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Edited Transcript of EVOL.OQ earnings conference call or presentation 11-Nov-20 10:00pm GMT

·16 min read

Q3 2020 Evolving Systems Inc Earnings Call Englewood Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Evolving Systems Inc earnings conference call or presentation Wednesday, November 11, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Keith Brody * Mark P. Szynkowski Evolving Systems, Inc. - Senior VP of Finance & Secretary * Matthew Stecker Evolving Systems, Inc. - President, CEO & Executive Chairman ================================================================================ Presentation -------------------------------------------------------------------------------- Keith Brody, [1] -------------------------------------------------------------------------------- Thank you, and welcome to Evolving Systems 2020 Third Quarter Results Conference Call. As you may have seen, we announced our third quarter results today, and our press release was just issued. Our 10-Q will be filed tomorrow due to the SEC EDGAR system closure for the Veterans Day holiday today. We thank all veterans for their service. Let me begin with a quick administrative note. My name is Keith Brody, and I'm VP of Marketing at Evolving Systems. I'll be hosting this in future calls. You may have observed that we're now managing these quarterly sessions ourselves using the evolving Zoom platform. Registration does require a few different steps than was previously the case. But otherwise, everything remains the same. If you have any questions or need any assistance, please contact our Investor Relations department via the website at www.evolving.com. With us from management today will be Matthew Stecker, Evolving Systems' Chief Executive Officer and Executive Chairman. On today's call, we will provide an update on the third quarter 2020 and update you on the business activities currently underway. Additionally, Mark Szynkowski, Evolving Systems' Senior Vice President of Finance, is with us and both here 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 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'd now like to turn the call over to Matthew Stecker. Matthew? -------------------------------------------------------------------------------- Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [2] -------------------------------------------------------------------------------- Thank you, Keith, and thank you, everyone, who has joined us today on this call and webcast. I think it's fair to say that 2020 has been an extraordinary year for all of us. The global coronavirus pandemic has presented both personal and professional challenges, the likes of which few of us have experienced before. At the end of the second quarter, when it had become clear that 2020 would not be business as usual, I noted in that earnings call that I believed Evolving Systems is better placed than many to successfully navigate through the challenges likely to be ahead. With that in mind, and as we continue to navigate through these historic times around the globe, I'm proud to say we've been able to generate positive operational performance. Our service revenues have increased from the corresponding periods a year ago. I believe, impressively, we have generated positive cash flow for the year. With this in mind, I'm confident that our performance this past quarter, in spite of the coronavirus pandemic and all of its challenges, is a result of builds on the hard work we have been doing for the last 2 years. I previously noted that in our years of servicing a global geographically distributed customer base, Evolving Systems has developed a culture of successfully managing our business through telework. Our established confidence and experience in this area have underlined our ability to implement solutions and provide support remotely. As a result, the pandemic has had a relatively limited effect on our operations. We continue to work with existing and new clients to find ways to use our products and services to enhance their businesses during these unusual times. It is, of course, true that market conditions remain far removed from business as usual, and our cash flow performance has been achieved despite the continued impact of the pandemic on our ability to interact with clients in the traditional modes of sales and business development. The silver lining to this cloud is that operating so effectively during the pandemic, we will be in a position to move forward confidently when it finally abates, hopefully, sometime in 2021. So if our expected growth this year has been slowed, we remain extremely excited about making the gains that we have and are excited about what the future holds for evolving. You can see why I'm confident with a quick look at the headline numbers we're reporting today. Third quarter revenue of $6.8 million, an increase of $0.5 million from the previous quarter. Year-to-date revenues of $19.4 million. The company has generated positive cash flow from operations in 2020. Third quarter operating profit was $0.4 million, net income of $0.1 million. Adjusted earnings before interest, taxes, depreciation and amortization for the third quarter was $0.8 million. Underpinning these numbers are the decisions we've made and the work the company has done, particularly in the last 12 months, many of which have allowed us to quickly and effectively adapt to our approach to the market conditions imposed by the pandemic. The investments we made, particularly in 2019 in product, research and development, marketing and sales are all contributing to our bottom line. We have also become a leaner company during this period. Our new Evolution platform is now on the market, and we expect to increasingly accrue the benefits of having a market leading product, both in the course of this year and more particularly next, as operating conditions return to normal. Our repositioned customer activation product line has been enhanced to enable us to tap many new and emerging revenue opportunities such as eSIM and the many provisioning challenges opened up by the shift to 5G networks and the volatility of telecom markets generally. I will discuss these opportunities in more in greater detail later in the call, but first, it's my pleasure to hand over to our CFO, Mark Szynkowski, to give you a detailed overview of the third quarter from his perspective. -------------------------------------------------------------------------------- Mark P. Szynkowski, Evolving Systems, Inc. - Senior VP of Finance & Secretary [3] -------------------------------------------------------------------------------- Thank you, Matthew. Good afternoon, everyone, and thank you for joining. Let's start with revenue for the third quarter ended September 30, 2020, which was $6.8 million, as Matthew noted, a $0.7 million increase from the 3 months ended September 30, 2019. This change was primarily related to increased revenues from upgrades and new projects, partially offset by projects that reached completion or a reduction in hours from some of our existing clients in the corresponding period a year ago. Total revenue for the 9 months ended September 30, 2020, was $19.4 million, an increase over $19.1 million in the same period a year ago, predominantly related also to the increased revenues from upgrades and new projects, but partially offset by reductions noted and the significant onetime licensing fees recognized in the prior year. Service revenues, which are mostly reoccurring in nature and the company's preference for it as it includes our managed service offerings over perpetual licensing agreements were $19.0 million year-to-date, an increase over -- of $1.1 million or 6.1% from the $17.9 million during the comparable year ago period. These revenues comprised of approximately 90% of our total revenue for the 9 months ended September 30, 2020. The company reported gross profit margins, excluding depreciation and amortization of approximately 68.5% for the quarter as compared to gross profit margins of approximately 64.9% during the comparable quarter a year ago. This increase in gross margin was primarily related to increased revenues recognized on those new projects and upgrades, while our costs have remained flat. For the 9 months ended September 30, 2020, the gross profit margin was approximately 66.7% as compared to a margin of approximately 67.2% for the 9 months ended September 30, 2019. This decrease in gross margin was primarily related to the product service mix in the prior year that had those previously aforementioned higher licensing revenue from the prior year. Total operating expenses remained constant at $4.3 million in the quarter ended September 30, 2020 and 2019. Reductions in travel and marketing costs due to the travel restrictions of the ongoing global pandemic were primarily offset by increases in general and administrative costs related to local accounting fees. Total operating expenses were $12.4 million for the 9 months ended September 30, 2020. Total operating expenses were $20.8 million for those same 9 months in 2019, or $14.1 million, excluding a $6.7 million goodwill impairment charge that was taken in 2019. The decrease of approximately $1.7 million was related to a mix of ours as delivery staff focused on customer projects not product development as in the prior year, a decrease in overall recent costs, reductions in our total incentive compensation expense and the aforementioned decreases in travel and marketing costs. The company was very excited to report operating profit of $0.4 million and net income of $0.1 million for the 3 months ended September 30, 2020, as compared to an operating loss of $0.3 million and a net loss of $0.2 million for the 3 months ended September 30, 2019. The company reported adjusted EBITDA of $0.8 million for the quarter ended September 30, 2020, compared to $0.1 million for the same period a year ago. Adjusted EBITDA for the 9 months ended September 30, 2020, was $1.5 million compared to an adjusted EBITDA loss of $0.2 million for the first 9 months in 2019. Moving to highlight some of our balance sheet accounts. Cash and cash equivalents as of September 30, 2020, were $3.5 million, an increase of 13.3% compared to $3.1 million as of December 31, 2019. Contract receivables, net of allowance for doubtful accounts, were $3.4 million, a decrease of $3.3 million compared to $6.7 million as of December 31, 2019. However, our unbilled work-in-progress saw an increase of $2.3 million to a total of $3.4 million as of September 30, 2020, compared to $1.1 million at December 31, 2019. Working capital as of September 30, 2020, increased to $4.8 million as compared to $3.8 million as of December 31, 2019. This was primarily related to the paydown of our current loan balance with East West Bank, which is scheduled to be retired at the end of the year. The change also includes an alternative minimum tax refund collected in the current year, which was previously recorded in our deferred tax assets. The company believes it has sufficient cash on hand and working capital liquidity to fund its business and continued strategic investments for at least the next 12 months. Thank you, and I'll now hand the call back to Matthew Stecker. Matthew? -------------------------------------------------------------------------------- Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [4] -------------------------------------------------------------------------------- Thank you, Mark. Let me start this section of the call by reflecting on the reasons we have confidence in the business looking forward. Now that we've established a solid platform from which to grow, and quite frankly, have stopped the shrinkage we've experienced over much of the previous decade, there is much to be optimistic about. Trends in the communications market are shifting very much in our favor. On the customer acquisition and network services side of our business, I mentioned earlier the importance of new technologies like eSIM and the ramification of 5G. You all know that SIM cards play a fundamental role in mobile as a secure and easy, transferable way to authenticate devices on to networks, new eSIM technology, which can essentially be downloaded rather than physically placed in the device, means that an ecosystem of platforms and partners is required by the operator to deliver an equivalent level of security and protection to their previously -- to that previously delivered by removable SIM cards. Helping operators meet the resulting new infrastructure requirements is a real opportunity for us. While we do not sell a traditional eSIM stack, which honestly has become something of a commodity, we are widely known as the go-to vendor for complex integrations and challenges in the activation space. Operators who are integrating eSIM invariably have challenges in implementation as it integrates with their existing infrastructure. And this trend remains a large driver of our service revenue in this part of the business. Better still, it's an opportunity we're well positioned to leverage. Our market-leading DSA product, which is activated over 1 billion traditional SIM cards worldwide, provides the foundation for meeting new eSIM requirements in a way that saves network costs, streamlines resource requirements, minimizes logistics complexity and maintains agility and service offering. This puts us in position to address what is likely to become an urgent need in both our client and prospect communities. Another shift we're well positioned to address relates to the Internet of Things, at the heart of which sit any number of connected devices, which present new revenue opportunities for the telecoms industry. The challenge here is a question of generating revenue from data because for various reasons, most legacy building and charging applications aren't entirely fit for the purpose of IoT monetization. Operators have systems that work when an average bill is $20, but when the average bill is $1 or $2, these systems cannot cope. Thus, as IoT becomes an increasingly important revenue source, our clients and prospects will need to provide identify -- prioritize identifying newer support systems better tailored to the IoT economy. Here, again, we're well placed to help. Our approach delivers an agnostic IoT device billing solution for the telecoms market based on the use of data SIM card profile that can track, monitor and manage data usage in real time. Such an approach enables mobile network operators to fully exploit business-to-business revenue streams in a simple and cost-effective manner. These 2 solutions are simply 2 among many of our continuously expanding roster of offerings that enable us to keep pace with the demands of the market. There are many others. And as I noted, they provide reasons for real confidence. On the other side of the Evolving Systems ledger are CVM and loyalty products line, what I often refer to as our marketing products that essentially comprises the 3 acquisitions we made in the previous 2 years. In this side of the business, the challenges our clients face and thus the opportunities for us are also myriad even during the pandemic when the requirement for effective customer interaction via the mobile devices at a premium. For example, Evolution, our flagship product in this side of the business, can address use cases such as interactive digital information services, which can be used for government, health care or retail critical when there's a need to manage populations, divert people to specific locations for testing or educate new people on developments, regulation and advice. More broadly, Evolution can also help our customers quickly and effectively fine-tune their large portfolio of automated, below-the-line personalized life cycle campaigns. In the highly competitive telecoms market, this means that our technology can put users in position to, for instance, make recharge offers in the time frame that an offer is valid. We can support segmented information campaigns based on customer location and can help our clients to adjust their offerings in short order. Essentially, Evolution helps the operators market to their customers. Evolution is also placed to allow wireless operators to reinvent their loyalty programs through the application of both innovative and highly personalized end user offers executed on a technology platform that leverages new technologies such as artificial intelligence and machine learning. This investor call isn't, of course, the right place for a deep dive into the functional advantages of our products, but I hope this brief overview will enable you to share my excitement about both the immediate and longer-term future of Evolving Systems. It probably also shares some color of the work that we do on a day-to-day basis. Beyond the growing relevance and impact of our products, the company somewhat streamlined over the past 12 months continues, nevertheless, to deliver. Our 2 business units have and continue to effectively develop, as you have seen, products and solutions that meet changing customer needs using the best of the products that we have in market today. The development of Evolution, a focal point over the last 12 months nears conclusion, it is already live at a number of paying customer sites. On the marketing front, many of you may have noticed the uptick in exposure of our brand via continual series of articles published in the media and new content directly offered via our website. This is fueling an aggressive ad generation program, which has seen, among other things, us rapidly rising through the search rankings in our field. Our database of leads and customer targets has grown significantly over the course of the year as we embrace the tools of digital marketing for our own business. So to summarize, as 2020 draws to a close, we continue to take necessary actions to service our clients to our fullest ability through the ongoing pandemic. We remain focused on continual business transformation, increasing innovation and product enhancements while identifying opportunities to meet our customers' changing needs. Our strong customer footprint in decades of proven performance gives a significant head start to maintain our business during these uncertain times. We selectively seek new opportunities, whether through potential accretive acquisitions, joint ventures or strategic partnerships to drive both top and bottom line performance and over the long term to bring our shareholders' long-term value. I want to thank you for your support and for listening to all this and look forward to updating you on our continued progress. At this point, I'd be happy to open the call to questions. Keith? Do we have someone to moderate the... -------------------------------------------------------------------------------- Keith Brody, [5] -------------------------------------------------------------------------------- I don't believe we have any questions. So with that in mind, ladies and gentlemen, I want to thank you again for your continued support. Management will be available to talk to investors throughout the week. And if you do have any questions, by all means, please feel free to contact us directly. -------------------------------------------------------------------------------- Matthew Stecker, Evolving Systems, Inc. - President, CEO & Executive Chairman [6] -------------------------------------------------------------------------------- And if anyone has any feedback, this is a little bit of an experiment to us to run the call ourselves using our Zoom platform, as Keith mentioned, at the top, if anyone has any questions or comments, feel free to reach out to the Investor Relations hotline or for any questions and comments about the business, we're happy to engage with any and all investors via that channel. -------------------------------------------------------------------------------- Keith Brody, [7] -------------------------------------------------------------------------------- Operator, we're now ready to end the call. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Good bye.