Evolving Systems' (EVOL) CEO Thomas Thekkethala on Q2 2016 Results - Earnings Call Transcript

| About: Evolving Systems, (EVOL)

Evolving Systems, Inc. (NASDAQ:EVOL)

Q2 2016 Earnings Conference Call

August 02, 2016 04:30 PM ET

Executives

Thomas Thekkethala - President and CEO

Dan Moorhead - CFO

Analysts

Josh Seide - Maxim Group

Jon Jung - Trailhead Asset management

Operator

Good day, ladies and gentlemen, and welcome to the Evolving Systems 2016 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to turn the conference over to your host, Dan Moorhead, Chief Financial Officer. You may begin.

Dan Moorhead

Good afternoon, and welcome to Evolving Systems 2016 second quarter earnings call. I am Dan Moorhead, Chief Financial Officer and joining me today is Thomas Thekkethala, Chief Executive Officer.

During the course of this call, we will be making forward-looking statements based on current expectations, estimates and projections that are subject to risk. Specifically, our statements about future revenue, expenses, cash, taxes and the company’s growth strategy are forward-looking statements.

Listeners should not place undue reliance on these statements. There are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information about the company.

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

Thomas Thekkethala

Thanks, Dan. Welcome and good afternoon. We are continuing to build momentum in 2016. In the second quarter we went live with our first mobile gaming managed services customer implementation in record time. And we continue to expand our managed service offering to existing customers. License and servings bookings were up 21% year-over-year and a mobile marketing solution segment was up 77% year-over-year. License and e and services backlog was up 48% year-over-year. And our new lean agile processes that I will discuss later are helping us improve the time and cost at solutions development and delivery. Second quarter adjusted EBITDA was up 80% year-over-year and adjusted EBITDA margin was 33%.

Dan will cover the financials in more detail in his update. We continue to focus our efforts in two areas. The first, mobile consumer engagement and marketing. And second, accelerating our transition into the recurring revenue managed services model. So, the first area of focus is mobile consumer engagement marketing. This is poised to be a very large opportunity for us. As we've discussed in the past, mobile carriers have invested significantly in spectrum, network buildout, and customer acquisition. And companies like Google, Facebook, WhatsApp and Skype and others and many more have leveraged these assets for dramatic growth in next generation services like mobile banking, gaming, entertainment, and mobile appetizing.

In the meantime, the carriers have missed out on these growth opportunities for the past few years, but they are now rising to the challenge. These next gen service opportunities of the carriers require specific software modules that first of all easily integrate into the carrier network and back office IT systems. Process large volumes of customer transactions in real time to develop dynamic profiles of that behaviour. Engage consumers and upsell and cross sell these next gen services. Activate these services, accelerate customer acquisition and provide CRM loyalty points and rewards.

It's a perfect fit for us because evolving software including TSA, DSA, TNM and RLM work as an integrated platform to support all of these functions. Take the example of Nova Gaming Ventures, a classic example of leveraging the network and consumers to generate incremental revenues through gaming. NovaPlay is a next gen platform for multiplayer gaming communities, where consumers can discover big ticket titles and free-to-play new games within an active gaming community including competitive match play, social features, tournaments and discussion forums.

As NovaPlay CEO outlined, their business depends on their ability to efficiently acquire, engage and retain gamers. These selected evolving systems based on our software platforms ability to rapidly build, test, and launch highly personalized customer acquisition engagement and upsell marketing tactics. And he noted there are teams, expertise and experience was critical to our selection. We have gone live in record time, using this lean agile delivery methodology that included active dialogue experimentation and trials with Nova marketing team. It has helped us score live in less than three months, compared to our traditional approach which will normally take six to nine months.

Our marketing services team is using our market tested real-time profiling and analytic solutions to generate actionable intelligence and highly personalized offers that are driving rapid customer acquisition and increased uptake of NovaPlay services. NovaPlay gaming is the tip of the vast opportunity in next gen mobile services that spans mobile entertainment, banking, retail, commerce and mobile advertising. Every carrier is either driving these opportunities directly or through partners. And we are uniquely positioned to enable our carrier customers to maximize these next gen opportunities.

These next generation services also generate massive event volumes per hour that need to be processed and profiled in real-time. So, we at Evolving Systems have initiated significant investments in big data and stream processing technologies similar to those used by Netflix, LinkedIn and others to support these requirement for the carriers in our platforms and solutions. The second major area of focus is managed services. Since I joined Evolving Systems 10 months ago, we have been positioning our managed services to our carrier customers for both their traditional services as well as for these next generation services.

For example, last quarter we discussed an example of one of our propose managed services for our carrier customers traditional voice and data services and that is to help them accelerate the conversion of their 3G customers to their 4G network. So, instead of offering this as a one-time license and service proposal, we propose a managed service that combines our software with our team's expertise to drive their business outcomes. In a managed service model we charge a monthly recurring fee and an additional performance fee for achieving and exceeding their goals.

NovaPlay is an example of the new kind of managed service proposal for next generation services. So, together these managed services generate several benefit for us. Managed services can be delivered remotely from India by a cross functional team supporting multi customer simultaneously which drives increased profitability. Lessons learnt at one customer can be implemented to other customers which drives higher performance and increased performance fees that have very high margins. Licenses on the other hand, deliver one time lumpy revenues whereas the managed service delivers recurring predictable and growing revenues and profitability over the life of the customer relationship.

As I mentioned, we have also rolled out lean agile methodologies to accelerate our marketing services, solution development and delivery to our customers, resulting in substantial improved efficiencies like we demonstrated at Nova. The combination of managed services at our existing customers wins at new customers like Nova and the lean agile methodology rollout has helped us drive EBITDA increases of up to 80% with 33% adjusted EBITDA margins in the second quarter. In light of the growth opportunities ahead of us that are outlined, combined with our increased investment in the business, our board of directors has decided to suspend the cash dividend in the immediate future in order to provide us maximum financial for flexibility for this future growth.

The board will continue to monitor our progress and make determinations on potential future dividend payments accordingly.

In summary, we are very focused on the customer engagement and marketing for both traditional carrier services and next generation services like mobile gaming, entertainment, banking and mobile advertising. We're investing heavily in big data and stream processing platforms to support these requirements. We can drive these solutions through our combined customer base at 75 carriers in 50 countries touching 1.3 billion consumers. We continue to push our managed service offerings that create significant value for our customers and we have initiated lean agile methodologies to further increase our efficiencies of developing and delivering solutions.

Now, I turn the call over to Dan Moorhead who will discuss Q2 '16 results in more detail. Dan?

Dan Moorhead

Thanks Thomas. Second quarter financial results. Second quarter revenue was flat, year-over-year at $6.1 million. Licence and Services or LS revenue was $3.2 million and Customer Support or CS revenue was $2.9 million. Q2 revenue was impacted by the weakening of the British Pound but keep in mind that expenses were also impacted but in a positive way. So, the overall effect of the recline in the pound on our economic position is minimal. Total cost of revenue in operating expenses were reduced by 13% year-over-year to $4.5 million from $5.1 million. The decrease included lower spending in all expense categories which more than offset $63,000 in restructuring charges and the assumption of $0.6 media operating expenses which we didn’t have in Q2 last year.

Specifically, on a year-over-year basis, sales and marketing expense decreased 21%, general and administrative expense decreased 17% and product development expense was lowered by 13%. Our profit matrix remained solid in Q2, including earnings per share of $0.7, 79% gross margins and 33% adjusted EBITDA margins up from 18% last year and 28% in Q1. Adjusted EBITDA increased 80% year-over-year to $2 million from $1.1 million last year. Q2 was our 33rd consecutive plausible quarter and GAAP net income was $780,000. On the balance sheet, we reported cash and cash equivalent a $5.9 million at the end of the second quarter up from $3.7 million in Q1 but down from $8.4 million at 2015 year end.

Working capital was $7.1 million, which is up from $3.5 million at 2015 year end because as you may recall, in the fourth quarter the $10 million balance on our revolver was cost by this trend set. Then in February this year, we paid down $4 million on the revolver and converted the balance to a term loan of which $987,000 is now classified as the current liability and $5 million is long term. Loan as interest only through the remainder of 2016 and then is paid-off over 36 months beginning in January 2017.

During the second quarter, we continued headcount and other expense reductions. Over the past three quarters we've taken approximately 1.5 million in restructuring charges including the $63,000 in Q2. To-date, our cost cutting measures have eliminated over $6 million in annual expenses from the business.

Six months results. Revenue through six months was $12.6 million versus $12.7 million in the same period a year ago. LS revenue was $7.1 million and CS revenue was $5.5 million. Total cost of revenue and operating expenses during both periods were $10.4 million but 2016 expenses include $1 million in restructuring cost. Adjusted EBITDA expense were 12% lower in the first half of 2016 compared to 2015. Gross margins were 78% up from 75% in the same period last year. Operating income was $2.1 million. GAAP net income was $1.2 million or $0.10 per share and adjusted EBITDA was up 39% year-over-year at $3.8 million.

Booking and backlog highlights. We find booking as sales orders that are expected to be recognized as revenue during the following 12 months. Total second quarter bookings increased 6% year-over-year to $6.3 million from $5.9 million in the same quarter last year. Q2 LS bookings increased 21% year-over-year to $3.4 million from $2.8 million. MMS LS bookings increased 77% year-over-year to $2 million from $1.1 million and total CS bookings were $2.9 million compared to $3.1 million year-over-year. Our total backlog at June 30th increased by 20% year-over-year to $12.4 million from $10.3 million. LS backlog grew 48% to $7 million from $4.7 million and included $5 million of MMS up 65% year-over-year and 1.9 in tertial activation or TSA up 17%. I'll close with our usual reminder that a single order can have a significant impact on our quarterly results. Accordingly, we continue to advice that it's more accurate to judge our performance on an annual rather than quarterly basis.

With that, we thank you again for joining us today and we are now happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Brian Kinstlinger with Maxim Group. Your line is now open.

Josh Seide

Hi, this is Josh in for Brian everyone. My first question is can you talk a bit about the process of cross-selling managed services for RLM into existing DSA, into the existing DSA install base and any progress you have seen over the quarter on that front?

Thomas Thekkethala

Yes, this is Thomas. This is the topic that we have been sort of working on. I mean, has been positioned with all the different carrier customers. It's about driving the monetization of many of their services using it. I think we have a lot of trail and other activity going on and we expect some actual deals closings in the upcoming months.

Josh Seide

That's helpful. And kind of getting to the Nova gaming win. Do you see other manage service opportunities in the pipeline for mobile gaming specifically or beyond that what are some of the verticals that we might expect to see coming up in the pipeline of opportunities?

Thomas Thekkethala

Well, beyond gaming there is mobile banking. Some of the countries have actually issued payment bank licenses to the carriers. And so, they have now published RSPs to get the same capabilities they have on the carrier side for mobile banking. So, this set of next generation services is the next growth opportunity for the carriers and we believe we have a very, very strong positioning there.

Josh Seide

Okay. And just to clarify the Nova win is that is a gaming service that's offered through a particular carrier in India. Is that the correct way to characterize the one?

Thomas Thekkethala

Actually, Nova is being delivered over multiple carriers. So, we are learning a lot in the process and now we can now take this out to in a lot more places.

Josh Seide

That's helpful. And then having suspended the quarterly dividend, can you talk a bit more elaborated, a bit more on the ways that that money might be put to work to accelerate the top-line?

Thomas Thekkethala

Yes. As I said, I think one of the important aspects of what we are doing now with these next generation services is that the opportunity is fairly large and substantial because today the real winners in the mobile ecosystem are the Google's and Facebook's of the world. And the carriers have really done their attention to this growing opportunity. We have the master agreements with these 75 carriers in 50 countries. We are touching 1.3 billion consumers. And so, it requires a much higher degree of processing capabilities that I discussed. So, a bringing in technologies and big data stream processing, the kind of things that the Netflix's and others have invested significantly in it and that's one of the biggest drivers of the reasons why we've decided that we needed the flexibility to invest in these opportunities because once you do the trials you have to be prepared to deal with billions of transactions an hour.

Josh Seide

That's helpful. And then lastly with I think the line share of the restructuring now kind of in the rear view mirror, can you talk a bit about where you see margins longer term? Are the margins that we saw this quarter kind of sustainable or should we expect that the run rate maybe a little bit more muted? Thank you.

Dan Moorhead

This is Dan. Are you looking at gross margins or EBITDA margins or?

Josh Seide

I was actually, I was talking specifically about EBITDA but a gross margin came in a bit higher than in where we were thinking a bit higher than last year last quarter. So, maybe if you can kind of just talk broadly.

Dan Moorhead

Okay. The gross margin they tend to be in the range they have been, 79 for the quarter was pretty good but somewhere in that that 75 to 79 is normal for us. On the adjusted EBITDA side we did have some currency stuff this quarter. That comes out adjusted EBITDA but just it affects our revenue lines and our expense lines as well. So, if I were to look at it I think somewhere in that 30% range is a normal adjusted EBITDA margin for us.

Josh Seide

That's helpful. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Jon Jung with Trailhead Asset management. Your line is now open.

Jon Jung

Hello. I wish I could tell you that we were pleased with each of the results for the quarter or you're dropping the dividend but we have been shareholders for a number of years and I am afraid we lost confidence in you. I don't know where sales in this sole program but we're messing and we are very disappointed in the way business has gone. So, we are out of here. Thanks.

Operator

[Operator Instructions] And I am showing no further questions. I would like to turn the call over to management for any closing remarks.

Thomas Thekkethala

We just like to thank everybody for joining us today. And we look forward to updating everyone with our Q3 results in November time frame. Thanks a lot.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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