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Edited Transcript of EVOL earnings conference call or presentation 15-May-18 8:30pm GMT

Q1 2018 Evolving Systems Inc Earnings Call

Englewood May 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Evolving Systems Inc earnings conference call or presentation Tuesday, May 15, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Stecker

Evolving Systems, Inc. - Executive Chairman

* Michael Glickman

Cisco Systems, Inc. - SVP of Americas Service Providers

* Thomas Thekkethala

Evolving Systems, Inc. - President, CEO & Director

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Evolving Systems' 2018 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Michael Glickman. Sir, you may begin.

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Michael Glickman, Cisco Systems, Inc. - SVP of Americas Service Providers [2]

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Thank you, and welcome to Evolving Systems' 2018 First Quarter Results Conference Call.

As you may have seen, our Form 10-Q was filed after market close today and our press release was just issued.

With us from management today will be Thomas Thekkethala, Evolving Systems' President and Chief Executive Officer; as well as Matthew Stecker, Executive Chairman.

On today's call, we will provide an update on the quarter and update you on the business investment activities currently underway.

Additionally, Mark Szynkowski, Evolving Systems' Senior Vice President of Finance is with us and will be available during the Q&A portion of the call.

Before I turn the call over to Thomas, I'd like to remind everyone that this call is being -- is 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 place undue reliance on these statements. There are many factors that could cause actual results to differ materially from those -- 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'd like to now turn the call over to Thomas Thekkethala. Thomas, go ahead.

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Thomas Thekkethala, Evolving Systems, Inc. - President, CEO & Director [3]

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Thank you, Michael, and thank you, everyone for -- who has joined this call and webcast.

First, let me start by saying that our team has been working extremely hard on our previously announced plans to increase our investments in product R&D, marketing, partner development and sales.

Everything we are doing is focused on generating and sustaining long-term growth and profitability.

Matthew and I will discuss this in greater detail. But first, let me start with an overview of the first quarter.

First quarter revenues increased to $8.2 million or 39% year-over-year as planned, driven by additional revenues from BLS and Lumata. Whereas Q1 revenue does not -- does represent a decrease from the seasonally strong Q4 '17 revenues of $9.2 million, it is in line with our expectations.

Services revenues increased $2.3 million or over 41% year-over-year to approximately 96% of total revenues as we continue the migration away from the traditional onetime license model.

Gross margins were approximately 65% in the first quarter of 2018 compared to 74% for the first quarter of 2017, continuing to reflect the lower overall margin we expected as we continue to integrate BLS and Lumata into our product mix.

Consistent with our plan of investment to the business, total operating expenses were $4.5 million, an increase of approximately $1.5 million year-over-year. This included the additional expenses of $1.4 million directly associated with the BLS and Lumata operations.

The remaining expenses, primarily related to the planned investments in sales and marketing, staffing and product development.

Total operating income in the quarter decreased to approximately $0.8 million from approximately $1.6 million reported for Q1 '17 due to higher expenses related to the cost of revenue and investment in sales and marketing.

As a result, net income for the quarter was approximately $500,000 or $0.04 per share versus approximately $970,000 or $0.08 per share reported in the year-ago period.

Lastly, we reported adjusted EBITDA of $1.4 million as compared to $1.9 million in the same period last year.

With respect to our balance sheet, we ended the first quarter with $8.7 million in cash and cash equivalents, an increase of $1.1 million or 15% compared with the $7.6 million reported at the end of Q4 '17.

Contract receivables, net of allowance for doubtful accounts were $11 million, up approximately $0.9 million.

Working capital increased slightly on a sequential basis to $9.1 million and the company continued to generate positive cash flows from operations.

We believe that based on these results, we have ample liquidity and working capital to fund our business and to support the level of investments we intend to make in the coming year while continuing to look for synergistic and accretive acquisitions and other strategic partnerships.

Now moving onto our business. Beyond the numbers, let me provide you a snapshot of the various initiatives our team has been working on throughout the quarter.

As we mentioned previously, our focus starting in the latter part of 2017 was to increase our investment in research and development, in line with new technologies and services being rolled out by mobile operators.

We went live with a software-as-a-service platform for customer acquisition and activation, targeting the growing MVNO market and continued to advance our full lifecycle dealer management suite to accelerate reseller channel retail sales.

Research and development is underway on embedded SIM or eSIM and subscription management as mobile technology gets embedded in automobiles and a range of equipment and devices.

We have also accelerated the integration of the best-of-breed product capabilities from the acquisitions into a common digital engagement platform we've now called Evolution.

The first version of Evolution went live at a major operator in South Asia with a stream processing engine to ingest massive event volumes and trigger real-time personalized offers that increase customer engagement and spend with the carrier.

Evolution is now being upsold to existing BLS and Lumata customers

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and supposed to be in position at all new

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Vice President for Marketing, another Regional Vice President of Sales and program and account managers for some of our large customers.

We expect to generate an increased level of activity and traction at our existing customers and at new customers that will yield increased growth in 2019 and beyond.

On the sales front, we continue to renew and upgrade the managed service at multiple customers in the LatAm, the Mid East, North Africa, sub-Saharan Africa, CIS and South Asia regions, that will yield recurring revenues during the upcoming quarters.

We added 1 new carrier logo in Europe and expect to add 2 more in early Q2, one in each of the CIS and Asia-Pac regions. The focus has been on targeting new customers globally. The pipeline now includes 60 new logos, of which, 30 were added just during Q1 '18 and a total new customer pipeline of over $25 million.

We also see increased activity with 2 of our existing global network equipment partners as well as 2 new global partners. Accordingly, we will be bringing in a Vice President of Business Development to expand these partnerships from 1 or 2 regions to all our regions across the globe as well as a new leader for our expansion in North America.

We have cross-trained engineers in our 3 hubs: Eastern Europe, Western Europe and Asia, thereby expanding our flexibility and capability to deliver.

We have also grown the R&D team, recently hiring a VP of Products and added an additional senior architect and engineering team to build out our new Evolution platform.

Once the majority of our customers are on the new platform, we expect to see huge benefits of rapid new feature deployments across our base, lower cost to serve and manage the space and the ability to support -- to streamline support resources.

I would like to turn the call over to Matthew for some additional remarks regarding our strategy and outlook, after which we will open the call for questions. Matthew?

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

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Thank you, Thomas, and good afternoon.

Last month with the release of our year-end results, we announced that Evolving will be increasing its investments in technology, product, marketing and personnel to position the company for growth long term, and into the future.

Thomas spoke about some our new hires. Now let me give a little bit of clarity around that.

We mentioned some vice presidents, some new sales people. I want to emphasize the kinds of people we've hired. We're super happy to have them on board. We were really pleased with the crop of people that we've got on board and these are hands-on doers, we're not bolstering the executive ranks by any means. And we're excited the impact that all these new folks are going to be able to make.

We found basically the right people for the job, so I couldn't be more excited about that.

We intend to [fund] to our new investments gradually while we continue to streamline operations and expenses for the goal of remaining profitable like we were this quarter during this period.

As Tom just noted, we've built our team and we have further plans to build from here, both in support of existing customers and to ensure that we are positioned to win new accounts backed by differentiated products. This is why investments in R&D are so critical this year.

Gross margins are down and will remain at these lower levels in the short term. Just to clarify why this is happening. We expect gross margins on existing business to stay about where they are. However, gross margins on new business will be lower for new customers because of longer sales cycles and discounting as we break into new customers.

Also, new customers are in regions of the world where we're not operating yet and so we have travel overhead to get there and get established. However, we expect that over time as new clients become existing clients, these margins will head back up to historic levels within a few hundred basis points.

We've seen this in the past as we'd expanded into new territories and had [rapid] expectations this will be the case.

We expect to see the improved results in these investments in 2019 and building thereafter.

We just have a long sales cycle. Our customers are with us for a long period of time but it takes some time to bring new customers on board.

All the teams from sales, through engineering and support are integrated and working on a common set of integrated solutions. We are, therefore, no longer tracking or recording revenue or costs by acquired entities or products. We just don't run the business that way. Engineers are working across the business, salespeople are selling both products, and we're really are running as an integrated team.

I'm pleased to report that the business is proceeding on plan and the team has already been executing our investment program. We are confident that our strategic investments will result in a stronger foundation, a best-in-class solutions portfolio and more customer touch points, which over time should result in meaningful top line growth and increase profitability.

We will continue to make investments to build our sales capabilities and position us to benefit with improved top line results, which again, should start seeing results in 2019.

In terms of profitability, as demonstrated in this first quarter, we anticipate modest profitability throughout the year. But we'll invest with the future in mind, so we are in a better position to drive meaningful growth, profitability, cash flow and increase shareholder value.

I want to thank all of you for your support and look forward to updating you on our continued progress.

At this point, I'd like to open the call up to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Speakers, I am showing no questions in the queue at this time. I'd like to turn the call back over to Michael Glickman for any closing remarks.

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Michael Glickman, Cisco Systems, Inc. - SVP of Americas Service Providers [2]

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Thank you. Ladies and gentlemen, I want to thank each and every one of you for your continued support. Management will be available to talk with investors throughout the week. And if you have any questions, by all means feel free to contact us and we look forward to communicating further progress and developments with you. Operator, we're now ready to end the call.

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Operator [3]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes your program, and you may all disconnect. Everyone, have a great day.