Symbolic Logic, Inc.
Q4 2015 Earnings Call Transcript

Published: 15 Mar 2016

[Operator:]

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

[Daniel Moorhead:]

Good afternoon, and welcome to Evolving Systems 2015 fourth quarter and year-end earnings call. I'm Dan Moorhead, Chief Financial Officer and joining me today is Thomas Thekkethala, Chief Executive Officer. During the course of this call, we will be making forward-looking statements based on current expectations, estimates and projections that are subject to 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 Thomas.

[Thomas Thekkethala:]

Thanks Dan, and welcome and good afternoon. As you are aware I was the President of the Company during Q4 and took over as CEO on January 1, 2016, so this is my first investor call as CEO. We had a strong finish in 2015 on several fronts. First, we had three new dynamics and allocation or DSA wins in the fourth quarter. This raises the 2015 DSA win total to five, a new record for the Company. This brings the number of carriers we have chosen Evolving DSA to 20 which is by far and away the largest customer base in the market segment. We also announced another DSA customer win in February and we highlighted the use of our DSA SIM in a blockbuster full front page ad in India’s largest financial newspaper by India's largest carrier. We integrated the SSM teams and its products into Evolving and started rolling out these combined offering for existing customers. Fourth quarter license and service bookings was the highest since 2011. Sequential quarter license and service bookings and backlog were up 39% and 16% respectively. It was also our 31st consecutive profitable quarter. Dan will cover the details about this in his update. The acquisition and merger of Sixth Sense Media SSM was an important milestone in the history of Evolving Systems. The enterprise software market is transforming itself from the traditional software license model to software as a service SaaS or Cloud-based models, which are being adopted by corporations around the world. This is a great opportunity for Evolving to roll out our own flavor of SaaS model in the form of managed service offerings. We are now rolling this out to all our 75 customers where we cross-sell and bundle it in with other solutions. Packages as a managed service, which is essentially a combination of our software solutions and our [indiscernible] expertise. And charge customers a monthly recurring fee plus the performance fee for incremental revenues or other KPIs that we achieved. This in effect has allowed us to narrow our focus and increase our product research and development into a few core joint offerings. We have also increased our investment in sales by combining sales, solution consulting and product managers into one sales organization. Further, we expanded our partner network especially in countries where one of our regional offices are not close by and in fact we’ve announced our first major deal in Q1 with a significant partner. This new focus has allowed us to right size the organization, eliminate redundancies and streamline operations resulting in further reduction in annualized operating expenses that Dan will discuss in detail. So where are we going from here, as I noted to you before carriers have invested billions of dollars in acquiring licenses and customers and in building networks. However, the OTT players like Skype, WhatsApp, Google, Facebook et cetera have hurt carrier revenue for voice, messaging and even data with Wi-Fi ubiquitous through local cable companies and others in most public places. The big new revenue opportunities in mobile are in next generation services like mobile advertising, mobile banking, m-commerce, mobile gaming and entertainment. However, the carriers have not been able to participate in these high-growth opportunities enabled by the mobile channel. Our vision for the business is quite straightforward. To help our carrier customers and prospects, accelerate customer acquisition to their high-speed network, upsell them more of their network services, and monetize their rich customer information to accelerate these next-generation mobile services. Evolving Solutions, Tertio Service Activation TSA, Dynamic SIM Allocation DSA, and Real-time Lifecycle Marketing RLM are now installed at over 70 carriers in 50 countries reaching 1.3 billion consumers worldwide. This is a very large audience. In the first phase of our transformation, we are adding RLM as a feature to all TSA and DSA releases. This enhances a traditional back office system proposition of DSA and TSA into a revenue-generating value proposition for our carriers. We can now help our customers using their existing system DSA and TSA to actually acquire, upsell and retain consumers. We do this by creating a highly personalized experience that engages the subscriber in real time from the first time the consumer powers on his new device to their day-to-day usage. An example of this new approach was the recent press release that I discussed earlier. Of this very highly visible marketing program with a large carrier customer in India that launched acceleration of 3G to 4G customer acquisition by bundling a DSA enabled 4G SIM directly into a full-page advertisement on the front page of India's largest newspaper. This was a really exciting marketing campaign and we are working forward now to look at the results. If the consumer, in fact is an existing carrier customer, our solution enables a fully automated SIM swap process that eliminates the need for the consumer to visit a store. During the process, the phone type is discovered and the most popular data plan for that phone in the region is offered up to selection, which is essentially the first step of upselling the consumer. Next, the consumers offered a choice of cloud backup or data security. And finally, consumers advised the most popular apps or games depending on the person's profile. Evolving in effect is enabling each step of the consumer upsell and earns a performance speed by helping the carrier generating these next-generation service revenues. In the second phase, which is underway now, we are working with carriers or expanding their services into mobile banking, m-commerce, mobile gaming and mobile entertainment. The carriers in fact remain the most trusted brands in the emerging markets. In these markets, for the majority of the consumers, mobile is their only access to the Internet. The market for m-commerce, mobile gaming and mobile entertainment is growing, while in many of these countries the carriers have also been awarded mobile banking licenses. We are able to leverage the existing consumer information, relationship and communication channels with the carriers to help them acquire engaged upsell and retain consumers for these next-generation mobile services. We expect to make our first announcement about this second phase in the upcoming week. And finally, we are in discussion with our carriers are going beyond monetizing their network to actually monetizing their consumer information. Carriers have built the most advanced always on personalized communication channel that encompasses a consumer's entire lifestyle, but they are not able to monetize the channel. So we are now working with them on several consumer information monetization scenarios. First off in the emerging market, every time a consumer completes the transaction that affects his or her balance an update message is sent to the phone. Messages are sent for many other reasons as well. So imagine two of our customers that together connect to over 400 million subscribers, every day an average of 10 balance or similar system messages sent to each consumer. That's about 4 billion messages or eyeballs a day, every day. We offer an interface integrate multiple types of personalized mobile advertising messages into the stream and we also offer links to connect the consumer to mobile awful walls to expand the offers to banners daily deals and app download. App downloads have become a large revenue opportunity for any network with a large audience like Facebook or Twitter. The carriers also own a network that has a large audience and we expect to work with them to monetize that. Consumers are indeed downloading a lot of apps. The challenge for companies like Spotify or Pandora is that the average consumer uses only around seven apps and their app might not be one of them. Based on the consumers’ behavior, location and context, we can make carrier sponsored offers to get the consumers to start using a specific app without incurring a data charge for a week. The carrier benefits from increased data usage after the three-week and Spotify or Pandora benefits from a loyal customer thereafter. In addition to apps consumer spend a large amount of time doing search and browsing. We are working on a new initiative now to enable the carriers to monetize its consumer information to help advertisers and ad networks to gain a higher click through rates by serving up more personalized ads then they are today. A recent GSM study sites that the majority of carriers surveyed highlight monetizing their consumer information as one of their top priorities. The solutions we are offering now are critical to these carrier growth strategies and they stimulate new carrier revenue streams. We are very excited about these opportunities opening up to Evolving Systems and our focus in 2016 is to accelerate these with our carrier customers. In summary, we ended 2015 with a very strong quarter. We have had a record number of DSA deals won which is five. We completed the integration of SSM and have now been rolling out joint offering, license and service bookings were the highest since 2011, sequential quarter bookings and backlog were up and it was our 31st consecutive profitable quarter. And now, I will turn the call over to Dan Moorhead who will detail our Q4 and full-year results. Dan?

[Daniel Moorhead:]

Thanks Thomas. Fourth quarter financial results. Fourth quarter revenue was $7.1 million up from $5.8 million in Q3 and compared with $7.6 million last year. Revenue included license and service or LS revenue of $4.4 million and customer support or CS revenue of $2.7 million. Q4 revenue was negatively impacted by the British pound as the rate decreased at the end of the quarter. Total cost of revenue and operating expenses increased 18% year-over-year to $6.1 million from $5.1 million. The increase included Sixth Sense Media operating expenses and a $533,000 restructuring charge. Our profit metrics remained strong in Q4 with 73% gross margins, 14% operating margins, and 26% adjusted EBITDA margins. GAAP net income was $1.1 million or $0.09 per share. Adjusted EBITDA was $1.9 million up 62% compared to Q3. On the balance sheet, we reported cash and cash equivalents of $8.4 million at December 31st compared with $9.8 million at the same time last year. Working capital was $3.7 million, which is lower than prior periods due to the $10 million outstanding on our revolver, which was classified as current debt as of December 31. During February 2016, we paid down $4 million on our revolving line of credit and converted the remaining $6 million to a term-loan. The loan is interest-only through the remainder of 2016 and then is paid off over 36 months beginning in January 2017. Also in Q1 2016, we continue to position the organization for profitable growth and therefore we eliminated some additional positions within the organization. We expect to take a restructuring charge in Q1 of approximately $1 million to cover severance, taxes and benefits of terminated employees. We expect the annual savings of approximately $2 million related to the Q1 reduction and approximately $3.5 million when combined with the Q4 reductions. For the full-year revenue was $25.6 million in 2015 versus $29.7 million last year. Revenue included $15.6 million in LS and $10 million in CS. Total cost of revenue and operating expenses were essentially flat year-over-year at $21.2 million. Gross margins grew to 75% from 74% in 2014, operating income was $4.3 million, adjusted EBITDA was $5.8 million and GAAP net income was $3.3 million or $0.28 per share. Booking and backlog highlights; we define bookings as sales orders that are expected to be recognized as revenue during the following 12 months. Total Q4 bookings increased 55% sequentially to $9 million from $5.8 million and 17% year-over-year from $7.7 million in Q4 last year. Q4 LS bookings increased 39% sequentially to $5.3 million from $3.8 million in Q3 and were up slightly from $5.2 million in Q4 last year. Mobile Marketing Solutions or MMS LS bookings were up 76% sequentially to $3.9 million from $2.2 million in Q3 and were up 6% from $3.7 million in Q4 last year. Total CS bookings increased 85% sequentially to $3.7 million from $2 million in Q3 and increased 45% year-over-year from $2.5 million. Our total backlog at year-end was $12.1 million that the 17% sequential order increase and a 14% increase over the year ago total. LS backlog totaled $6.1 million up 16% sequentially and up 9% year-over-year. The MMS component of our LS backlog was $5 million up 28% sequentially and 22% year-over-year. TSA LS backlog was $1.1 million. Dividend updates; our Board of Directors declared a first-quarter dividend of $0.11 per share payable April 1, 2016 to stockholders of record on March 28, 2016. I’ll close with our usual reminder that a single order can have a significant impact on our quarterly results. Accordingly, we continued to advice 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 the line of Brian Kinstlinger from Maxim Group. Your question please.

[Brian Kinstlinger:]

Tom from a high level, can you talk about the market environment from a telecom spending and IT perspective, 2015 which characterizes when that was very difficult. Can you talk about today different to same worse as we head into the beginning of the year?

[Thomas Thekkethala:]

Well, what we are seeing out there is that I think things are remaining more or less the same as they were in 2015. And I think this is why our strategy are not simply relying on the carriers or telecom IT spend is critical, because we’re really driving at demonstrating increases in revenues for them and participating in performance fee based on those increases. So what we’re essentially doing with the managed services strategy and things that I have laid out is our core businesses which is to sell the technology of DSA or TSA or RLM will continue as we have in the past. But the growth will really come from the fact that we packaged in these managed services that directly go at creating new revenue sources for them and carriers are definitely interested and they’ve always had a history of doing rev share and things of that nature back from the days of value-added services. So that’s sort of where we are. So we think that the impact on us will be less and less as we go forward.

[Brian Kinstlinger:]

So with these stronger bookings and then you are tying RLM into DSA and TSA businesses? Can you talk about what a reasonable topline growth rate target for the overall Company as for the year?

[Thomas Thekkethala:]

Well, we don't typically provide any guidance per se around those things. I would simply say that, we believe that this direction that we’re taking which is moving from license to managed services as you know does have a certain kind of impact, which is that if you traditionally had a license for just 500,000 right and you took it as a license you would recognize the 500,000 right away. On the other hand in the managed services world you end up taking it let's say as $20,000 a month managed service. So the first year you end up getting $240,000 to second year $408,000 - $240,000 again. And then thereafter you are continuing to be charging them $20,000 or more based on the growth in subscribers, based on the growth in activations or other services and that’s the baseline. And then on top of that you add the performance fees, so you're going to see some changes that Dan will get into later on I think in describing how that works fine.

[Brian Kinstlinger:]

Maybe I think it can be helpful. So the sales analysts can accurately predict what’s happening. Are you saying it's kind of like when software companies go from a licensed model to a subscription model and this is going to be the year of transition where we’ll see revenues flat to down as your contracts are structured differently, is that we are trying to communicate?

[Thomas Thekkethala:]

I am suggesting that we’re gradually moving from a traditional license model, which requires one to do a lot of deals every quarter and of course it’s not really predictable. We are gradually migrating from a traditional license model towards the managed service model. And as a result, there will not be the same kind of large license type of deals that we may have done historically. And we would be expecting to do some of that because some customers will continue in that model, while we continue to offer them a managed service. The best case scenario for us is a customer who essentially buy the license and then we come back to them and say that you know what it’s going to take you one, or two, or three IT people to manage this software environment in your IT department. They are having a lot of cutbacks in their IT department. So what we would do in that case is we would say will offer to provide the operation support for our own software in your environment and we’d provide some packages off our people that would allow you to optimize the use of the software. So you would not have to have that kind of IT expense which that's what becomes the managed service. It’s our software and our people and then we make additional revenues on top based on our performance.

[Brian Kinstlinger:]

Great. Okay. Two quick ones. Can you provide the revenue that was contributed from $0.06 in the quarter?

[Thomas Thekkethala:]

Dan, do you want to take that?

[Daniel Moorhead:]

Yes, we’re not breaking out SSM versus EVOL, but they were pretty true to their run rates if you review the 8-K that we filed with their historical financials, their quarterly run rates they were slightly less than that, but we don't break that out specifically in the financials.

[Brian Kinstlinger:]

Okay. And then can you give directional target for expenses I mean oftentimes companies cut costs, but and they reinvest some of that savings in other initiatives. Is the discussion that you talked about is all that cost coming out or and will be flow through the bottom line or will some of that be reinvested?

[Daniel Moorhead:]

I can take that Thomas. We expect most of it to flow through the bottom line, so I think if I was looking at it I would look at EVOL was running in about a $20 million expense run rate, again if you looked at the 8-K we filed for Sixth Sense and we purchased them they were running at about four and these are adjusted EBITDA expense basis. So without depreciation and amortization, stock compensation those types of things, but – so that $24 million expense base in my script earlier I talked about a $3.5 million reduction with Q4 and Q1 combined that's what I would use as your adjusted EBITDA expense base for 2016.

[Brian Kinstlinger:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of James Moorman from D.A. Davidson. Your question please.

[James Moorman:]

Thanks. So I knew you guys have done a lot of work in Africa and just where are you, I know would that carrier seem to get a lot of penetration, so it’s kind of a lot of small deals and are there more of those to follow and just wondering kind of where you are and penetration of that market or you’re going to start. I know you’ve also done a deal on India, just where do you kind of see the future business and how much more is kind of left in Africa with that service provider? Thanks.

[Thomas Thekkethala:]

Well, with that service provider they have – I guess they have a few more properties that were in discussion with and I think we’ll continue to win some of those in Africa as we announced in Q1. We won another deal in Africa that was through with a large partner that was not based on a large carrier group deal. So we are seeing some momentum in Africa. And then based on the - this great press release that came out about the DSA SIMs being embedded in the Economic Times newspaper in India, definitely a lot more momentum there as the carriers in India look to go from 3G to 4G with Reliance looming in the background with their huge investment in all India 4G network. So we’re seeing some momentum in India as well. Southeast Asia has been another market which has been strong for us and we are starting to see a lot more activity in Latin America now, because these services essentially, definitely on the one level optimize costs and operational efficiency, but what we are doing now is sort of bundling in the fact that it can be net revenue generators for the carriers by adding a lot of value-added services and next-generation services as a upsell directly at the first point of the DSA installed and then thereafter.

[James Moorman:]

Great. Thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of Seth Poppel from Poppel Family Investments. Your question please.

[Seth Poppel:]

On a global macro basis and not looking for guidance on short-term do you feel that EVOL the way it structured now is capable of doubling in five years, in other words over time smoothing out the lumpiness. Is this a Company that you think can double its revenue in five years?

[Thomas Thekkethala:]

Well, I think it sort of depends on our execution on two fronts. I think we will do fine in our core business which is the continuation of DSA and TSA and RLM, we have put forth these managed service value propositions in front of several of our customers and we are doing more of them. I think based on the uptick of those things on the one level helping themselves mobile gaming, mobile money, mobile entertainment and other such things is definitely going. If that really takes hold with these carriers, in other words the factors there is the carriers have to become somewhat successful in delivering those next-generation services. We would be very, very successful and we will clearly do what you're talking about. And then on top of that, if we can essentially participate in the mobile advertising revenue where the carrier is in the data path I think it could be very, very uplifting for us as a Company.

[Seth Poppel:]

Okay. And then I have a follow-up for Dan, with regard to the refi and changing your revolver into a term loan? Can you talk a little bit about the rationale and what took place to cause you to do that?

[Daniel Moorhead:]

Sure. The first piece if you're familiar with the covenants we had on the revolver, we had a $4 million required cash balance with East West, what that ended up being was non-usable cash right, so we’re paying interest on $4 million and not able to use it on the cash side. So we were able to negotiate with them and get them to wave that if we paid down the $4 million so that was a no-brainer and then the $6 million term loan obviously the revolver was expiring in October of this year, so we were looking to either roll that to a new facility, but best case for us was to renew to a term loan, so we could pay it down over time and we were able to negotiate very favorable terms prime plus one on a term loan was pretty good, so we were happy with the renegotiation in whole.

[Seth Poppel:]

And looking at the confidence, two of the three looks fairly comfortable at this time, the current assets to current liabilities should be comfortable, your maximum total leverage ratio should be reasonably comfortable, but the minimum fixed charge coming at 2017, 2018, 2019 you're going to have to repay approximately plus or minus $2.5 million or $2.3 million a year in that neighborhood. And if you keep the dividends at the current rate are going to be paying out $5.8-odd million in dividends. So you are going to be up around $8.1 million and that’s before CapEx and cash taxes. How do you feel about your ability to keep the dividend that its current rate and still meet that minimum fixed charge coverage ratio?

[Thomas Thekkethala:]

That’s a good question. So obviously we’ve forecasted this out and the business should be able to support the dividends closer to 5.2, 5.3 were running about 1.3 a quarter or little less than that or a little more depending on the shares that are outstanding. And so with that we've done some changes in our tax structure that we believe our tax expense is going to come down some CapEx is fairly minimal. EBITDA last year was over $9 million, this year we did less than that, but we expect with the cost cuts and the acquisition of SSM for our EBITDA to get back up to 2014-ish level. So at those levels, we can support the dividend and the debt payments in the 2017, 2018 and 2019.

[Seth Poppel:]

Excellent. Thank you very much. End of Q&A

[Operator:]

Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Thomas Thekkethala, CEO for any further remarks.

[Thomas Thekkethala:]

Okay. Well, thank you all for joining the call. I’ll look forward to talking to you next quarter, which is about early May when we discuss our second quarter results. Thank you all.

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.