Symbolic Logic, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Evolving Systems Second 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. And now, I’ll the conference over to your host Dan Moorhead, Vice President of Finance. Please begin.

[Dan Moorhead:]

Good afternoon, and welcome to Evolving Systems 2015 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 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. Q2 was a challenging quarter for us, but we don’t believe it’s a reflection of our overall business opportunity. The business case for our products remained strong and with the news about the Embedded SIM which I’ll discuss in a few minutes, we believe it gets even stronger. I’d like to start with some highlights for the quarter. Profitability continues to be good with gross margins at 75%, operating margins at 15% and adjusted EBITDA margins of 18% with fully diluted EPS of $0.07 a share. The balance sheet remained strong with $10.3 million in cash and no debt. Tertio Service Activation or TSA continue to have a strong year with license and service, our LS bookings for the first half up 25% from the same time in 2014. In Q2, we closed deals with two new Dynamic SIM or DSA customers both in Africa a market that continues to represent strong growth for EVOL. And due to strong sequential customer supporters CS bookings, total order backlog was flat at $10.3 million compared with $10.4 million in Q1. Where we fell short was in bookings and revenue, which were below our estimates. We attribute this largely to tightening budgets as many carriers have experienced the slowdown in net subscriber ads coupled with the introduction of aggressive price plans. The knock-on effect carrier purchases were less predictable than we’ve seen in the past and this made forecasting a challenge. We saw several projects get their budgets called very late in the improval cycle. In particular in Q2, we had a customer in the UK and another in Asia, both long-term EVOL customers whose budgeting processes we understand in both cases these projects were put on hold well into the approval cycles. We do not believe these budget challenges are specific to EVOL or our products but emblematic of an overall slowdown in industry spending, a situation that we believe to be a temporary condition. As you know, over the years EVOL has seen these cycles before and let me mention that we recently celebrated our 30th Anniversary and our 17th year as the NASDAQ-listed Company. We believe the long-term outlook for growth remains positive especially in the emerging markets where subscriber growth is six times greater than the developed markets of North America and Europe. And it is in these markets the emerging markets where we have made our biggest investment in terms of sales staffing. We will continue to ensure that we have appropriate levels of sales resources located in these markets have represented the best growth potential for the Company. According to the GSMA, the emerging markets added 166 million subscribers over the past four quarters versus the addition of only 9 million in the developed world. On the product front, we continue to invest in R&D to add new features, features that will drive business cases back in standup to the budgetary rigors we are experiencing. This includes [indiscernible] our work to integrate mobile advertising and cloud backup into the activation experience. We are also continuing our investments in the promotion and downloading of apps during the initial activation as well as post activation. In addition, we are adding [Giller] capabilities to speed up the activation process while at the same time reducing costs and hours. A key area of investments for the business is partner management and business development. We are advancing our DSA partnerships with mobile advertise and cloud backup providers, areas that customers are keenly focused on for growth. The promotion and downloading of social media, travel or retail apps all represent good use cases and our partners are providing expertise in marketing content, subscriber targeting and a highly optimize user experience. Beyond mobile advertising, we are working to integrate DSA to support personal cloud backup features as well. Because of the potential we’ve seen these partnerships we are adding resources to partner management in business development, so that we can accelerate the pace, that our DSA partnerships start generating revenue, which is a good lead into the topic of Embedded SIM. In the past weeks, they have been a number of articles on the GSMAs new Embedded SIM initiatives. As a leader in SIM card activation, Evolving Systems can play an important role in helping our customers prepare and implement this new proposed standard. As we’ve mentioned in our recent press release, we endorse the Embedded SIM initiative as we believe it will make it easier for subscribers to gain access through wireless services and will give them more choices in selecting service providers. At the same time, any claim regarding the death of the SIM are as they say greatly exaggerated. Today, there are over 3.7 billion subscribers in the world and each has on average 1.8 SIMs that equates to over 6 billion SIMs in the world. There are literally billions of devices that require conventional removable SIMs and these devices are expected to remain in service well into the future. Consequently, carriers will need systems that support both standards, the new Embedded SIM standard as well as the current removable SIM. And Evolving Systems DSA Solution will provide support for both Embedded SIM and removable SIMs. Going further, we believe the introduction of the Embedded SIM has the potential to accelerate the growth of DSA. Carriers not just in the emerging markets or prepaid markets will need to update their SIM ordering management and activation processes to support the Embedded SIM. This should expand the addressable market for DSA and while we are talking to a carrier about adding support to for the Embedded SIM it will be a natural opening to position DSA as a replacement for their current SIM ordering and activating processes. We know change is constant in the wireless industry and the Embedded SIM initiative is just one of the latest changes. And with EVOL recognized any industry is having deeper expertise regarding the management activation and promotion of SIMs whether embedded or removable we believe our customers prospects and partners will see value in our expertise and in that we see opportunity. To summarize, Q2 was a challenging quarter impacted by tight budget to situation that we believe to be a temporary condition. That now withstanding, we are confident that our focus on the growth areas of the emerging markets, our increased investment in partner management and business development, our continued investment in product R&D and the potential of the Embedded SIM initiative that all these steps will position us for long-term growth. Thank you for joining us today, and I’ll turn the call over to Dan for a recap of financial results.

[Dan Moorhead:]

Thanks, Thad. Second quarter financial results, second quarter revenue was $6.1 million compared to $7.9 million in the same quarter last year. License and services revenue was $3.6 million versus $5.2 million a year ago. Customer support revenue was $2.5 million versus $2.8 million. Total cost of revenue and operating expenses decreased 4% in the second quarter to $5.1 million from $5.3 million a year ago. Total gross margins remained at 75% and customer support margins grew to a record 87%. Income from operations was $900,000 versus $2.6 million in 2014. GAAP net income in the second quarter was $800,000 compared to $1.7 million a year ago. Diluted earnings per share were $0.07 versus $0.14 year-over-year. Adjusted EBITDA was $1.1 million in the second quarter versus $2.8 million in the same quarter a year ago. On the balance sheet, we reported cash and cash equivalents of $10.3 million at June 30, up from $9.8 million at December 31. Working capital stood at $14.8 million versus $15.8 million at year-end. Turning to six months results, revenue in the first half of 2015 was $12.7 million versus $14.5 million in the first half of last year. License and services revenue was $7.9 million versus $9.5 million and customer support revenue was $4.8 million versus $5 million. Total cost of revenue and operating expenses were 5% lower in the first half to $10.4 million from $10.9 million a year ago. Total gross margins grew 75% up from 73% in the first half of 2014. Operating income was $2.4 million in the first half of 2015 compared to $3.6 million in the same period last year. GAAP net income through six months was $1.6 million versus $2.3 million year-over-year. Diluted earnings per share were $0.14 versus $0.20 last year. Adjusted EBITDA was $2.8 million compared to $4.2 million for the comparative six months period. Bookings and backlogs, we defined bookings as sales orders that are expected to be recognized as revenue during the following 12 months. Second quarter bookings totaled $5.9 million compared to $7.2 million in the second quarter last year. On a year-over-year basis, LS bookings were $2.8 million versus $3.7 million; DSA LS bookings were $1.1 million versus $1.9 million; TSA LS bookings were $1.7 million versus $1.8 million. Total customer support or CS bookings came in at $3.1 million versus $3.6 million last year. Six months bookings totaled $12.4 million versus $14.7 million a year ago. LS bookings were $7.1 million versus $8.8 million year-over-year. DSA LS bookings were $2.9 million versus $5.4 million; TSA LS bookings increased to $4.2 million from $3.4 million and customer support bookings were $5.3 million versus $5.9 million last year. Total backlog at the end of the second quarter was $10.3 million versus $12.5 million at the same time last year. LS backlog totaled $4.7 million compared to $6.3 million a year ago and included $3.1 million in DSA and $1.7 million in TSA. CS backlog was $5.6 million versus $6.2 million last year. Dividend update. Our Board of Directors declared a third quarter dividend of $0.11 per share payable August 28, 2015 to stockholders of record on August 21, 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 a 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. Ladies and gentlemen [Operator Instructions] We have a question from Josh Seide of Maxim Group. Your line is open.

[Josh Seide:]

Hey, thanks for taking the question. Of the two customers you mentioned earlier that total process on hold I think one was UK and one was in Asia, could you elaborate a little bit on whether or not there is an expectation of that process will resume in second half of ‘15 or is it something that’s ongoing?

[Thad Dupper:]

Hi Josh, it’s Thad. Yes, the orders were not gigantic but that did have an impact on revenue that would have put us more in line with -- in analyst expectations of the quarter. One was the Dynamic SIM order and the other was the Tertio order, again not huge, but when you miss revenue by 600k that contributed. I think the comment was more as an example to show that in this environment budget is tight and we’ve got to work very hard to close the business and not only close the business we have to make sure that when it’s inclosing that we stay focused on and we get it closed because any delay in this environment and the budget will get pulled. So the idea is to qualify, re-qualify and then close quickly and that’s what we’ve instructed our sales people to do.

[Josh Seide:]

That’s helpful. And then, looking forward to second half of the year was there any expectations for upgrades or FUAs moving forward?

[Thad Dupper:]

We gave some color on that in the last call and we do expect the second half of 2015 to be better than the first half. So, Dan has modeled that and we think that continuing to be true. So, we expect some incremental benefit from additional FUA licenses in the second half from the first half you agree with that, right Dan?

[Dan Moorhead:]

Yes. That’s right.

[Josh Seide:]

Okay. And then so, this quarter there was two DSA awards versus last quarter where there were no awards, so it’s -- it looks like the bookings though declined sequentially since last quarter is that…?

[Thad Dupper:]

So DSA bookings were down sequentially and I think your question is, well we got two new deals in Q2 which is good generally it get [technical difficulty] but the bookings number is down sequentially when you didn’t get any new accounts in Q1. But what we did have in Q1 is we had some nice upgrades and we had better order flow in general. So taking the two new DSAs out of Q2 out, we didn’t get that many other DSA upgrade orders in the quarter and that’s why the comp looks bad.

[Josh Seide:]

I see that’s helpful. Thank you so much. One last question then I’ll get back in line. Has the Board considered ending or reducing the dividend in order to deploy market capitals for growth?

[Thad Dupper:]

Well, as you know, the Board makes a decision every quarter on the dividend. So right now, I would say the Board feels that Company is very capable of EPS more in line with what we did last year and even beyond that. So to say that they disappointed with the $0.07 EPS is probably accurate, and as we go forward they always consider the dividend amount in every future meeting what I would say is for this quarter they believe the [indiscernible] is right and they have confidence in us as a management team, we get the business back on track so that we can sustain this dividend.

[Josh Seide:]

Great, that’s very helpful. Thank you.

[Thad Dupper:]

Thanks.

[Operator:]

Thank you. Our next question is from Mike Crawford of B Riley & Company. Your line is open.

[Mike Crawford:]

Thank you. So looking at your business on an annual basis the backlog declined were actually more than a year five sequential quarters, so is there some other change going on in the business that you think is driving that or is that just the matter of slowing that subscriber ads in your customer base.

[Thad Dupper:]

Well, the total backlog is just about flat quarter-to-quarter. LS is down a little bit I agree with that. One of the things we said when we were getting FUAs last year where we had a good year those things didn't impact backlog too much because they would come in and go out quickly, so I don't think there is anything market to this and we like the metric of two new accounts, at this point last year we had zero new accounts. So adding new names is important to us and we like that metric. New accounts will lead to upgrades and upgrades have been and we believe we will continue to be a big part of our contribution. We have the names new in Tertio account this year but Tertio bookings were up quite a bit and those were driven by upgrades. So I don't think there is anything fundamentally changed Mike with the business, I just think we have to focus and get out, work together and start closing business and drive more business. So that's what I have told my management team and that's what they are going to be focused on closing business and taking those orders and driving them into converting the backlog into revenue. So that's our focus.

[Mike Crawford:]

And when you said that DSA will provide support for both [indiscernible] and embedded SIM when will that be supported?

[Thad Dupper:]

Well, the initiative hasn't been approved yet. So right now it's a proposal. Our indications from the GSMA is the Embedded SIM standard if approved and put in place would probably be put in place to support the iPhone 7 launch. Now we know what you know about the iPhone 7 launch but if history is predictor typically Apple comes out with a new phone in the fourth quarter of the year, so we suspect the iPhone 7 would probably come out on or about Q4 2016, so we suspect that that standard if approved would probably be in place which have been very quick for telecom standards by the way since we are in Q2 2015 but the indications are that the embedded SIM would support the next gen Samsung and iPhone devices so we are expecting around Q4 2016 and knowing telecom the way we do those systems would have to be in place and tested in Q2 ‘16 in order or Q3 ‘16 in order to be prepared. So I would say starting Q3 they are about a year out when those systems have to be in place, if the standard gets approved which we expect it will.

[Mike Crawford:]

Thank you, as carrier purchases are getting less predictable with that caveat mind can you just go through maybe some high level commentary on the status of the pipeline similar to how you are providing in the past versus what you are bringing in on yourself with how many different channel partners or pilots certainly you think of that nature.

[Thad Dupper:]

So it's good point and one of the things that we would say is we said in our script we have been here before and for those of you who have been with the EVOL for quite a while 2015 booking was looking lot to us like 2013, so as a matter of fact, the start of 2013, the first half of 2013 was 9% lower in terms of LS bookings than what we just posted. So when we look back at 2013 that slow start was followed by a good Q3 and a good Q4. Well, that good Q3 and good Q4 set the stage for record 2014. So again we have seen slowdowns in bookings before as reasonably the first half of 2013, so what our focus is and our plan is, is to get back on the horse, post improving bookings for Q3 and yet again improving bookings for Q4 that will replenish the backlog and we will be positioned to go into 2016 like we did in 2014 with a good backlog and generate good results. So that's what our plan is we have done it before. The funnel suggest we can do it. The caveat we would add is deals are closing slower and with more effort than we have seen in the past. We have recognized that we are going to deal with it. And we are going to get about to closing these orders and restocking the backlog and our plan is for the start in Q3.

[Mike Crawford:]

Okay. Thank you. Then last question relates to more strategic alternatives in the past the company had I think interest in both parts of the business you did so the numbering assets for a quite a good price I thought and currently there had been some interest in activation piece as well, is that an accurate characterization and is there anything that you can add at this point?

[Thad Dupper:]

Let me just correct your thinking a little bit your recollection. So years ago we received some interest in the activation business as a result of that we went out and talked to -- we engaged with the bank and when we talked to series of targets and prospects. The byproduct of that effort laid to the divesting and selling of our numbering assets and you are right in July 2011 we sold numbering it was about $14.5 million business we sold for 31 three times sterling revenue and we sold it to new start strategic buyer and it was a good deal for them and a good deal for EVOL and I think it’s worked out to both company's benefit. The result of divesting number left EVOL as what we call a pure play activation company. Service activation with Tertio which last year represented about half of our revenue and same activation with DSA again about half of our revenue which was up significantly last year. So our focus and our strategy is the same. In terms of interest you can count on the board if the board receives interest or any sort of offers they would review them with the – I do share responsibility and they can handle it appropriately, but our focus and we think the prescription for EVOL is to focus on driving the operation and closing business and that's what our top priority is right now.

[Mike Crawford:]

Okay. Great. Thank you.

[Thad Dupper:]

Thanks Mike.

[Operator:]

[Operator Instructions] Next question is from James Moorman, D.A. Davidson. Your line is open.

[James Moorman:]

Yes, thank you. Can you just talk a little bit more about I mean the last quarter you guys – your first ordered for the new app promoter capability and just you talked it before about this kind of being the year partnership and I know you talked earlier about [deploy more] resources towards that. Do you think that is kind of where it's stay, what it will take or kind of why I guess I am little surprised I guess this area is having taken off a little faster.

[Thad Dupper:]

Well, so let’s cover it, you are right we have a trial underway for app promoter product in Asia. And that trial is going well. And that continues to proceed so that's very good. We have been very active year-to-date with our partnerships. Most of those partnerships center around mobile advertising, mobile ad insert and mobile app download and then one of the partnerships involves personal cloud backup. So we have been active in those. We have been working on pricing. We have been working on go to market plan. We have been building technology to integrate DSA's capabilities with the various partners. So a lot of that work has progressed. We think it's very important. We think it's going to represent a good opportunity for the business. We haven't predicted any sort of revenue generation for it but what we do believe is with better mentoring and better attention and more focus in the area of partner management of [indiscernible] we can drive these partnerships faster. We just had a call earlier today on these and I am pleased with the progress and I am very pleased with the value prop soon our sales forces will be presenting these capabilities to our customers and prospects. I think it's one of the areas of growth and it's not just because I believe it. When you look at the numbers generated by mobile advertising it's very, very significant and we think in the BYOD world bring own device world where phones are unlocked, when the SIM is initially put into the phone it's a great – it's the first touch point that a carrier has with this new customer and we think there is a lot of up sale in marketing and advertising that can be done and I am pleased with the progress in this regard but we think we can do more and that's why we have increased our investment in the areas of partner management and [indiscernible].

[James Moorman:]

Okay. Thanks.

[Operator:]

Thank you. We have a follow up from Josh Seide of Maxim Group, your line is open.

[Josh Seide:]

Thanks, just one other quick question. I was just wondering in terms of R&D spend, in advance of the embedded SIM, potential transition could you just elaborate a little bit on whether or not there will be a ramp up in R&D spending or if you think there is adequate resourcing already.

[Thad Dupper:]

No, we don't expect to be increasing expenses significantly we think EVOL runs pretty well at a 20 million OpEx range and we know what we are capable of taking a look at last year's results, we do think we can grow this business. We may shift some emphasis away from Tertio onto these partnerships into this mobile advertising initiative but it's all within the existing budget so we don't expect nor we would indicate that we expect the expenses to go up significantly. So I don't think anybody should model that. What they should be modeling is our focus on bookings, increased bookings and as those bookings drive revenue as the profit indicated to show this quarter again is if we can close the order we can deliver it with good margins and good EBITDA. So again and the mantra here is bookings, bookings, bookings.

[Josh Seide:]

Great. Thank you.

[Thad Dupper:]

All right.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the conference over to Thad for any closing remarks.

[Thad Dupper:]

All right. Well thank you for joining us again today, I hope you all get to enjoy the remainder of your summer and we look forward to talking to you again in the fall. Cheers.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect, have a wonderful day.