Symbolic Logic, Inc.
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Evolving Systems first quarter earnings 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, this conference is being recorded. I would like to introduce your host for today's conference, Dan Moorhead, Vice President of Finance. Mr. Moorhead, you may begin.

[Dan Moorhead:]

Good afternoon, and welcome to Evolving Systems 2015 first 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 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 Thad.

[Thad Dupper:]

Thanks, Dan. Welcome and good afternoon. For Q1, we had the following highlights

[Dan Moorhead:]

Thanks, Thad. First quarter financial results. Revenue in the first quarter grew by 1% to $6.7 million from $6.6 million in the same quarter last year. License and services revenue decreased slightly to $4.3 million from $4.4 million a year ago. Customer support revenue increased 5% to $2.3 million from $2.2 million. Total cost of revenue and operating expenses decreased 6% in the quarter to $5.2 million from $5.6 million a year ago. The decrease reflected in part $211,000 in restructuring charges in the first quarter of 2014 related primarily to our Q4 2013 acquisition of Telespree Communications. Higher gross margins and lower operating expenses led to a 39% increase in operating income to $1.4 million in the first quarter from $1 million in Q1 a year ago. GAAP net income increased 32% in the first quarter to $900,000 from $700,000 last year, resulting in diluted earnings per share of $0.07 versus $0.05 a year ago. Adjusted EBITDA grew by 17% in Q1 to $1.6 million from $1.4 million in the same quarter a year ago. On the balance sheet, we reported cash and cash equivalents of $11 million at March 31, up 13% over $9.8 million at December 31. Working capital stood at $15 million versus $15.8 million at year-end. Bookings and backlogs. We define bookings as sales orders that are expected to be recognized as revenue during the following 12 months. First quarter bookings totaled $6.5 million compared to $7.4 million in the first quarter last year. On a year-over-year basis, LS bookings were $4.3 million versus $5.1 million; DSA LS bookings were $1.7 million versus $3.5 million; TSA LS bookings were $2.5 million versus $1.6 million; total customer support or CS bookings were down slightly at $2.2 million from $2.4 million. Total backlog at the end of the first quarter declined to $10.4 million from $13.1 million last year. LS backlog totaled $5.5 million compared to $7.8 million a year ago and included $3.6 million in DSA and $1.9 million in TSA. CS backlog was $4.9 million, down from $5.3 million last year. Dividend update. Our Board of Directors declared a second quarter dividend of $0.11 per share payable May 29, 2015 to stockholders of record on May 22, 2015.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 are now happy to take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Mike Crawford from B Riley & Company. Your line is now open.

[Mike Crawford:]

Thank you. Regarding the DSA pipeline, it was nice to see you closed the one deal on April 2. And can you talk a little bit more about the other one that is on hold and you mentioned some other opportunities as well, please?

[Thad Dupper:]

Yeah. Hi, Mike, how are you?

[Mike Crawford:]

Good.

[Thad Dupper:]

Yeah. We do business in a lot of faraway places and sometimes I feel the maturity of the business process sometimes is less mature than perhaps we’d like and the decisioning sometimes reflects that. So we had an opportunity, we worked on it. It was via one of our SIM partners and the approval process, budgeting process just doesn't seem to be as mature and as refined as we would like, as a result the order didn't come in. That said, we still think we can get it, although we're not forecasting it for this quarter. What we are forecasting for the quarter though are a number of other new DSAs. And as we said in our comments, we're confident that we'll be closing additional DSAs and as everybody listening knows, adding new accounts in DSA is always important to us. So we like the funnel. We are far along in quite a few decision processes and now we just have to get the paper and we're confident that we'll be getting that in Q2. The other comment I would make for the audience is, we have a relatively favorable comp in Q2 with bookings from last year, 3.7 to license and service bookings a year ago Q2. So we think that's a favorable number that we can compare positively against, and we think that is another reason we can grow backlog. So adding new DSA accounts, closing orders, whether they're new accounts or upgrades, posting that number, driving backlog, we think is a top priority for us and that's where we're focused on.

[Mike Crawford:]

And then of the number of DSA deals that you're working on, are these again a broad mix of your own, plus your two primary SIM partners or is there one channel that seems to be rising to the forefront?

[Thad Dupper:]

Yeah, now for Q2, I would say there is some SIM partner in that, but the bulk of it is direct sales. And sometimes we like that because we have a lot of control over it, as you'd imagine. So I'd say the majority of Q2 is direct sales with one or two names from the SIM partners. For the year at large, our SIM partners have a nice funnel, but we think for Q2 what will carry the day will be the work of our direct sales force.

[Mike Crawford:]

And then you talked about your AppLoader, so how many carriers are doing this now?

[Thad Dupper:]

So in our last call, we announced the first order for AppLoader. So we have one carrier that's testing it currently. But with these partners we're talking about, we’re integrating DSA with either our AppLoader, in some case they have a version of the AppLoader. But what we're seeing is a lot of interest through this trial and through these partnerships with downloading apps. And we really think it's the higher end of the food chain and as smartphone adoption accelerates in the international markets, particularly in the emerging markets, we think it's a sweet spot and we're seeing a lot of activity. We just had a call this week with one of our carriers, current DSA customer, to cover what we can do with app loading with one of our partners. And the backup capability is also via AppLoader, where when we're activating the SIM, we would download the cloud backup app. So between self-care, cloud backup, mobile apps, social media apps, gaming apps, we really are spending a lot of cycles on this because we think it represents an enormous opportunity for us.

[Mike Crawford:]

Okay. Thank you. And then last question, I know you don't provide guidance, but given the status of your bookings and backlog, it would appear that maybe the second quarter is going to look a lot more like Q1, but then with your recent wins, we should expect the jump in revenue and earnings on the income statement in the second half of the year. Is that fair?

[Thad Dupper:]

I think that's fair. I think that's very much aligned with what we were saying.

[Mike Crawford:]

Okay. Great. Thank you very much.

[Thad Dupper:]

Thanks, Mike.

[Operator:]

Thank you. And for our next question, it comes from the line of Brian Kinstlinger from Maxim Group. Your line is now open.

[Brian Kinstlinger:]

Hi guys, how are you?

[Thad Dupper:]

Hey, Brian.

[Brian Kinstlinger:]

So the first question I have, you mentioned some FUA numbers. In the first quarter, how much of the 500,000 that you expect in the first half was recognized in the first quarter, then how much is versus the projection in the second quarter?

[Thad Dupper:]

I think that was all of it, wasn’t it Dan?

[Dan Moorhead:]

Yeah. Q2 is - sorry, so the 500K was all in Q1. Q2, we have - we don't have anything forecasted in Q2 at this moment, and then the rest would be in Q3 and Q4.

[Brian Kinstlinger:]

Got it. Okay. And then essentially there is less FUA, while revenue may look the same in 2Q than 1Q that generally drives earnings down with FUA, is that accurate?

[Thad Dupper:]

I think that's accurate, but we have this new DSA we closed in April 2, that's in our backlog now, but it's not in our reported backlog. And then what we have to do is drive bookings to drive hours, which drives revenue. So I think you're right on that. The other thing is, forecasting some of these renewals is more art than science. So there is a potential that one or two of them could come into the quarter. So we have to be a little careful. We're not doing microsurgery. But right now we're not forecasting any FUA revenue in Q2. But we are planning to work a lot of hours from backlog and also from new sales, so that's our focus.

[Brian Kinstlinger:]

Just to be clear the one you signed April 2, it takes some time to get them ready to launch and go live. So they're not really going to be a big contributor rather than some services revenue in 2Q. Is that right or is that wrong?

[Thad Dupper:]

Well, it's not the biggest DSA project we've ever done. So typically we’d model and we close the DSA. In the quarter after we close it, we usually get something like 25% of the hours in the first quarter and then almost 25% per quarter after. It's almost even like that. So the fact that this closed so early in the quarter, we're going to generate quite a few hours [ph] from that. Yeah.

[Brian Kinstlinger:]

Okay. And then can you take us through the expected timing for customers that haven’t gone live yet, but have made an order and when you expect them to go live? And what's your rough timing quarter and maybe not month?

[Thad Dupper:]

Well, most of the orders we've gotten have gone live now. So the ones that we're in the process of putting into production would be that Q4 order that we got, obviously the one we just closed in April. Everybody else I think is pretty much dialed in. Our Russia customer, I think, is working with low volume right now, but they've got some big upgrade plans. So most of our orders are in production with the arrival of India and I think the Philippines also went into production, also the second Philippine carrier. So I'd say other than the last two orders, most of our customers are nearer in production right now.

[Brian Kinstlinger:]

And then you mentioned in 2Q, it sounds like there's a lot of activity. You mentioned there's two SIM partner deals that are closed, but you mentioned that direct sales are playing a bigger role. So are you saying that it’s potentially four to six new DSA orders that could occur either in the second quarter or early in the third quarter, is that what we're talking about?

[Thad Dupper:]

Well, that's a big number. So just to kind of give some color, in the past years we've done four new accounts a year. Last year we only did one new account. Year-to-date, we've already closed one, this April order. We think we'll have a strong quarter for new accounts for Q2. I don't want to pin it down to a number, because as we saw in Q1, predicting closes sometimes can lead to disappointment. But what I would say is, the funnel is of a size and shape that we should be able to have very good new account closes for Q2. Whether it's a record or not, I may stop just short of saying that, but that certainly would be a goal for the quarter.

[Brian Kinstlinger:]

Yeah. And then for the one where you had mentioned they got delayed for budgetary issues, is it that they communicated that the budget was there and then the money was no longer there when it came down to make the order? And is that an annual budget, is that a quarterly budget that you think that ultimately that could be still signed this year?

[Thad Dupper:]

Yeah. I don't think it was as much a budgeting issue as it was an approval issue and a decisioning issue. We felt the budget existed. We think the budget still exists. It's just a question of who's making the decision and who's calling the shots with this carrier and we're learning. This was through a SIM partner. We think they still want DSA. We're just going to be a little more conservative with this account seeing as it was hard to predict their behavior. Now that said aside, we think we have enough opportunity in the key two funnel, without that opportunity, without that deal, just go very high on DSA bookings and DSA new accounts. So leaving now an aside, we’re pretty confident that we can set a good number for Q2.

[Brian Kinstlinger:]

Great. And the last question I have, do you see any of the players that are trying to build similar technology having any positive traction and gaining traction on you, just curious, competitive landscape?

[Thad Dupper:]

You've heard me say before, Brian, occasionally we run across some competition, but we don't think that's a significant issue for us. We're the leader in this space, we invest heavily in this space. We have the largest number of production customers. We do the highest volume of SIM activations, as you heard this discussion about SIM swap feature that's in production in India. This app loading work that we're doing with partnerships. We believe we're the leaders and we’ll continue to remain the leaders in this space. Occasionally, we do run across partners, personally I believe when carriers bring up partners, they do that to try to inflict some price pressure on us rather than a viable alternative, a technical alternative for us.

[Brian Kinstlinger:]

Got it. Thanks so much.

[Thad Dupper:]

Thanks, Brian.

[Operator:]

Thank you. [Operator Instructions] And we have a question coming from the line of Dana Jaeger [ph], a private investor. Your line is now open.

[Unidentified Analyst:]

Hi, Thad. Sorry, I haven't seen the press release, because it's not on your website yet. But can you talk about - obviously AT&T just closed on their merger of Nextel Mexico, were they use to sell [ph] Nextel customers of Evolving?

[Thad Dupper:]

No. I mean, I'm just thinking back years ago when we were doing numbering before I answer that. They are not current customers of EVOL with service activation in DSA. We do have customers in Mexico, but they are not our used to sell in Nextel.

[Unidentified Analyst:]

Okay. And can you update us on - I don't know if you said some earlier, I joined a little late. Last year you had a number of trials with potential customers, can you give us an update on how those trials have gone or if anything is active on them still?

[Thad Dupper:]

Right. So one of the trials closed in December. So that was our win in December. And another one of the trials is one of the new accounts we're counting on to this quarter. So we feel good about it. We are reluctant to go into trials as you recall from when we used to speak, Dana. Having said that, I would say we’re two for two, but again we don't want to wave the flag and do a lot of trials because they take so much resource. Now two for two assuming we close this deal this quarter, right.

[Unidentified Analyst:]

Okay. All right, great. Thanks, Thad.

[Thad Dupper:]

Right. Nice talking to you, Dana.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And I see no further questions in the queue. I would like to turn the call back over to management for closing remarks.

[Thad Dupper:]

Well, thank you for joining us today and we look forward to giving you an update during the course of the quarter, and if not, on our earnings release, which will probably be in early August. Thank you for joining us. Cheers.

[Operator:]

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