Cover-All Technologies, Inc. (NYSEMKT:COVR)
Q2 2014 Earnings Conference Call
August 12, 2014 5:00 p.m. ET
Manish Shah – President and Chief Executive Officer
Ann Massey – Senior Vice President and Chief Financial Officer
Andrew Berger – Investor Relations, SM Berger & Co.
Bill Chapman – Morgan Stanley
Michael Potter - Monarch Capital Group
Eric Weinstein – Chancellor Capital
Roger Bensen - Number One Corporation
Good day and welcome to the Cover-All Technologies Incorporated second quarter 2014 earnings conference call. Today’s conference is being recorded. At this time, I will like to turn the call over to Andrew Berger with SM Berger & Company. Mr. Berger?
Thanks Scott. Good afternoon and welcome to Cover-All earnings conference call for the 2014 second quarter which ended on June 30, 2014. I'd like to point out that during the course of this conference call, there may be statements made relating to future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance and achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors including those set forth in the company’s filing with the Securities and Exchange Commission.
It should also be noted that the webcast of today’s conference call may be found on the internet by visiting the company’s corporate website, www.cover-all.com and a current version of the webcast will be available shortly for at least the next 12 months pursuant to SEC guidelines. In addition, in the press release announcing the financial results, there are instructions for accessing archived version on the conference call via the internet.
Also, during the course of today’s call, we will refer to non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release that was issued after the market closed today.
With that, let me turn the call over to Manish Shah, Cover-All’s President and CEO for his remarks. Manish?
Thanks Andrew, and thank you for joining Cover-All’s 2014 second quarter earnings call. Accompanying me on this afternoon’s call is Ann Massey, our CFO.
The 2014 second quarter and first half has continued many of the strategies and initiatives that began in 2013. As you may remember, we fundamentally changed our organizational core structure in 2013 by reducing expenses and finding new ways to operate more efficiently. And the benefits from this course improvement program are having a meaningful impact on the profit contribution of professional and support services.
In addition, in the 2013 fourth quarter, we launched Cover-All Dev Studio which enables customers to create new products or change existing products through a powerful set of rules and tools. Cover-All has invested in developing cloud-ready and scalable core processing and business intelligent software, allowing CMC, that is Property and Casualty Insurance Carriers, the ability to quickly deploy and configure new products. As a result, during 2013, we closed nine deals, six with existing customers and three new customers. While we’re working hard and expect to close software licenses this year, much of our focus is on successfully implementing a number of projects which we believe will be an important catalyst for future shares.
I will provide additional color later on this call on the importance of project implementations, but first, I want to quickly provide you with a high level overview of our 2014 second quarter and first half financial results. For the 2014 second quarter and first half, total revenue of $5 million and $10.2 million were influenced primarily by lower licensing revenue, but significant growth in supported professional services revenue. As we have stated in previous calls, it is normal for us to have wide swings in license revenue from quarter to quarter. This is the reason we do not use license revenue only as a measure for growth by comparing it against previous quarters.
Our professional services and support services revenue grew 100.2% and 7.1% respectively for the 2014 second quarter. I’m pleased with this growth, especially its contribution to profitability. We experienced significant improvement in our support and professional services gross profit in both the 2014 second quarter and first half and we saw improvements on a sequential basis too.
We achieved net income in the 2014 second quarter and first half of $328,000 and $762,000 respectively compared to net losses in same period last year. These improvements are a direct result of higher sales, better utilization and the improvement we made last year to our core structure. As a result of improvements through profitability and cash managements, we generated $1.7 million in cash from operations and significantly strengthened our balance sheet.
As June 30, 2014 cash and cash equivalent increased almost 90% to $3.5 million since the end of 2013. Working capital at end of June was $2 million compared to a working capital deficit of $19,000 at December 31, 2013. And stockholders’ equity at end of June increased 8.6% to $11.9 million from $10.9 million at December 31, 2013. We anticipate continued improvement to our balance sheet and capital provision throughout the remainder of the year as we generate additional cash from operating activities.
At this point I would like to discuss the status and importance of our implementations and provide an update on license and sales. Successful implementations are critically important to our ability to retain existing customers and attract new customers. Cover-All is a customer centric company, which means our interactions with our customers do not end once we complete a sale of our software. We participate in the entire implementation process and work closely with our property and casualty area customers to ensure a successful implementation. Our knowledge and experience with the property and casualty insurance industry enables us to implement our software faster and in a cost effective manner while achieving 100% success rate.
So far this year we have successfully completed five projects and we are complete -- working on implementing 14 additional projects before the end of the year. Implementation of core operating systems are complex and require a significant amount of knowhow and experience. They can take anywhere from a couple of months to a couple of years depending on the size and complexity of the program. Cover-All is distinguishing itself from others in the industry as we successfully implement our software for more and more customers. An example of our success is a current implementation we are accomplishing for a well-known tier 2 specialty insurance company. This customer is using our Cover-All policy product for their commercial auto line of business throughout 51 jurisdictions. We estimate the customer will go live this year which means it will take Cover-All roughly five months and approximately $400,000 to fully implement such a large and complex line of business.
Once successfully implemented, this experience will be a powerful and tangible case study that demonstrates significant cost and time savings to insurers of Cover-All’s products and implementation process. There is no better proof in the value of our products and services than successful implementations which we believe take a fraction of the cost in claims compared to large P&P software providers. We believe every completed implementation builds confidence in our products and create a new catalyst for the next dollar of potential licensing revenue.
Another example of our success is that during the second quarter we went live in Society Insurance, a multi-line commercial property and casualty insurance company specializing in this each business. Society is currently using Cover-All policy including rating, quoting, underwriting, policy lifecycle management, document generation and management and program based underwriting for commercial auto and workers compensation lines of business. Throughout the year, Society will be adding Cover-All Test Studio for effective and efficient automated testing and Cover-All Dev Studio, a visual product configuration tool highly customized and bureau based business owners quality, general liability and umbrella lines of business. I hope you can see implementations that are important not only for a sales and marketing standpoint, but also from its financial contribution. Implementation for your traditional revenue opportunities and the contributions from a profit prospective is more significant today than it has been historically.
Momentum in professional solutions will continue and we’re working hard to achieve the next round of new product sales. To this end anyone who has followed Cover All or others in this industry understands the sales cycle of our industry is long and complex. Depending on the size of the customer, the decision to invest in a new core product processing system is made at an operational committee level or at the Board of Directors’ level. Over the past 12 months, our recent softwares, partnerships and soon additional successful implementations is walking us through more doors than we have previously experienced. Our pipeline is more advanced in later stages than it has been [inaudible]. While we’re unsure when potential customers will make the decision, we’re hopeful that some of these potential customers, may choose Cover-All products. The revenue contribution from a new software sale is important and is more incremental to profitability today than it was in previous years.
We understand investors’ disappointment with the uncertain timing of these sales. And I hope you know that as a management team we share in your frustration. But we are better positioned from a competitive and financial position today than we have been in a long time. Our improved capital position provides us with flexibility to invest in long term growth, producing strategies as well as we have mentioned previously, we are determining a number of modules and acquisition opportunities to further row our business, including the transformative opportunities. Do to the nature of these activities, I cannot go into the details on this call, but I have to communicate to our investors that management and the board are working hard to rapidly enhance shareholder value.
Finally, I’d like to conclude my prepared remarks with the business plan for the remainder of the year. We continue to have a solid client services back log and better revenue visibility. We anticipate professional services revenue for 2014 to be in the range of $8.5 million and $9.5 million, compared to $6.4 million that we projected last year. We’re also hopeful to win some of the deals we’re competing for and recognize license revenue in 2014. Finally, we expect continued profitability in second half of 2014 that will add additional capital and further strengthen our balance sheet.
With that let’s move forward with questions and answers. Operator, please welcome the call for Q&A.
Question and Answer Session
(Operator instructions). Our first question today comes from (inaudible) with EEVI Asset Management
I wanted to -- I understand that in the call you mentioned that it is something that you don’t want to disclose or talk about right now about this possible acquisition that you’re looking at. But can you provide us some color or light on the fact that whether these acquisitions are mainly to like increase the revenue of the company or they’re more in the direction of technology where you’re basically trying to have more products in the line in the same kind of area.
That’s a great question. Let me provide you some color since -- to an extent that I can. So as you know, we do have products in certain areas which are very strong. Obviously the market that we are playing which is pretty fragmented, there are 50 plus companies, some of the companies have invested in technology. Some of the companies have not invested in technology. What we see here is that in terms of for us to be very accretive and rapidly enhance our shareholder value, we’re looking for an acquisition which provides both ways where we do get a significant revenue boost, including profit. So we’re looking for an accretive organization and not ready to sort of saying that we’re investing in the technology.
But at the same time we are looking to expand into personal lines as well as some of the areas just billing or in a suite, which we think we can get an acceleration to entering that area because as we are seeing into the market, we need to be offering a broader set of products than we are currently offering to further accelerate our organic growth. When we are a looking at this thing we are seeing from both angles and not just from the financial or revenue side of it, although we are very confident in that we remain accretive financial.
I see. That’s very good. In terms of these acquisitions do you have some timeline as to when do you think the next step where you would be able to see if it was a success, whether you were able to acquire that target or not? When do you think it’s a timeline? In the next one to three months? In the next one quarter? How do you see it as of now, as of today?
As of today we have a bunch of probabilities and they vary from acquisitions and some are the merger possibilities as well. We are at various different stages. At this point from a timing perspective I think that it’s less of an issue because I think from a timing perspective we might be looking to have something this year. But more so from our perspective, we want to be very, very careful in terms of ensuring that we are getting the most for the Cover-All shareholders during those acquisitions. The reason for us if not mentioning too much is because we are not 100% sure about that any of these deals confirming that yes we are going to do the acquisitions until we are fully sure. We are putting more due diligence. We are putting more thought in our robust profits around it before we actually pull the trigger. But I think in terms of timing, if it’s to happen we expect something to happen this year.
Manish, on that I think that’s very wise thinking, I see a lot of technology companies who are basically just trying to capture the next big thing but they miss out the financial part of it which is obviously best for share from shareholder perspective. It’s great that you are actually looking at to cover both ends of it to capture something which is actually very good in technology and can actually help you with your products and at the same time even be accretive to the earnings and shareholder value. That’s very good. The other thing, I am sorry, I may have missed that earlier when you said in the call is I see that in the first six months the professional services revenue grew by almost 100%. Now, was that the result of the licenses that you sold, the company sold in 2013? And if that is the case, now you had like I think you mentioned about like you executed about five projects and you plan to execute 14 more projects in the next coming six months. Should we assume that the professional services revenue is going to be much higher that what it is in these last six months?
At this point I would say that professional services revenue as we are saying we have estimated somewhere between $8.5 million to $9.5 million. Let’s just take $9.5 million. The way it is trending, there is a lot of demand for our professional services. So considering we gave $5 million, we are still expecting $4.5 million. Now those divisions do get to – I mean those numbers do get revised. When we provided the range, we provided someth9ing like $7.5 million during the first quarter call. Since then we have seen even higher demand for our professional services. What’s more important is that we are able to respond to it in terms of scaling the organization because and we also do not want to just irresponsibly take the revenue because we want to make sure those implementations are done correctly because we believe that as we finish these projects and as the market and we start publishing the case studies, as market will see that, okay, very good.
All these projects are having 100% success rate which means the risk is very little in terms of going with Cover-All products and some of the case studies will show that how successful those implementations and our customers centric approach. But we’re seeing some of the larger competitors where they tie it with SIs and even they’re not team sizes and the project runs for years and years and millions of dollars. I think that we will get some attention, which means more chance at deck, which means catalyst for the sales. So this is all connected. I just recommend that everyone should see all of these things. It’s very easy to see license will eventually create professional service revenue. But you should also see that the professional services will also create the licenses to loop back and that is a complex picture, but that’s how the industry works, that they will invest in this software. It’s very important. It’s for their core systems and they would like to see that. I like to work with a vendor where they have lots of references that yes, it has gone successfully
I see. Do you see in terms of investment that there was going to be at some point where the, I understand the -- and all insurers are obviously not willing at the first point to basically investing just because they are not sure about the success of the execution of the project. But do you see that at some point they would just have to invest? There is some lack of investment from their side which is going to pick up let’s say later this year, early next year, because they have been, just not keeping up with that technology in terms of their software.
There is still, believe it or not, but despite of a wave that is going on in terms of the core system replacement, there is still a significant market as many market research reports and many analyst reports suggests that the core system modern replacement or transformation projects are going to go on for a minimum 5 to 10 years obviously. There is still a lot of negative systems that is out there that is yet to be replaced. What is happening is that the demand will be of course be widening to the different segments. But where we’re seeing is that an insurance companies who are a billion dollars or less, which is where the most of the insurance companies lies, there is a significant amount of transformation that is yet to be taken. Our sweet spot by the way right now is somewhere between $250 million to $750 million quota range of the insurance. But what we’re trying to do is we’re now trying to expand our sweet spot to go up to a billion dollars but on the bottom coming up with more cost effective solutions to tap in the bottom of the market as well.
So we’re trying to expand our sweet spot from $100 million to a billion dollars and that will extend opportunity. But again the more important thing for us is to make sure that we have all this successful risk behind us, that our sales team is capable of going out there, pointing to the reference accounts and make Cover-All as a – Cover-All is known in terms of deliveries. But keep in mind that our products that are being implemented are new and this will provide the ultimate seal of approval of our products as well as our service capabilities.
I see. That’s great. I really appreciate you guys taking my questions and wish all the best. Hopefully these acquisitions target that you’re looking at even in terms of margin hopefully work out. I look forward to seeing some positive results.
Thank you for your support
(Operator instructions) Next from Morgan Stanley we’ll move to Bill Chapman
Bill Chapman – Morgan Stanley
Congratulations on a good quarter. Sure is nice to see the cash growing and excellent cash management and cost control. At the end of your meeting, you were mentioning that management had an objective of three years to be at least approximately $62 million plus between organic growth and your acquisition strategy. And I was wondering, do partnerships fit into that? What is our status on partnerships?
Partnership will fit into that partnership is another channel for us to -- for our sales. And we announced one partnership which is the MSX that you know. I think we’re now finally competing together after a year of hoping I think things finally are now -- hopefully will have a revenue generating relationship soon.
Bill Chapman – Morgan Stanley
Have a revenue generating relationship soon. We’re also partnering with a company just for now to bridge our gaps we have in terms of billing so that we can qualify for those deals so we don’t have to let those deals go. In terms of the growth, we do need to attack it from both angles and we are. We are growing organically. Even organically we need to make sure we have multiple cylinders to fire and in case it wanders and fire make sure other does fire. But then most fires they just give you that significant boost that you need. I think we are doing right in terms of how we are doing it with the implementations and then our building of those deals. So keep in mind our sales team relatively new but very promising and they are carrying a lot of pressure right now in terms of getting new deals and stuff like that. And I at this point on remain confident on them and that they will deliver.
In terms of -- that ship not enough I think because there are some really good opportunities that are out there which includes some of the acquisitions as well as the mergers. And as I pointed out earlier these are not just roll up opportunities we are talking about. We are talking about opportunities where we have product synergies, we have growth synergies because keep in mind we are running an organization very lean and that you can see from our numbers and on gross margins. So, we are running the organization very lean. We are not looking in terms of cost synergies. What we are really looking in terms of growth synergies and the product synergies to tap him to a larger buy of the market that is available.
And next we move to Michael Potter with Monarch Capital Group.
Michael Potter - Monarch Capital Group
Hey Manish, congratulations on continuing to make some nice profit here. And it really sounds like the plan is becoming very well thought out and organized and I’m looking forward to further execution on it. I had a question on pipelines and with regards to license pipeline. How does our or where does our pipeline currently stand? Are you anticipating that we are going have any new license agreements signed in the current quarter and before, perhaps before the year end as well?
Yeah. Let me give you - it’s a twofold question. Let me give you the state of our pipeline. Certainly as I mentioned earlier in my prepared remarks, the pipeline is certainly as t a stage where we have more prospects at the later stage of the pipeline that we had earlier this year. The thing though what we seeing is that we have two kinds of process, right now those who are at the later stage of their pipeline and there are some who are in the beginning or the midway. Suppose we are beginning or a midway, if progressing nicely we are going through the process. It’s just a process that you have to go through it. It’s just how it gets set up. The prospect that we are having at the later stage where in many cases we are either one of two or one of three or one of four which I would call it later stage pipeline. Some are moving. Some are stalled. So we are trying to again see when the -- and it’s for business reasons, nothing to do with us. But essentially we hope that they will again starting thinking.
In terms of what we are expecting my team is -- my sales team is focused on 2014. We would really like to bring in few deals home this year. It’s very difficult to tell you which quarter or anything like that, but we do have deals going on, our prospects going on. We are talking. We are -- and then that goes into the policy side that goes into the BI side as well. We are not interested in some flame size, we are not just relying only on the policy per se. We remain hopeful at this point Michael, but other than providing this information and knowing the exact name of the pipeline and where that stands, there is still a lot of dependency on customers who take a next step. And we are helping them to take a next step that there is income solve, whether it’s an incentive, whether it is in terms of helping them understand the cost of rating and opportunity cost and all. We’re purposed. And we are hopeful that we will close some licensing deals. I just don’t know, Michael exactly when but believe me when I have it you will know.
Michael Potter - Monarch Capital Group
Okay, but to that end do you anticipate that we should have two, three license deals closed before the end of the year is what you are anticipating?
I would say that it's a bit skeptical.
(Operator Instructions) And we’ll move to Eric Weinstein of Chancellor Capital.
Eric Weinstein – Chancellor Capital
Thanks. Again, great execution of the plan, Manish. Just one or two questions on the – one on professional services. Is that – what are you doing differently? Maybe I'm not sure if it's something that you’re doing differently or maybe the nature of the business that’s been responsible for the increase in margins. And when we look at that backlog through the second half, is that sustainable? Also on the cost side, I seem to remember, there may have been some costs associated with maintaining some of the legacy platforms. Do you continue to incur them or is there sort of an end in sight that could also help to reduce expenses? Thanks.
Okay. Eric, thanks for those questions. For the professional services side, there are two things that we’ve done that is different than what we used to do. First we said we now have a P&L division within – there’s accountability for the revenue as well as from the margin perspective. And what we have done is we have – we were either leaving a lot of money on the table or we were just simply not having the better utilization of the resources five years ago. Clearly, the demand is there from our professional services point of view. But also keep in mind that professional services, just as service there is a lot of work and we’re just beginning to do that in terms of generating the revenue as well. So there is a lot of selling that you can do around the professional services that we have not historically done. We have just basically waited for the order to come and then fulfill it and that too we were not very efficient in fulfilling it.
So now we are tackling it that I think we got and it's a working process, but I think we got some real good organization structure and also the people around the professional services with a lot of oversight from the finance department in terms of ensuring that we are going in the right direction. But then also on the other side, we are having a lot of selling aspects that is going on under the professional services. So we will be in the coming -- for the next year, we will be going to these accounts and looking to grow our professional services beyond maybe what we are traditionally known to doing. At this point, we do have a good backlog. I think the backlog will continue at least –as long as my visibility goes, I think it's going to continue till end of first quarter next year. I don’t have more visibility beyond that, but that’s just the nature of the business how the professional services work.
In terms of maintaining the legacy system which is sloppy, that we’re still maintaining and you picked up right. There are some cost savings that be generated once we stop maintaining this. However, we still have customers that are using it which are under the implementation of the newer products. Until we get those customers up and running into the new products, which again is like the kind of a thing that you have to make a business decision that we have a platform maintaining the older system guidance. So my intention is to get all the customers up and running. But at the same time, those customers are not seeing this as just a replacement. They’re seeing it as a transformation, which means they want us to do more in terms of professional services time.
So they are generating revenue for us as well. So we cannot – we don’t want to necessarily short circuit those projects because A, they’re revenue generating and they’re important. And B, those times that it’s taken to do those professional services, is very important because they’re seeing – customers are seeing this as a transformation. I think that we’re going to have the traffic which is our older product service at least will go to 18 months. Maybe we will drop another $0.5 million to the bottom line once we utilize those resources to doing something else which might be more revenue generating, but obviously we are a very customer-centric company and our customers help us – get us new business. So, we definitely want to not sort of just abandon them. But at this point again, we have done what we can in terms of cost. Maybe 12 to 18 months, we’ll redeploy those resources and we may get more cost savings, but not right now.
Our next question comes from Roger Bensen - Number One Corporation.
Roger Bensen - Number One Corporation
Hi Manish. Certainly congratulations on the presentation. Other people was talking about the two numbers and so but you’re all very much appreciated. But you have – I think you explained the business much more cordially than has often been the case in the past. We understand better what you’re going through and what's happening. And so thank you very much for that as well as your continued efforts.
Thank you, Roger.
Roger Bensen - Number One Corporation
My question has sort of been asked before. One thing that seems to stand out is the unusual use of the word transformative deal when we’re talking about mergers and acquisitions and obviously whatever you’re working on is still a work in progress shall we say. Do you have any idea as to when you might think that this thing could be achieved? Are we talking three months, six months? We don’t know at all? Any guesses?
As I said Roger, don’t get difficult. Builds like these are complex. Builds like this -- we are and we’re very, very careful in terms of ensuring that overall shareholders get the most that they deserve and also have a lot of upside going forward. Essentially it could be in two months, or it could be in four months. I still expect it’s something – I still expect that. I don’t think that we are very far, but it could very well be that the deal doesn’t happen and that’s why we are being very careful because we don’t want to set up unrealistic expectation. But at the same time, we’re not really far if it's to happen. It will happen soon.
(Operator Instructions) And it appears we don’t have any further question at this time, Mr. Shah, I'll hand it back over to you for any additional or closing remarks.
Thank you. I appreciate everyone for attending the Cover-All call and I look forward to speaking with you during the third quarter earnings call. Thank you very much.
That does conclude today’s conference. We thank you for your participation.
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