Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Evolving Systems (NASDAQ:EVOL)

Q3 2012 Earnings Call

November 13, 2012 04:30 PM ET

Executives

Dan Moorhead - VP, Finance & Administration

Thad Dupper - CEO

Analysts

Mike Crawford - B. Riley & Company

Warrick Jervis - Trailhead Asset Management

Operator

Good day ladies and gentlemen and welcome to the Evolving Systems third quarter earnings conference call. At this time all participants are in a listen only mode. Later we’ll have a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Dan Moorhead, VP of Finance and Administration. Sir, you may begin.

Dan Moorhead

Good afternoon and welcome to Evolving Systems 2012 third quarter earnings call. I am Dan Moorhead, Vice President of Finance and Administration and joining me today is Thad Dupper, 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 risks. 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, as well as our news releases and websites for more information about the company.

As a reminder, in July 2011, we sold our Numbering business for $39.4 million in cash plus the assumption of 5.8 million liabilities. The resulting gain from the asset sale as well as the financial result attributed to the Numbering business are presented in discontinued operations in our 2011 financial statements.

Third quarter results, third quarter revenue grew by 60% to $6.8 million from 4.3 million in the third quarter a year ago. License and services revenue increased 147% year-over-year to 4.7 million from 1.9 million. Customer support revenue was 2.1 million compared to 2.4 million last year.

Total cost of revenue and operating expenses in Q3 increased 8% to $5.2 million from 4.8 million a year ago. The increase reflected higher cost of license fees and services related to the strong increase in license and services revenue during the quarter. Sales and marketing expense declined 21% year-over-year to 1.3 million from 1.6 million. General and administrative expense was up 10% year-over-year with product development expense rising 7%.

Based on our 60% revenue increase against only an 8% rising cost and expenses, Evolving Systems achieved a $2.2 million positive swing in operating income for the third quarter to 1.7 million of an operating loss of 500,000 a year ago.

Our other income category which consists primarily of interest income, gain on sale of investments and foreign currency gains and losses was a loss of $100,000 in Q3 from a $400,000 gain in the same quarter last year. Q3, 2011 other income was primarily related to our marketable debt securities which were all sold during the second quarter of 2012. Q3 net income from continuing operations increased to 1.2 million from a net loss from continuing operations of $100,000 a year ago. This equated to earnings of $0.11 per basic and diluted share up from a loss of $0.01 per basic and diluted share in Q3 last year.

Adjusted EBITDA from continuing operations in Q3 was 1.9 million, a $2.1 million improvement over the adjusted EBITDA loss of $200,000 in Q3 last year. Q3 GAAP net income was $1.2 million or $0.11 per basic and diluted share in the third quarter compared with net income of 18.2 million or $1.67 per basic and $1.63 per diluted share in the same quarter last year. Keep in mind that in Q3 a year ago, we had $18.3 million in income from discontinued operations related to the sale of our Numbering business.

Nine months results, of the nine months period we reported a 38% increase in revenue to $19.4 million from 14.1 million in the same period last year. License and services revenue was up 83% to 13 million from 7.1 million in the same period last year. Customer support revenue was 6.4 million versus 7 million last year. Total cost of revenue in operating expenses through nine months declined by 4% to $15.6 million from 16.2 million. Cost of revenue increased 16% related to the 38% increase in revenue. Sales and marketing expense declined 22% to 3.8 million from 4.9 million while general and administrative expense was flat at 2.8 million. Product development expense was up 17% to 2.2 million from 1.9 million year-over-year. The year ago nine months period included a $600,000 restructuring charge.

Operating income through nine months was 3.8 million which represented a $5.9 million positive swing over the operating loss of 2.1 million last year. Total other income year-to-date was up 166% to 1.3 million from 500,000 a year ago due to interest income and the gain on sale of our marketable debt securities. Year-to-date net income from continuing operations increased to 4.1 million from a net loss from continuing operations of 1.4 million a year ago. This translated into income of $0.37 per basic and $0.36 per diluted share up from a loss of $0.13 per basic and diluted share last year.

Adjusted EBITDA from continuing operations was 4.6 million through nine months, a $5 million increase over the adjusted EBITDA loss of $400,000 a year ago. GAAP net income through nine months was $4.1 million or $0.37 per basic and $0.36 per diluted share compared with net income of $30.6 million or $2.82 per basic and $2.73 per diluted share in the same period a year ago when the company booked $32 million in income from discontinued operations.

Now a review of our booking and backlog highlights, the company defines booking as new, non-cancellable orders expected to be recognized as revenue during the following 12 months. In the third quarter, we booked $7 million in new orders compared with 7.8 million last year. Please remember the $7.8 million total from 2011 included the largest ever order of dynamic SIM allocation or DSA from a tier one customer in Russia. Licenses and services orders were 5 million compared to 5.4 million last year and up from 4.1 million in the second quarter of this year. DSA license and services orders were 2.3 million in Q3, more than double the 1.1 million we achieved in the second quarter.

(Inaudible) of Service Activation or TSA license and services order were 2.7 million up 139% year-over-year. Customer support orders were 2 million compared to 2.4 million last year. Through nine months, total bookings were up 11% to 18.4 million from 16.5 million. Licenses and services orders through nine months grew 27% to 13 million from 10.2 million. DSA license and services order were up 4% to 6 million from 5.8 million. Please recall our 2011 total included our largest DSA ever to appear in customer in Russia. TSA license and services orders increased 57% to 6.9 million from 4.4 million. Customer support orders were 5.5 million compared to 6.4 million a year ago.

The company’s total backlog at September 30th, 2012 increased 13% to $11.6 million from 10.3 million at the same time last year. Licenses and services backlog increased 7.6 million up 30% over the year ago backlog of 5.9 million. DSA licenses and services backlog was 4.7 million compared to 4.3 million last year. TSA licenses and services backlog grew 80% year-over-year to 2.9 million. Customer support backlog was 4 million compared to 4.4 million last year.

Balance sheet highlights. Cash and cash equivalents at September 30th, 2012 were $12.4 million up from 10 million at June 30th. Recall that in the first half of 2012, the company returned approximately $41.4 million to stockholders through special dividend which accounts for the lower third quarter cash and marketable securities balance relative to 2011 year end. As of September 30th, 2012, we had working capital of $14.2 million up 21% from the yearend balance of 11.7 million.

Dividend updates, the company a fourth quarter dividend of $0.05 per share to stockholders of record as of November 30th, 2012 payable December 21st, 2012. Typically our dividends are paid in the quarter following the quarter in which they are declared but we have decided that in the fourth quarter of 2012 as we believe it may benefit our investors.

With that, I'll now turn the call over to Thad.

Thad Dupper

Thanks Dan and good afternoon everyone. As Dan just reported, our Q3 results showed across the board strength led by a 60% growth in revenue, significant improvements in all profit metrics and a strong performance in bookings and order backlog that sets the stage for our continued success. I will add that gross margins for the quarter were 60% up from 65% a year ago and our operating margins increased to 25% as well.

In addition, Q3 was our best quarter year-to-date for LS bookings with solid performances in both product areas, TSA and DSA. For DSA, the headline was our first one in China. In terms of the often reference brick economies of Brazil, Russia, India and China, with the addition of this new DSA win in China, India stands as the only remaining brick economy that is yet to select DSA and we are confident that it’s just a matter of time before we add Indian carriers to our expanding list of DSA customers. While we are not at liberty to disclose the name of our new DSA customer in China, I can confirm that it is one of China’s top three carriers. This win was the result of working closely with our regional partner and order calls for us to deploy DSA in one of their carriers’ largest operating regions. By (inaudible) background, this carrier operates in over 20 additional regions in mainland China. From a product point of view, associated with this order, we will be adding support for CDMA to DSA. This will be in addition to our support for GSM and LTE. This not only increases the market for DSA but just as importantly, it will continue to widen our competitive lead over other DSA like solutions.

To summarize, given the size of the mobile market in China, I don't think we can overstate the importance or the potential of this DSA win. Looking beyond the China win, in Q3, we also have closed two significant DSA upgrades with production customers both in Latin America.

Turning now to TSA, where we also had a very good quarter. Q3 TSA license and service bookings were up 139% year-over-year while TSA license and service revenue was up 63% year-over-year. This growth was driven primarily by customers upgrading their networks to LTE 4G. As the proliferation of smartphones continues, and now extends to include tablets, carriers around the world are upgrading their networks to support the higher data rates needed to satisfy the demand from these devices. When carriers make the move to LTE 4G, it requires a significant amount of investment and changes to the network and systems. To the benefit of evolving systems, it also requires changes to the operational support systems which of course includes the activation layer which is where our TSA product resides.

Looking now at our regional results. Year-to-date 56% of our revenue came from Europe, followed by Middle East Africa at 16%. Latin America at 15% and Asia at 13% for a very balanced performance. From an LNS bookings perspective year-to-date Europe produced 43% of our orders followed by Middle East Africa at 26%, Latin America at 20% and Asia at 11%. I will point out highlighted by our DSA order in China; we remain very bullish on the Asia region as a significant contributor to our growing forward growth. To that point, during the quarter we added two new additional sales people to our Asia team.

Turning our attention to our products and industry trends. Our pure play activation strategy based around TSA and DSA produced very solid growth metrics for us this quarter. And this is in line with the macro trends affecting the industry including the accelerated adoption of smartphones and tablets and their need for faster networks. The other trend worth noting is the migrating to prepaid plans. For the vast majority of the world’s mobile uses, the most common practice involves purchasing a handset, just like any other electronic purchase you made and then later, selecting the network carrier in the pay plan. Imagine for a moment that next time you buy a television, if you had to commit to what cable company and cable package you wanted and then were locked into that plan for the next 12 to 24 months.

It just doesn't work that way except for our cellphones. In Europe, 52% of all subscribers are on prepaid plans, in Italy, that number runs as high as 82% according to GSM Association. However, things are beginning to change. While today 28% of US customers are prepaid users, the prepaid market is one of the few segments that is experiencing growth and we expect that to continue. We believe as US carriers increasingly view the prepaid market as a strategic growth opportunity, it will work to our benefit given our proven solutions and deep experience in this area. It is these trends that account for the current high level of activity at Evolving Systems. To that point, our teams are extremely busy during the quarter as they focused on readying for service several of our DSA and TSA customers. In the last few weeks, we placed two TSA customers into production with LTE deployments and by year end we are scheduled to place three more DSA customers into production. Of course, once these systems are placed into production, we begin recognizing support revenue which is a high margin segment for us. And in addition, once in production, we are much more likely to received upgrade orders as we saw this quarter in two of our production DSA customers placed orders to add new functionality.

It is also worth noting from a competitive point of view, placing customers into production, especially DSA customers, attracts the attention of their competitors which more often than not, helps advance our DSA proposals with those carriers.

In closing, a few words about our dividends. As you know, in January, we distributed a special dividend of $2 a share and then in May, we distributed our second special dividend of an additional $1.70 per share. In between we paid our Q1 quarterly dividend and today we are declaring a Q4 quarterly dividend of $0.05 which we will be paying in December.

For the year then we will have returned $3.80 per share in dividends to our shareholders. That notwithstanding, we remain a well-capitalized company with no debt while these dividend payments have been substantial, we continue to fund our strategic initiatives as evidenced by our 17% increase in R&D spent this year. And as I do have recorded, I will remind you, that we remain a company with a delay of any single key order can have a pronounced effect on our quarterly results.

With that in mind, we continue to advice that it is more accurate to judge our performance on an annual rather than a quarterly basis. Given the momentum that we continue to see and the strong growth metrics we announced today, we believe Revolving Systems remains well positioned for attractive long term growth. With that, we thank you again for joining us today and we’re now happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mike Crawford from B. Riley & Company.

Mike Crawford - B. Riley & Company

Thank you given the bookings and backlog mix, is it fair to state that most of the demand you’re seeing for (inaudible) is centered in Europe?

Thad Dupper

That's a good question. I’d say mostly Europe, but we are getting good upgrades from some of our African customers as well as Latin America. But I would say the trend to LTE is being led predominantly by the established market and then it’s spreading to more of the emerging markets, so I would agree with that.

Mike Crawford - B. Riley & Company

And with regards to your increased R&D investment, one project you’ve had in the works for a while as you’re intelligent controller or whatever m to m (ph), so is that mirror some kind of beta release or is there some potential customer looking more closely at that now?

Thad Dupper

Yes, we do have an opportunity that we feel pretty good about, that we’re working on. It is enclosed yes, but we feel pretty good about it. And in addition, what I would add is, we’re working on some new offers that aren't related to (inaudible) or IMC, and that's where we've been spending some of that 17% increase in R&D.

Mike Crawford - B. Riley & Company

And then the deal won in china, was that one that you won yourself or were you bought in by with a partner you can discuss?

Thad Dupper

Yes, we worked with an original partner, very large partner with a lot of experience in the Asian markets. It was a standalone DSA award though. It wasn’t coupled with another system. So the carrier was looking for DSA solution and they selected Evolving and as I said, as we’re learning, the culture is different in China and we were able to gain a lot of benefit by working with this local partner. So we were very pleased by the systems that they gave us.

Mike Crawford - B. Riley & Company

So this was not a SIM card partner?

Thad Dupper

No it wasn’t.

Mike Crawford - B. Riley & Company

And final question is, how would you describe the relationship between the company and its SIM car partners in terms of both strengthening such partnerships or are you finding that you’re competing against them in certain deals? What's the status of that?

Thad Dupper

We live in a complex world. So there is competition that's out there. That said, one of the large DSA upgrades in Latin America for the quarter came through one of our SIM partners and the earlier in Saudi Arabia was with another one of our SIM partners. So we’re in communication with them on a regular basis, I'd say almost a daily basis, certainly on the deployment in Saudi Arabia and with our Latin America team. So really, both relationships, very positive and healthy.

Operator

(Operator Instructions). Our next question comes from Richard Gene (ph) from (inaudible). Your line is open.

Unidentified Analyst

I think you mentioned that the TSA revenue in Q3 was up 63%. I just wondered if you could give any sort of split on total revenues between DSA and TSA and also the customer supports in it as well. Can you give any sort of clue about the split there?

Thad Dupper

I'll have Dan look that up for you. I think we did breakout in the press release, didn’t we Dan? But what we’re seeing at a high level Richard is, (inaudible) as many of our investors know is our more mature product and dynamic SIM is the emerging product and the growth rate of revenue for DSA this year has been very good and we project for the year will be good. TSA as a more mature product I think will have may be less explosive growth, but where we are seeing growth which we referenced and we’re very pleased to see, is when our customers are adding LTE, it generates a very good flow of change request business for us. So that's worked out very well.

Dan Moorhead

Richard, in the press release we don't breakout revenue between DSA and TSA.

Thad Dupper

What about LS and CS license serving customer support, not TSA, DSA but just those two?

Dan Moorhead

We do breakout between LS and CS, just not by product.

Thad Dupper

You know I think what happens with the company our size Richard; we have to be careful that if we break things out too many ways, it opens us up for too much competitive review and it works to our disadvantage.

Unidentified Analyst

And TSA, do you have a pipeline? Is there any further revenue? Could you talk about the pipeline in both DSA and TSA? TSA, is there much opportunity in the new business there because most of the revenue gains I gather are coming from the switch to LTE driven by upgrades

Thad Dupper

No, most of the revenue is coming from our install base but some of these projects to move to LTE are very sizable. As a matter of fact, we have quite a few opportunities in the UK with operators, one of which who’s already launched LTE and there is good follow on business required from that customer. And then we also see a variety of customers doing a convergence upgrade where they look for the carrier to get, the customer to get a bundle of cable, wire line and wireless and in those cases, not only do they look to refresh their billing systems, but in many cases they look to refresh their activation systems. So while that maybe an existing customer for us, the move from wireless to wire line or vice versa from wire line to wireless is a new sector, a new segment for that existing customer and that represents growth for us. So while there are very few Greenfield operators because of the saturation of carriers and subscriber growth around the world, we’re very pleased to be generating growth we are out of this segment and it really is propelled to move to the new technology.

Unidentified Analyst

And final question is cash flow, because your cash has improved quite a lot in the quarter, can you discuss that? Is that how that improvement…

Thad Dupper

I think it’s just a reflection of Dan and his team doing a good job on collections. I mean sales are up, bookings are up and so eventually revenue and cash follows but I would say the finance department in Q3 did a good job in collections. Do you want to say anything more than that Dan?

Dan Moorhead

No, I'd say that the increased cash flows following the increased profits is flowing through it and converting the cash.

Operator

(Operator Instructions). Our next question comes from Warrick Jervis from Trailhead Asset Management. Your line is open.

Warrick Jervis - Trailhead Asset Management

I was just hoping you could quantify this China contract. So if you’re in the top three, the third carrier is far larger than the biggest in the US or Europe. What is the dollar amount in this contract? Can you give me a range or…

Thad Dupper

Well you are right, we don't reveal the dollar amounts but the color we provided was this was one of 20 somewhat regions. So while the dollar amount was reasonable we think the upside is enormous. I mean one could say there could be a factor of 10, 20 times of this original contract value if we were to deploy DSA in all these regions. And you’re right, I mean the subscriber size in this market compared to other markets we’re in, sometimes is 10 times larger. I think the largest carrier over there is something like 600 million subscribers, whereas we think the carrier was 60 million subscribers is a large carrier. So while I would say it was reasonable in size it certainly didn’t rival the Russian deal from a year ago in terms of size. But in terms of potential, we think it’s very, very intriguing and to that end, we are very much focused and committed to making this thing a success.

Warrick Jervis - Trailhead Asset Management

And do you recognize revenue from that contract in the third quarter?

Thad Dupper

The answer is no. we did not recognize revenue in the third quarter on that project.

Warrick Jervis - Trailhead Asset Management

Okay, so that's still to come. How is that deployment going?

Thad Dupper

Well it’s just starting. If the deployment had made real progress in Q3, we would have recognized some revenues. So there are some issues over there, we’re getting some pieces and things like that, but it’s going about as we would expect in the early stages. The other thing that we did say as we've added some resource to the Asia team. Two of the resources we added are Chinese speakers. So this is a new market for us. You can imagine DSA in of itself is a complex enough system to sell and then install. It’s even more so when you don't speak the language. So our partner is very fluent but we felt it was indicative on us to go get some Chinese speakers and that's what we did in the quarter. So I would say the project is just ramping.

Warrick Jervis - Trailhead Asset Management

Okay and then turning to the US, you’re seeing any potential there or recognize that no revenue from the US thus far?

Thad Dupper

Right and all our US customers in revenue were associated with our Numbering business and we had many customers in the US contributing significant amounts of revenue in EBITDA. And that when we sold the Numbering business to New Star, last year, we did win an award with Light Squared for service activation because I think many of you know Light Squared’s business model and business has stopped as an ongoing operation, so we lost our business. That said, my comments during the script about the focus and the interest on prepaid in the United States does represent an opportunity for us. Now let me balance that by saying, for the sales cycle associated with our products is not something that we typically can qualify and bring to closure within three, six months, it’s more of a 12 month cycle. But we do like the trend we’re seeing in the US with carriers expressing more interest in prepaid and we’re not surprised by, usually a touch economy has people looking at their phone bills and saying is there a way we can save and one of those mechanisms is by going to prepaid plans.

Warrick Jervis - Trailhead Asset Management

It’s interesting that, 5% of the population globally but that's what US investors focus on. For example if you announced that the US win, it would be huge, but…

Thad Dupper

But we are proud of the Chinese win. We were proud of the Russian win and we are proud of the Brazil win. So you’re right, it would huge and there are very few carriers in the US. That's part of the challenge. You could look at this market and say it’s either four or six carriers and they've made a very substantial investment in the retail channel. So these are not startups, these are mature carriers that are already activating subscribers. So it’s not a Greenfield opportunity for us. That said, I think our opportunity into the US market comes through a prepaid and it comes through dynamics and allocation.

Operator

Thank you. I’d like to turn the conference back to Mr. Thad Dupper for closing remarks.

Thad Dupper

Well thank you again for joining us today. We look forward to giving you an update on our business on our Q4 call sometime in the March time frame. Have a pleasant holiday season and thank you for your interest in Evolving Systems.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Evolving Systems' CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts