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Edited Transcript of EVOL earnings conference call or presentation 15-May-19 9:00pm GMT

Q1 2019 Evolving Systems Inc Earnings Call

Englewood May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Evolving Systems Inc earnings conference call or presentation Wednesday, May 15, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark P. Szynkowski

Evolving Systems, Inc. - Senior VP of Finance & Secretary

* Matthew Stecker

Evolving Systems, Inc. - President, CEO & Executive Chairman

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Presentation

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Operator [1]

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Thank you, and welcome to the Evolving Systems 2019 First Quarter Results Conference Call. As you may have seen, our Form 10-K was filed after market close today, and our press release was just issued. Joining us from management today will be Matthew Stecker, Evolving Systems' Chief Executive Officer and Executive Chairman; and Mark Szynkowski, Evolving Systems' Senior Vice President of Finance. On today's call, Mark will provide an update on the first quarter 2019 results and Matthew will update you on the business investment activities currently underway. Both Mark and Matthew will be available during the Q&A portion of the call.

Before I turn the call over to Matthew, I'd like to remind everyone that the company will be making forwarding-looking statements based on current expectations, estimates and projections that are subject to risks. Specifically 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, and we encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information about the company.

At this time, I would like to now turn the call over to Matthew Stecker for some opening remarks. Matthew?

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Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [2]

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Thank you, and thank you to everyone who's joined us today on this call and webcast. Let me start by acknowledging that the first quarter results we've announced today underlie the ongoing complexity of the corporate and product transformation that has been our focus over the past 12 months and the fact that this process is not yet complete. The new strategy we did was initiated because we identified a trend of revenue decline in our core business that had to be addressed, really can only be addressed by broad changes in our approach to the market and our products themselves.

As we expected, we continue to feel the pinch of historical revenue decline now, but frustratingly, we are not yet reaping the full benefits of the corporate and product changes and innovations we have invested in due to our long sales cycle.

In the second half of this year, I'm confident that our performance will begin to show positive effects from these ongoing sales and investment activities. I'll address in some detail in this call where we now stand with regard to our progress toward building the new Evolving, a focused company with an updated product line formed from multiple acquisitions over the past 2 years. But it is fair to say at the outset that the transition has taken longer than when those investments, particularly, the acquisitions were contemplated.

When we began a journey that required consolidating 3 products with 3 code bases to create 1 state-of-the-industry customer value and loyalty offering, when we started the transition from license to services business model, and when we began investing in our human resources infrastructure, we knew there would be a number of difficult hurdles to overcome. But while progress has been slower than we would have liked, our core activities remain very much on track. Products that we sell today realized revenue between 2 and 4 quarters into the future. We expect improvements in top line financial in the later part of this year or at the early part of next.

With that said, let me reassure you once more, the company continues to be focused on generating and sustaining long-term growth and profitability. We are firmly focused on these goals, and we are confident that we are progressing towards them. We have worked to iterate our invested level -- actually, that's supposed to say we work to titrate our investment level, that spellcheck gets it every time, so that we remain profitable, and we have done this successfully through the past year.

In the first quarter, unexpected costs associated with our audit change incurred in the last days of the quarter impacted us and swung us toward a loss. This has been in our plan, and we don't expect to repeat it.

I began our last call by saying that our investments in product, research and development, marketing, partner development and sales over the past years are beginning to bear fruit. In spite of a difficult quarter, which may be traditionally a low quarter as our clients approve spending budgets for the year, this remains in the case.

As we know only too well, the telecom software sales cycle is lengthy, sometimes proceeding what seems a near glacial case. But we have not only seen interest on our new evolving technology, the critical component of our future success, but also the establishment of a much healthier sales pipeline, the first components of which are now progressing towards closed deals.

Finalizing and implementing sales of new technology is necessarily more complicated than doing the same thing with established technology as wrinkles and highly complex solutions often are only identified and need to be ironed out on the slot. But if the overriding numbers in the first quarter have been lower than hoped, partly because of this reality, the prospective revenue moving through the pipeline gives us cause for optimism.

I know that in our last call that many of you will also have observed that our new website has now been launched, finally providing Evolving with the new window to the market that accurately reflect the advantages our technologies can deliver and articulate the company's value proposition in a way that enables us to stand against our competitors. While the process of fully optimizing the new website is now underway, the measure of results and impact of the site in a profitable future are being established. In a year-on-year comparison, the first 2 months of the new site versus the old one, the traffic volumes had increased by about 80%. That means roughly twice of any prospective buyers of our technology are now seeing and interacting with us. Getting the word out there is the first step on the road to profitability. We are doing that far more effectively than before.

Our investment in marketing is also paying off beyond the new website. In 2017, marketing generated no new sales prospect at all. In 2019, as of today, marketing efforts have added significant value to the pipeline, much of it has already progressed a long way towards closed deals. Armed with both this new stream of opportunities and a new state-of-the-art industry product, there is, as I've said, every cause for optimism about the remainder of the year in the future. We expect a number of win announcements in the second half, as described.

I'll talk more about these and other developments later in the call. But first, let's go over the numbers. And for that, I'll turn it over to Mark.

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Mark P. Szynkowski, Evolving Systems, Inc. - Senior VP of Finance & Secretary [3]

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Thank you, Matthew. Good evening. Let me review our results. Total revenue for the first quarter ended March 31, 2019 was $6.7 million, a $1.5 million or approximately 17.9% decrease over the comparable year ago period. The decrease is related to a $1.3 million loss from service revenue from pricing pressures to our existing clients and less projects. Various reasons for the decrease includes changes in regulatory compliance such as GDPR standards, our customers being acquired by larger firms causing them to change their platforms.

First quarter of the prior year 2018 had many large ongoing projects, mostly related to contracts that were from the acquired company that since have been completed during 2018. So compared to the quarter a year ago, we have also had some decrease in revenue. These were offset by an increase of $0.4 million in revenue from new implementation and new incremental licensing of $0.5 million.

We reported gross profit margin, excluding depreciation and amortization, of approximately 71% for the quarter ended March 31, 2019, as compared to approximately a 65% for the same quarter last year. This increase in gross margin was primarily related to product and service mix that includes that additional licensing revenue, but we have also gained efficiencies due to the full integration of the acquired workforce with the existing delivery teams contributing to higher margins on our projects.

Total operating expenses of $5.4 million this quarter increased approximately $0.9 million as compared to the corresponding year ago. We continue our investment and focus on product development and growing our global business development team. Further, there was approximately a $0.3 million increase in professional fees, mostly related to the unforeseen additional charges associated to the complexities in the completion of our year-end audit. We also invested in nonrepeatable accounting services to update our global transfer pricing to include the acquired companies and correct our tax benefit going forward and completed our resubmission of prior year tax returns to claim R&D credits for our United Kingdom subsidiary.

Recently announced, our transition to a new independent audit firm for 2019, Marcum LLP, and we look forward to working with them. We'll also continue to identify areas to gain efficiencies in our processes.

The company reported a loss of $0.7 million as compared to $0.8 million in operating income in the quarter ended 2019 versus first quarter ended in 2018, respectively. Net income per share, both basic and diluted, were a negative $0.09 for the quarter ended as compared to last year's basic and diluted of $0.04 profitable.

The company reported adjusted earnings before interest, taxes, depreciation and amortization of a negative $0.3 million in the first quarter as compared to $1.4 million EBITDA in the first quarter of 2018.

Cash and cash equivalents as of March 31, 2019, were $5.6 million, a decrease compared to $6.7 million as of December 31, 2018. Our contract receivables and our unbilled work-in-progress, net of allowance for doubtful accounts, was approximately down $0.1 million compared to the same period last year as we continue to focus on our collection and invoicing procedures.

Working capital as of March 31, 2019, decreased $3.4 million since last -- since December of 2018. This was primarily due to the reclass of long-term debt to short-term debt as we are currently noncompliant with our current loan covenants, but are working on restructuring the terms that would allow us to continue to execute on our strategic plan while we look for alternative resources. We just have not had sufficient time to fully engage with our lenders on the new terms prior to the filing deadline.

Going forward, we expect to negotiate covenants that align strategically, and we'll make every effort to stay in compliance. The company has made every loan payment in full and in schedule -- as scheduled within our agreement and anticipate making all future payments as we believe we have ample cash on hand and liquidity in the working capital to do so.

Other factors affecting working capital was the decrease in our cash used, predominantly, for the reduction of our debt and payment of interest. Also, we added a new current liability of $0.4 million recorded as part of the adoption of ASU 2016-2 on Topic 842, updating the accounting of operating leases that was not recorded as of year-end last year.

As I said, we believe there's ample liquidity in working capital to fund our business and support the level of investments we intend to make in the coming year while continuing to look for synergistic and accretive acquisitions and/or other strategic partnerships.

Thank you and I'll turn the call back over to Matthew at this time.

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Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [4]

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Thanks so much, Mark. So I'd like to underlie some of my introductory comments, although the first quarter was a difficult one, a candid and realistic look at it has led us to stay firm on the current strategic path. It's not to say the challenges don't remain as we finalize our operating model and the balance of the year will be plain sailing.

Let me tell you, given that, why leadership believes that the company's path and our commitment to it is now stronger than ever. Evolution, our new customer value and loyalty platform is here. It's finished, and we're putting it in customers' hands right now for the first time. I really can't stress enough that this is a key milestone for us. Furthermore, the activation side of our business, what some people called the legacy, but really it's half of our business and we expect it to stay so, is also seeing product renewal with the new version of our Smart Dealer offering that is leading to a number of sales opportunities and new positioning around managing the cycle for operators really all around the world.

Taking 3 different platforms with 3 different code bases and migrating them towards a single new technology that retains the best features of each has been and remains a difficult problem. Not only is the technology -- technological but also the human challenges of this undertaking are time consuming. We've been able to complete the task successfully, but perhaps we're a little bit optimistic about the time it would take. That reality has impacted first quarter results. We had anticipated being able to start reaping the rewards of Evolution in the first half of this year. Realistically, it will now be in the third and fourth quarter before significant revenue benefits are felt.

The point there remains that Evolution gives us the ability to handle the processing volumes demanded by the world's largest operators. And doing so, it opens the door to new customers for Evolving.

In terms of sales, we continue work in the channel. As I've noted already, the sales cycle is long, more so with a new flagship product. But I've -- as I've already mentioned, there has been a notable upsurge in the pipeline that in the coming months we expect to convert into details and revenue.

I'll conclude by noting that I said in our last call that 2019 would again involve a good measure of blocking and tackling, that our internal focus remains on increasing our efficiency and expanding our bandwidth. That prediction is proving to be accurate. However, the multiple steps we took in 2018 to reorient Evolving's operating structures are bearing fruit in an accelerating pace, and I believe in the second half of the year we'll see a significant turning of the corner on the balance sheet.

Finally, remember that our stated plans have been to invest up to the level of breakeven profitability. In the past several quarters, we have been conservative about planning this and have ended up with significant positive cash flow even while trying to shoot towards breakeven. In this quarter, we had, as Mark described, a number of unplanned costs, largely associated with our accounting transition very late in the cycle that didn't allow us time to trim our expenses comparably. As we mentioned before, we don't expect this to happen again.

I want to thank you for your support and look forward to hearing your -- updating you on our continued progress. At this point, I'd love to hear questions. Operator?

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Operator [5]

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(Operator Instructions) And I'm not showing any questions at this time. I would now like to turn the call back over to Matthew Stecker for any further remarks.

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Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [6]

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Well, listen, I see a bunch of familiar names. And again, I encourage -- I know that some of you guys will be calling to set up one-on-ones, and we certainly encourage those folks who have done that before and anyone else who haven't to take advantage of that if you have specific questions. It's often a format that makes it easier for us to address them, and there's information on our website about how to contact our Investor Relations to do that. So again, thanks for your continued support. Operator, we're now ready to end the call.

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Operator [7]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.