Evolving Systems, Inc. (NASDAQ:EVOL) Q1 2019 Earnings Conference Call May 15, 2019 5:00 PM ET
Matthew Stecker – Executive Chairman & CEO
Mark Szynkowski – SVP, Finance
Conference Call Participants
Thank you and welcome to Evolving Systems 2019 First Quarter Results Conference Call. As you may have seen, our Form 10-K was filed after market close today, and our press release was just issued.
Joining us from management today will be Matthew Stecker, Evolving Systems’ Chief Executive Officer and Executive Chairman; and Mark Szynkowski, Evolving Systems’ Senior Vice President of Finance. On today’s call, Mark will provide an update on the first quarter 2019 results and Matthew will update you on the business activities currently underway. Mark and Matthew will be available during the Q&A portion of the call.
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 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, and we encourage you to review our publicly-filed documents, including our SEC filings, news releases, and website for more information about the company.
At this time, I would like to now turn the call over to Matthew Stecker for some opening remarks. Mathew?
Thank you, and thank you to everyone who has joined us today on this call and webcast. Let me start by acknowledging that the first quarter results we’ve announced today underlie the ongoing complexities that corporate and product transformation has been our focus over the past 12 months and the fact that this process is not yet complete. For this strategy, we did initiate it because we identified a trend of revenue decline in our core business that had to be addressed, really going to be addressed by broad changes in our approach to the market and our products themselves.
As we expected, we continue to feel the pinch of historical revenue decline now, but frustratingly, we are not yet reaping the full benefits of the corporate and product changes and innovations we have invested in due to our long sales cycle. In the second half of this year, I’m confident that our performance will begin to show positive effects in these ongoing sales and investment activities.
I’ll address in some detail on this call where we now stand with regard to our progress toward building the new Evolving, a focused company with an updated product line form for multiple acquisitions over the past two years. But it is fair to say at the outset that the transition is taking longer than when those investments, particularly, the acquisitions were contemplated.
When we begin a journey that required consolidating three products, the three co-bases to create one state-of-the-industry customer value and loyalty offering. When we started the transition for license to services business model, we began investing in our human resources infrastructure, we knew there will be a number of difficult hurdles to overcome. But while progress has been slower than we would have liked, our core activities remain very much on track. The product we sell today realized revenue between two and four quarters into the future. We expect improvements in top line financials in the later part of this year and the early part of next.
With that said, let me reassure you once more, the company continues to be focused on generating and sustaining long term growth and profitability. We are firmly focused on these goals and we are confident that we are progressing towards them. We have worked to tight-rate our investment level so that we remain profitable and we have done this successfully through the past year. In the first quarter, unexpected cost associated with our audit change incurred in the last phase of the quarter impacted us and swung us toward a loss. This has been in our plan and we don’t expect to repeat it.
I began our last call by saying there are investments in product research and development, marketing, partnering development and sales over the past two years were beginning to bear fruit. In spite of a difficult quarter, which may be traditionally a low quarter as our clients’ approved spending budgets for the year, this remains the case.
As we know only too well, the telecom software sales cycle is likely sometimes perceiving a what seems a near-glacial case. We have not only seen interest in our new Evolving technology, the critical component of our future success, but also the establishment of a much healthier sales pipeline, the first components of which are now progressing towards disclosed deals.
Finalizing and implementing sales of the new technology is necessarily more complicated than doing the same thing with the established technology, as wrinkles and highly-complex solutions often are only identified and need to be ironed out on the slide. But at the overwriting numbers in the first quarter have been lower partly because it is reality. The perspective revenue moving through the pipeline gives us cause for optimism.
I noted in our last call that many of you will also have observed that our new website has now been launched, finally providing Evolving with a new window to the market that accurately reflect the advantages our technologies can deliver and articulate the company’s value proposition in a way that enables us to stand against our competitors.
While the process is fully optimizing the newly built website now underway, the measured results and impact at the site in a profitable future being established. In a year-on-year comparison, the first two months of the new site versus the old one, the traffic volumes have increased by about 80%. That means roughly twice of any perspective buyers of our technology are now seeing and interacting with us.
Getting the word out there is the first step on the road to profitability. We are doing that far more effectively than before. Our investment in marketing is also paying off on the new website. In 2017, marketing generated no new sales prospects at all. In 2019 as of today, marketing efforts have added significant value to the pipeline, much of it has already progressed a long way towards closed deals. On with [ph] new stream of opportunities that a new state-of-the-art industry product, there is as I’ve said, every cause for optimism about the remainder of the year in the future. We expect a number of win announcements in the second half as described.
I’ll talk more about these and other developments later in the call, but first, let’s go over the numbers and for that, I’ll turn it over to Mark.
Thank you, Matthew. Good evening. Let me review our results. Total revenue for the first quarter ended March 31, 2019 was $6.7 million, a $1.5 million or approximately 17.9% decrease over the comparable year ago period. This decrease is related to a $1.3 million loss from service revenue from pricing pressures up to our existing clients and less projects. Various reasons for the decrease includes changes in regulatory compliance such as GDPR standards where customers are being acquired by larger firms causing them to change their platform.
First quarter of the prior year 2018 had many large ongoing projects, mostly are related to contracts from the acquired company that since have been completed during 2018. So compared to the quarter a year ago, we have also had some decrease in revenue. These were offset by an increase of $0.4 million in revenue from new implementation and new incremental licensing of $0.5 million.
We reported gross profit margins excluded depreciation and amortization of approximately 71% for the quarter ended March 31, 2019 as compared to approximately a 65% [indiscernible] for the same quarter last year. This increase in gross margin was primarily related to products and service mix that includes that additional licensing revenue, but we have also gained deficiencies due to a full integration of the acquired work force with the existing delivery teams contributing to higher margins on our project.
Total operating expenses of $5.4 million this quarter increased approximately $0.9 million as compared to the corresponding year ago. We continue our investments and focus on product development and growing our global business development team. Further, there was approximately a $0.3 million increase in professional fees mostly related to the unforeseen additional charges associated to the complexities and the completion of our year-end audit. We also invested in non-repeatable accounting services to update our global transfer pricing to include the inquire company and current correct [ph] our tax benefit going forward and completed our resubmission of prior year tax returns to claim R&D credits for our United Kingdom subsidiary.
Recently announced, our transition to new independent audit firm for 2019 was, Mark LLP, and we look forward to working with that. But we also continue to identify areas to gain efficiencies in our processes. The company reported a loss of $0.7 million as compared to $0.8 million in operating income in the quarter ended 2019 versus first quarter ended in 2018 respectively.
Net income per share both basic and diluted were -$0.09 for the quarter ended as compared to last year’s basic and diluted was $0.04 profitable. The company reported adjusted earnings before an interest tax of depreciation and amortization of a -$0.3 million in the first quarter, this compared to $1.4 million EBITDA in the first quarter of 2018.
Cash and cash equivalents as of March 31, 2019 were $5.6 million, a decrease compared to $6.7 million as of December 31, 2018. Our contract receivables and our unbilled work in progress, net of allowance for doubtful accounts was approximately down $0.1 million compared to the same period last year as we continue to focus on our collection and invoicing procedures.
Working capital as of March 31, 2019 decreased $3.4 million since December of 2018. This was primarily due to the re-class of long term debt to short term debt as we are currently non-compliant with our current loan covenants, but are working on restructuring the terms that will allow us to continue to execute on our strategic plan where we look for alternative resources.
We just have not had sufficient time to fully engage with our lenders on the new terms prior to the filing deadline. Going forward, we expect to negotiate covenants that aligns strategically and we’ll make every effort to stay in compliance. The company has made every loan payment in full and as scheduled within our agreement and anticipate while making all future payments as we believe we have ample cash on hand and liquidity and the working capital to do so. Other factors affecting working capital was the decrease in our cash used predominantly for the reduction of our debt and payment of interest.
Also, we added a new current liability of $0.4 million, recorded as part of the adoption of ASU 2016-2 on topic 842, updating the accounting of operating leases that was not recorded as of year-end last year. As I said, we believe there is ample liquidity and working capital to fund our business and to support the level of investments we intend to make in the coming year while continuing to look for synergistic and accretive acquisition and/or other strategic partnerships.
Thank you and I’ll turn the call back over to Matthew at this time.
Thanks so much, Mark. I’d like to underline some of my introductory comments. Though the first quarter was a difficult one, a candid and realistic look at it has let us to stake firm on the current strategic path. It’s not to say that challenges don’t remain as we finalize our operating model over did the balance of the year will be plain in sailing. Let me tell you, given that why leadership believes that the company’s path and our commitment to it is now stronger than ever.
Evolution, our new customer value of loyalty platform is here. It’s finished and we’re putting it in customer’s hands right now for the first time. I really can’t stress enough that this is a key milestone for us. Furthermore, the activation side of our business, what some people call the legacy, but really it’s half of our business and we expect it to stay still, is also seeing product renewal with a new version of our smart dealer offering that is leading to a number of sales opportunities, a new positioning around managing the sales cycle for operators really all around the world.
Taking three different platforms with three different co-bases and migrating them towards a single new technology that retains the best features of each has remained a difficult problem. Not only is it technological, but also the human challenges of this undertaking are time-consuming. We’ve been able to complete the task successfully, but perhaps we’re a little bit optimistic about the time of the take. That reality has impacted first quarter results. We had anticipated being able to start reaping the rewards of evolution in the first half of this year. Realistically we will now be in the third and fourth quarter before significant revenue benefits are felt. The point that remains that Evolution gives us the ability to handle the profiting volumes demanded by the world’s largest operators and doing so, it opens the door to new customers for Evolving.
In terms of sales, we continue working the channel. As I’ve noted already, the sales cycle this long more so with the new flagship product, but as I’ve already mentioned, that has been a note to an upsurge in the pipeline than in the coming months to expect converting to details and revenue.
I’ll conclude by noting that I said in our last call that 2019 would again involve a good measure of blocking and tackling, that our internal focus remain on increasing our efficiency in expanding our bandwidth. That prediction is proving to be accurate, however the multiple steps we took in 2018 to reorient involving operating structures are bearing fruit in accelerating pace and I believe the second half of the year we’ll see a significant turning of the corner on the balance sheet.
Finally, remember that our stated plan had been to invest up to the level of breakeven profitability. In the past several quarters, we have been conservative about planning this and have ended up with significant positive cashflow even while trying to shoot towards break unit. In this quarter, we had as Mark described, a number of unplanned costs largely associated with our accounting transition very late in the cycle that didn’t allow us time to trim our expenses comparably. As we’ve mentioned before, we don’t expect this to happen again.
I want to thank you for your support and look forward to hearing your updating in our continued progress. At this point, I’d love to hear questions. Operator?
I see a bunch of familiar names and again, I encourage — I know that some of you guys will be calling to set up one-on-ones and we certainly encourage both the folks that have done that before and anyone else who haven’t, to take advantage of that if you have specific questions. It’s often a format that makes it easier for us to address them. And there is information on our website about how to contact our investor relations to do that. Again, thanks for your continued support.
Operator, we’re now ready to end the call.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone, have a wonderful day.