Symbolic Logic Inc

NASDAQ:EVOL

Earnings Call Transcript 2021-Q1

[Keith Brody, VP, Marketing]

Now I would like to turn the call over to Matthew Stecker. Matthew?

[Matthew Stecker, Executive Chairman and CEO]

Thank you, Keith. And thanks, everyone for joining. We have a quite a crowd today. So I'll begin by underlining what's now become happily a regular theme in these calls a consistent stretch of quarters with positive adjusted EBITDA which began a year ago, and reflects the turnaround of our business continuing in this the first quarter of 2021.

Additionally, despite the continued global pandemic defined commercial environment, our revenue rose from the corresponding quarter last year when the impact of COVID had just started to be felt.

I want to digress a moment on that note and thank evolving employees, those in our team who have together driven our turnaround and often extremely challenging environments. Many of you know that roughly half our staff are located near our two development centers in India. You'll also likely be aware that presently India is facing truly harrowing conditions as Coronavirus is spiraling there.

Tragically, many of our regular internal calls with our people in the subcontinent are prefaced by news of sickness and lost family members. All our team in India are now working from home often in restricted conditions. Yet despite the truly horrifying background, they continue to deliver results for the company and our clients and ultimately, our shareholders. The storm they're facing and the way they're handling adversity has really brought the pandemic home and highlights an easily overlooked but critical strength of evolving which is in our people.

Seeing from that perspective, the results we're announcing today may seem even more impressive. First quarter revenue was $6.5 million. The company has generated positive cash flow from operations and increased the cash and cash equivalents balance to $4.3 million. First quarter adjusted operating loss was $0.2 million, net loss of $0.9 million. Adjusted EBITDA was positive $0.3 million. We made our final payment on the East West Bank term loan in the first quarter and are by any reasonable definition, debt free.

As I said at the start of this call, though, the pandemic has stopped slowed our rate of growth, we continue to make gains. We are on a sound footing. So the question for all of us is what happens next. It's become clear in recent months that the challenging or change pandemic defined commercial landscape isn't going to disappear anytime soon. There is no return to normal immediately in prospect. While some countries now appear to be turning the corner in the battle to control the situation. In others, like I mentioned at the beginning of the call we're seeing in India, it's still raging. At the end of last year, we were starting to make plans for operating the post pandemic environment. We quickly realized our optimism was misplaced or at least maybe a little bit miss-focused. So where do we stand now?

For Evolving and indeed other commercial enterprises to some extent we have transitioned from a world in which the key question is how do we adapt our business to one where we're asking a more focused question which is what's changed for my customers? How is the pandemic impacted their needs and expectations? It's how we've traditionally operated likely to remain the best way forward and by extension will 2021 be a year of continued adjustment or even sweeping change? Let's look at those questions in series.

The scenario you'd all love to believe is that will soon return to pre-pandemic conditions that hospitality, travel and leisure will bounce back. Shops and restaurants will once again be full that going to the office will resume its former role of business as usual. We need to ask how likely that is and how fast it can happen. An alternative scenario is that the vaccines allow us a partial return to normal but the restrictions remain for some time yet. People will still travel less. Offices may be reopened but are significantly reduced in capacity. Government imposed rules mean at some part of every nation across our large footprint is perpetually in some form of restriction or lockdown for the near future. And of course on the continuum between these two extremes are numerous other scenarios which might represent the state we'll find ourselves in for at least the next few quarters and probably longer.

Regardless of where we end up on the spectrum and individual countries the implication for businesses, consumers and the economy will continue to be profound. What we need to identify if we can is which new trends are here to stay, as opposed to which are transient temporary reactions to the ongoing situation.

Digitization, which has been accelerated by the pandemic fits into the former category. There is no going back. Businesses who have had to either adapt to digital commerce and digital marketing, or risk losing out to socially savvy online brands, who have always engaged with consumers remotely. For proof just one example is the United Kingdom's Arcadia group, one of the nation's leading retailers now in administration. Why its failure in recent years to shift its business online.

With all this in mind, while we all want to say the COVID or at least the worst of it will soon be over its effects will be persistent. So what we here at evolving have to do is to identify changes our clients can embrace and the trends they can utilize. For instance, what trends presently impacting how we engage customers with our loyalty programs and CVM activities.

Today's consumer has in historical terms led a sheltered life, world wars have ceased to exist in our lifetimes. None of us has before experienced a global pandemic. As a result, the events of 2020 have had a strong emotional impact, one is deeply rooted in our minds, and in turn affects our behavior in both the short and long run. The emotional impact is manifesting itself in significant behavioral changes not only driven by fear, but also instinctively as a way forward out of the crisis showing our adaptive nature. We see this in a number of ways. Consumers are anchoring around psychological health and safety is primary motivators, motivators of most decisions. The suffering resulting from a loss of control and connection is also redefining consumer traditional priorities. Consumers life and usage patterns have seen digitalization increase significantly. Consumers have moved dramatically towards online channels and companies industries have responded.

Numerous surveys confirm the rapid move toward digital interaction. They also show that the rates of digital adoption are years ahead of where we were only 12 months ago. Data suggests consumers today are three times likelier than before the pandemic to say that at least 80% of their customer interactions are digital in nature. This quantum shift is driving the creation of digitally enhanced offerings.

Across regions there's evidence of a dramatic increase in the rate at which companies are developing new digital products and services. This appears to be greatest in developed Asia. This year may well augur in a global rise in unemployment that means a reduction in available income and more budget conscious consumers. While disposable income ultimately returned to pre-pandemic levels, that probably won't happen very quickly a remote working, we expect that to not stop anytime soon either.

With regard to communications in person sampling declines and the shift in media consumption habits continued. Overall media consumption has changed. Consumers are now watching more television, using more social media and listening to more radio. Buying patterns and behaviors have changed. On the go random consumption has declined replaced by a search for online commerce and shopping closer to home. Trusted brands partly as a result have become even more trusted with direct personal experience and interaction more out of reach.

So the question all enterprises need to ask themselves in light of these and other trends is how has my customers behavior changed. Among the changes we're seeing are nesting indoors. Home is the new coffee shop restaurant, entertainment and fitness center. The laptop and the phone are media pivotal in everyone's lives, which quite literally depend on the more and more. For our clients, the world's wireless operators this is good news. And for us, it's a great opportunity. Together, our tools in the hands of customers have unrivaled attention.

Thus far in the pandemic, we're seeing that loyalty programs satisfaction has decreased. A shocking result considering the conditions are favorable for the reverse to be happening. What to make of that corundum. For us, it's an opportunity. As loyalty practitioners, we have the ability to keep our customers satisfied by designing innovative programs that drive long term customer relationships. Easier said than done perhaps not. There are numerous ways we at Evolving can help operators turbocharge their loyalty approach. The intersection of loyalty technology and the expertise needed to maximize the impact of that technology is our suit spot and is fundamentally what we do in our digital marketing and loyalty practice.

It has never been more important to collect, analyze and keep an eye on customer data than it is now to be constantly aware of the changing behaviors and regularly adapting communication program elements to address the changes being seen. This is exactly where we play. Evolving loyalty framework provides a way to enhance both loyalty and CVM approaches critical to the future of all commercial enterprises.

I would encourage you and considering these trends and new realities to share my confidence in evolving future. Our measured growth and increasingly established success in the past 12 months shows that we are demonstrably successful. I'll talk about the business and future plans a little bit more toward the end of this session. But for now I'll turn it over to Mark Szynkowski to take a deeper look at the financial results. Mark?

[Mark Szynkowski, SVP, Finance]

Thank you, Matthew. Good afternoon, everyone. And thank you for joining. Let us start with the total revenue. As Matthew touched on earlier for the first quarter of March that ended March 31, 2021 it was $6.5 million a $0.2 million increase from the three months ended March 31, 2020. The increase was primarily related to revenues from existing client work on new projects and upgrades, as well as a few new client projects. These were partially offset by less work as some projects near completion and some other things ongoing services decreased.

Service revenues. They're mostly reoccurring in nature increased year-over-year by $0.2 million to $6.3 million over the comparable year ago period. The company reported gross profit margins excluding depreciation and amortization, mostly consistent with the prior periods at approximately 65.3% for the quarter ended March 31, 2021.

Turning to expenses. The first quarter of 2021 total operating expenses were $4.4 million, a slight increase of approximately $0.1 million as compared to $4.3 million the corresponding year ago period. The increase was related to resource costs and our product development group as we increase staff and reassign delivery staff to product development off of the client project work. This cost was partially offset by a reduction in sales and marketing cost as travel and entertainment costs remain lower due to the travel restrictions imposed and there was also a reduction in staff in that area.

This resulted in the company reporting a loss of $0.2 million in the quarter ended March 31, 2021, consistent with last year's quarter that ended March 31, 2020 when the global pandemic just started towards the tail end. The company reported a net loss of $0.9 million for the quarter ended March 31, 2021, as compared to a net loss of less than $0.1 million in the comparable year ago period. The other expenses recorded were primarily related to foreign currency exchange loss, and a recording of a contingent liability regarding an ongoing litigation matter. While we have previously disclosed the existence of this matter regarding our former CEO in our filings, a settlement seemed unlikely and value cannot be estimated.

Well no settlement has yet been reached recent discussions between the parties have been progressing. As such, we felt prudent [free corridor] the contingent liability and the amount $2.3 million as of March 31, 2021 reflecting our estimate of Evolving Systems’ liability should the matter be resolved. The company reported adjusted earnings before interest taxes, depreciation and amortization, adjusted EBITDA of $0.3 million in the first quarter of 2021. This was an increase as compared to the $0.2 million of adjusted EBITDA in the first quarter of 2020.

In review, the balance sheet cash and cash equivalents as of March 31, 2021, was $4.3 million, an increase of 55.3% compared to $2.8 million as of December 31, 2020. Contract receivables net of allowance for doubtful accounts were $4.7 million, a decrease of $1 million compared to December 31, 2020. Unbilled work in progress, although increased to $3.6 million for the period ended March 31, 2021. This was a $0.2 million increase compared to last year.

The final account of note was an increase of $1.3 million to the unearned revenue to make the balance $5 million as of March 31, 2021, as compared to $3.7 million as of December 31, 2020. Working capital as of March 31, 2021, decrease $0.4 million to $5.1 million as compared to $5.5 million as of December 31, 2020. This change was primarily related to the changes in the accounts I noted earlier.

Also, as we mentioned in previous earnings calls and in this call, our last payment on our Eastern West Bank term loan was made in January 2021.

Thank you, and I'll now hand the call back to Matthew Stecker. Matthew?

[Matthew Stecker, Executive Chairman and CEO]

Thanks Mark. Earlier I spoke at some length and I thank you for indulging the length about how today's commercial conditions are in fact extremely favorable to evolving due to our specific areas of expertise in digital marketing and customer value management.

For those of you who don't really know what these are, essentially, this part of our business runs programs for wireless operators around the world designed to help them get the most from their existing customer bases by driving specific behavior through promotions and other incentives.

The trends we're seeing in this segment of our work give me a great deal of confidence about both our short and long term future. Carriers today must renew their approaches and their mechanisms for customer communications. Industry leaders around the world already seen as mandate and acting. And some of those are our customers already working with us to do this. Our customers are asking us every day to help them find ways to incentivize their consumers to build enhanced relationships. And in the process to differentiate themselves from their competition. They have to find relevant themed partners and promotions they can add to their portfolios.

Using Evolving’s technology to drive personalization and adding gamified elements can turn a loyalty program into a revenue center. Our clients come to evolving to help them realize opportunities just like this. And make no mistake, our contribution makes a real difference. I would encourage you to check out just as an example three Ireland's evolving driven three plus program as an example of where we can succeed. In challenging market conditions, you have to change your rewards portfolio. Entertainment related rewards might not be attractive as customers will be hesitant to use them. No one is rushing to the cinema. Customers of ours like three understand the need to look and re-analyze how customers have changed, what their fears are, their preferences, and then to help adjust their loyalty and rewards portfolios to help them thrive, feel safe, and support their new normal lifestyle.

I want to conclude with a few housekeeping notes. Just as the market isn't standing still, nor we. In the past quarter, we've taken the important step of reorganizing our sales operation to better position ourselves for both post pandemic sales and for long term success. We've streamlined several functions into one global sales organization now headed by the hugely experienced Richard Lewis, previously the CEO of the company BLS which we acquired a few years back. Richard's reputation that communications industry is near unrivaled and we believe his coherent, focused and data driven approach will quickly deliver increased results.

I've had the pleasure of tilting across carrier offices in far flung lands with Richard and I'm enormously confident that he and his newly shaped team can continue our success in closing new deals. At the same time, we've tweaked enhanced our marketing program, which over the past three years has expanded to deliver better and better results. Marketing is a process of testing and adapting the knowledge we've accumulated over the past years means our spend generates more and more impact per dollar today.

Lastly, let me co-opt to recent headline from the New York Times it read, “Tech has won the pandemic” It might not be quite that simple. But these are genuinely exciting times for companies like ours that delivers the software that's already fueling the new economy. [indiscernible] capitalizing on customer trust is king. I want to thank you for your support and look forward to update you on our continued progress.

At this point, I'm happy to open the call to questions. Operator?

[Operator]

So we presently don't have any questions. But if anybody has anything they'd like to ask, would you please use the question box now. We'll hold for about 30 seconds and then move on.

[Matthew Stecker, Executive Chairman and CEO]

In the absence of specific questions case, I'll take it that we've we've addressed every possible contingency.

[Operator]

There appear to be no questions. So ladies and gentlemen, thank you for your, actually we do have a question.

[Matthew Stecker, Executive Chairman and CEO]

I will take them. The first one is have you addressed the shelf filing. So as you may have seen we filed the shelf registration with the SEC, that would allow us to raise money by offering new shares to the public markets. That filing has now gone effective. For us, the purpose is essentially good housekeeping. At a certain level, it is simply prudent for us to raise capital in the balance sheet. We do not have specific purposes for that other than we keep our options open to raise more working capital if it makes sense. So there is not a specific target or strategic mandate for those funds. We are currently in the process of reviewing and deliberating between various brokerage proposals of people who have different ideas for how we can drive that. And that's how we look at it.

Second question, any plans to start accepting Dogecoin or another currency? I would love to accept Dogecoin from our clients. We will let them drive that. But if they want to offer it, we'd love to take it.

Next question. How do you explain the drop in the stock value by approximately $1 per share in the first quarter? Our stock is highly volatile over any reasonable period. It's still up substantially over the last 24 months. And I think that value that it's increased has largely reflected the fact that we are now debt free and the market had been betting that we might not get to that outcome. In terms of the volatility over the last 60 days the stock reached a peak on around March 19, just after the first quarter after the annual call.

Honestly, we reported reported results then are very similar to the results we're reporting now. Slight positive EBITDA and slight growth sequentially. So I cannot explain why the market has reacted a certain way. From our perspective as management, we focus on creating fundamental value and driving the business forward. And we think for the reasons we've mentioned, we've done a good job doing that. And that long term the market will appreciate that. In terms of short term motions, it's very hard to predict what the market will do.

What's interesting, by the way, is that the drop from that high on March 19 to now we have had essentially no news. Right. So there has been literally no news driving the behavior. So again it's hard to say why something happens against the background of news but it is, we're cognizant that investors have a financial stake and we're looking to drive long term value.

[Keith Brody, VP, Marketing]

Okay. Ladies and gentlemen, I want to thank you for your continued support. Management will be available to talk with investors throughout the week. And if you have any questions, by all means, please feel free to contact us and we look forward to communicating further progress and developments with you.

Operator, we're ready to end the call.

[Operator]

Thanks, everyone.