Evolving Systems' CEO Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Evolving Systems, Inc. (EVOL)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Evolving Systems’ 2013 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Today’s conference is being recorded.

I would now like to turn the call over to Dan Moorhead, Vice President of Finance and Administration. Please go ahead, sir.

Daniel J. Moorhead

Good afternoon, and welcome to Evolving Systems’ 2013 first quarter earnings call. I am Dan Moorhead, Vice President of Finance, 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 risk. 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, including our SEC filings, news releases and websites for more information about the company.

With that, I’ll know turn the call over to Thad.

Thad Dupper

Thanks, Dan, and good afternoon, everyone. As we highlighted in our press release today, we’re off to a strong start in 2013 with first quarter results, which met or exceeded analyst’s expectations. Revenue increased 13% year-over-year, led by license and service revenue growth of 19% and a 144% increase in adjusted EBITDA. And as our investors know, but it’s worth reiterating there is no M&A revenue in our numbers while our growth is organic growth.

We have maintained against M&A growth that Evolving Systems is one of the few telecom software companies that continues to post solid growth without the help of M&A revenue. From an order point of view, our first quarter bookings are in line with our expectations, showing slight year-over-year growth.

That said, our DSA license and service bookings came in above our expectations with sequential growth of 93%, led by upgrades from our DSA customers. One Asia customer placed a significant DSA order as they committed to roll DSO out across the entire country. Profits in the first quarter was particularly noteworthy with record gross margins of 72%, operating margins of 27%, and adjusted EBITDA margins of 30%. In addition, from the quarter, we grew cash and cash equivalents by 30% from the year-end level. With our steady organic growth and strong cash flows, we remain solidly profitable and something not all that common among Micro-cap companies.

During Q1, we made great progress with millions of subscribers and sim cards being activated by our Tertio Service Activation solution or TSA and our Dynamic SIM Allocation solution, which we call DSA. In Africa for example, we have two DSA production customers who combined are activating nearly a million SIM cards a week.

In Asia and the Middle East, we are also seeing ramping volumes driven by the impact of DSAs chosen number feature. Specifically, we are seeing lower churn and increased ARPU, where our DSA customers offer their subscribers the ability to choose a number of their preference.

DSA’s number selection was proven to be powerful market differentiator, especially in the hyper competitive prepaid markets. Another progress point is with large carrier groups such as Telefonica and SingTel. As these DSA deployments move into production and meet or exceed their business cases, we are seeing other carriers within the group express an interest in DSA. As you would expect having an internal DSA production reference is helpful.

On the product front, we’ve launched two initiatives in Q1, first was the SIM Reservation Portal that we introduced during the first quarter.

As you recall, the SIM reservation portal extend VSAs on device activation capability to now include the carriers portal were still front. The reservation portal allows to subscribe to visit the carriers portal or website throughout select and reserve the phone numbers, select the call plan and even complete the subscriber registration process, when finish the subscriber receives an order number and/or our barcode which should they can take any of the carriers outlook. Once there they slight to barcode and VSA will automatically configure SIM card with the phone number and call plan that was preselected.

We think reservation portals in major step forward in terms of convenience for subscribers and a competitive advantage for carriers. The second product initiative of the quarter was for our TSA product. Not to be overlooked, TSA also had a good quarter with year-over-year license and service bookings increasing by 48%.

During the quarter we started an engineering work to add in addition to our LTE capabilities support the TSA for (inaudible) sales and older the top services. And in Q2, we began a major project, which will be formally launched in the coming months to migrate DSAs key features to a cloud-based environment, although we are calling DSA in the cloud.

DSA in the cloud were not only significantly short in our implementation terms, but as importantly will lower the up to the carries upfront financial commitments for DSA, as was clearly highlighted by (inaudible) recent results. The software industry is going through transformation from what some called the construction business, the building and rolling out of the extensive systems where the implementations can take a year a longer.

Instead, we have seen encouraging increasing results in the cloud-based solutions. Each projects tend to take far less time to implement and don’t require a larger front capital commitment. We are confident the cloud-based DSA will be well received by our customers and will help to accelerate the EVOL to a more recurring revenue model.

And on the subject of recurring revenue, as more of our DSA customers calculate production volumes, we are beginning to forecast when the contribution of license renewals or what we call first-user activations and FUIs will occur.

Starting in 2014, we are forecasting to see increasing revenue coming from DSA customers. We’ll now have to revive or renew the DSA licenses. And keep in mind, FUI renewal rates are all been negotiated as part of the original DSA contract. And while the revenue impact with FUIs could be meaningful, the EBIT impact of FUIs could be even more significant.

As I mentioned, we expect the majority of the FUI revenue to start occurring in 2014. However, given the recent volumes we’re seeing, some of this FUI revenue could move into 2013.

Before I turn it over to Dan, let me conclude by saying that I’m very pleased with the results we announced today. And we are equally excited about the progress we’re making in transforming our business model to more of a recurring revenue model. This is driven by our work on DSA in the cloud, as well as the progress we are making at our DSA accounts and the impact that increasing volumes will have on recurring FUI revenue and profits going forward.

With that I would now turn the call over to Dan.

Daniel J. Moorhead

Thanks, Thad.

The first quarter results, first quarter revenue increased 13% to $6.7 million from $5.9 million in the first quarter last year. License and services revenue grew by 19% year-over-year to $4.5 million from $3.8 million while our customer support revenue was $2.2 million compared to $2.1 million last year. Total cost of revenue in operating expenses in Q1 declined by 8% to $4.9 million from $5.3 million in Q1 last year. This decrease reflected lower totals in all expense categories. The result of a carefully managed cost structure, gross margins increased to 72% from 63% last year, sales and marketing expense declined by 3%, general and administrative expense declined by 2%, and product development was also down 2% year-over-year.

Operating income improved 210% to $1.8 million in Q1, up from $600,000 in the same quarter last year. In our other income category consisting primarily of interest income and expense plus foreign currency gains and losses we showed a loss of $46,000 in Q1 versus a gain of $400,000 in the same quarter last year. This decrease was due primarily to interest income on marketable securities in the first quarter of 2012 and those securities were subsequently sold in Q2 last year.

GAAP net income in the first quarter increased 55% to $1.2 million from $800,000 in Q1 last year. Diluted EPS was $0.10 up from $0.07. Adjusted EBITDA in the first quarter was $2 million, an increase of 144% over adjusted EBITDA of $800,000 in the same quarter last year.

Now, look at our booking and backlog highlights. We define bookings as new non-transferable orders expected to be recognized as revenue during the following 12 months. In Q1 we booked a total of $5.7 million the new orders, which was slightly higher than the $5.6 million in Q1 a year ago. License and services orders were $3.6 million versus $3.8 million last year.

DSA license and services order in the first quarter were $1.8 million compared to $2.6 million year-over-year, but up 93% sequentially compared to Q4, 2012. DSA license and services order were up 48% to $1.8 million from $1.2 million in Q1 last year. Customer support orders were $2.1 million up from $1.8 million in Q1 last year.

Total backlog at March 31, 2013, was $9.8 million versus $12.5 million at the same time last year. License and services backlog was $5.6 million versus $7.8 million a year ago. DSA license and services backlog was $3.1 million compared to $5.9 million last year. DSA license and services backlog was $2.5 million versus $1.9 million a year ago. Customer support backlog was $4.2 million compared to $4.7 million last year.

Balance sheet highlights. Cash and cash equivalents at March 31, 2013 were a $11.5 million up 30% over $8.8 million at 2012 year end. Our working capital balance at the end of the first quarter was $14.3 million up from $13.9 million at year end. We generated $2.8 million in cash from operations in Q1 from a $1.5 million in Q1 last year.

Dividend update. Today, Evolving Systems board declared the second quarter dividend of $0.08 per share to stock holders of record as of June 10, 2013 payable July 12, 2013.

In conclusion, as we do every quarter, we remind you that we remain a company was delayed of a single key order can affect our quarter result.

With that we continue to advise that it’s more accurate to judge our performance on an annual rather than quarterly basis. Based on our Q1 results, as well as our 2013 funnel, we continue to believe, we are well positioned for continued 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) The first question comes from Mike Crawford from B. Riley & Company.

Michael Crawford – B. Riley & Company

Thank you. Just to start where you left off on the funnel, it sounds like it’s pretty full, I think on your last call you talked about seeing a record number of RFPs and maybe helping for some of those on DSA side to compute or summarize. Is there any what has been a movement in that pipeline over the past couple of months?

Thad Dupper

Yeah hi Mike it’s Thad. You are right the funnel is good, we’re making progress on all these deals. It’s against the backdrop of type budgets from some of our buys being a little more cautious. So I would assume the closing seems to be a little slower than we’ve seen in the past.

So what I will say is all these RFPs when we come out of them there’s usually a metrics based on functionality and the different dimensions, that rate the products and compare the products. We always come out on top on the metrics. So we give ranks very, very highly. Now it's a question of moving these opportunities from the ranking stage into the closing stage, and our teams are very well positioned around the world to do that and now it’s just a matter of closing these deals which are in front of us, that’s not to minimize the effort involved in doing that, but it does reassignment and that’s what we know we need to do.

Michael Crawford – B. Riley & Company

Speaking kind of around the world, I know that India seems to be the last major growth market that you’ve – you have to really track, but you’ve put some resources there, what’s in the progress in India?

Unidentified Company Representative

It’s been good progress, I mean, I just find a travel approval for our VP of Sales to be in India in the middle of June. So we’re very active. There is a lot going on there. DSA is an excellent fit for that market. So I would say it’s very high on our list, Mike.

Michael Crawford – B. Riley & Company

Okay, thank you. And then regarding the move to more of a Cloud-based or recurring service, is that something that you expect would just comprise a portion of your, of the way you are selling the product going forward or is there’s going to be some wholesale change in really your business model, which needs to be accounted for definitely one, those coming up with their own projections?

Unidentified Company Representative

You know that Dan will make a comment on the rev [rack] in a minute, but in general, we don’t think we’re going to stop selling DSAs as we sell them today. Those systems are deployed at the carriers’ location, we think there are going to be customers who still want that and we think that will still be the main thrust. However, we’re talking to carriers today who are saying, oh, we like the idea of number selection, but we don’t want to spend $1 million, $2 million upfront and the better part of the year implementing it. So is there a way that you can give us that functionality with an easier implementation even if it’s out of your data of your datacenter and the answered technically is yes. We think a cloud-based DSAD will work with – will look like less upfront, but more on a counter activation cost and price. And we like the predictability in the recurring nature of that revenue and you’d expect and anything you’d like to learn about web (inaudible) recognize revenue in the cloud mobile?

Unidentified Company Representative

I would say just in the cloud mobile, you’re going to see more of a status model. So it’s going to be more of a kind of a lower upfront and then more recurring similar to kind of have an account for SUAs that I mentioned earlier. But until we start seeing contracts to target and nail it down exactly, but in general that’s what you should see.

Michael Crawford – B. Riley & Company

Okay, thank you. And then last question is on your intelligent MtoM controller. I think the last time – on your last call, you sounded hopeful that you might actually have a customer to take the charge on this one?

Unidentified Company Representative

Right, I mean, but I would say we’re making continued progress on IMC and I think you should look for an update on our next Q3 call in early August.

Michael Crawford – B. Riley & Company

Okay, thank you.

Unidentified Company Representative

Hey thanks, Mike.

Operator

(Operator Instructions) The next question comes from Richard Genece from Edison IBM Research.

Richard Genece – Edison IBM Research

Good afternoon, guys and congratulations on the growth. And so if you could talk about and I noticed, the DSAD bookings have doubled since Q4. So I mean is this just under one Asian win and sort of the pipeline as this is much about extending to total cost within or you looking at (inaudible) well.

Unidentified Company Representative

So, Richard a couple of things. So we didn’t close the new DSA in Q1. I guess that’s the bad news. The good news is the existing installed base generated a nice run rate of upgrades and you’re right, you see our bookings number almost doubled from Q4 and that’s without a net new name now as I just commented we have a lot of opportunities for that new names that were focused by enclosing.

Now your second question about the groups is very interesting, because we’ve been working very hard installing (inaudible) within a group, operating companies and the group. And we’re having very healthy dialogues with the other members of the group where they can call our fellow CIL or CMO and say how is that DSA system working. So that’s very positive for us. So we think, we’ll be adding new names to our customer list and we think we’ll be adding new names from existing groups to our customer list and we think both are going to be important so we like that.

Now from the product perspective, what we’re keying on it is the fact that we now have the installable DSA that you install at the customers location and we’re working on and we don’t think it’s (inaudible) its not that hard to do. Taking elements of DSA and offering that in the cloud package. So that we can deploy them and implement them faster and get less upfront, yes, but get more on a per activation basis, which we think is going to be in the long-run very attractive to us.

Richard Genece – Edison IBM Research

And when will that be available?

Unidentified Company Representative

Well, we’re hoping the formal announcement because I want to get a bigger bang out of it that it will be available in the next several months.

Richard Genece – Edison IBM Research

...on the OpEx rather than CapEx as well?

Unidentified Company Representative

Yes, I mean we’d like to having it and we think it’s an important and we’re not the only one. As I said in my script the industry is moving in this direction and I think it’s critical to our long-term success that we have a cloud-based offer and we’re about getting that done right now.

Richard Genece – Edison IBM Research

All right and the TSA it’s interesting right now, I mean this is the trend that we were sort of we were looking at which I think which is consistent with expectations. And your cash of course is (inaudible) more than we were forecasting for the year, but I think you got a lot of dividends to pay for the year, so that would be a bit of a drag on cash for the year as well.

Unidentified Company Representative

Well, I am going to let Dan to talk about cash because I think it’s one of highlights and all finance department did a great job with collections worth is this down and cash is up, so do you want to just comment on that.

Unidentified Company Representative

Yes, the cash thing we do a lot of long-term contracts than what happened is we build based on milestone and so you can see some minor blips up-and-down dependent on when we hit those milestones and when stock is build. So and you are right we do have to face a difficult out over the year, but I would expect cash to be steady throughout the rest of the year.

Richard Genece – Edison IBM Research

One of the comments to make is EBITDA was up very healthy and EPS was up as well, but we’ve paid a little bit more tax because of the higher dividend and having the cash where we want to pay the dividend, right. So, EPS was a little bit affected by the tax rate associated with moving cash around, we’re not Apple to pay the dividend.

Unidentified Company Representative

That’s a good point. And EPS thing, if you look at the facts our effective tax rate on the phases of P&L is over 30%. But if you really take into it, our cash tax either what we actually pay in taxes is closer to 20. And so the difference there is a lot of our NOLs in the U.S. are related to stock comp, before the adoption of what was FAS 123(NYSE:R).

And so the benefit we get from that – from those NOLs doesn’t decrease tax expense, because we never expense that stock comps, since it was pretty FAS 123(R) and so it’s a little (inaudible), when you see the 30% tax rate, because they are really utilizing the NOLs in the U.S. to offset a good portion of that, so really our cash tax rate is only 22%, 23%. But it doesn’t drag on EPS to the tune of a penny or two.

Richard Genece – Edison IBM Research

Right, okay. Okay, thanks very much for that.

Unidentified Company Representative

Thank you, Richard.

Operator

At this time, I am showing no further questions, I would now like to turn the call back over to Thad Dupper, Chief Executive Officer.

Thad Dupper

Well, thank you all for joining us again, today. We’re pleased with our results as I said and we look forward to giving you an update on our Q2 results, which should be released first week of August. If we stay on schedule, what we usually do. Thank you everyone. And have a pleasant day. Cheers.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a Good day.

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