Q3 2020 Evolving Systems Inc Earnings Call

You did throughout the meeting.

Thank you and welcome to evolving systems Twentytwenty <unk> quarterly results conference call.

As you May have seen we announced our third quarter results today in our press release, it's just a huge.

Yeah.

10-Q will be filed tomorrow.

The FCC at gets system closure, the Veteran's day holiday each day.

We thank all veterans to that service.

Let me begin with a quick administrative not.

My name is Keith Brady and I'm VP of marketing as evolving systems.

I'll be.

Adjusting this in future calls.

You may have to judge that we're now managing these quarterly sessions ourselves using the evolving soon.

Registration doesn't require a few different steps than was previously the case, but otherwise everything remains the same.

If you have any questions or need any.

Consistence, please contact our Investor Relations Department via the website www evolving dot com.

With us from management today will be Matthew Stacker evolving systems, Chief Executive Officer, and executive Chairman.

On today's call, we will provide an update on that.

Third quarter, Twentytwenty and update you on the business activities currently underway.

Additionally, maxing koski evolving systems senior Vice President of finance is with us and by P.N. Matthew will be available during the Q in April one 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, and the company's Greg strategy and 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 in.

Information about the company.

At this time I'd now like to turn the call over to Matthew Stacker Matthew.

Thank you Keith and thank you everyone, who has joined US today on this call and webcast I think it's fair to say that 2020 has been an extraordinary year.

All of US the global Corona virus pandemic has presented the personal and professional challenges the likes of which few of US have experienced four at the end of the second quarter. When it had become clear the 2020 would not be business as usual I noted in that earnings call that I believed evolving systems is better placed than many.

Professionally navigate through the challenges likely to be ahead with that in mind and as we continue to navigate through this historic times around the globe I am proud to say, we have been able to generate positive operational performance. Our service revenues have increase from the corresponding periods a year ago I believe impressively, we have generated positive cash flow for the year.

With this in mind Im confident that our performance this past quarter in spite of the current a virus pandemic and all of its challenges as a result of builds on the hard work weve been doing for the last two years I.

I previously noted that in our years of servicing a global geographically distributed customer base evolving systems has developed a culture and.

Successfully managing our business through Telework, our established competence and experience in this area have underlined or ability to implement solutions and provide support remotely.

A result, the pandemic has had a relatively limited effect on our operations, we continue to work with existing and new clients to find ways to use our products and service.

Is this to enhance their businesses during these unusual times.

It is of course true to that market conditions remain far removed from business as usual and our cash flow performance has been achieved despite the continued impact of the pandemic on our ability to interact with clients in the traditional nodes of sales and business development the silver lining.

This cloud is that operating so effectively during the pandemic, we will be in a position to move forward confidently when it finally base hopefully sometime in 2021. So if our expected growth. This year has been slowed we remain extremely excited about making the gains that we have and are excited about what the future holds for evolving you can.

Can see why Im confident with a quick look at the headline numbers are reporting today.

Third quarter revenue of $6.8 million, an increase of 0.5 from the previous quarter year to date revenues of 19.4 million. The company has generated positive cash flow from operations in 2020.

Third quarter operating profit was point $4 million net.

Anything come a point 1 million adjusted earnings before interest taxes, depreciation and amortization for the third quarter was 8.8 million.

Underpinning. These numbers are the decisions, we've made and the work the company has done particularly in the last 12 months, many of which have allowed us to quickly and effectively adapt our approach to.

The market conditions imposed by the pandemic the investments we've made particularly in night 2019 in product research and development marketing and sales are all contributing to our bottom line. We have also become a leaner company during this period.

Our new evolution platform is now on the market and we expect to increasingly accrue the benefits of having.

Being a market leading product both in the course of this year and more particularly next as operating conditions returned to normal our reposition customer activation product line has been enhanced to enable us to tap many new and emerging revenue opportunities such as Easton and the many provisioning challenges opened up by the shift to Fiveg networks.

The volatility of telecom markets generally I will discuss these opportunities more in greater detail later in the call, but first its my pleasure to hand over to our CFO marketing Koski to give you a detailed overview of the third quarter from his perspective.

Thank you Matthew good afternoon, everyone.

And thank you for joining.

Let's start with revenue for the third quarter ended September Thirtyth, 2020, which was 6.8 million as Matthew noted a 7.7 million increase from the three months ended September Thirtyth 2019.

This change was primarily related to increased revenues from upgrades and new.

Projects, partially offset by projects that reached completion or reduction in hours from some of our existing clients and the corresponding period a year ago.

Total revenue for the nine months ended September Thirtyth, 2020 was $19.4 million, an increase over $19.1 million in the same period a year ago.

Predominantly related also to the increased revenues from upgrades and new projects, but partially offset by reductions noted and cigna and the significant onetime licensing fees recognized in the prior year.

Service revenues, which are mostly recurring in nature and the company's preference for it as it includes our managed service.

Service offerings over perpetual licensing agreements or $19.0 million year to date, an increase over of $1.1 million or 6.1% from the $17.9 million during the comparable year ago period.

These revenues comprised approximately 90% of our total revenues.

News for the nine months ended September Thirtyth 2020.

The company reported gross profit margins, excluding depreciation and amortization of approximately 68.5% for the quarter as compared to gross profit margins of approximately 64.9% during the comparable quarter.

Quarter a year ago.

The increase in gross margin was primarily related to increased revenues recognized on those new projects and upgrades, while our costs have remained flat.

For the nine months ended September Thirtyth 2020, the gross profit margin was approximately 66.7% as compared to a mark.

10 of approximately 67.2% for the nine months ended September Thirtyth 2019.

This decrease in gross margin was primarily related to the product service mix than the prior year that had those prior you previously for mentioned higher licensing revenue from the prior year.

Total operating expenses remained constant at $4.3 million in the quarter ended September Thirtyth, 2020, and 2019 reductions in travel and marketing costs due to the travel restrictions of the ongoing global pandemic were primarily offset by increases in general and administrative costs related to local accounting.

Counting fees.

Total operating expenses were $12.4 million for the nine months ended September Thirtyth 2020.

Total operating expenses were $20.8 million for those same nine months in 2019 or 14.1 million, excluding the 6.7 million goodwill impairment charge them.

Taken in 2019.

The decrease of approximately 1.7 million was related to a mix of hours delivery staff focused on customer projects not product development as in the prior year.

The decrease in overall resourcing cost.

Reductions in our total incentive compensation expense.

And the aforementioned decreases in travel and marketing costs.

So the company was very excited to report operating profit of point 4 million and net income of $2.1 million for the three months ended 30 September Thirtyth 2020, as compared to an operating loss of <unk> point $3 million and a net loss of <unk> point $2 million for the three.

Three months ended September Thirtyth 2000 to 2019.

The company reported adjusted EBITDA of point $8 million for the quarter ended September Thirtyth 2020, compared to point $1 million for the same period a year ago.

Adjusted EBITDA for the nine months ended September Thirtyth 2020 was 5.1 0.5.

<unk> million compared to an adjusted EBITDA loss of $8.2 million for the first nine months in 2019.

Moving to highlight some of our balance sheet accounts cash and cash equivalents quick.

Equivalents as of September Thirtyth, 2020 was $3.5 million an.

An increase of 13.3%.

When compared to 3.1 million as of December 30, Onest 2019.

Contract receivables net of allowance for doubtful accounts were $3.4 million, a decrease of $3.3 million compared to 6.7 million as of December 30, Onest 2019. However.

However, our unbilled work in progress on increase of two.

Point $3 million to a total of 3.4 million as of September Thirtyth 2020, compared to 1.1 million at December 31 2019.

Working capital as of September Thirtyth, 2020 increased to 4.8 million as compared to 3.8 million as of December 30, Onest 2019.

And this was primarily related to the pay down of our current loan balance with East West Bank, which is scheduled to be retired at the end of the year.

The change also includes an alternative minimum tax refund and collected in the current year, which was previously recorded in our deferred tax assets.

The company believes it has sufficient cash.

Hand, and working capital liquidity to fund this business and continued strategic investments for at least the next 12 months.

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

Thank you Mark.

Let me start this section of the call by reflecting on the reasons, we have confidence in the business looking.

For now that Weve established a solid platform from which to grow and quite frankly have stopped the shrinkage we've experienced over much of the previous decade, there's much to be optimistic about trends in the communications market are shifting very much in our favor on the customer acquisition in network services side of our business.

I mentioned earlier, the importance of new technologies like east him and the ramification and Fiveg you all know that Sim cards play a fundamental role in mobile as a secure and easy transferable way to authenticate devices onto networks, New Easton technology, which can essentially be downloaded rather than physically place and.

Device means that an ecosystem of platforms in partners as required by the operator to deliver an equivalent level of security and protection to the previously to that previously delivered by removable Sim cards, helping operators meet the resulting new infrastructure requirements is a real opportunity for us while we do not sell a traditional.

EPS in stack, which honestly has become something of a commodity we are widely known as the go to vendor for complex integrations and challenges in the activation space operators, who are integrating easton invariably have challenges and implementation as it integrates with their existing infrastructure and this trend remains.

Not large driver of our service revenue in this part of the business.

Better still its an opportunity we are well positioned to leverage our market, leading DS eight product, which is activated over a billion traditional Sim cards worldwide provides the foundation for meeting new eastern requirements in a way that saves network cost streamlined resource renewal.

Environments minimizes logistics complexity and maintains agility in service offerings. This puts us in position to address what is likely to become an urgent need in both our client and prospect communities.

Another shift we're well positioned to address relates to the internet of things at the heart of which sit any number of connected devices devices, which.

Which present, new revenue opportunities for the telecoms industry. The challenge here is a question of generating revenue from data because for various reasons. Most legacy building in charging applications aren't entirely fit for their purposes via key monetization operators have systems that work on an average bill is $20, but when the average bill is one or $2.

These systems cannot cope.

Thus as I would keep becomes an increasingly important revenue source, our clients and prospects will need to provide identify prioritize identifying newer support systems better tailored to the economy.

Here again, we're well placed to help our approach delivers an agnostic IP device billing solution.

For the telecoms market based on the use of data Sim card profile that can track monitor and manage data usage in real time, such an proche enables mobile network operators to fully exploit business to business revenue streams in a simple and cost effective manner. These two solutions are simply too among many of our continuously expanding.

Roster of offerings that enable us to keep pace with the demands of the market. There are many others and as I noted they provide reasons for real confidence.

On the other side of the evolving systems ledger, our CVM and loyalty products line, what I, often referred to as our marketing products that essentially comprises the three acquisitions we may.

In the previous two years.

In this side of the business the challenges our clients face and Thats the opportunities for US are also myriad even during the pandemic when the requirement for effective customer interaction via the mobile devices at a premium for example evolution our flagship product on the side of the business can address use cases, such as interactive.

Digital information services.

Which can be used for government health care or retail critical when there's a need to manage populations divert people to specific locations for testing, where educate new people on developments regulation and advice.

More broadly evolution can also help our customers quickly and effectively fine tune their large.

All you have automated below the line personalized lifecycle campaigns in the highly competitive telecoms market. This means that our technology can put users in position to for instance, make recharge offers in the timeframe that an offer is valid we can support segmented and segmented information campaigns based on customer location.

Help our clients to adjust their offerings in short order essentially evolution helps the operators market to their customers.

Evolution is also plays to allow wireless operators to reinvent our loyalty program. So the application both innovative and highly personalized end user offers executed on a technology platform that leverages new technologies.

Hum such as artificial intelligence and machine learning.

This investor call is and of course, the right place for a deep dive into the functional advantages of our products, but I hope. This brief overview will enable you to share my excitement about both immediate and longer term future of evolving systems. It probably also share some color of the work we do on a day to day basis.

Beyond the growing relevance and impact of our products the company somewhat streamlined over the past 12 months continues nevertheless to deliver our two business units have and continue to effectively develop as you have seen products and solutions that meet changing customer needs using the best of the products that we have in market today the development.

Moment of evolution of focal point over the last 12 months and years conclusion. It is already live in a number of paying customer sites.

On the marketing front. Many of you may have noticed the uptick in exposure of our brand via continual series of articles articles published in the media and new content directly offered via our website. This is fueling an aggressive ad gentry.

One program, which has seen among other things us rapidly rising through the search rankings in our field our database of leads and customer target has grown significantly over the course of the year as we embrace the tools of digital marketing for our own business.

So to summarize it's 2020 draws to a close we continue to take necessary actions to service our clients.

Sorry that are full of stability through the ongoing pandemic, we remain focused on continual business transformation, increasing innovation and product enhancements, while identifying opportunities to meet our customers' changing needs our strong customer footprint in decades of proven performance gives us significant head start to maintain our business. During these uncertain times, we select.

Actively seeking new opportunities whether through potential accretive acquisitions joint ventures, the strategic partnerships to drive both top and bottom line performance and over the long term to bring our shareholders long term value.

I want to thank you for your support and for listening to all this and look forward to updating you on our continued progress at this point I'd be happy to open the call to questions.

Instance, Keith.

Do we have someone to moderate.

Again believe we have any questions.

So with that in mind.

Ladies and gentlemen, I want to thank you again for your continued support management will be available to investors throughout the week and if you do have any questions by all means please feel free to contact us directly.

On a go forward.

If anyone has any feedback this is a little bit of an experiment to us to run the call ourselves using our zoom platform as Keith mentioned that the top if anyone has any questions or comments feel free to reach out to the investor Relations hotline.

Or for any questions and comments about the business, we're happy to engage with any and all investors via that channel.

And operator, we're now ready to end the call.

Good bye.