Elephant Talk Communications' (ETAK) CEO Steven van der Velden on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Elephant Talk (ETAK)

Elephant Talk Communications Corp (NYSEMKT:ETAK)

Q2 2014 Earnings Conference Call

August 11, 2014 11:00 AM ET

Executives

Alan Sheinwald - IR

Steven van der Velden - CEO

Mark Nije - CFO

Paul Burmester - CEO of ValidSoft

Analysts

Stan Berenshteyn - Sidoti & Company

John Nobile - Taglich Brothers

Ed Woo - Ascendiant Capital

Steve Chizzik - The Verrazano Group

Operator

Good day and welcome to the Elephant Talk Communications Corp. Second Quarter, 2014 Conference Call. Today’s conference is being recorded.

At this time I’d like to turn the conference over to Alan Sheinwald, Alliance Advisors, please go ahead.

Alan Sheinwald

That’s Capital Markets Group, thank you, operator. Thank you everyone, good morning to everyone in the United States and good afternoon to our European listeners. And thank you for joining us for the Elephant Talk Communications shareholder update conference call.

On our call today will be Steven van der Velden, CEO of Elephant Talk; Mark Nije, CFO of Elephant Talk; and Paul Burmester, CEO of ValidSoft. Following management’s discussion, there will be a Q&A session open to all participants on the call as the operator has already mentioned.

Now, before we get started, I am going to review the Company’s Safe Harbor statement. Remarks made on this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only of the date hereof. In evaluating such statements, perspective investors should review carefully various risks and uncertainties identified in this conference call in the manner stated in the Company’s SEC filings. These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements.

With that out of the way, I’d now like to turn the call over to Elephant Talk’s Chairman and CEO, Mr. Steven van der Velden. Steven, the floor is yours.

Steven van der Velden

Thank you, Alan and thanks to everyone for joining us today for our shareholder update call. The second quarter of 2014, once again so strong, sequential growth in our mobile security services revenue, which now marks our 12th straight quarter of growth.

As we continuously migrate additional SIM cards to our platforms in Mexico, Spain and in the Middle East, we expect this trend to continue. The continued increase in our mobile and security revenue, drove our margins to increase to a record level of 88%, contributing to a further improved adjusted EBITDA of approximately $553,000.

As we just mentioned, we go into these numbers will continue to increase throughout the remainder of the year as we migrate all of the remaining SIMs from Iusacell the start of a licensed and new partner (Ph) new mobile network, which is managed on the ET mobile platform and further growth from Vodafone is expected throughout the remainder of the year.

Sequentially, our mobile and security revenue increased 8% compared to the first quarter of 2014. Outside operating results, we are pleased to have recently announced our global SIMs collaboration agreement with Hewlett Packard. This partnership not only strengthens the capability and value of our ET Software DNA 2.0 platform but also expands our marketing and sales reach.

To date, we’ve already submitted the number of requests for qualification and proposals with HP. We look forward to capitalizing on the value of this important relationship to bring new mobile operators as well as virtual operators on to our platform in a short period of time by allowing them to benefit from seamless subscriber mobility across heterogeneous networks when these mobile operators are looking step away from their current legacy systems or for example looking to monetize market opportunities to accommodate mobile virtual network operators.

Next to incorporating in HP home location register so called HLR for 2G and 3G networks, our ET Software DNA virtualized platform today also incorporates the HP integrated home subscriber server so called HSS, which enables service providers to manage their disclaimer identity across network technologies in high availability model. With HP HSS, the subscriber identity is continually seen carried over, no matter where the mobile consumer travels or which access method or radio access network stabilities being used, while supporting all major network types including GSM, CDMA and 4G LTE networks.

In combination with the Elephant Talk Software DNA 2.0 platform, the HP HSS allows for the delivery of a unique undisrupted virtualized service experience. Based upon the platforms performance today, we believe this combined offering will allow mobile operators to realize up to 80% of their infrastructure cost cutting objectives while at the same time substantially improving their operational flexibility as well as service levels capabilities.

We believe this should propel our product offerings in the forefront of the industry and increase the speed with which we further commercialize our platform and we’re therefore looking forward to making additional joint presentations to the market in collaboration with HP. In regards to our platform and our contract with Iusacell, we are now, literally as we speak, in the midst of a next major migration of over 0.5 million customers. Over the next few days, we should be able to communicate more details about this migration to all of you. We remain on track to complete the migration of the remaining SIMs over the course of the next few quarters. Most importantly, we continue to receive positive feedback from Iusacell regarding the performance of our system based upon the utilization reports on the previously migrated client base.

On top of this, this week we are starting the first new MVNO in Mexico on the Iusacell network. In first instance, with just friendly users and soon to evolve into a fully operational market offering. All these new managed SIMs will continue to drive growth of revenue and margins while generating further growth in our adjusted EBITDA. We expect the success of this business combined with our new agreement with HP to generate additional activations and migrations globally as we move forward. Our contract with Zain in Saudi Arabia is progressing. As we previously discussed, Zain launched a new brand called Matrix that is hosted on the Elephant Talk platform.

Currently, Zain has a limited number of SIMs on the platform from this brand but as they begin to further market the Matrix brand in the coming month, the number of SIMs being hosted on our platform should grow. Additionally, we are already implementing another new brands that we expect to launch later this year, running on the Zain mobile network as well as being hosted on our platform. We will of course provide more information on this new brand once it has been launched and plan to run on our platform. We are now confident that our business in Saudi Arabia will develop during the latter half of 2014 as originally envisioned.

Our contract with Vodafone continues to strengthen and grow. We continually receive monthly payments from Vodafone from our increased scope of work. Additionally, we have been awarded a new test platform from Vodafone to make it easier to provide additional services to that clientele. This test platform is currently being installed and should lead us to managing additional SIM cards in the Spanish market. Through our continuing work with Vodafone, Zain, Iusacell and now also HP, we are fully confident that our platform possesses the key features from high-end distribution systems and back-office sale systems to superior data management capabilities which will lead us to new global markets.

Over to our security business now, I therefore will now turn over to Paul to discuss ValidSoft in further depth. Paul the floor is yours.

Paul Burmester

Thank you, Steven. As you know we have spent much of the first half of this year focusing on simplifying our product portfolio and our go-to market messaging. As a result of this successful program, we now have a more strategic business approach in multi-factor authentication, the transaction security and this is focused on device trust and user authentication. Device trust utilizes data from mobile network operators to validate the authenticity of the consumer’s mobile device. This is critical to help identify SIMs swap fraud and to enable international location correlation. Today, we have been focusing our efforts on securing access to the data from all the UK mobile network operators while also working closely with the GSM association which is the governing body on mobile network operators, advocating for an agreement, creating a global standard to access the required data.

As of today, we have relationships in place that give ValidSoft access to 90% of the targeted mobile data for the UK market. In parallel, we have R&D project underway that is centered around finding the most efficient and reliable way of sourcing this data on a global basis. So that this capability can be rolled out to our customers and our channel partners more quickly not just in the UK but on an international basis. One element within this R&D project is the development of our zero latency correlation process that enables us to extract the device trust data directly from the mobile device rather than via the mobile network operator. As part of the continued development of our intellectual property and our adherence to strict data protection policies, we are very pleased to announce that EuroPriSe has just awarded ValidSoft a data privacy seal for our zero latency correlation process.

This means that ValidSoft now has four data privacy sales, which is an unprecedented achievement within this industry. The second element of our multi-factor authentication solution is user authentication, which utilizes our proprietary voice biometric technology.

During the second quarter of this year, we focused on development resources on the completion and productization of this technology. The end result is that we now have a product which can be used as part of our multi-factor authentication solution or as a standalone voice biometric engine, offering both text independent and text dependent functionality.

Text independent voice biometrics are typically used passively in environment such as call sensors in order authenticate the caller or identify blacklisted frauds test. Text dependent voice biometrics require the use of the preset pass phrase and are often used in conjunction with mobile applications and interactive voice response systems.

We believe that these capabilities built into a single solution will provide competitive value for us in the marketplace. Reaction to these advances has been significant and we now have a number of proof-of-concept trials underway both direct and in conjunction with channel partners across financial services and enterprise sectors.

Finally, to support our more focused go-to-market approach and commercialization strategy for this technology, we’re now working on the development of robust partner channel and applied line building program for our voice biometric technology and look forward to sharing these developments with you in the near future.

I will now turn it over to Mark, to discuss the financials. Mark, the floor is yours.

Mark Nije

Thanks Paul. I’d provide the financial highlights for the second quarter of 2014. We are pleased with a continued growth we’ve experienced over the last 12 quarters in our mobile and security services solutions. Our total revenue for the second quarter was over $6.9 million an increase of 54% compared to the same period of 2013.

Revenue for the mobile and security service solutions is greased as a percentage of our total revenue to 99% during the second quarter of 2014 as compared to 89% in the same period in 2013. Cost of service for the second quarter of 2014 was around $830,000 a decrease of 43% compared to the same three-month period ending June 30, 2013.

This decrease is primarily related to the decline in our legacy landline service solution. During the second quarter, we achieved margins of 88%, our total margin was $6.1 million. For the six months, margin was $11.6 million which is already 73% of the margins realized of the fully year of 2013 or even though we are only halfway to current year.

The increase in the margins was due to the increased number of SIMs migrated on to our platform throughout 2014. Selling, general and administrative expense for the three months ended June 30, of this year and 2013 were $7.4 million and $7.5 million respectively, a minor decrease of around $40,000. SG&A expenses remained relatively stable in the second quarter of this year because of a lower share-based composition of $1.9 million compared to $2.9 million the year before.

For the second quarter of 2014, our adjusted EBITDA increased to $550,000 compared to a loss of $950,000 in the second quarter of 2013. Compared to the first quarter of 2014, our adjusted EBITDA increased almost 90% compared to the $292,000 previous quarter. When comparing the six month period of 2014 with last year’s adjusted EBITDA, there was an increase of around $3.2 million from a loss of $2.4 million in 2013 to a profit of $0.8 million in 2014.

We expect this trend to continue as additional migrations take place during the next few quarters. Our net loss which by the way includes substantial amounts of non-cash items was $4.6 million for this quarter, a decrease of $3 million or 40% compared to the loss of $7.7 million for the same period in 2013.

We continue to expect to decrease our losses going forward as we continue to increase our revenues from additional migrations from Iusacell, Vodafone, Zain and other clients that yield higher margins that we traditionally used to help. This concludes our financial summary, I would like now to turn the call back to Steven, for his closing remarks. Steven, the floor is yours.

Steven van der Velden

Thank you, Mark. Looking ahead to the remainder of calendar year 2014, we believe we are positioned for interim growth and long-term financial success based upon these current contracts with Iusacell, Vodafone, and Zain and of course also now the agreement we have in place with HP. We are working to accelerate the migration plans and does the growth rate of our revenue and adjusted EBITDA numbers. Our adjusted EBITDA number continue to grow substantially as we have not hit our critical mass number of SIMs on our various platforms. The increasing number of SIMs hosted on this platforms is placing us in a position to sooner reach an overall cash flow positive operation including the requirement investments for further growth in combination with available vendor financing.

After three years on our Board of Directors, Mr. Rijkman Groenink has decided not to stand for reelection based on the time commitment of other business and family obligations. His experience and financial knowledge created value for our entire organization. The Board is pleased to nominate Mr. Jaime Bustillo and Dr. Francisco Ros as new Board members. Mr. Bustillo has extensive technical knowledge of and business experience in the wireless telecommunications industry in Europe particularly in the area of mobile virtual network operators as well as mobile network operators. Mr. Bustillo has the knowledge base of how mobile operators should change customer experience requirements into flexible, cost effective specifications for mobile network and IT solutions.

Currently he is the CEO of AIRIS Mobile, a Spanish mobile virtual network operator. From 2000 to 2012, Mr. Bustillo held a number of senior positions at Vodafone Group. Mr. Bustillo was the Group Director of Networks Evolution for Vodafone and he served as Vodafone’s Chief Technical Officer of Western Region, while serving as a member of Spain management board and the Vodafone Group Technology Board. Mr. Bustillo was also the Chairman of the Board of Vizzavi España, a Vodafone Group subsidiary a few years ago renamed Vodafone Enabler Espana, when Vodafone originally contracted the Spanish outsourcing platform with this Vodafone subsidiary.

Dr. Francisco Ros is Executive President of First International Partners, S.L., and a business consulting firm he founded. Dr. Ros is a member of the Board of Directors of Qualcomm Incorporated, a world-leading provider of wireless technology and services. He has served as a Senior Director of Business Development at Qualcomm Europe and Managing Director of Qualcomm Spain. Dr. Ros is also Chairman of Asurion Spain and honorary Professor at Universidad Politecnica de Madrid. Dr. Ros was Vice Minister of the Spanish Government, responsible for telecommunications and the development of the Information Society. He held key positions within the Telefonica Group, including General Manager for Telefonica International at the time of its vast expansion into Latin America. Dr. Ros holds two PhDs, in Telecommunications from the Universidad Politecnica de Madrid and in Electrical Engineering and Computer Science from the Massachusetts Institute of Technology, MIT.

We believe their industry knowledge and extensive telecommunications relationships will provide us with the expertise of fields as well as the implementation of our platform among numerous large scale wireless providers. Based on our financial success and improving cash flows, management has been working with the New York Stock Exchange to regain compliance with listing standards. We are continuing to work towards obtaining financing which we expect will improve our balance sheet and provide us with more working capital to further growth the business. Management is committed to building value for our shareholders and customers and is excited by the growth we expect in our pipeline for later this year. We believe our strategic relationships and industry knowledge will continue to provide us with excellent global contract opportunities.

This concludes management’s update portion of the call. I would like now to open the floor up for any questions that you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will come from Stan Berenshteyn with Sidoti & Company.

Stan Berenshteyn - Sidoti & Company

Hi Steven, thank you for taking my call. First I’ve to take a look at the HP partnership, that some clarity here, so the partnership mean that clients will now be buying from both Elephant Talk and HP as kind of a package deal?

Steven van der Velden

Yes, correct. HP delivers a key elements being the HLR, HSS described before and we believe that the joint proposition is a very strong proposition to help out mobile operator to better monetize for example virtual operator opportunities to three lines their operations away from their legacy systems.

We believe that having the technical base of Elephant Talk combined with the huge market against sales power of HP and together in deep bring us a new customers especially from the current group of customers that is being serviced by HP.

Stan Berenshteyn - Sidoti & Company

Okay, and so for new as a new customer purchases this package, what percentage of that package goes to Elephant Talk what percentage goes to HP?

Steven van der Velden

That is not standard because of course it really depend on the individual requirements for any specific installation but normally you could expect that the vast majority of such a contract would ultimately go to Elephant Talk as the HLR HSS even though which is extremely important element is just one of the 30, 40, 50 elements that together form the Elephant Talk platform.

So, its relative expanded important element but it’s definitely not let’s say a large majority not on the country. So Elephant Talk, we have the vast majority of those revenues.

Stan Berenshteyn - Sidoti & Company

Okay, and can you maybe I guess maybe this is more subjective but can you give us an idea of the level of commitment HP has and providing the sales back into – pushing this product?

Steven van der Velden

Well, that’s quite difficult to quantify, I think they are very seriously working results, I think together with HP we have been visiting somewhere between 50 and 20 operators over the last 12 months around the world during in depth presentation supported by HP’s local presence in over 200 geographical markets and I believe all together it just open quite a few new doors and we feel confident that this is a very good stepping stone for Elephant Talk to upgrade this act and to be more proper supplier to many large companies that may not necessarily want to work with a small company like Elephant Talk but in combination with HP would definitely like to consider us. And I think from that perspective and what I’ve seen so far HP is very much positive and committed about his co-operation.

Stan Berenshteyn - Sidoti & Company

Right, and just to clarify in the press release it was to be 2.6 million SIMs presumably half of that is, roughly half of that is Iusacell, half of that is Vodafone, correct?

Steven van der Velden

Correct.

Mark Nije

Correct.

Stan Berenshteyn - Sidoti & Company

Okay, and can you maybe touch more base on the organic growth under Iusacell and Vodafone, Iusacell, historically we’re looking at 8 million Vodafone 1.4 million SIMs that we are looking to have, is that going to grow and so what base [indiscernible]

Steven van der Velden

Yes, well – we’ve for sure Iusacell is just mentioned, we’re currently migrating over 0.5 million customers, we hope to get back to you in the next few days when that is successfully closed. We are just now installing this new test platform in Spain which is basically is an element to make it easier to introduce new services and new customers on to the platform. So all together we feel comfortable that these developments underlying the intention of our customers to rapidly increase the number of subscribers indeed.

Stan Berenshteyn - Sidoti & Company

Alright, well do you have a see through as to organic growth that Iusacell is having so they have 8 million subscribers right now is this going to grow 5 to 10% in 2015?

Steven van der Velden

Well, that is difficult to say of course because we are just B2B supplier so we’re kind of dependent on the success of Iusacell in short marketing and sales of their subscriber base in Mexico. On the other hand of course we try to provide them a very good tool to improve services to improve as – and we believe that altogether that we will position Iusacell for further growth in the future. However, that mainly restart once the full base of customers of Iusacell has been migrated which we expect into the next few quarters as stated before.

Stan Berenshteyn - Sidoti & Company

Okay, and does there any revenue growth on the ValidSoft?

Steven van der Velden

Look, we have definitely seen some revenue growth although still the base is very small and we don’t state out revenues are such for ValidSoft but we feel comfortable that under the leadership of Paul Burmester, where the whole productization has been improved, clarity of the message towards the market has been improved, a lot of relationships have been build up but ultimately that will show fruit (Ph) and we feel comfortable that in the very near future we’ll have more success as ValidSoft can be shared with the market.

Stan Berenshteyn - Sidoti & Company

Okay, and last question, you mentioned that the you’re starting an NV in Elephant so is there a name associate with that NV now that you can tell?

Steven van der Velden

No, I mean of course there is a name but it’s not up to us to disclose that I mean that’s more for Iusacell for its customer itself but of course there is a name behind that NV and I think the market will be pleasantly surprised once there will be balance of that name.

Operator

Thank you, we’ll take our next question from Robert Scott [ph] Private Investor.

Unidentified Analyst

Hi Steven, thanks for the update and I want to congratulate you on growth, you stated that we are on track on the Iusacell migration which is great news. So, the first eight months we get to a 1.2 million SIMs and in the next few days we get to 1.7 million SIMs. Based on some previous announcements, we believe that 5 million are going to be in place somewhere between late August and Late September. This requires a real rapid acceleration in the rate of migration. How the 3.3 million more SIMs happened between August 15th and October 1st?

Steven van der Velden

Well very good question, of course I can assure you that it’s all being planned to take place in the timeframe that you mentioned. There are certain reasons why servicing sometimes go a bit slower, other things go a bit faster but you can also imagine once you go through the learning curve of your cooperation with Iusacell that the first 2 million SIMs is more of an issue then migrating the next 2 million SIMs and then the next 2 million SIMs and so on. So, we definitely expect some progress in that matter and the timeframe you mentioned or said before is still the one we are focusing upon.

Unidentified Analyst

So, 5 million SIMs by the end of September is still very…

Steven van der Velden

Around 5 million SIMs that are the prepaid GSM based of Iusacell should be migrated by that time indeed.

Unidentified Analyst

Okay and I just have a very quick question for Paul on the ValidSoft side. In the UK, you said you have 90% of the targeted information you need for ValidSoft and proximity correlation logic. Are there any major installations that are going strong other than the Santander SIM swap install and is there anything new with FICO now that the software is resident in their risk engine?

Paul Burmester

Thank you for question. Regarding deployments that are in the public domain Santander is the only one that disclosed they are using our technology today for SIM swap detection and international proximity correlation. FICO themselves are now starting to be more active I think it’s fair to say and part of that was simply us securing access to that data in the UK and say having access to 90% of that data which is the three major mobile network operators and all their MVNOs has been critical to giving them the confidence and ultimately their customers that it’s reliable and usage data.

Unidentified Analyst

So, is it safe to say that the ValidSoft revenues grew beyond whatever the Santander SIM swap business growth was in the last quarter?

Paul Burmester

I think as Steven said, we don’t separate out the revenues but the revenues have shown some growth, yes.

Operator

Thank you. We will take our next question from John Nobile of Taglich Brothers.

John Nobile - Taglich Brothers

I am relatively new to the story but I would like to know few basic questions, the first one the Iusacell contract, is that for a $1 a month per subscriber or is it different than that?

Steven van der Velden

Just to answer then your first question, we don’t disclose what the individual pricing schedules for each contract are. As we state in our investor presentation, we aim overall to get an average of $1 per subscriber but of course as you can imagine that if you would have an 8 million subscriber contract with Iusacell but that will come on the different sliding skill in pricing then maybe 2 million subscriber contract with Vodafone in Spain or another contract in another country. So, each country has its own pricing, has its own cost structure, has its own sliding skill and from the company’s perspective, we just communicate that we aim to achieve average about a $1 per month per subscriber but of course if we would have done smaller contracts that would be easier to meet than if you would have for example three larger contracts as we have today. So, it’s an aim and I think that we will keep that aim up because ultimately we may indeed get very close to that aim especially if we open up new contracts with smaller amounts of customers as those are in the earlier stages of a sliding skill.

John Nobile - Taglich Brothers

Okay, so it’s safe to say for modeling purposes that I could possibly -- looking at that is maybe not up to the full $1 a month per subscriber depending on the contract being large. It’s a little bit less or I don’t know if you could…

Steven van der Velden

Ultimately you can imagine if you really talk about huge amounts of customers, it’s substantially less what you get for the last customer.

John Nobile - Taglich Brothers

Okay and you alluded to at the end of Q3 with this contract of having about approximately 5 million SIMs from where you are now at the end of Q2, what was that about?

Steven van der Velden

Currently we have reported around 1.2 million subscribers in Mexico. We expect to migrate from 500,000, 600,000 these days currently as we speak and we expect the rest of the balance to come in over the next couple of weeks up to the end of September.

John Nobile - Taglich Brothers

Well, the rest of the balance being 8 million?

Steven van der Velden

Up to 5 million or around 5 million of the GSM prepaid base of Iusacell.

John Nobile - Taglich Brothers

Okay by the end of Q3 I thought, correct me I’m learning here about this contract but I thought it was for as many as 8 million SIMs for [indiscernible].

Steven van der Velden

Correct, yes. So, there are couple of phases, the first phase are all the GSM prepaid accounts which amounted to about 5 million and then the rest of 3 million orders which are either GSM postpaid or CDMA accounts and they will be migrated stating once to 5 million GSM prepaid had migrated. So we would started around in early Q4 or later in Q4 we’d expect to have this finish by the end of the year early next year.

John Nobile - Taglich Brothers

Okay, so

Steven van der Velden

So, overall it’s 8 million, you’re correct.

John Nobile - Taglich Brothers

Okay, and just one more question I know you said that you’re going to breakout the revenue from ValidSoft but I was wondering not necessarily the actual amount but if you could talk about it in terms of just to get an idea of how big or how small that might be right now I imagine it’s relative small but percentagewise of the overall mobile and security revenue I mean which is say it’s like less than 5% of that?

Paul Burmester

Again, we don’t disclose that breakout but it’s relatively small.

Operator

Thank you, our next question will come from Ted Wolfe (Ph), Private Investor.

Unidentified Analyst

Thank you for taking my question. My question concerns compliance with stock exchange regulations. I’m wondering if there is an end point date that you have to meet to certain things to be in compliance and you see any reason as to why that compliance will not take place within the given timeframe.

Steven van der Velden

Yes, thank you for the question. As we have published there is an end date in November this year, so another four months out there. The main item is satisfying the compliance is having sufficient cash to make sure that we have a window of at least 12 months to operate and the good thing improving our cash flows is that the amount of money that it would require in the next 12 months window would get lower and lower. On the other hand, we are extensively involved and trying to attract debt financing as we have announced earlier. So far we’ve not yet concluded any one offer, although we have a couple of offers that we are currently discussing. And at the end of the day it will be our board that will decide whether to terms that our linked – are attractive enough for us to take it or that we keep on looking for it but we feel comfortable that in the next couple of months indeed some of the financing can be attractive which should be very helpful listing the compliance problems we have today.

Unidentified Analyst

So, you really don’t foresee major competitions or something making that compliance and leading our compliance base happen, is that correct?

Steven van der Velden

No, we believe that’s before that they will happen that we will be fully compliant again. We are doing our [indiscernible] to reach that.

Operator

Thank you, our next question will come from Ed Woo of Ascendiant Capital

Ed Woo - Ascendiant Capital

Yes, thank you for taking my questions. In terms of agreement with HP does it reset the sales process for all your agreements? And is there any, can you talk about just how the pipeline is going in terms of – maybe in the next 6 to 12 months?

Steven van der Velden

Sorry, I missed the first part of your question, could you please repeat that?

Ed Woo - Ascendiant Capital

Sure, the first part is now that you have partnered with HP, does it kind of reset and you have to restart the sales cycle with other different partners that I’m curiously, you mentioned that you guys are talking to lot of possible customers and entering various stages and now that you’re with HP, does that started off reset and remain back to you the beginning and you kind of – sales process or are you able to bring them in turned this sales process that you are working right now?

Steven van der Velden

Yes, okay, very good question, thank you Ed. Well, let’s put it this way, all the new contracts that we have through HP R&D new contracts. So, these are all new mobile operators that has been screened by HP of their needs of their requirements of their paying gain levels and it’s kind of selective group of usually current customers of HP or customers HP has already in their focus for quite some time to reach agreements with and we are of course very much helped by being able to now be part of the HP sales effort to reach out to these current customers and of course coming in together with HP in such a process makes it easier to digest the fact that we are a small company in new technology because basically HP puts showers – under our technology and basically communicate with us towards these potential customers that our technology is sound as mature as being used by couple of perfect reference partners and so forth. So it definitely helps but it’s too early to say whether ultimately the sales cycles together with HP will be significantly shorter than without HP therefore the cooperation is just not being too long so far. But hopefully in the next 6 to 9 months we’ll have to clear our picture about that but definitely it’s going to take any longer let me put it that way.

Ed Woo - Ascendiant Capital

So, it’s a selected group of customers so there are some contracts that you are still working on by yourself, does that correct?

Steven van der Velden

Yes, definitely. We have of course quite some links already outstanding. We have a lot of RFQs on our own and some of those RFQs indeed still HP is a supplier to us but they are not under lead of sales and marketing like we are in some of the other prospects that HP has brought us to the table.

Ed Woo - Ascendiant Capital

Great and I had a clarifying question. You mentioned one of your objects is to be cash flow from operation positive including investments. Do you give a specific time period of when you expect that to happen?

Steven van der Velden

Not specific but as I just mentioned a little earlier that we expect with the growth of the SIMs on our platforms that even though we are now ready for three quarters operational cash flow positive that we also expect in the not too distant future to be overall cash flow positive, meaning that we can also take care internally of all the CapEx that is required. Of course taking into account the vendor financing that is available to us and we feel that in the near future that point can be reached.

Ed Woo - Ascendiant Capital

Great and my last question is Zain in Saudi Arabia, do you expect any significant ramp up in that business or you still kind of wait and see?

Steven van der Velden

No, as I also explained a little earlier, we are very confident that we can now finally in the second half of this year get the whole project going up to a higher level. We still expect Axiom to get its licensed MVNO position in the Saudi market and Axiom being the largest reseller of current top-ups and bundles of the three main operators in Saudi Arabia, we feel comfortable that they can come on the reasonable market share down the road. Next we got the Matrix brand that’s growing as I said and also new brands are being launched by Zain in the near future and those SIMs will also run over our platform. So, altogether we are kind of positive about developments in Saudi Arabia that can be expected over the next six to 12 months.

Operator

Thank you. (Operator Instructions). We will take our next question from Mark Flap, Private Investor.

Unidentified Analyst

I think you answered most of the question I was going to pose but I would like to understand one thing about the HP partnership a little bit better and that is regarding any specific strategy that Elephant Talk and Hewlett Packard are implying regarding how you are educating the sales teams, how you are communicating with them at HP to understand, how does HP engage specifically with Elephant Talk on what the value proposition is, is that something you could provide some clarity on?

Steven van der Velden

Very good question, thanks for that. Well, HP has a specific division aims at telecommunications and in which the HLR, HSS proposition from HP is the core product and they are very well educated in the whole core network aspects of a mobile operator and also actually in the IP aspects which is still probably left over from the Compaq days when they were very much focused on the IT platforms and being actually the only provider of the non-stop platforms that made Compaq famous in those days. And so they have a dedicated sales and marketing force that of course can also piggyback on all of the organization of HP throughout the world. And we have been travelling with a quite a few HP people around the world supported by their local teams. And I think in the meantime quite a few HP sales and marketing staff has now have direct experience and exposure to our presentations have picked up the story very, very well and we feel greatly supported by HP in their endeavors to reach out to customers to potential mobile operators. And so we feel very comfortable that this whole cooperation will indeed have a very positive effect on us.

Unidentified Analyst

That’s great, so I got one very quick follow-up question, is there any particular region or geography where you are seeing at this point in time any more traction given the early stages of the partnership?

Steven van der Velden

No, I think it’s too early to say that. I think we have had presentations with HP in four different continents so far. And I would not say already that we can draw any conclusion about certain regions being more attractive than others. Hopefully, in the next three, six, nine months that will become more clear if we could communicate some of those successes to the market but I think it’s too early to say that today.

Operator

Thank you. Our next question will come from Steve Chizzik with The Verrazano Group.

Steve Chizzik - The Verrazano Group

I have a question for Mark regarding accounts receivable. Accounts receivable shows about a 120 days of accounts receivable outstanding and that’s obviously primarily with our two major customers. What are their terms and what can we expect and how do we bring that down?

Mark Nije

Okay, first of all I cannot comment on the individual terms of the customers but in general in telecommunications, it’s not uncommon to have to deal with terms between 90 and 120 days as to payment terms. So, in that respect it’s to some extent a one-sided business case. In our case in general, we have been able to reduce that with one or two of the customers to a lower level. However, we have to realize at the same time that there are sometimes very large timing aspects that’s come to floor because the number of customers that we have are still pretty limited which means that if a customer pays just after a quarter end then for our cash spending that’s not an issue but if you report just one day before the payments has come in then the actual outstanding is disproportionally increased that shows very high outstanding balance. So, that’s something that we need to understand. The other item relates to the fact that revenues have been increasing so in that respect you will see on an absolute level the increase in AR outstanding. And lastly one item that also is relevant this amount of spending relates to the project work that we do especially for the newer customers but also to some extent for the existing customers. They have often different statement terms than the normal SIM based recurring revenues. So, that sometimes has also to a temporary increase of the outstanding AR. So also from a cash balance if you look at the bank balance now you will see that it’s pretty much higher than the reported balance at June 30, simply because just after cutoff date the large payments came in.

Steve Chizzik - The Verrazano Group

Appreciate that, got to get them in before the reporting date.

Steven van der Velden

Hey, you tell us.

Steve Chizzik - The Verrazano Group

Alright.

Operator

Thank you, we will take our next question from George [indiscernible] with Private Investor.

Unidentified Analyst

Thank you, very good quarter guys. One question Steven, how would you describe the pipeline with respect to new business from new customers or new business from existing customers for the next 3 to 6 months. Do you expect to see the new builds (Ph) closed within that time frame?

Steven van der Velden

Thank you George, I think it is not wise to put any hard date on new deals to close, we are working on a couple of deals very very seriously, I believe that we are timing the last phases of some of the negotiations but it’s always very difficult to say whether that may take another month or another four months, it’s simply not possible and actually history have shown that it’s kind of dangerous to pinpoint too much on – schedule. For existing customers however, it’s slightly easier because of course there is a contract, there is infrastructure and it’s of course much more easy to add additional business on to an existing relationship and onto an existing platform. And that’s why we’re looking forward of course to the migrations in Mexico where we hope to increase our installed base from around 1.2 million now to around 5 million by the end of the quarter and around 8 million at the end of the year early next year that’s of course very very substantial increase and you can imagine quite a few of the resources are focused just on that because that’s much more lower hanging fruit than any new contract can bring us. Next to that, of course we already discussed the progress we are expecting with Zain, so we’re also putting a lot of efforts they have to make sure that we will be in a position of operational excellence once these customers will come on board, we’ll be very happy and we’ll keep customers for a very very long time. And then finally, even also service Vodafone we are expecting growth, so from the current existing customers we expect substantial growth that can bring us at least to the point of the overall cash flow positive as indicated earlier.

Operator

Thank you, we’ll go to Robert Scott (Ph), Private Investor.

Unidentified Analyst

Hi Steven, just a quick follow up on. So we know that IBM has been in the business of managing the MNOs with one of our current customers is also a customer, it seems like HP is also in the business and both of them are in -- substantially as it safe to say about HP and IBM have a very broad client base in this business?

Steven van der Velden

Yes, they both have a very broad client base, however, the service their delivering is quite distinctive. I think IBM is much more the general computing platform as well as a little of services whereas HP is much more focused on selling very specific solutions to the industry. So their angle is completely different and I’m not too sure how they compete head on. But I don’t think that we see them too often competing with each other because they are really addressing different segments within the mobile operator markets.

Unidentified Analyst

But it seems like both of those companies in a lot of ways are very bigger as competitive against us where they have so many existing clients and we’re going after all this new business that we’re going to run into HP and IBM frequently as we look for new business?

Steven van der Velden

Yes, but I mean listen, this is a very competitive market all local operators are functioning today. So, it’s not that any new operators hit the market that’s a very low number. So, it’s basically you have to replace someone else. So, there is a lot of competition out there and not only are we supplying a completely new technology which is kind of a threshold to overcome but as well as we are a small company with only few proven references. So we are handicapped at the moment to go after those existing suppliers like IBM but we feel confident that the solution is that much better than the current legacy solutions that bit by bit mobile operators will change their mind, will look at the references we are building up and at one moment the pain gain factor was simply be so attractive to them that they will make the move. And of course we will not be alone in that market, I mean four, five, six of these huge multi-billion dollar companies are currently heavily investing into whole domain of software defined networking and network function virtualization.

Some two months ago Ericsson, one of our main competitors announced that they will redeploy most of their software development efforts into exactly the areas of software defined networking and network function virtualization, something Elephant Talk has been doing for the last five, six, seven years. And today, we have carrier grade ready-to-market platform that is servicing millions of customers and we have AAA customers that are willing to write cheques of millions of dollars or more a month to be services by us. So, I think we have a very good position but we are still a small company in a huge market fighting against huge competition. That will take time but we ultimately believe that the quality of the platform, the simpleness of the solution and the flexibility it brings to the markets will ultimately prevail. And we will definitely be in that market next to other competitors. However, we have today a solution that is working with millions of customers, with major mobile operators and actually I think we are the only one who can claim that today. So, I think our position is very good but we have to realize that there’s enormous competition out there.

Unidentified Analyst

Yes, but the good thing is we have a couple of year head start in the very big marketplace.

Steven van der Velden

That’s what we have been told by some of our customers indeed yes.

Operator

Thank you. And it appears that this time we have no further questions, I will turn the conference back over to CEO, Steven van der Velden. Please go ahead.

Steven van der Velden

Thank you. Again on behalf of everyone at Elephant Talk Communications and ValidSoft, I would like to thank everyone for joining us on today’s call and thank you to all of our long-term shareholders for the patience and commitment to the company. As stated earlier we look forward to providing additional updates on future achievements in the very near future. Thank you all and have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect.

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Elephant Talk Communications (NYSEMKT:ETAK): Q2 EPS of -$0.03 misses by $0.01. Revenue of $6.9M (+38.3% Y/Y) misses by $0.83M.