Symbolic Logic Inc

NASDAQ:EVOL

Earnings Call Transcript 2021-Q2

[Keith Brody, VP, Marketing]

Good evening. Thank you and welcome to Evolving Systems 2021 Second Quarter Results Conference Call.

As you may have seen our Form 10-Q was filed after market close today. And our press release was just issued. With us from management today will be Matthew Stecker, Evolving Systems' Chief Executive Officer and Executive Chairman.

On today's call, we will provide an update on the second quarter 2021 as well as update you on our business investment activities currently underway. Additionally, Mark Szynkowski, Evolving Systems' Senior Vice President, Finance is with us and will be available during the Q&A portion of the call. I may ask that you pose any questions you have by the Q&A button. Thank you.

Before I turn the call over to Matthew, I'd like to remind everyone that the company will be making forward-looking statements based on current expectations, estimates and projections that are subject to risks. Specifically statements about future revenue expenses, cash taxes, and the company's growth strategy are forward-looking. 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. And we encourage you to review our publicly filed documents, including our SEC filings, news releases, and websites for more information about the company.

At this time, I would now like to turn the call over to Matthew Stecker. Matthew.

[Matthew Stecker, Executive Chairman and CEO]

Thank you, Keith. Over the past 18 months, there's been a lot of talk about a new normal, how would the workplace change as a result of the pandemic? How would companies weather the storm of adapting to new ways of doing business? How would habits and preferences change in light of the impact of lockdowns? Would post-pandemic normal return to something resembling pre-pandemic normal?

Happily at Evolving, as we announce our second quarter results today, our new normal is hallmarked by the fact that we have once again been able to make a significant gain in our revenues and we came our stretch of quarters with positive adjusted EBITDA.

So it's worth starting with the numbers. Second quarter revenue was $7 million and year-to-date revenues are $13.5 million. The company has generated positive cash flow from operations and increased the cash and cash equivalents balance to $4.9 million. Second quarter operating profit was $0.4 million with a net income of $1 million.

Adjusted earnings before interest, taxes, depreciation and amortization, EBITDA as the kids call it, for the second quarter was positive $4.7 million. These figures suggest that Evolving's new normal is built on an increasingly strong foundation. As most of you know the company was going through a transformation before the pandemic hit. In many ways during the past 18 months we've emerged from that period of change and have now entered a period of growth.

If we remind ourselves a little history, after 2018 our primary challenge as a company was the integration of three recent acquisitions, with three different but effective competing effectively competing products to create a new customer value management and loyalty division of our business. I use the word challenged there and I sure mean it. When the pandemic arrived early last year, we had largely met that challenge. The aforementioned three products each with three separate code bases had been replaced by Evolution, our new unified and purpose-built CVML platform.

At the same time our traditional customer acquisition and network services product lines have been redeveloped into the ECM Lifecycle Management Suite. At the time, late 2019, that is, so not when supported by the financial numbers, I spoke in these calls about my confidence that a turn in our fortunes was imminent. So it has proved. It's probably fair to say that the pandemic has slowed down our projected growth curve as virtually all industries adapt to a different commercial landscape. But the continuing bottom line success speaks for the momentum and directionality that is gradually building with our business.

This momentum we are confident will not only be maintained, but in fact will gather pace in the coming quarters. One reason for this confidence is demonstrated in how well the recently rebuilt Evolving Systems assets and competencies match up with the direction of travel towards which the telecoms industry is heading. For example, the leading consultancy firm, Deloitte recently published its list of biggest trends for 2021. Deloitte's analysis highlights three key strategic opportunities for communications service providers to position themselves to thrive in the future.

One, renewing focus on customers' needs by taking more nuanced approach to customer engagement. Two, converging and re-mixing entertainment experiences through new service offerings, entertainment bundles. And three, repositioning to monetize advanced wireless networks through new products, services and models. Deloitte's findings, consistent with those of almost every other industry expert, effectively position Evolving at the front and center of an enormous opportunity.

Our solutions directly impact and enable telecom's ability to address all three of these trends. How? Evolution, our customer service platform across - sorry, Evolution, our customer engagement software platform, is built using the latest technologies and is designed specifically to capture customer data from multiple sources, build a 360 degree profile of customers and integrate with communication and provisioning channels providing marketing, retention, and customer value management teams with an intuitive user interface so they can more effectively manage real time context-driven decisions using machine learning, advanced customer journey management, gamified loyalty and rewards.

Using Evolution puts our customers at a competitive advantage by putting both inbound and outbound customer engagement in a single platform that orchestrates personalized journeys across multiple campaigns and offers. It provides a powerful marketing catalog to create products based on the telecom\s own services as well as third party products and to build various packaged offers with various prices, enables more complex gamified loyalty program mechanics beyond points earn and burn. It's flexible dashboards and reporting provide advanced customer insight and best practice program measurement against key performance indicators.

Evolution, and more generally, this product niche is one to which telcos are not directly looking as they plot their post-pandemic business models. We know because our phone has been ringing. At this juncture on a confident note, I'll now turn over the call to our CFO, Mark Szynkowski for detailed update on the second quarter 2021 numbers. Mark?

[Mark Szynkowski, SVP, Finance]

Thank you, Matthew, and thank you to everyone for joining this afternoon. As Matthew reported, the total revenue for the second quarter ended June 30, 2021 was $7 million. This was a $0.7 million increase from three months ended June 30, 2020. The change was primarily related to revenues from existing client work on new projects, and an upgrade to those existing clients and new client projects as well.

These gains were partially offset by the reduction in work with other clients as projects neared completion or services request a decrease from the corresponding period in 2020. Total revenue for the six months ended June 30, 2021 was $13.5 million, or approximately a 6.7% increase from $12.6 million in the same period a year ago, predominantly related to the aforementioned reasons.

Services revenues, which are mostly reoccurring in nature were $13.3 million year-to-date, an increase over year-over-year of 1 million or 7.8% from the comparable year-ago period. Service revenues which include revenues from the companies' preference for managed services over perpetual licensing, comprise approximately 99% of our total revenues year-to-date for June 30, 2021.

The company's gross profits, margins, including depreciation and amortization were approximately 68.8% for the quarter ended June 30, 2021, an increase over the comparable period a year ago. For the six months ended June 30, 2021, we reported gross profit margins excluding depreciation amortization of approximately 67.1% as compared to the gross profit margins of approximately 65.7% for the six months ended June 30, 2020. The increase in gross margins was primarily related to our work on new projects, and an increase in revenue from those managed service accounts which both provide higher margin.

Our total operating expenses were $4.5 million for the quarter ended June 30, 2021, an increase from total operating expenses of $3.8 million in the quarter ended June 30, 2020. The increase was primarily related to resource cost spent in our product development, as we have increased our staff size. There were increases in general and administrative costs primarily related to higher professional and accounting fees, as well as internal resource costs compared to the prior year period.

Total operating expenses were $8.8 million for the six months ended June 30, 2021 compared to total operating expenses of $8.2 million for the six months ended June 30, 2020. The increase of approximately $0.6 million was related to the aforementioned increases in resource costs and product development, in the G&A group, increases in professional and accounting fees and an increase in equity compensation costs. These are partially offset by a reduction in resource costs in our sales and marketing team, as well as a decrease in travel and marketing costs due to the restrictions imposed during the global pandemic.

The company reported an operating profit of $0.4 million and a net income of $1 million for the three months ended June 30, 2021. That income was inclusive of other income items such as the forgiveness of the Paycheck Protection Program loan, and a foreign research and development tax credit related to work done by our French subsidiary, and if not applied to future tax liabilities will be refunded in future years. These were increases over the three months ended June 30, 2020, in which operating income of $0.3 million and a that loss of less than $0.1 million.

The company reported adjusted EBITDA of $0.7 million for the quarter ended June 30, 2021 compared $0.6 million for the same period a year ago. And adjusted EBITDA for the six months ended June 30 2021 was $1.1 million compared to adjusted EBITDA of $0.8 million for the first six months in 2020.

Turning now to look at our balance sheet, our cash and cash equivalents as of June 30, 2021, were $4.9 million, an increase of 77.2% compared to the $2.8 million as of December 31, 2020. On June 30, 2021, contract receivables net allowance for doubtful accounts were $4.7 million, a decrease of 16.2% compared to the $5.7 million as of December 31, 2020. This was related to strong collection efforts and an increase in the unbilled work in progress of $0.8 million to a total of $4.2 million as of June 30, 2021, as compared to $3.4 million as of December 31, 2020.

Unearned revenue was $5.5 million at the end of June 30, 2021, and increased to $1.8 million compared to December 31, 2020. This increase was primarily related to collection of yearly support contracts billed at the start of the support period, and some large projects with significant billing during the early stages of the project.

Working capital as of June 30, 2021, increased to $5.6 million, compared to $5.5 million as of December 31, 2020. The change was primarily related to the changes in the accounts we just noted.

At this point, I'd like to hand the call back to Matthew Stecker and remind you that you're welcome to post any questions in the Q&A section. Matthew?

[Matthew Stecker, Executive Chairman and CEO]

Now. Thank you, Mark. Before I continue, I will briefly note as many of you may have seen announced on our website that we have amicably resolved our dispute with our former President and CEO and my predecessor, Thomas Thekkethala. As part of that agreement, Evolving was happy to make a donation to the Learn from Life Foundation, the charity the Thomas steers that provide support to individuals in India, a region in which the company has a significant presence. The Foundation's valuable work is entirely consistent with Evolving Systems' ethos, and beliefs and we are thrilled to be able to invest in Indian education.

Earlier in the call, I spoke at some length about the telecom industry's direction of travel and how that's benefiting us, particularly with regard to our CVML and loyalty business unit. With digitization happening at pace, that's a glamorous and potentially lucrative niche to be involved in. And as I noted one reason we are confident that the present growth trend will continue. However, our confidence isn't founded only on one half of our business. In our traditional customer acquisition and network service business the same is also true. I like to take a little time to spell out why.

Whether via the newer eSIM, or the traditional physical SIM, which is still forecast to be with us in large volumes for the foreseeable future. The centrality of the SIM presents communications service providers with a growing logistical challenge. Demand for mobile data will likely double over the next five years, which means that mobile network operators are able to find more efficient, less costly methods of handling that growth will be at an advantage. To achieve this, they must reduce the cost of managing the SIM lifecycle end to end while simultaneously providing upgraded subscriber experiences.

With increased competition in any market, there invariably comes a need for greater efficiency. For an enterprise while finding alternative sources of revenue is critical, lowering existing costs is no less important to financial success. In the context of SIM logistics Evolving believes that this can best be met through a digitized cost effective approach to a complete SIM lifecycle management process. This is a process that runs from sales through to ordering from distribution to provisioning and right through to activation. If SIM logistics can be streamlined, it will help service providers control and reduce costs associated with a variety of functions.

Network resource management and connections, network optimization and SIM logistic processes, all while driving new sales through digitized opportunities and subscriber interactions. A SIM lifecycle whether it's eSIM or otherwise begins before the SIM is activated, or in many cases even exists. For example, when thinking about what services are to be produced and what identifiers need to be resourced within the network SIMS need to be purchased, they then then need to be shipped distributed and placed into the market. The SIMS then need to be sold and activated. Driving sales is necessary to potentially and also an expensive process because enterprises need to manage an increase in SIM supply chain, while simultaneously reducing their costs.

Efficiencies can be gained by developing new sales upgrade tactics like self-service secure SIM swapping, activating new services in real time by assigning MSISDN and other associated resources at the time of first use, and designing new initiatives to target moving SIMS. These are all businesses Evolving has been in the forefront of for over a decade. The same lifecycle begins with resource management. When a SIM using enterprise goes to market these resources needs to be set up and loaded onto the network somewhere in a ready state. This is the case of dynamic SIM activation or pre-activation are being considered.

Placing an order with multiple SIM manufacturers and streamlining the ordering process is the next stage in the lifecycle. Standardizing the ongoing ordering process at the manufacturers and understanding when an order should be placed is crucial as SIMS are sold at different times throughout the year. SIMS are then distributed and sent to a warehouse or storage location, and that's when they're resold. The seller will require an end to end system to track the entire distribution process from the same vendor right through the storage location into distributor systems and into the market.

This is a topic that we're seeing becoming very popular through industry. Enabling the digital sales channel and providing service providers with the ability to engage and monetize their network of subscribers is the next lifecycle stage. There is need for a truly flexible digital sales force, which enables dealers to interact with their subscribers across all their products and services. This can help provide visibility of dealer performance and in turn drastically reduce costs which is vital to the selling process.

In addition, sales activities can feed back into the distribution and ordering functions, enabling just in time logistics. In short, the traditional business of Evolving is very much alive and represents the majority of both our profits and revenues. We only anticipate continued growth and vitality in these businesses based on what we're seeing in the market.

One last note, there was some public reaction to two parts of our last earnings call from some prominent bloggers. Well, I usually focus on the business itself and leave the commentary to the market. I'll respond to a couple of things that were said about the last call. First as to our Shelf Registration, it was pointed out that the Shelf Registration in its text allows for raising funds "up to $100 million." Some commentators were aghast that we'd allow for such a massive dilution of shareholders. I would just like to note that this figure is a placeholder for we're asking for authorization to raise as much as we'd be permitted to raise under the relevant rules.

$100 million is just a large number and a placeholder and it could easily - just as easily have read $1 billion or $1 trillion. There was never any intention to raise $100 million, a billion or a trillion dollars. The baby Shelf rules which apply to Evolving should we at some point choose to execute on such a fund raising exercise, if called upon today would limit us to a raise under $10 million. I will emphasize what I said back then, which is that while we have no plans right now to raise additional cash, having the shelf effective gives us a quick path to doing so in the future should we have a need for additional capital?

Finally, in the last call, I feel that a question from an investor asking whether we be open to accepting Dogecoin as a currency. I laughingly said yes, assuming that everyone was in on the meme culture that pervades the Doge ecosystem and precipitates such questions across public earnings calls. Still, perhaps my laugh wasn't obvious enough because my crypto qualifications were called into question for entertaining, accepting an unstable meme based currency. Lesson learned I suppose.

In all serious though - my seriousness though, my background in crypto goes back to the beginning. And crypto is increasingly something I'm not only involved in personally, but is squarely in our product development plans. It's fairly obvious that an evolution from points to digital currencies is going to happen in the loyalty space. Today we issue points for programs around the world. For many of these we will be issuing crypto tokens in the future. Our customers are the most conservative enterprises and while I would be happy for a world where crypto gains enough traction for commercial settlements, we are far less likely to see crypto used as a tool in our - so we are far more likely to see crypto used as a tool in our loyalty platform long before our customers use crypto to settle billing transactions with customers.

That said, I'd be thrilled to see it happen. Anyway, I'd like to thank all of you for attending this session. And in addition to celebrating another positive quarter closing, I hope you're now in a position to share my confidence about the opportunities ahead of us, knowing that we have the tools and the capacities to address a lot of key issues in our target markets. For Evolving, these are potentially exciting times ahead.

I also want to thank you for your support and look forward to continuing to update you on our continued progress. At this point, I'm happy to open the calls to questions.

[Keith Brody, VP, Marketing]

Thank you, Matthew. Right now, it doesn't appear that we have any questions. So with that in mind -

[Matthew Stecker, Executive Chairman and CEO]

There is one question. Someone has asked in the question answer whether it's disconcerting that there have been some 10% owners and directors selling the stock back in March. Generally, the Directors we have, have been on board for a long time. The stock did trade on market volatility. And I think I share your enthusiasm for the long term, the long term opportunities in the stock, I think that you'll you know, I can't blame people for profit taking. And you'll see that occasionally when the stock does hit spikes, but I think that long term, both management and the board are enthused about the value of the stock long term.

[Keith Brody, VP, Marketing]

Okay, thank you, Matthew. I don't think we have any other questions. So with that in mind, ladies and gentlemen, thank you again for your continued support. Management will be available to talk to investors throughout the week. And if you have any additional questions, by all means free, feel free to contact us and we look forward to communicating further progress and developments with you. Operator, we're now ready to end the call. Thanks, everyone.

[Matthew Stecker, Executive Chairman and CEO]

Thanks everyone.