Elephant Talk Communications (ETAK) Q4 2015 Results - Earnings Call Transcript

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Elephant Talk Communications Corp. (ETAK) Q4 2015 Earnings Conference Call March 31, 2016 11:00 AM ET

Executives

Valter Pinto - Capital Markets Group

Hal Turner - Executive Chairman

Mark Nije - CFO

Analysts

Lisa Thompson - Zacks Investment Research

Operator

Good day and welcome to the Elephant Talk Communications Corp 2015 Year-End Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Valter Pinto, Capital Markets Group. Please go ahead.

Valter Pinto

Thank you, operator and good afternoon. Thank you for joining us for the Elephant Talk Communications 2015 full year financial results conference call. On our call today will be Mr. Hal Turner, Executive Chairman of Elephant Talk and Mr. Mark Nije, Chief Financial Officer, as is customary following management’s discussion, there will be a brief Q&A session opens to all participants on the call.

Before we get started, I’m 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 and Section 21E of the Securities and Exchange Act of 1934. All forward-looking statements are inherent uncertain, and 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. Evaluating such statements, perspective investors should review carefully various risks and uncertainties identified in this conference call and the matters 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, I would like to turn the call over to Mr. Hal Turner, Executive Chairman of the company. Hal the floor is yours.

Hal Turner

Valter, thank you very much and I want to thank all of you, who are on the call for joining us today for this full year results for the year 2015. To begin, I’d like to tell you that Elephant Talk is improving and we are fundamentally a different business and a much better business today and when I last spoke with you in mid-November of 2015. Elephant Talk is a more stable business with the restructuring effort that is underway and this restructuring will continue and we have been demonstrated to have been very worthwhile as we sideway into the lateral part of this year. On today’s call, I want to provide you an update on several key areas. It is our restructuring, ValidSoft and our vision of the future for Elephant Talk.

First the restructuring. Our restructuring of operations and financial matters has had one overarching goal that is to protect our current customers, services and revenue and position our business for growth. We developed a very specific three-pronged strategy and began the actions that we deem critically necessary to improve this business. In Phase I, we’ve cut costs every year, this is mostly occurred in Q1 of 2016.

In Phase II, we are re-examining everything again, always focusing on the fewest number of things that will produce the greatest results and we will take more savings and more efficiencies to achieve our goal and to complete both the operational and financial re-ramping. This will be mostly in Q2 of 2016 and we’ll segway a bit into Q3.

In Phase III, we will grow again and we will broadly re-entered the market with professional sales focus and professional sales force and bolster our good employees throughout the organization. The concept that we're all in sales as a culture will continue to be infused into the organization and this is mostly Q3 and Q4 of 2016. I want to speak a little bit about some of the details of Phase I, during Phase I we've recognized right away that the 2015 annualized recurring revenues have been substantially reduced significantly by Iusacell. So we curtailed and in some cases halted all cash expenditures and hiring. We implemented a complete recalibration and in some cases a full restart of portion of this business and this is an ongoing process as I've mentioned. We reviewed every line item on our P&L and balance sheet.

In Phase I we concluded some things number one that our expenses were significantly above those necessary to service each client, also we concluded that our largest expenses were centered on excessive headcount. We initiated a headcount reduction strategy by asking the fundamental question, what is the minimal headcount required to give great service and support to our customers and to keep our key performance indicators that we contractually agreed to with key customers at acceptable levels that was the basis under which we made all of our decisions. We're early days into Phase II and from this perspective our sales team tells us and we see a continued loyalty that's very solid among our existing customers.

Many of these existing customers have promotional plans set up for the balance of the year and several of our customers are accepted to increase their subscribers and underlying MVNOs and that's because of their promotional plan and of course this is going to generate revenue to Elephant Talk because of our enabled managed services platforms which drive those MVNOs. We're seeing new sales opportunities continue to be addressed and these predominantly are for the existing customer base and their associated pipeline. The complete restructuring of our sales organization is now planned for Q3 of this year.

As I share with you how we have performed in Phase I and early days of Phase II, I want to introduce to you what we considered to be a tried-and-true industry ratio and this will be our ongoing key track-able metric call-after-call to answer the fundamental question of how are we performing. This key track-able indicator will be revenue or sales per employee, revenue per employee is as all of you probably know and efficiency ratio and we're monitoring it closely for several reasons. Fundamental of that is when you hire the best people you get the best results, so to us in answering our internal question of why are we using sales or revenue per employee, it tells us that our company can operate in a streamlined manner with very low overhead cost in fewer locations, in other words, doing more with less.

We can also extract unnecessary cost and continually extract more based upon focusing on the smallest number of things with the greatest result. This reinforces our capital efficiency and scalability of the business model which makes us attractive for a number of reasons. We believe this to be the strongest precursor to healthy growth and profits in the business and we do believe that we've got a highly scalable business here because of this software model. So how have we actually performed so far in this restructuring? Here are some facts for you. In November of 2015, we had 264 employees. Today at March 31st we have reduced our headcount by 65 people to 199. By the end of second quarter of 2016, we anticipate having approximately 160 employees in Elephant Talk, reflecting the reduction of 104 person and that's approximately 40% less headcount than in November of 2015.

As we look at this full time equivalent personnel resources our headcount at PEs to revenue ratio, we're looking at the run rate of our sale and it is very clear to see the value we've created in a short amount of time particularly during the first quarter of 2016. At the end of third quarter 2015, revenue per employee was $52,813. We're projecting for the end of the second quarter of 2016 there our revenue per employee will increase to $89,612. On that basis, we will have improved in just six calendar months, our revenue per employee ratio by 70% and we will have performed this with 40% less headcount.

With the vast majority of these improvements having come into January to March timeframe, we are infinitely proud of the tasks that our employees have undertaken to make this happen. In summary when I spoke to you last time our last goal was to reach EBITDA breakeven on an operational basis with neutral cash burn by the end of the second quarter. We're very happy to affirm that goal and we're well on track to achieving it. I want to note for you those that our plans to rebuild the professional sales organization have been delayed into the third quarter and that's due to the ValidSoft transaction, not consummating when the buyer failed to close as contractually bound to do.

Again I want to emphasizes, it’s no small feat to have accomplished these restructuring items in a short amount of time and with very limited resources, it is the thanks and the acknowledgments that I provide to the executive team, all of the employees and Elephant Talk as a whole for their unending drive in this which has really made it possible.

I’d like to turn briefly to ValidSoft and our divestiture plans. Last week, as you all be aware, we provided Cross River Initiatives or CRI with the notice of default in the binding letter agreement date of February 17, 2016. We are and will continue to have ongoing discussions with Cross River concerning their purpose to purchase of ValidSoft.

However, we cannot in the best interest of you, our shareholders and all of our stakeholders extent deal preference or exclusivity any longer solely to CRI. We are now actively working with an investment bank to evaluate many of the multiple strategic alternatives we have for ValidSoft, its assets as well as other sources of ongoing capital. We remain very optimistic that our transaction can be consummated in line with our restructuring plan objectives.

We view these events very practically, we now have multiple opportunities, we’re creating a much more professionally develop yield book to market ValidSoft, which was not done in the past into a much broader audience. In the interim, we’re now working to extract the obvious energies that exist with ValidSoft and Elephant Talk for whatever reason we’re not previously addressed or captured.

Additionally with ValidSoft, we will explore licensing and partnerships with ValidSoft that have not been previously addressed. I must also say that I’m very pleased at the continued commercial progress of ValidSoft and the team and the many opportunities that they’re working on which we think have high promise. Growing cash flows that are organically generated will be generated and we’ll come back into our business through new products and services and roadmap, and that’s part of what we see as this strategic initiatives that’s underway.

I’d like to say finally that we believe that using this whole area of the revenue per employee and also looking to ValidSoft tells us that the health of our business is getting stronger and stronger. I will conclude now these remarks on ValidSoft and I’ll yield to Mark Nije, but I will come back in just a moment and address the final point, which is the future of Elephant Talk.

So Mark over to you please.

Mark Nije

Thanks, Hal. I will now discuss the company’s 2015 financial results. As can be seen form the10-K we filed, we will provide investors with both GAAP and non-GAAP revenue information, this side we’ll do also now. Furthermore since, we are primarily a Euro-based company that needs to report in U.S. dollars. I will also flex upon exchange rate impacts and the numbers that we report.

In 2015 revenue was 31 million, an increase of approximately 10.7 million or 52%, compared to the 20.4 million for the last year. This increase was a result of the full recognition of deferred revenue related to the termination of the Iusacell contract in June 2015, approximately 11.6 million. In addition increases in the company’s other mobile and security business revenue of approximately 1.6 million. However, against this, we have negative reporting impact of 2.5 million following the devaluation of the Euro against the U.S. dollar.

The non-GAAP revenue or billings was 21.3 million, a decrease of 7.7 million or 27%, compared to 29 million in 2014, a decrease again was the result of the termination of the contract with Iusacell. In addition, the non-GAAP revenue was negatively impacted by approximately 2.5 million in exchange rate effect.

Sorry to interrupt, I think there is a mic still open that may need to be muted. Thank you.

Cost of service for the full year 2015 was 5.9 million, a decrease of approximately 760,000 or 11%, compared to 6.7 million in ’14. The decrease in cost of service is primarily a result of the lower Euro versus U.S. dollar exchange rate in 2015 together $765,000 and reductions in combination of cash and non-cash stock-based employee compensation of almost 700,000. All these partially offsets by increases in the cost of mobile bundled services close to US$700,000.

General and administrative expenses for the year 2015 and in 2014 were 12.9 million and 12.6 million respectively and this is a decrease of 300,000 or 2%. Adjusted for positive exchange rate impact of approximately 1.3 million general and administrative expenses increased by 1.6 million. However, the increase in general and administrative expenses was primarily the result of the restructuring charges that were included and largely paid during the fourth quarter of ’15.

Total amount of workforce reduction services was approximately 1.3 million, around 100,000 in non-cash related compensation expenses. Excluding the restructuring charges to general and administrative expense increased by approximately $360,000 or 3% compare to 2014.

Product development expenses for the year 15 was 4.5 million, a decrease of approximately 2.7 million or 37% compared to 7.2 million in 2014. The decrease in product development in expenses just result of lower euro versus U.S. dollar exchange rates in 15 of $725,000 and reductions in the combination of lower non-cash related compensation expenses, the reduced consultants and reallocations of certain stocks to other countries are pulled together both [Indiscernible]. So the marketing expenses for the year ’15 was 3.6 million a decrease of approximately 240,000 or 10% compare to 2.4 million in 2014.

When adjusted for the positive impact of the lower euro versus U.S. dollar exchange relative to 265, the increase was 500,000 due to increased staffing and associated non-cash related compensation expenses, but partially offset by reduced third party PR and general marketing related expenses. Net loss for year ’15 was 5 million which is a decrease of almost 70 million compare to the loss of 22 million for same period of 2014. This decrease in loss was mainly caused by the full release of deferred revenue 11.6 million related to termination of the contract with Iusacell, as well as compensation by Iusacell for actually terminating the contract. Adjusted EBITDA for the full year ’15 was a negative 1.3 million compared to a positive 4 million in the year before.

I would like now to turn the call back to Hal for closing remarks. Hal, over to you.

Hal Turner

Mark, thank you. This is appreciated and before we open the call for questions I mentioned that I would address our vision for the future of Elephant Talk, so straightforward our vision is that we've observed there are many devices throughout the world that will communicate and be connected. We believe that Elephant Talk can be a major facilitator of this interconnection and interoperability. We intend to bring additionally wireless and mobile communications help bring that to the next billions of users worldwide, the enablement strategy and this will be principally in Europe, Middle East and Africa. Most of this growth is going to come from smartphone users and almost all of that is going to be in the emerging markets.

We intend to do this with three simple strategies. Number one is to focus on our foundation which is the communication service providers of the world, these make up our current customers but we will move to new wireless carriers in different marketplaces and different segments. And what we see is that all the carriers have commonality, they're seeking new subscribers to replace lost voice revenues, they want to expand their brands, and to do that without heavy CapEx and we're ideally suited to do that we can do it either outsourced, we can to it on a managed cloud basis, any number of ways, but this is our foundational market and we will penetrate it much deeper.

Second strategy is to enter the enterprise marketplace and doing that with channel partners and almost every enterprise in the world wants to manage their expense spending on wireless and cellular and many of them want to create affinity brands and do things that makes sense that absolutely, perfectly aligned with our services platforms and capabilities that we can enable. Finally, our third strategy is again recognizing that we believe that many things will be connected that is the Internet of Things and in doing that whether it's sensor-based or whether it's monitoring or any number of uses of sensor-based devices, they create a tsunami of data and someone has to mediate that, someone has to be able to facilitate this world chaos as people and devices move among networks and figure out who gets paid for what and how does it happen and we are ideally suited for that to mediate and sit in the middle.

I want you to know that our entire management team is all-in to making the fixes that are required to sustain our business. We're continuously focused on these most important items and we take actions whether it’s sales, whether it's expenses or whether its business development and we're looking for impact. On behalf of everybody at Elephant Talk, I want to thank you for having joined us today and I want to leave you with the couple of things that I think are very important.

First of all I believe that we've got the products, I think we've got the services and we've got services roadmap that is ideal and excellent and positions us well. We're operating in a very large and growing market that depended upon which piece of that you look at is measured in billions and billions of dollars.

We're differentiated from our competition and we can sustain that differentiation because our software. We have foundation of a great team of people, we were very-very happy to find as we went through the reorganization, the strength of the people in the underlying organization to carry the load and make no mistake, they're strong and resilient. We’ll build on that to create value for all and I have to ask myself why do we do, why do this, why are we up to this challenge.

First of all, it’s our duty. But I’m going to show you or tell you a little bit about what I observe as I look at this business. I see from Q4 of 2015 to Q2 of 2015 [ph] and annualized revenue run rate trend that’s upward of plus 20%. I see subscribers that are growing in the 15% to 20% range within our customers. I see headcount down by 40%. I see revenue per employee up by 70% during this period, this tells me we’ve got a scalable business, it tells me that our customers are loyal and creating more services every day and this is reflected in combination of subscribers and change request for new features and benefits. These are the most positive indicators I can give you and I can tell you that we are up to the challenges that lie ahead to complete the reorganization and restructure both financially and operationally.

With that, I conclude my remarks, Valter. Questions?

Valter Pinto

Operator.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll go first to Lisa Thompson with Zacks Investment Research.

Lisa Thompson

Hi, good morning. Nice to hear from you again.

Hal Turner

Good morning Lisa. I must say, the last time we spoke, I’ve been employee 23 hours and you were very kind to me.

Lisa Thompson

Okay well that all over.

Hal Turner

Any way four months into this, I’m happy to speak to you again.

Lisa Thompson

Great. Thank you. Okay, first off, could you tell us what the adjusted EBITDA was for the fourth quarter, you usually give that, I think it’s like 1.3 million loss, is that right?

Hal Turner

Yes. Mark, do you have this specific number in front of you.

Mark Nije

Yes. Sorry, I was on mute. Sorry, you were talk about the fourth quarter adjusted EBITDA, it was. Sorry?

Lisa Thompson

What was it?

Mark Nije

Yes. It was minus 4.5 million.

Lisa Thompson

3.5?

Mark Nije

4.5.

Lisa Thompson

4.5, okay.

Mark Nije

But that includes the restructuring charges.

Lisa Thompson

Right. So adjusted will take that out. I was -- so it’s more like 1.3, isn’t it?

Mark Nije

But it’s going to be somewhere between 1.2 and probably 2.

Lisa Thompson

Okay.

Mark Nije

So it’s between one point similar to Q3 for instance. So that sales basically Q3 and let’s say steady state and let’s say a post Iusacell sale period that shows me minus 1.2. And then Q4 has some additional one off charges outside of the straight towards restructuring. So you probably end up with around 2.5 million.

Lisa Thompson

Okay. So you’re saying from that this point in Q4 to get to Q2, you’re going to get to breakeven. So I’m sure part of that is ValidSoft. How much of that savings will come from selling ValidSoft?

Hal Turner

The ValidSoft -- well, first of all Q2, by the end of Q2 we expect to have achieve the operational breakeven i.e. no more cash burn. ValidSoft, we are certainly expecting that we will have done some transactions that make sense. But right now ValidSoft is representing about, Mark, if I’m not mistaken, it’s somewhere around 300,000 a month or so.

Mark Nije

Correct. Of loss.

Hal Turner

Yes.

Mark Nije

Let’s say the operational losses.

Lisa Thompson

Okay. So when you say, which breakeven by N2 and you’re counting ridding yourself of those losses?

Hal Turner

We are expecting that we will continue to address matters with ValidSoft. We certainly hope that a transaction will have been completed, but we’re also taking every step to work with ValidSoft integrate them take synergies between the two companies and to help them get their sales up in the event that we have not completed a transaction. So we are affirming that we are on track for the breakeven. I’ll tell you that the operational breakeven basically addresses one part of triage if you will and that stopped bleeding.

The other part of the triage is solving the accumulated working capital deficit and we’re certainly addressing that in a multiple set of ways, that includes ValidSoft divestiture, it certainly includes working with our senior lenders, it includes working with our vendors and other sources of capital and that’s one of the reasons we’ve decided to work with an investment bank on this. So we’re on it, we’re working hard at it and we believe we’ll be there.

Lisa Thompson

So do you think that this -- you sell ValidSoft for a price similar to what you thought you were going to sell it for, will you also need additional capital to achieve you plan?

Hal Turner

Actually, if you just look at the sort of the accumulated negative working capital that we've got, it's in the, if you go to the --.

Lisa Thompson

11 million.

Hal Turner

Yes, I thought 10.8 million, so we think that the ValidSoft will be more than sufficient for that. Also we certainly are as I mentioned exploring other financial options as part of our capital gain planned, so it's not a concern of ours with the [indiscernible] there.

Lisa Thompson

So when you talked about restructure would be an additional restructuring charge in Q1 or was that found in the Q4?

Hal Turner

Mark, help me here but I believe we took most of the restructuring in Q4, but there will be some that could be identified as part of the ongoing examination and reexamination that we do. Mark would you want comment a bit more specifically?

Mark Nije

You are correct Hal, so we took a substantial part in the fourth quarter of ’15 and there has been a residual additional severances in Q1 and maybe a lost reference too.

Hal Turner

Let me just comment, we think most of it will have wash through by Q3.

Lisa Thompson

But there might be a little something.

Hal Turner

A little something possibly yes.

Lisa Thompson

Okay, so I noted in the 10-K that you have a lot of locations, have you closed some of them or are you going to?

Hal Turner

The answer is yes and yes. Our internal general counsel is going through an exhaustive review at this point of every one of the entities and we are certainly seeking to rationalize where we can rid ourselves and the approach we expect to end up during the course of the next 18 months or so to in-depth with our principal operations based in Spain particularly supporting our European customer base. And we're expecting our principal corporate growth to be headquartered here in the U.S. including our sales organization.

So we will examine all the entities that exist out there and as you can realize depending upon where contracts are inactive, in some cases you must have a local entity. We want to make sure that we have rid ourselves of the ones that we don't need and kept the ones that will be valuable.

Lisa Thompson

So have any been shut down already?

Hal Turner

Mark, I believe we have actually shutdown at least one or two, is that correct?

Mark Nije

Yes, well actually the most expensive once they're been closed, one of the most was in the Netherlands and there is probably a residual small office left in the Netherland. But that was probably the most important one and adding the most to the bottom line in cost savings.

Lisa Thompson

Okay so then, interestingly so you think the current customers -- are all the current customers, are still customers or has anything changed about who you're dealing with or supporting? It sounded like a lot of -- you plan to have you growth at least this year come from the current customer.

Hal Turner

That is correct, all of our current customers are still customers and certainly are on varying portions of either remained three year contracts or some portions of five year contracts, so they're very stable, very sticky and when I talk about the -- my observation of our annualized revenue trend being upward, that comes from these existing customers either creating new promotions within their existing channel partners, so MVNO that's operating off of their core cellular network as an example.

And also expansion plans they have within their own market to license other operators off of their, their core platforms. So we're very pleased with that and the trend is definitely upward. The real acceleration will come as I mentioned as we have now delayed into the third quarter the complete reorganization of our sales team and the repopulation of sales executives, but that's where the real acceleration will begin to show up.

Lisa Thompson

Okay and how is Vodafone doing, is [indiscernible] getting traction? I haven't heard about them recent.

Hal Turner

Well, again without specifically talking about a brand or so forth, I think I've mentioned to you that the trend is upward regarding the subs and as you can imagine with that key European customer representing a large portion of our revenue therefore a large portion of their subscriber group is coming from that area.

So I'll be in Europe in the latter part of April and will be visiting our key customers and everything is really good and all of our thought processes and plans for expansion, which our customer has given us are on track and we’re looking forward to a really good solid last half of the year based upon that.

Lisa Thompson

Okay. And then two, final question is that. I’m sure people would love an update and what’s happening in the U.S.?

Hal Turner

Okay. In the U.S. with our key Tier 1 customer, the platform began testing in March, which is good. This is a technical integration, which basically we’ll then allow them to drive other brands and other customers off of it. It’s expected to go live in April, there is one MVNO carrier customer, who will be the test customer on it, so we’re very pleased with that. And we do expect that our strong part of the sales organization actually sits here in the U.S. with our sales support sitting in Spain.

So we’re very well position to support some growth here and we’re going to do that. Part of the, sort of recalibration and expansion of the sales in the later part of year and segwaying into 2017 comes with our ability to integrate and inter-operate with most of the major carriers on both the pre and post-sale basis. So that is ongoing work and that will also drive a lot more new business for us. But we’re very pleased with the work, it’s been done by our key U.S. personal.

Lisa Thompson

If this test customer a freebie or you will pay?

Hal Turner

It will be paid, the freebie part is the test that’s underway now. The un-free-part begins in April, late April.

Lisa Thompson

Great. Thank you. Thank you so much for the update.

Hal Turner

You’re welcome Lisa

Operator

[Operator Instructions].

Operator

And no further questions on the phone. I’d like to turn the conference back over to Mr. Hal Turner for any additional or closing remarks.

Hal Turner

Thank you very much. Again, we appreciate your time and your attention today. Look forward to speaking with and meeting you in due course. And thank you all very much. Valter if there is nothing else, we’ll conclude the call?

Valter Pinto

Thank you.

Hal Turner

Okay. Thank you all. Good bye.

Operator

Again that does conclude today’s presentation. We thank you for your participation.

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