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

Q2 2019 Evolving Systems Inc Earnings Call

Englewood Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Evolving Systems Inc earnings conference call or presentation Monday, August 19, 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 Evolving Systems 2019 Second 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 quarter 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 forward-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 be -- should not place undue reliance on these statements. These 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 turn the call over to Matthew Stecker for some opening comments. Matthew?

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

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Good afternoon, and thank you for joining us. I see a number of familiar names and some that aren't so familiar on the list of people that have registered for the call, so thank you for making the time.

First, I'd like to quickly thank everyone for enduring the last minute reschedule of the conference call and release. Our auditor is reraising the matter of goodwill after we had just taken significant allowance a couple of quarters ago, happened at the last minute and added an expected complexity to our time line. I'll discuss the goodwill charges in a second.

As we anticipated at the end of the first quarter, second quarter revenues have fallen a little below our expectations. However, on the upside, any disappointment we feel is ameliorated by a return to EBITDA positive performance, the fact that costs are firmly under control and our cash position. Furthermore, we returned to cash flow-positive performance in the quarter. This good news is set against the background of a substantial nonoperational goodwill impairment, of which most of you are already aware, as we filed notice of it with our extension request a few days ago. The impairment was triggered solely due to the market capitalization of our current -- of our common stock during the second quarter of 2019. All other valuation metrics would not have required an impairment. The impairment is only relative inasmuch as it obscures the underlying progress we've made this quarter and the tangible beginnings of the significant turnaround in our performance. I've said in recent investor calls that there are now concrete signs that in the second half of the year, the turnaround in the business we projected would arrive in 2019 is beginning to realize. The goodwill impairment does not change this, nor does it undermine my optimism in the company's future. The impairment has no impact on our business, its outlook or prospects. The only thing that had changed was the stock's trading price. It also does not reflect how we operate the business today or see our -- or see generating revenue in our future. Nothing to that effect has changed. With that said, the investments we made in the company between 2016 and 2018 to build both the right infrastructure and the right products necessary for long-term success are now starting to show results with many deals now in the later stages of the sales pipeline and others in the closing process. A number of significant win announcements are imminent. So if the numbers we're announcing today remain a little frustrating at the headline level, to no one more than me, they are somewhat offset by a well-founded optimism about where the company stands. I believe we have reached and are now passing through the tipping point.

Top line revenues of Evolving and its acquired companies had been on a declining trajectory for years. We've been hard at work rationalizing, repositioning and redeploying our assets. We believe that the company will see growth over the long term, and we'll be on a solid growth trajectory in the quarters ahead. The first half of 2019 has been undeniably difficult. As you know, a major and complex rebuild of our offering in customer value management loyalty was time-consuming. Turning 4 products with 4 code bases into 1 updated fit-for-purpose solution is not an easy journey, but it's resulted in the availability of perhaps our first coherent and unified marketing offering, capable of supporting multiple relevant in-demand use cases. In short, we now have something to sell in the CVM world. It's called Evolution and we're excited about it. The first customers of Evolution are existing Evolving customers who would have surely left for competitive offerings had we not built it. Those deployments are now in progress and further Evolution rollouts are a significant source of our optimism.

Turning to the second -- turning for a second to the other side of our business. Our activation and network services solution set has been repackaged. We're now terming it the eSIM Lifecycle Management Suite. And the products within it updated with significant new version releases for Tertio Activation, Smart Dealer and DSA. Our investment in marketing last year has yielded deal opportunities that are now advanced. We had, of course, hoped we'd be in this position in the first half of 2019, but we've weathered the challenge of reinventing Evolving Systems and have now seen that the work we've done is beginning to bear fruit. It's worth underlining that our course of action wasn't optional. We had to create an Evolving Systems' position to compete in the telecom market today. Digitization, the advent of eSIM, the growing importance in partnering -- I'm sorry, the growing importance of partnering and other trends influence operators' buying decisions when it comes to enabling software had to be addressed in the old Evolving, and its product line of 18 months ago wasn't in the position to do that. Now we're able to deliver solutions that provide an impactful bottom line boost to our customers' businesses.

So in confidently anticipating that the second half of 2019 will see some increase in the flow of win announcements even more so pick up speed, I think in time we'll see the difficult first half of the year that we're closing today as having been vital for the necessary foundation building for that success. I will discuss these and some other developments in greater detail later in the call but first, let me start with an overview of the second quarter. For that we'll hand it over to Mark Szynkowski.

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

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Good evening. Thank you, Matthew. Let me just run through the numbers quickly here. Our revenue for the second quarter ended June 30, 2019 was $6.3 million or $1.9 million, or approximately 23% decrease from the comparable year ago. Total revenue for the 6 months ended June 30 was $13 million or approximately a 20.5% decrease over that same period. Service revenues, which include revenues from the company's preference for managed services over perpetual license comprised approximately 96% and 93% in the total revenues for the 3 months ended and the 6 months ended June 30, respectively, and remains a significant part of our strategy as we try to engage closely with our clients. We reported gross profit margins, excluding the depreciation and amortization of approximately 68% for the 6 months ended June 30, 2019, as compared to 65% for the same 6 months ended 2018. This was primarily related to the product and service mix, inclusive of additional licensing revenue and efficiency gain from the full integration of our client delivery and support workforces. As Matthew addressed earlier in accordance with the accounting standards, we are required to test our goodwill and other indefinite-life intangible assets for impairment in interim periods when a triggering event is identified. As management we consider the market capitalization along with other possible factors affecting the assessment of the company's reporting units for the purposes of this impairment assessment, which included assumptions about the future, revenue forecast, discount rates, changes in economy, trends in stock -- stock prices and other operating conditions. However, the significant decline in the marketing capitalization despite many positive factors still -- outcome was a triggering event and therefore, resulted in a noncash charge for the impairment of goodwill for the remaining carrying value of $6.7 million to our audited condensed consolidated financial statements.

Total operating expenses including -- excluding the impairment charge would have been $4.4 million in the quarter ended in June. And decreased by approximately $0.6 million as compared to $5 million in the corresponding period a year ago. This decrease was primarily related to the reduction in professional fees, lower legal and accounting fees and lower incentive compensation compared to that period a year ago. Total operating expenses for the 6 months, again, excluding the goodwill impairment charge was $9.8 million, an increase of approximately $0.3 million as compared to the $9.5 million for the corresponding 6-month period in the prior year. The increase was related to our increased focus on product development and growing our global business development team offset by a decrease in G&A costs. Further, there was a nonrecurring charges of approximately $0.2 million in the first quarter and associated the complexities in our year-end audit and additional accounting fees working on the submission of our R&D tax credits, which were refunded to us in the U.K. for one of our subsidiaries.

We reported an operating loss of $7 million, however, again, excluding that goodwill impairment charge, the loss would have been $0.3 million as compared to a $0.2 million operating income for the 3 months ended June 30 of last year. However, the adjusted earnings before interest taxes and depreciations, our adjusted EBITDA number returned to positive as we reported a $0.1 million profit for the quarter ended June 30. Prior year second quarter adjusted EBITDA was $0.6 million. Cash and cash equivalents as of June 30, was $5.3 million, a decrease of $1.4 million compared to $6.7 million as of December 31, 2018, which was related primarily to the repayments of our outstanding loans. The company has generated positive cash flows for operation through the first half of 2019, and our contacted -- our contract receivables net of the allowance for doubtful accounts was $8.5 million, or an increase of $0.7 million compared to December 31, 2018.

Working capital for June 30, 2019, decreased on a sequential basis of $4.4 million from $8.1 million for -- as of December 31, 2018. This was mainly related to the decrease in cash through the payments of our outstanding debt and interest. Also, we had an additional liability recorded for $0.4 million regarding the adoption of the accounting standard ASU Topic 842 for accounting on operating leases and as in the prior quarter, we continued to report the full amount of our debt as short term due to the company's noncompliance of bank covenants, which we are still actively negotiating and restructuring of our terms. The company has always made every loan payment in full and as originally scheduled in our agreement and anticipates making all future payments. We believe there is ample cash on hand and liquidity in the working capital to fund our business and continued strategic investments. Moving back to our business report, I'll turn the call back to Matthew.

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

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Thank you, Mark. With these results in mind and underlying what I said in my opening comments, I believe that our return to an EBITDA positive quarter marks a tipping point for the company in terms of performance. Our turnaround is the direct result of the actions we've taken during the past 12 to 18 months. Our recent Evolution platform about which I spoke at some length in the first quarter earnings call is now attracting significant attention and drawing opportunities in the market due to its ability to support the kind of innovative use cases in areas like customer value, churn reduction and partner enablement that are moving to the top of the telecom operators' agenda as they seek to transition themselves into digital businesses. Evolution also allows us to target carriers larger than were supportable by our legacy platforms. We've seen significant progress and opportunities ranging from the CIS to Middle East to Western Europe that we expect to close in the next 2 quarters, that without the advent of Evolution, would have bypassed us. Our go-to-market for the new offering not only allows us to enable the transition, but also to position Evolving Systems as a leading partner in the necessary process of digital innovation. Watch this space. Exciting announcements are imminent.

Our customer activation and network services business has been through and now has emerged from equally significant transition in its product lineup in the first half of 2019. Our initially somewhat disparate set of products has now been repositioned as the eSIM Lifecycle Management Suite, a coherent set of offerings reflecting our unique ability to help carriers keep pace with the evolution of SIM functionality, particularly the advent of the SSIM and eSIM central to their business. Tertio, DSA and Smart Dealer, the 3 core products have all seen the release of new versions in the second quarter, and we are presently marketing these aggressively with early returns that give cause for optimism. There is a substantial install base and new point releases generate revenue. Though unlike Evolution, our [cans] products address the operational side of the communication service provider's business, they have in common in deployment the fact that they improve the customer experience, bringing together a coherent positioning for both parts of Evolution's business. In terms of sales, we continue working the channel now with increasing effectiveness. I've already said that win announcements that reflect the results of these progresses are imminent. We see them in the daily basis and the happy problem thrown up by our work in the first half of 2019 is the growing the number of opportunities we're addressing is now stretching our resources as we strive to be able to exploit them. The telecom software cycle is long, complex and demanding. Now that our products set in positioning had been successfully reset, managing this more effectively has become our next and largest challenge.

In the last quarterly call, I spoke again about Evolving and its acquisitions and the difficulties of integrating, rebuilding the company into one coherent whole. I believe today, by and large, we can mark this transitionary period as complete. The close of the second quarter marks the formal arrival of the new Evolving Systems. Of course, a great deal of work remains to be done to optimize our own performance but the foundations for success are now firmly in place.

With that in mind at the end of the second quarter 2019, we are finally emerging from a period in which blocking and tackling was our foremost challenge and have transitioned into one where increasing our efficiency and expanding our bandwidth will be paramount. We have shifted from rebuilding mode to one of trying to exploit the investments we've made to plan for growth. This hopefully, will be good news for all of us.

Finally, I will briefly address the elephant in the room and that's obviously the depressed stock price. I know that more so than any other metric, it drives day-to-day frustration and pain from our investors and we are keenly sensitive to that. With that in mind, what can we do? We believe that overall, the market is significantly undervaluing the company.

We are a significant worldwide player in the markets we're active in and while the sector as a whole has been depressed, we have maintained and, in some ways, solidified our position. Over the last year, the plan had been to solely work on -- work internally on building the company's products and pipeline. The market we felt will respond appropriately. Yet we see a significant gap developing between how we see the company, its performance and prospects and the way it is viewed by the markets. As such, we'll begin to turn significantly more attention towards IR in telling the story of the turnaround that's happening here. We will begin modestly as we move through Q3 into Q4, but we will begin devoting some nonzero attention to finding places to tell the Evolving story to small and large audiences. Stay tuned to more -- stay tuned for more on this.

I want to thank you for your support and look forward to updating you on our continued progress. At this point, I'd be happy to open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) I'm showing no questions sir.

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

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That is -- with that said, we have a form on the Evolving website if anyone would like to reach out to our Investor Relations to ask directly, that's something you are more than welcome to do.

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Operator [3]

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And with that ladies and gentlemen, we conclude today's program. Thank you for joining us. You may now disconnect.