last year. Bookings and backlog. We define bookings as new noncancelable orders expected to be recognized as revenue during the following 12 months. Total second quarter bookings increased 18% to $7.2 million from $6.1 million in Q2 last year. License and services, or LS, bookings grew 25% to $3.7 million from $3 million. DSA LS bookings grew 18% to $1.9 million from $1.6 million. TSA LS bookings grew 33% to $1.8 million from $1.3 million. Q2 Customer Support, or CS bookings were up 12% year-over-year to $3.6 million from $3.2 million. Turning to 6 months booking. Total bookings increased 24% year-over-year to $14.7 million from $11.8 million. LS bookings were $8.8 million, up 34% over $6.5 million. DSA LS bookings were up 58% to $5.4 million from $3.4 million. TSA LS bookings increased 9% to $3.4 million from $3.1 million. And CS bookings increased 11% to $5.9 million from $5.3 million last year. Total backlog at June 30, 2014, was $12.5 million, a 21% increase over $10.3 million at the same time last year. LS backlog totaled $6.3 million, a 23% increase compared to last year and included $3.8 million in DSA and $2.5 million in TSA. CS backlog was up 20% year-over-year to $6.2 million from $5.2 million. On the balance sheet, cash and cash equivalents at June 30 were $12.4 million versus $13.8 million at December 31 year end. Working capital increased to $15.4 million from $14.7 million at year end. Dividend update. As announced today in our earnings release, our board declared an increased third quarter dividend of $0.11 per share payable August 29, 2014 to stockholders of record on August 22, 2014. I'll close with our 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] Our first question comes from Michael Crawford with B Riley.

[Michael Crawford:]

On the DSA trials, the 2 of those that look like they're heading toward what could be successful contract negotiation. Would you expect -- would you hope that one of those can be concluded in the current quarter or do you think both of those negotiations could be concluded before September 30?

[Thaddeus Dupper:]

Mike, it's Thad. It's unclear. We're going to try our best on both, but they're progressing. And that's the important thing to us. So we'll try, but it's not clear to me. I think we had one of them in our forecast. The other one was not in the forecast for the quarter, as I recall our board update. Now just also keep in mind, other than the trials, we have other names in the funnel that didn't have trials that we're working on closing.

[Michael Crawford:]

Okay. And as far as these 2 plus those other ones, do you think it is likely that when you are closing these new deals that it also includes this app promotion element?

[Thaddeus Dupper:]

No. We're bidding it. And as I said, we're getting very strong feedback from the customers. And the other nice thing about the trials is we showed the screen and we can show the functionality, the capability of it, so that's garnering good attention. So I know in at least one of the trials, it's very prominent, the other one it was there. But even the deals that are on the table that are in trials, we're bidding those modules because they're so powerful.

[Michael Crawford:]

Okay, great. And then just to be clear on the bookings, it looks like there's some grounding issue, where there's $7.2 million or $7.3 million depending on the breakout.

[Thaddeus Dupper:]

What, total bookings for the quarter?

[Michael Crawford:]

Yes.

[Thaddeus Dupper:]

Can you repeat that agreement? I can't hear you.

[Michael Crawford:]

I think the license and -- License services bookings are $3.7 million and the customer support was $3.6 million and that works to $7.3 million and is that just the rounding?

[Daniel J. Moorhead:]

It is rounding, yes.

[Operator:]

[Operator Instructions] And our next question comes from Donna Jaegers with D.A. Davidson.

[Donna Jaegers:]

Firstly on the profitability, Thad, on the FUA outlook, can you, obviously I think there was one in the quarter. Can you remind us, I think, originally when you started talking about this year, they were 4 in the lineup and I don't know if that was all this year, but can you give us an update there?

[Thaddeus Dupper:]

Yes. You're right about that. So there are 4 customers that are in reload status, and we've closed the big one year-to-date and we've got, I think, a few more in the funnel. So I think by the end of the year, we'll have 4 done. We're still tracking, as we said. We think it will be a record year for FUAs. Last year was a good year for us. And we're going to eclipse that if we haven't already. So that number 4 is still a good number to model to.

[Donna Jaegers:]

Great. And then, on -- there's been a number of announcements on different MVNOs that are on EE's network in the U.K. and [indiscernible] network in Mexico. Can you sort of update us what you're doing with MVNOs in the international markets if those are in your funnel or how you're approaching those?

[Thaddeus Dupper:]

We're doing some work with it. I mean I wouldn't say its the most red hot sector we have, but we've gotten a fair amount of change requests from our customer EE, who launched a couple MVNOs earlier this year. I do think where it's been very active is down in Mexico, and we've received a fair amount of orders from Movistar Mexico carrier in support of launching MVNOs. So it's been good in Mexico, it's been active in the U.K. Beyond that, I think it's a topic of discussion, but as you rightly question, those were the 2 names where we've been driving business regarding MVNOs. Other than the U.S. business that we get from Telespree with MVNOs.

[Donna Jaegers:]

And that those MVNO, have those resulted in orders that are in the bookings now?

[Thaddeus Dupper:]

With the Telespree or?

[Donna Jaegers:]

No, the -- in Mexico and the U.K.

[Thaddeus Dupper:]

We got -- we put out a press release. I think it was May last year about an order we got from Mexico in order to support MVNOs. Now Movistar is one of our largest customers, so we get quite a few orders from them. But I think we've been rolling out that MVNO support recently. So that's been good. And then EE, I know -- I don't know it was Best Buy or some retail MVNOs, they rolled out, but they did that just recently and, obviously, that needed changes to the activation system, which we made. The other thing we did was, we supported EU roaming, which was a new change and that drove some business on the Tertio side. So it's been an active spring for us.

[Donna Jaegers:]

Okay. And then on the tablet trial. I know you don't want to talk about the exact customer there, but they're focused on high-end customers and tablets and would that be the DSA product that they would be wanting to use if people brought their phones unlocked to them?

[Thaddeus Dupper:]

That's right. So it's all DSA. These 3 trials I alluded to were all Dynamic SIM trials and, yes, it is DSA.

[Donna Jaegers:]

Okay. Then I guess, well, one clarification for Dan, the restructuring expense in the quarter, is that some more Telespree restructuring and are we pretty much finished with that now?

[Daniel J. Moorhead:]

Yes. That was just the trueup of a prior accrual. When we accrued Q4 in the Q1 restructuring, the 26 is really just cleaning that up and cleaning up the accruals in all the payouts that remain. So there wasn't anything additional in Q2, as far as restructuring. It was just the trueup of the prior quarters.

[Donna Jaegers:]

Okay, great. And then Thad, one last question for you. On -- Sprint recently announced this sort of do-it-yourself prepaid plan where they're using the It's On platform. Can -- that doesn't -- they weren't using Telespree in that -- for that side of the prepaid business before, is that correct, so that doesn't hurt your business with Telespree?

[Thaddeus Dupper:]

We would have like to receive that business, but no it doesn't hurt us. What Sprint is using Telespree for today is to activate their 3G phones and they're going to continue to do that. Now their newer phones in the LTE, they run in a different direction. My understanding was they didn't select a vendor. They were going to do it in-house, but I don't know all the details.

[Operator:]

[Operator Instructions] We have a question from Jim Gentrup with Val Vista Capital Management.

[Jim Gentrup:]

Just last couple of years, you guys have had some pretty good seasonality in the second half as far as bookings on the Licensing and Service. I just wondered, if you had the kind of visibility that you could say you'd have that same type of visibility in the second half of this year?

[Thaddeus Dupper:]

Well, its a very good question and you're right. Last year, we had a strong second half. The funnel is there for it. Right now, I'm really looking towards Q4 to be very strong, but that's not to say Q4 or Q3 wouldn't be. But I would say, seasonally, we have every opportunity to have a stronger second half bookings wise than we had in the first half. Now, the proof will be in delivering that, but you're right. Usually our second half of the year is better than the first, and this year should follow that pattern as well.

[Jim Gentrup:]

Okay. And then the SaaS solution and I may have missed this comment already, I apologize, but the DSA SaaS solution, can you just give us a little more color on the impact here going forward in the second half. Is it far enough along that you'll be closing some smaller SaaS deals that will have an impact in the second half?

[Thaddeus Dupper:]

We bid a couple. Whether they close or not, it's not clear to me. What I would say is, I like where we are in terms of getting the technology up and running, doing the regen. We've had a couple pockets of strong interest, which we're responding to. It's not 100% clear to me whether these will close. I would say, it's unlikely they will close in Q3. Q4 is a possibility. It's just a little further out for us to predict.

[Jim Gentrup:]

And then, just looking longer-term though this strategy so far, has it been better than you -- I mean, in other words, you look at 2015 and the out years and you think your SaaS solution is going to -- is there anything there that you could say, yes, this thing, it's really going to gain traction in a year or so, or I mean how would you?

[Thaddeus Dupper:]

Well, I think this solution is well placed, especially for the smaller carriers. Now our sales guys like to hunt elephants. So they tend to go after big deals. There is good news in that for us. But as we said, some of these operators where we have premise DSA installed, are parts of groups where they have smaller carriers and those smaller carriers, we've always said, in the sub 5 million subscriber range, that's a good fit to our SaaS DSA. They don't have the operational staff. The budget really is not large for our premise DSA. So we continue to believe that SaaS DSA is a very good solution for those sub 5 million subscriber carriers, and those are the ones we're talking to. We're building the funnel, we're generating the interest. We are making some bids. And along the way, our sales force is also going after some of the big Tier 1s that can really move the needle. So to us, it's an and condition not an or, and we believe that's well placed right now.

[Jim Gentrup:]

And you don't see the need or feel the need to change anything in the sales force to go after the smaller deals?

[Thaddeus Dupper:]

Not yet. Occasionally, we talk about some inside sales to go after smaller deals, but not yet. I think we're making the progress and we'll see where it takes us. But now, we are adding some salespeople. We've talked about that before. We plan to add 2 more this year, and that will help our direct sales and the products selling, the numbers are good. And we think we can sustain adding a few salespeople to cover the world, it's a big place.

[Jim Gentrup:]

And then just last one for me, the FUA's that you have -- I'm pretty sure that you've said in the past that they -- usually when you book them you also recognize revenue in the same quarter, is that a safe statement?

[Daniel J. Moorhead:]

All right, this is Dan. I would say that's typically correct. It wasn't the case in this quarter. Just the way the order came in, we ended up booking in Q1 and taking the revenue in Q2.

[Jim Gentrup:]

Okay, All right, but you and then you still got that's the big one that you mentioned earlier, right, I'm assuming?

[Thaddeus Dupper:]

Yes. That's correct.

[Operator:]

Our next question comes from Donna Jaegers with D.A. Davidson.

[Donna Jaegers:]

Yes, just a quick follow-up, guys. On customer service, both revenues and bookings, obviously, Q2 was stronger than I was looking for on customer service and bookings were very strong going forward as well. Is there something new going on there, or what's driving that?

[Daniel J. Moorhead:]

Are you talking about customer support?

[Thaddeus Dupper:]

Yes.

[Donna Jaegers:]

Yes, sorry.

[Daniel J. Moorhead:]

Well, it's increase -- part of the increase in Q2 is related to timing. So you know sometimes it's an order with a Q1 order. It doesn't come until Q2. We don't take the revenue in Q1 because we don't have the renewal yet. And then Q2, you get a little bit of a catch-up affect and you get to take revenue all the way to that point. So it's partially that in Q2. And then the other piece is we talked about it. We had some DSA deliveries through the second half of last year and once those are delivered and installed then we start getting the customer support revenue on that. So there's a couple of different things going on in customer support.

[Donna Jaegers:]

And then in the bookings for customer support, is that anything unusual or that's just because of the DSA orders that you guys have already booked, so then the follow-on support goes with it?

[Thaddeus Dupper:]

Yes. The -- Q2 is typically a strong quarter for CS bookings. And it really just comes down to timing. Some people renew annually, some people renew quarterly. So it's just a booking cycle and it's really just the timing thing. I think you'll see the revenue growth, and if you look at Q2 or Q1 and Q2 and look at kind of the average of those, I think that will be a pretty good number, going forward.

[Operator:]

Our next question comes from Michael Crawford with B. Riley.

[Michael Crawford:]

One follow-up question. On SG&A, that went down from the levels we'd seen in the last couple of quarters, is that an anomaly or would you expect SG&A to have been elevated in the last couple of quarters, or you have been taking the cost out of Telespree and this is the normal level to ramp-up from?

[Daniel J. Moorhead:]

Yes. Q1 is typically a high quarter for us. We have kind of some kick-offs and we have Mobile World Congress and those are big sales and marketing quarters for us. A drop in Q2 because we didn't do as many events as we did in Q1. So -- the projection goes forward to be probably somewhere in the middle of those 2. So I think that would get you to about the right place. If you look historically, Q1 is typically pretty big and then at times it will drop after that.

[Operator:]

At this time, I'm showing no further questions. I would like to turn the call back over to management for any further remarks.

[Thaddeus Dupper:]

Thank you for joining us today. And we look forward to giving you an update in probably the early November timeframe with our Q3 results. Have a happy and safe summer. Cheers.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect.