Symbolic Logic, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Evolving Systems' third quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's program, Dan Moorhead, Vice President of Finance. Sir, you have the floor.

[Daniel J. Moorhead:]

Good afternoon, and welcome to Evolving Systems' 2014 Third 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. We are pleased to report third quarter revenue grew by 25%, adjusted EBITDA was up by 60%, and operating margins increased 58%, all represent strong year-over-year improvements. In periods of high revenue growth, our ability to maintain and even grow margins is noteworthy. Q3 gross margins were again strong at 74%. Also worth noting, we were able to grow revenue without increasing CapEx. The net result is very profitable revenue growth. In fact, for the first 3 quarters of 2014, we posted $6.8 million in adjusted EBITDA, exceeding 2013's full year results of $6.3 million, which may raise the question, what is driving our growth and increasing profits? The short answer is Dynamic SIM Allocation or DSA. DSA revenue for the quarter was $3.8 million, up 68% from a year ago as customers continue to increase their usage and activate more SIMs. For Q3, 7 DSA accounts ordered upgrades to their systems. In addition, we recognized 3 license extensions, making 2014 our best DSA year so far. As you know, these license extensions are what we refer to as First Use Activations, or FUAs, carry very high margins and we saw again this quarter the positive impact they can have. From an operational perspective, our activation rates continue to grow, as customers are activating more and more of their devices via DSA, with strong growth coming from Asia, Africa, Latin America and the Middle East. Some examples, one of our newest DSA customers in Africa is currently activating 28,000 SIMs per day with plans to increase to 50,000 SIMs next month. For all of Africa, across the 3 production DSA customers, we are now averaging over 200,000 activations per day. In South America, we average over 135,000 per day. In our most recent DSA deployment in Argentina, our competitive displacement is already averaging 35,000 activations per day. In Saudi Arabia, another data point that illustrates the breadth of our customer base, we activated over 600,000 cards during Hajj, which lasts from September 1 to October 11, as people make their religious pilgrimage to Mecca. We expect these activation rates to increase as we enter the busy holiday season, where last year, we activated over 4 million SIMs during the 2 weeks leading up to Christmas. In addition, we'll be placing 2 more DSA customers in production during November

[Daniel J. Moorhead:]

Thanks, Thad. I'll start with a brief review of our third quarter financial results. Revenue in the third quarter was $7.6 million, a 25% increase over $6.1 million in the third quarter last year. License and services revenue was up 34% to $5.1 million from $3.8 million year-over-year, and customer support revenue increased to 8% to $2.4 million from $2.2 million. Total cost of revenue on operating expenses increased 14% in the third quarter to $5.2 million from $4.6 million last year. The majority of the increase is related to the operations of Telespree Communications, which we acquired in the fourth quarter of 2013. Our strong revenue gains in the quarter more than offset the higher expenses and led to a 58% increase in the operating income to $2.3 million from $1.5 million year-over-year. Q3 GAAP net income grew 83% to $1.7 million from $900,000 in the same quarter last year. Diluted earnings per share was $0.14 versus $0.08 a year ago and marked our 26% consecutive quarter of positive net income. Adjusted EBITDA reached $2.5 million in Q3, up 60% from $1.6 million in Q3 last year. On to our 9 months' results. Revenue for the first 9 months of 2014 increased 19% to $22.1 million from $18.5 million in the same period a year ago. License and services revenue grew 24% to $14.7 million from $11.9 million year-over-year, while customer support revenue increased by 11% to $7.4 million from $6.7 million. Total cost of revenue and operating expense through 9 months increased 15% to $16.1 million from $14 million in the comparable period last year. The majority of that increase is related to the operations of Telespree Communications. The $2.1 million increase in total cost of revenue and operating expenses was more than offset by year-to-date revenue growth, resulting in a 33% increase in operating income to $6 million from $4.5 million in the same period last year. GAAP net income through 9 months also increased 33% to $4 million or $0.34 per diluted share from $3 million or $0.26 per share a year ago. Adjusted EBITDA increased by 34% year-to-date to $6.8 million from $5 million a year ago. Bookings and backlog. We define bookings as new, noncancelable orders expected to be recognized as revenue during the following 12 months. Total Q3 bookings were $6 million versus $7 million in Q3 last year. License and services, or LS bookings, declined slightly to $4.5 million from $4.7 million. DSA LS bookings were up 12% to $2.5 million from $2.2 million. TSA LS bookings were $2 million versus $2.5 million last year. And customer support, or CS bookings, were $1.5 million compared to $2.3 million last year, primarily due to the timing of renewals. Turning to 9-month booking. Total bookings increased 9% year-over-year to $20.6 million from $18.8 million. LS bookings increased 18% to $13.2 million from $11.2 million. DSA LS bookings were up 40% to $7.8 million from $5.6 million. TSA book -- TSA LS bookings were $5.4 million compared to $5.6 million in 2013, and CS bookings were $7.4 million versus $7.7 million last year. Total backlog at September 30, 2014, was $10.6 million compared to $11.4 million last year. LS backlog totaled $5.5 million and included $3.3 million in DSA and $2.2 million in TSA. TS backlog was $5.1 million versus $5.3 million last year. On the balance sheet. Cash and cash equivalents at September 30 were $11 million, down from $13.8 million at December 31 year end. The decrease in cash is primarily related to the timing of billings and collections on contracts and the increase in the dividend. Working capital increased 8% to $15.9 million from $14.7 million at year end. Dividend update. Our Board of Directors declared a fourth quarter dividend of $0.11 per share payable November 25, 2014, to stockholders of record on November 18, 2014. I'll close with the usual reminder that a single order can have a significant impact on our quarterly result. 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 are now happy to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Mike Crawford from B. Riley & Co.

[Michael Crawford:]

Thad, it's impressive. Your carrier customers are increasing in activation so much. When a customer is -- the one you mentioned that's requesting pricing for another 20 million activations, are you finding that Evolving is holding firm on FUA per SIM?

[Thaddeus Dupper:]

FUA pricing?

[Michael Crawford:]

Yes.

[Thaddeus Dupper:]

Yes, we do. I mean, occasionally, they try to jam us a little bit at the end of the quarter to try good to get little bit of a discount, but it isn't much, And of course, the whole license is 100% gross margin. So occasionally, we may carve out and shave off a little bit in order to bring an order in or, in this case, if they can order so many and maybe looking for a little bit of a discount. But it isn't much. It's just kind of fine-tuning. But these contracts have all been negotiated in advance, so the pricing in the tables are already a reference point. Sometimes it's a little bit of pressure, but not too much.

[Michael Crawford:]

Okay. And then regarding your DSA trials, there were 2 in particular that have been singled out, of late one that you were hoping to enter commercial negotiations, and another one that was ramping up back in August. What's the status of those?

[Thaddeus Dupper:]

So they've both gone into commercial negotiations. Business cases are being reviewed and approved. Financial terms are being discussed. So we like to progress on both. We have to adhere to holidays around the world, so sometimes these holidays delay us a little bit. The other trial I talked about is in Canada, and that's restarted actually, and that's an LTE trial. So even though they paused it, they now come back to us and so they want to move ahead with it. But the other 2, which are the ones we really promoted have advanced now into negotiating stage, and we're working diligently to try to bring these things across the line into booked orders.

[Michael Crawford:]

Okay. And then given that, that might happen by -- at the end of -- well, at any time but maybe at the end of this quarter but hasn't happened yet, and bookings were down at $6 million, is it fair to say that fourth quarter is likely to be down year-over-year as well? Or...

[Thaddeus Dupper:]

So there's no way fourth quarter -- were you talking about revenue or bookings?

[Michael Crawford:]

I'm sorry, with -- yes, bookings last year was $7.4 million in the fourth quarter.

[Thaddeus Dupper:]

Right in totals, and $5.2 million for LS, right. Now we want that number to be up. I mean, that's what we're striving for. And now we're going to have to close new accounts to eclipse that number. But that's -- the LS number was $5.2 million, the rest was CS, and Dan can speak to the timing on the CS contracts, but we did $4 million or $5 million this quarter, which was up sequentially from the $3.7 million in Q2, down slightly from the year-over-year $4.7 million. We've always liked to finish strong and carry a big backlog into Q1. So our goal would be to exceed last year's Q4 number. To do that, I believe we need to close some new accounts, but as we've commented, we're in day-to-day discussions on some of these. So if we can bring them across the line along with our normal change request volume, and maybe a few FUAs, we feel good about year-over-year numbers growing.

[Michael Crawford:]

Okay, great. And then last question just relates to the fourth quarter revenue this year. So how tied is that to the $6 million in bookings? Is that -- what do you expect revenue...

[Thaddeus Dupper:]

Bookings always drive revenue. What's our account, Dan, for a year ago, is it $6.6 million?

[Daniel J. Moorhead:]

$6.6 million, yes.

[Thaddeus Dupper:]

So I mean, we just posted a $7.9 million and a $7.6 million, so we should be able to blow that $6.6 million out of the water pretty well. Now we know your number's higher, but we think we're on pace to stay in the 7s. We'd like to hit an $8 million. We're going to need a few FUAs to hit an $8 million, and then drive some revenue -- EBITDA. Last 2 quarters, we had very strong EBITDA, and if we were to model the last couple of quarters, average the first 3 quarters, EBITDA looks pretty strong for the year. And as we already commented, we've already eclipsed last year's total. And that was just through the first 3 quarters. So we think we're on pace for record EBITDA.

[Operator:]

Our next question comes from the line of James Moorman from D.A. Davidson.

[James G. Moorman:]

First, could you just go in a little more detail about the connected cards, and I know the carriers have started reporting this as the new 2015 cards have rolled out and they're -- I think AT&T said they had about 500,000 net adds to the connected card. What's the opportunity you see there? And then also just kind of what are you seeing in terms of tablets?

[Thaddeus Dupper:]

Yes. Thanks, James. Well, connected card is a big deal. It's not a big deal in all our markets, but where we're doing the trial is in an Eastern European market. We're supporting 6 different device types, so we're connecting a lot of different device types within these cards. And we think it's an important first step. We, too, noted that AT&T activated 500,000 last quarter here in the States. So we like -- and our comments were meant to communicate that we like the fact we're going beyond the feature phone and the smartphone into a larger variety of connected devices. So we think this is an important and an intriguing trial for us. Going back to your comment on tablets. Tablets are very, very important. Data is very, very important. One of the trials we commented on last quarter that's now moved into negotiating phase was most of the trial was around tablets. There were also smartphones involved. But as we're seeing with network-connected iPads now, data plans are very, very important to carrier customers. And we've got a very powerful capability within DSA to have a very rich user experience on an out-of-the-box network-connected iPad, where the subscriber can go through a series of menus, pick their tariffs, their pay plan, select their number. And then as we've talked about in the past, as we're finalizing, completing the activation to promote apps based on contextual information, location, device types, the time and date. Location, if you're outside a soccer field in Brazil, maybe you want to promote a FIFA app. If you're outside Fenway, you probably want to promote a New York Yankee app because we know the Yankees are better than Red Sox. So we're doing these types of things and having these conversations with our carrier customers, and we're excited about the fact that it's not just pop the SIM into a feature phone and activate it. Now there's a user experience, UX, on a variety of devices, Android, iPhones, iPads, tablets and now, even cards that is expanding the population. And as we expand the population, it drags more volume of activations, and that will drive upgrades and it will drive FUAs, we believe.

[Operator:]

Our next question is from the line of Jon Jung from Trailhead Asset Management.

[Jon Jung:]

Well, congratulations, Thad. That was a great quarter.

[Thaddeus Dupper:]

Yes, it was a good quarter. I'm a little staring [ph] with the term great, but I think it was a good quarter, thanks.

[Jon Jung:]

Good. Well we like to hear the progress. Can you give us information about your progress in the more mature markets like the U.S. and Europe?

[Thaddeus Dupper:]

Well, we activate a lot of 3G phones at Sprint every day, so that's an existing customer. It's a rather large customer. So that continues. We do think as the U.S. market becomes more a BYOD market and the phones become unlocked and we think the carrier leading the charge in this respect on one hand is T-Mobile U.S., we think John Legere is very, very aggressive. And then with AT&T's acquisition of Cricket and Leap, we think they're going down market to the prepaid market. So we think there's a fit with both. We're not forecasting closing business with either in the near term. But everything starts with the dialogue, and we do have some dialogue now. We've got a ways before we can start to put them into the funnel and forecast it as revenueable business.

[Jon Jung:]

Sure. What's the status in Europe?

[Thaddeus Dupper:]

Europe's good. I think they're still facing some headwinds with the economy. So I think the emerging markets Asia, India, Latin America is stronger for us. That said, we made a number of meetings last quarter in Italy, in Ireland, in Germany, talking to carriers about DSA. And as you know, we already have a production customer with DSA in the U.K. and a production customer in Russia for DSA and another trial in Russia. So we're active. The other comment I'd share with the audience is we added 3 salespeople last quarter, one in the U.S, which was a replacement, but 2 in net adds, one based in Ireland and the other based in Dubai, isn't it?

[Daniel J. Moorhead:]

Correct.

[Thaddeus Dupper:]

For the Middle East. So we continue to add, and we'll give these guys a little bit of time to build their funnel. But as I mentioned, we already had meetings this quarter in Italy and Ireland and Germany around DSA. So we think that's a good data point.

[Jon Jung:]

Terrific, terrific. Anything going on in China for you guys?

[Thaddeus Dupper:]

There's some stuff. We're going to an offsite planning meeting next week, where we're going to talk about our investments for 2015 and one of the things on the table, in addition to a rather significant investment in Internet of Things solution, is also do we want to increase our investment in China. So that's something that we're going to be discussing as a team next week. Too early to determine what the outcome will be, but it's on the agenda.

[Jon Jung:]

How are you entering the market? Do you have salespeople directly going into China?

[Thaddeus Dupper:]

We have a partner who helps us in China, and then we also have an Asia team that covers China from Kuala Lumpur. So we cover the region from there, but we don't have any individual employees in China yet.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jim Gentrup from Val Vista Capital Management.

[Jim Gentrup:]

Thad, I just want to ask you a little bit about the Telespree acquisition and that's proven to be an asset that you thought it was when you first purchased it. And just tell us a little bit more about the cloud-based initiative.

[Thaddeus Dupper:]

I think it is. I think all M&A is hard and having done 3 or 4 of them now. What we like and we continue to like is that all the revenue generated out of Telespree comes from the U.S., predominantly from our relationship with Sprint, but also from a handful of MVNO customers, some of which are very innovative. So we like that. We like having U.S. revenue. So that's a good thing. And then just to remind you, the 2 things we were very eager and drove the transaction was cloud-based experience, which we're putting into the DSA product, and then a nice portfolio of patents around the activation of SIM cards. So from that perspective, the acquisitions lived up to it, and it's helped us. One of our other goals when we go to this planning meeting next week is how to accelerate and do a better job taking the Telespree technology and selling it into the international markets. I think that's an area for -- an area of opportunity for us, and also an area where we can do a better job in '15 than perhaps we did in '14.

[Jim Gentrup:]

But no meaningful revenue really, it's not contributing now materially yet?

[Thaddeus Dupper:]

I don't know, Dan, we wouldn't call them material, but there is [Audio Gap]

[Jim Gentrup:]

FUA activity this quarter, and I think you had a couple of announcements. I just didn't know what they contributed to. I think they partially did this quarter, but could you just fill me in on that again, please?

[Thaddeus Dupper:]

Yes, they did. I mean, I don't -- what do we say 3, we have 3 FUAs in Q3. It was good. And we're expecting to close more in Q4. So FUAs are a small but important piece of our EBITDA because it's 100% gross margin. So I would say, as we get in the beginning of the year, we think 2014 will be our best FUA year yet. And certainly, that's tracked, and we expect -- we had good FUAs in Q3, and we expect good FUAs in Q4. So [indiscernible] proving out, yes.

[Jim Gentrup:]

Just to follow up then. I think you mentioned last call that you had a couple of larger ones. Are those -- did those come through in Q3 or are those you're talking about in Q4 yet?

[Thaddeus Dupper:]

We had our largest ever in Q2 as a single FUA and that was very big, and that was -- that's still the record. But in Q3, we had good ones. I mean, and we had a couple of good ones and we have a few in front of us now. Now you get to the end of the year, sometimes people have budget money left over, that's good. Sometimes people try to squeeze you for a deal that's not necessarily good. So we'll measure these deals and appropriately close them, or let them go into Q1, depending on the Ps and Cs that the customer may try to get. So we'll rate them as they go, but there's another good funnel of FUAs this quarter just like last quarter.

[Operator:]

Our next question comes from the line of Walter Ramsley from Walrus Partners.

[Walter Christopher Ramsley:]

Congratulations. Really nice quarter. I had a question about the app loader. You talked about that quite a bit on the last conference call. Making any progress?

[Thaddeus Dupper:]

We are hopeful to close our first proof of concept, the first order for it this quarter. So dialogue is underway. I think a workshop was held, a 2-day workshop, to go through all the technical details of it and to answer the questions that the carrier had. So we're eager, and it's one of my pet projects. We believe we'll close something this quarter. So we're still keen on it. And we think, as we've said before, when we're activating, finalizing the activation of the device, we have this golden moment that we can promote based on device type location. And we're continuing to make progress with it and have calls, but my top focus regarding that product right now is getting this first order closed in Q4. And I think that will be a good step forward for us.

[Walter Christopher Ramsley:]

So just thinking out loud, what sort of potential do you see for that thing over the next couple of years?

[Thaddeus Dupper:]

It's really hard to predict. I mean, I think let's get this first order implemented, get some learnings from the first deployment, and from there, we'll much -- we'll be in much better position to know. So I'd rather not predict. But I do like the concept, and I do like the real estate we own in terms of the focus of the subscriber on the device. You've heard me say before, most of us on this call, not only the people we know, if the mobile device we own doesn't work, our quality of life is diminished. So the attention we've seen that the subscriber puts into the initial activation is very high. And we think we can turn that into a very powerful marketing moment. That's really the premise of the app loader. It's been trialed and demonstrated in some of these trials we talked about last quarter. Now we want to get an order for it, money and deploy it, and see where the experience takes us from there, then we'll go to proliferate it, tell the carriers. So we'll be in a better position to answer your question in more detail, I think, in a quarter or 2. But we're still very high on the concept and the technology.

[Operator:]

[Operator Instructions] And I'm seeing no other questioners from the queue at this time.

[Thaddeus Dupper:]

Well, we thank you again for joining us today, and we look forward to giving you an update on our Q4 results at the beginning of next year. Please watch our press releases for announcements around new DSA deals, as well as other progress with the business. Thanks for joining us. Cheers.

[Operator:]

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