Q4 2019 Earnings Call

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Ladies and gentlemen, today's conference is scheduled to recoup begin shortly please proceed to standby and thank you for your patience.

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Thank you and welcome to evolving systems 2019 second quarter results Conference call.

As you may have seen our form 10-K was filed after market closed today in our press release was just issue.

Joining us from management today will be Matthew Stecher evolving systems, Chief Executive Officer, and executive Chairman and marks in Koski evolving systems Senior Vice President Finance.

On today's call Mark will provide an update on the quarter and Matthew will update you on the business investment activities currently underway.

Both market Matthew will be above <unk> during the Q when a portion of the cool.

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 in 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 turn the call overcome Matthew Stecher for some opening comments Matthew.

Good afternoon.

Joining us.

We do they.

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<unk> financial results Mark.

Okay.

And since we see if it's been sometime.

It's been a little bit disease. So we've a lot about big screen today may go a little longer than we traditionally have hopefully you'll be patient with that.

Yeah.

We anticipated <unk> third quarter headline today is that fourth quarter revenues rose from the preceding quarter.

Got a lot of hard work behind the scenes had been our expectation there appears to be getting an upward trend after a lengthy period focused on internal investment.

He said from multiple acquired company.

The project of improving evolving systems remain ongoing continued to execute on plant consolidation and leverage the leadership position, we have begun to product families. We sell to wireless carriers around the world.

At the key milestones were proud to be able to announce today than we have generated positive cash from operations into your 2019 World revenues for the year were down from 2018, our fourth quarter rose from third quarter, which as I said reflects our new trajectory.

I did want to emphasize before I turn it over to Mark the operating loss of 7.9 billion in net loss of 9.7 million for the year ending 2019 of reporting today. It was almost completely relate to the goodwill impairment, we announced the second quarter the year, excluding the goodwill impairment operating loss would have been 1.2 million net loss.

3.0 million for the year ended December 31.

So what does it mean, when we see that the goodwill impairment was triggered solely due to the market capitalization of our common stock. We look at the value of these intangibles from multiple aspects and all the fundamental valuation test would not have required an impairment in other words, we think devalued. The acquisitions. We made remains strong that said there are various rules and guidance does it make it.

Hard for a company and for the auditors to allow their company to carry goodwill in access of the company's public market cap. So at the end of the day, rather than spending our time, finding auditors and account that was easier to write down those assets bend, our cycles focused on our products and our customers. We've now written off all the large transactions of goodwill left Makena and.

Likely because we'll have to repeat this exercise and the going forward. It is likely the headline number one numbers will more closely track with our actual operating result.

I bring up the goodwill impairment because it obscures the underlying progress we've made this year and the tangible evidence in the fourth quarter of an upward turnaround in our performance.

I said in previous Investor calls, we're starting to see concrete signs of a turnaround business involve taking about six months longer than anticipated is now starting to show in the balance sheet. There's good reason for optimism about the company's future the impairment had no impact in our business its outlook for prospects.

The investments we made in the company between 2016 in 2018 or National returns, but deal now deal down in the later stage the sales pipeline some close during clothing.

You will notice a number of media announcements recently that attest to that that it's a frustrating feature of our business that the carriers. We've worked with tend to be reluctant to have their name publicizing press releases.

So it's often that our press releases are necessarily anonymized. Nevertheless, the represent good news and they also backup the well founded optimism about where the company stands today.

I appreciate that it's hard for you guys investors to judge the impact on our stock value. We haven't released it says we want to contract and then on the large operator, who sizes and defined usually we can't give either those pieces of information out.

Generally, though I would take the flow these announcement as indication of the ongoing health of the company's deal flow. If a particular deal has a transformational quality we'll call. It out still however, frustrating. These anonymized releases are I hope you'll agree that there preferable to a background the silence.

From a fundamental strategic perspective, we are nearing the completion of retiring that debt taken on to purchase we model BLS and asked them looking forward, if you're able to continue executing we see a path towards the continued debt free profitable evolving systems are there within our current products and profile.

And reflecting on 2019, we overcame a large number of challenges and milestones operationally the major and complex rebuild of our offering and customer value management loyalty with time consuming but the result of that work. The evolution platform has now been implemented its first customer site.

Turning for products with four complicated couldn't basis into one updated fully functional solution was not straightforward. We can now marketing stellar coherent and unified offering capable of supporting multiple relevant in demand use cases interestingly. Several of these are highly relevant theme for the ongoing Corona virus pandemic and we'll talk about that in a bit.

Our activation in network services solutions, where as we have previously discussed repackaged it to a package we call the east Didnt lifecycle management suite in 2019, and its component products were updated significant new version three leases for Tertio smart dealer DSS.

Our investment in marketing last year to yielded multiple opportunities, including a substantial new customer wins.

Over the past 20 per month, we have built in evolving systems that can continue to compete and telecom market today.

Digitization the advent adhesive another trends are including the ongoing even including the ongoing global situation all implements operators buying decisions when it come to enabling software that we can address often for the first time as a result, I'm confident we anticipate the 2020, we'll see a continuation of the upward trend started in the fourth quarter.

Yeah.

Finally, I'd like to take the opportunity to discuss the viral elephant in the room and touch on how the global Corona virus outbreak is impacting.

The good news is that we're a company that has been built on a distributed foundation our people serve a global footprint of operators and our themselves.

Lastly, decentralized our global footprint is much larger than most companies our size due to the nature of our work a positive effect of this existing profiles that we had been both running our own business and interacting with our key customers through Telework and other remote technologies for years, our key meetings and internal processes have for a long time.

In design Turbo participation in recent weeks, we've leveraged this internal ability by extending it to provide support remotely to our clients and prospects.

As such the President Global situation has had a relatively limited effect on our existing operation. We've had some staffed offices that have had some new drew vote work, including in India in New York and in the UK, but this has caused it simply extend rather than create properties for supporting network I'll talk more about that that can work as to the numbers but in.

General we've been on the low end of the spectrum of impact of the current situation all of US an evolving remain focused on growing our business and creating long term value, while continuing to meet our client need.

Again, I will discuss these developments in a little bit more detailed from a different aspect later in the call, but first let's start with an overview of the second quarter it for that.

Right.

Year end the quarter at this point to do that on handed over to Mark.

Thank you Matthew.

Good evening, everyone, let's run through the numbers I'll, let me start with the fourth quarter. It was good as Matthew mentioned to see revenues turned up from the third quarter.

Looking at the quarterly comparison over the same three month period of last year 2018. The total revenue for the fourth quarter ended December 30, Onest 2019 was 6.7 million as compared to 6.9 million from a year ago, a decrease of point 2 million or just 3.4% mainly driving this decrease was the high.

Higher revenues associated with the project work and clients acquired from the acquisitions at the end of 2017 and the work went on through 2018 offset by this year, new implementations and upgrades that we have begun.

Total operating expenses for the fourth quarter 2019 were 4.2 million compared to 4.5 million, excluding any of the goodwill impairments from the fourth quarter of last year. The decrease was mostly related to a reduction in product development staff has begun working on the project deliverable work and shift.

That away from that.

Product development work.

The company reported operating income of point 1 million for the fourth quarter ending December 30, Onest 2019, compared the point 2 million operating income again, excluding that impairment loss from the prior year adjusted EBITDA for the fourth quarter Decemberthirty. One 2019 was point 4 million as compared to the adjusted EBITDA point 6 million.

And in the fourth quarter ended 2030 for December 30, Onest 2018.

Moving on to the year over year results, let's start with the balance sheet cash and cash equivalents as of December 30, Onest were approximately 3.1 million as opposed to 6.7 million it last year.

That allowance for doubtful.

Sounds receivable and and that allowance for doubtful accounts was 6.7 million a decrease of 1 million or approximately 13.2% compared to last year.

Working capital decreased 4.3 million or approximately 53% to 3.8 million from 8.1 million.

As of the decrease in the working capital is related to decrease in the cash the contract receivables. The unbilled prior work in progress partially offset by the decrease in the current term loan payable and accounts payable and accrued liabilities. They also to note is there's very little long term debt lab as when we updated the amended.

So with the bank and.

We had a 1 million dollar pay off making that loan near repayment.

Working capital was also decreased recording the liability a point 4 million related to the adoption of accounting standard a S. U 2016 on topic 842 about accounting for leases.

The company continues to generate positive cash flow from operations has made timely all of its schedule loan payments to east West Bank.

Moving on to the results from operations total revenue for the year ended December 30, Onest 2019 was 25.8 million a 15.9% decrease compared to last year. Most of this decrease was into services revenue as we discussed earlier many of the many of the ongoing project work.

Was completed from the acquired companies as well as some of the client relationships. After the acquisition that ended in 2018.

The company reported gross profit margins, excluding depreciation and amortization of approximately 66.3% as compared to a gross profit of 66.2% for the years ended December 30, Onest 2019, 2018, respectively. The company continues to assign staff when they're available to us.

Work on support.

Efforts internally and product development.

As noted earlier as a result of the significant applied declined in the market capitalization. This year end in prior years, there was a significant non cash charge for impairment of goodwill for the remaining carrying value of 6.7 million in the second quarter of this year and as noted previously it was 17.8.

Really in the fourth quarter of December 30, Onest 2018.

Total operating expenses were 25 million for this year end, excluding the goodwill impairment to cover the company's operating expenses were 18.3 million, which decreased approximately point 2 million or 1.4% as compared to 18.5 million in the corresponding year ago, excluding that 2018.

Good will impairment.

The decrease was primarily related to the reduction in professional fees lower legal fees and lower incentive compensation as compared to the prior year, but was offset by our increased focused on product development and growing our global business development team in tandem with additional marketing efforts.

The highlight again the company excluding any goodwill impairments from both 19 in 18 had an operating loss of 1.2 million and a net loss of point 3 million for the year ended December 30, Onest 2019, compared to operating income of 1.8 million and net income of 3 million for the same year peer.

Area of year ended December 30, Onest 2018.

The company reported adjusted earnings before interest taxes, depreciation and amortization EBITDA appoint adjusted EBITDA of point Threemillion compared to 3.6 million per the does respective year end last year, the company's strategically invest the portions of its profits and continuing initiatives to foster long term.

From growth.

Now I will now I'll turn it back over to map you. Thank you.

Okay, Mark Thank you very much.

So with these results in mind and to underline what I said earlier I am confident the company has been passed through an inflection point in terms of performance track. We are on well continue to deliver the upward trend in revenues, we saw in the fourth quarter. The turnaround of the past 12 to 18 months isn't totally complete but the hard graft is now largely behind us.

Foundation.

Lee.

Of course as you move into 2020, there are still some unknowns with respect to the Corona virus situation I previously discussed how we as an operating entity or continue with business largely as usual our customers continue to use our product and pay for that and we continue to service them with the excellent we become to be known for.

The largest practical impact has been to our traditional those sales and business development new sales for US has historically met heading highly trained specialist bump to airplane and hasn't converse with telecom operator spread out around the world that traditional process has obviously ground to a temporary halt.

Still we are sitting on our hands. We are quick on working with our current and prospective clients to find new ways to communicate about.

Dallas to service our products. There are cases very good activation really can help operators, who is retail operations have blinked that exists our CVM platforms can help our operators communicate rapidly changing offers and programs to their customers in real time look out for media articles superior shortly describing the specific ways.

That operators can use our tools to address novel Covance 19 related need.

We've also developed direct marketing literature addressing a topic that we're communicating to our clients even as we speak all that said however, while the good news is that our existing product to revenue streams continuing to running at full speed. We've seen in many carriers a blanket freeze on new initiatives in some cases were a publication installation work is scheduled new products.

It's requires people to be onsite physically to acquire are installed equipment or to be last cetera.

Or where we need to support a carrier personnel those initiatives are being delayed.

Links of our sales cycle.

It will take some time to understand the impacted the current a virus on our sales and business development and the effectiveness of the Mitigations, we put in place.

As we sort through our business development challenges. We're simultaneously just beginning to look at the impact of various government programs and opportunities specific to the code situation.

Frankly with the earnings release now behind US we plan, it's our and significant horsepower towards understanding and evaluating how recent legal and regulatory changes as well as new government programs could benefit us crop in many countries that comprise our footprint I hope that by the time, we speak again with the next quarter, we will have some concrete updates about that.

Returning for second to the more regular part of our business.

Our 2019 released evolution platform about which had spoken about often is now live and contributing to the bottom line. This year, we will see it proliferate both to existing customers as they migrate to new technology and his new ones Rod our go to market for the new offerings physicians evolving in the leading partner in digital innovation are.

Customer activation network services business also transitioned product line of 2019, the Easton lifecycle management suite now clearly articulate our unique ability to help carriers keep pace with the evolution of Sim functionality, including the advent of the east, Germany Esteve, both central to their businesses and as a result is resonating with clients and prospects.

Like.

In terms of sales we continue to work in presenting our new product line. After the market clearly corona virus add to the challenge and closing deals that decision makers and no longer closely assembled and though this is a store by said, but rather a pretty effect, which would operational perspective, it's probably reasonable to expect sales cycles to be somewhat extended in 2020 has already said however, we seem to number.

In announcement, and we expect that trend to continue through.

So to summarize 2019 ended on a good note for evolving as as ever much work remains to be done to optimize our own performance. We have strong foundation to build up in this new world where movement is temporarily restricted the coming months, we'll see an increased focus on digital marketing with investments in search engine optimization and traditional as well.

All social media efforts as we fine tune operations to accommodate the present operational reality.

Causing our performance will continue to trend in the right direction. We are in growth mode and that's good news for all of us.

I previously said the plan in 2019 was solely to work internally on the company's products and pipeline, we've done that and now we see the market starting to respond.

There is however significant gap between how we see the company's performance and prospects in the weight is viewed by the market, but we expect that gap to begin to close in 2020 is that trend beds in as a result, we will start turning increased attention to finding places tell the evolving story to large and small audience is the investor community I know theres been a lot of pain.

Built around the decline in our stock price.

Stickler the volatility around the Covance situation hit in what for us as long as period liver quiet, but we need to file or year result, It also forces a blackout period hasn't OLED any of us as management to individually take advantage of the stock price being so low with no information the market it seems the worst hopefully.

After this call once you've made it clear that the business is relatively resilient the pandemic and is trending in the right direction from our perspective, we can call back some of the ground we've lost due to the uncertainty.

In short we have everything we need in the tool box that if we wielded very precisely we continue to see organic progress.

And begin moving towards sustained result.

It is not an easy enterprise to run our clients are demanding their dispersed in our products are highly specialized we've learned how to make those ingredients work together and I think the future allow it to continue demonstrating that but we're assessing the could impact we start to play we have come to a place where rail broad evolving systems can start being consistent about performance.

I want to thank you for your support and look forward to updating you.

Both as a group at individually and our continued progress at this point I'd like to be able to turn the call and open it to question operator.

Thank you.

And as a reminder, ladies and gentlemen to ask a question we need to press star one when your telephone.

To withdraw your question. Please press the pound key.

Please stand by what we can barbecue in a roster.

And it is at this time im not showing any questions on the phone mine.

I'll take a tie complement the comprehensive job we did in addressing all anticipated questions.

And we do have a we do have one question.

From the line from the line of March diesel will stand Phil Capital. Your line is now.

Yes, hi, guys. Thank you Im glad I'm, not leaving you tube only on this call.

Couple of couple of questions Logistically you have these big offices in India, I understand indias it looks like on locked down how are all those guys working poor normally in that you know fivesix thousand square foot office.

Hi, Thanks for the question. So we have not one but two offices in India. The traditional part of evolving has it.

I mean operation office in Bangalore, and the former SSM had an office.

In Calcutta Adobe still operate for our Cbm group.

As I said before we had been because most of the rest of our offices around the world do a lot of capital work.

Most of our people who are not in India, Telework on a daily basis and so for us.

We were able to.

Prepare for those folks doing telework by increasing the bandwidth we had to especially the Bangalore office. We did a day of trial tests, where we have different stay home before it was mandated so we can make sure that people could work from home and notably we have not close to put our office on Lockdowns. Our policy there that we are occurred.

King ever want to work from home, if they need something or they need to re Buddha server their welcome to come into the office and as a result than we've been kind of keeping a tight eye on how as I said the few offices that had been physical have transitioned to remove work we have not experienced a decrease in productivity as a result.

So those people are working from home is that what you're saying Thats correct. There also okay.

The same programming jobs. They were in the same software quality monitoring depending on where Q, but if I ever they were in Q a testing.

They all have the tools to do what theyre doing remotely.

Okay great. Good. Thank you. So one more question. This is a much bigger.

Picture question and you probably get this all the time and by the way we're relatively.

New investors here, we've been buying this for the last maybe three months or so and we're still losing money like everyone else, but it hasn't it hasn't been horrible, but this was my question.

I mean, you have this this tiny little company, you're probably doing I mean, just call. It 1 billion a year in free cash flow ballpark. It probably costs, you and correct me, if I'm wrong, but to be a stand alone public company with all the legal stuff in the accounting stuff and then a C suite and all that stuff that could cause.

2 million a year.

You see it seems that you would be such an obvious strategic acquisition for somebody looking to pick up 65% gross margin revenue and a two bucks a share or more than two bucks a share they'd be paying only one times revenue for you and then and yet that would be a triple in the stock price. So.

At what point is there any strategic process and you sell this thing to some company looking to pick up cheap revenue, which for us to shareholders is a massive percentage increase in the stock.

It's it's a really good question and one thing I'll tell you is that when the stock price went from six Bucks a share.

Down to 80 cents a share for essentially the same business.

The difference really was paying a dividend versus not.

We got a lot of we continue to generate a lot of on solicited strategic input. It's often hard I think for people to as much as you'd like to tell them listen.

Because of some very complicated factors the Martha public market to beat its up.

But if you value. This on any traditional valuations that evaluation metric is right where would you come to what is a business doing. These metrics were then ill give you some guidance.

Pending on we run a pretty tight ship both in terms of our public accounting and all that.

Rough numbers, it's probably about a million dollars we spend.

In direct costs for being a publicly traded company so acquire could potentially either lose all of that or lose half of that if they still needed audited financials, I mean as a rough numbers of course.

But that well then but then there's another number another million from having a C suite right. So.

Ballpark, so thats 2 million and then there's a billion to free cash flow so call. It a million. So you've got a 3 million dollar company right. If a guy came in and paid I don't know even two bucks a share here he be buying this thing for per watt like eight times freak out any it would be a steel for him, but it will be.

A hell of a good deal for shareholders, who now have a 70 cents stock.

I didn't mean to interrupt you I'm, sorry, but yes.

No look it's a point well taken Raymond I think you'll get new argument that our size.

We we spend.

This thing with clean up a lot and become a different business that we didnt have those this public costs and you know that thesis is out there and there have been people who have explored that from time to time.

And.

Look I.

I think that.

From us from internally right, where we've been for the last 18 months two years is repaying the debt that we had.

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And for having done the acquisitions that we did nothing thats ending in the death almost retired I think it's going to be a movement in the business, where we can kind of turned our attention to think more strategically about we'll be doing what we want to do going forward because practically speaking the debt covenants, we had and continue to have through later than the year.

You know they haven't really allowed us to do anything other than business as usual.

But again, we do see some interest in time to time, I mean, if you're asking rhetorically why there was it more interest people, who have a thesis like that and I probably would argue about the extra overhead in our C suite other than me and Mark that that is that these we were both.

Super active day to day in keeping our business going but okay.

Look I think that look I think there there could be some synergies there for somebody wanted to do that a lot of evolving as investors have been on it for a long term and they currently.

I do the route big into big investors than and there are some folks who haven't seen pieces you do hey, why didn't you go and try some and take this out for a quick hit.

Folks have been along and and you know what is the long organic rebuild back to levels were a few years ago and so I think thats a good discussion that we'll continue to have and it's good to be able to habit.

Yes, I mean look I don't know if I'm, a big investor, but I guess, we have around.

500000 shares of stock. So you know that's it's a so meaningful percentage of the company, even if it's not that much money. So.

There's there's there's my vote right there you know [laughter].

Let's not so I appreciate the perspective and by the way I would encourage you did you want to reach to our investors relation line.

We'd love to take some time and meet with you and answer your questions privately is as we do for any investors, who want to take advantage of that and Ah certainly, but would love to continue to get your input.

Okay Alright. Thank you very much. Thank you for the question.

Thank you.

And just a reminder, ladies and gentlemen dies. Good question, we need to press star one when you're Touchtone telephone.

Im not showing any further questions on the phone line and bet you Matthew.

Hi.

So.

Hi.

Thank you everyone I lost a little if I had a little pieces script the.

To end of usually just have the.

Thank you everyone for participating and we look forward to speaking with you soon anyone who wants to ask more detailed questions. There instructions on our investors relation page on how to get in touch with us incentive for private public management may encourage people to do that and take advantage of that they would like to it.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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