Good afternoon, and welcome to Evolving Systems 2011 Fourth Quarter and Year End Earnings Call. I'm Dan Moorhead, Vice President of Finance and Administration, and joining me today is Thad Dupper, Chief Executive Officer.

During the course of this call, we will be making forward-looking statements based on current expectations, estimates and projections that are subject to risk. Specifically, our 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.

We encourage you to review our publicly filed documents, including our SEC filings, news releases and website for more information on the company.

Once again, for the benefit of new investors, I want to point out that our financial statements reflect the July 2011 asset sale of our Numbering business to $39.4 million in cash plus the assumption of $5.8 million in liabilities. The resulting gain from the asset sale as well as the financial results attributed to the Numbering business are presented as discontinued operations in our financial statements.

Fourth quarter results. Revenue declined to $4.9 million from $5.2 million in the fourth quarter last year but was up from $4.3 million in the third quarter of 2011.

License and services revenue was $2.7 million versus $3 million a year ago but was partially offset by a small increase in customer support revenue to $2.3 million from $2.2 million due to our larger Dynamic SIM Allocation, or DSA, installed base.

Total costs of revenue and operating expenses in Q4 were flat at $5.6 million year-over-year. Although I will note that the 2011 fourth quarter included a $500,000 restructuring charge related to headcount reduction.

Sales and marketing expenses were 15% lower year-over-year to $1.3 million from $1.6 million. G&A expense declined 11% to $800,000 from $900,000, reflecting lower employee-related costs and professional fees.

We reported net income of $1.5 million or $0.13 per basic and diluted share in the fourth quarter, up from net income of $1.2 million or $0.11 per basic and $0.10 per diluted share in Q4 last year. Net income from continuing operations was $1.5 million or $0.14 per basic and $0.13 per diluted share, versus a net loss from continuing operations of $400,000 or $0.03 per basic and diluted share in the fourth quarter last year.

Q4 2011 results included a $1.2 million income tax benefit related to our deferred tax assets, and interest income and gains on the sale of investments of approximately $750,000.

Special dividend. In the fourth quarter, we declared a $2 per share special dividend that was paid in January 2012.

In addition, last week, we declared our regular $0.05 quarterly dividend as payable this coming April 13 to stockholders of record on March 19, 2012.

On to our full year results. Total 2011 revenue was $19 million, down 17% from $22.8 million in 2010.

The mix included license and services revenue of $9.8 million versus $14.6 million a year ago, the decline partially offset by higher customer support revenue of $9.3 million versus $8.2 million in the prior year. The decrease in license and services revenue was primarily due to the timing of bookings during 2011.

$10 million of our $14.8 million of license and services bookings came during the second half of the year, which gives us less time to convert those bookings into revenue. The increase in customer support revenue resulted from having more DSA customers in production as well as higher revenue from Tertio Service Activation or TSA.

Total costs of revenue and operating expenses in 2011 declined to $21.8 million from $23 million in 2010, due primarily to lower variable comps related to the revenue decline and to a decline in G&A expense due to lower employee-related costs and professional fees. Included in total cost of revenue and operating expenses in 2011 was $1.1 million in restructuring cost from headcount reductions related to the midyear sale of our Numbering business.

We reported net income of $35.9 million or $3.30 per basic and $3.21 per diluted share for the full year, inclusive of the gain on the sale of our Numbering business. That compares to net income of $5.4 million or $0.53 per basic and $0.49 per diluted share in 2010.

Net income from continuing operations for 2011 was $1.6 million or $0.15 per basic and $0.14 per diluted share, versus a net loss from continuing operations of $400,000 or $0.04 per basic and diluted share in 2010.

2011 results included a $3 million income tax benefit related to the release of the valuation allowance on our deferred tax assets, and interest income and gains on the sale of investments of approximately $1 million.

Now I'll review of our bookings and backlog highlights. We booked $7.4 million in new orders in Q4, a 33% increase over the $5.6 million in the fourth quarter last year.

License and services orders in Q4 increased 55% to $4.6 million from $3 million last year. It was our second consecutive quarter of solid year-over-year increases in license and services bookings and represented the best fourth quarter in this category since 2008.

TSA license and services bookings in Q4 were up 413% year-over-year to $2.5 million from $500,000. Q4 customer support bookings grew to $2.8 million, up from $2.6 million in the same quarter last year and represented the highest quarterly total of 2011.

For the full year, total bookings increased 22% to $24 million from $19.7 million.

License and services bookings grew by 23% to $14.8 million from $12 million, reflecting record DSA bookings of $8.2 million for the year, up 68% over the $4.9 million in DSA orders in 2010.

Customer support bookings increased 20% for the year to $9.2 million from $7.7 million. We define bookings as new non-cancelable orders expected to be recognized as revenue during the following 12 months.

Total backlog at year end increased 64% to $12.6 million from $7.7 million at the same time last year. License and services backlog increased to $7.8 million, up 182% over the year ago backlog of $2.8 million and up 32% over the third quarter total of $5.9 million.

The DSA license and services backlog increased 673% year-over-year to $5.5 million from $700,000, and was up 30% over the third quarter total of $4.3 million.

Customer support backlog was $4.8 million at December 31 versus $4.9 million a year ago and $4.4 million at the end of third quarter.

Balance sheet highlights. The combination of cash, cash equivalents and long-term investments in marketable debt securities at 2011 year end was $50.7 million, up from $10.8 million at December 31, 2010.

Of course, the 2011 total was prior to the first quarter 2012 special dividend payment of approximately $22.3 million.

As we explained in our last conference call, our marketable debt securities formerly classified as long-term investments on our balance sheet may actually be sold and converted to cash before they mature, which is what happened in the fourth quarter when we sold a portion of those investments and booked a $221,000 gain on the sale. The company generated $4.8 million in cash from operations in 2011 versus $5.7 million in 2010.

With that, I'll now turn the call over to Thad.

Thanks, Dan, and good afternoon, everyone.

A high point for the fourth quarter was the fact that we were able to sustain the strong bookings momentum we generated in Q3. This was particularly noteworthy given that our Q3 L&S bookings were so strong.

Going further, our second half L&S bookings were nearly $10 million, more than double the $4.8 million we booked in the first half of 2011.

We were also pleased that new bookings were led by the sales of our DSA solution both to new customers as well as upgrades to existing customers. These strong L&S booking results translate into a much improved backlog number.

L&S backlog, a leading indicator for the health of our business, was up 182% to $7.8 million at the end of 2011 compared to $2.8 million at the close of 2010.

When we look at DSA backlog specifically, the results are even more dramatic. DSA, L&S backlog is $5.5 million, up from $700,000 a year ago for an impressive 673% growth rate.

So from a bookings and backlog point of view, both leading indicators of our future growth, Evolving Systems finished 2011 in very strong fashion.

Based on this momentum, we are very confident about our prospects to grow both revenue and EBITDA from continuing operations in 2012. And we are very encouraged by our year-over-year projections especially for quarters 2, 3 and 4.

One of the facts we took from 2011 is that we are closing fewer but larger DSA deals, and we think this is a noteworthy development. The fact that we are closing bigger deals with larger and more influential carriers presents us with a strategic opportunity.

Recall in Q3, we closed our largest ever DSA order with MTS, one of the leading carriers in Russia boasting a subscriber base of over 70 million. The influence of our early DSA adopters, especially our large carrier early adopters, carriers like Telefónica, MTN and MTS, and the influence they have not only within their groups but also on their competitors, presents us with a real opportunity.

To that end, we're committing to expanding the resources needed with these early customers with the understanding that we are deeply invested in one another's success.

The other takeaway regarding DSA for 2011 was rather than working predominantly with IT and the network organizations, we increasingly found ourselves working with marketing departments on a variety of DSA-related areas that included creating first-use and in-life promotions, designing dealer incentive programs, consulting on SIM card packaging and, of course, on implementing number selection.

We know the wireless industry is extremely competitive where changes take place at warp speeds. We clearly see the competitive benefits DSA can provide in terms of improved time to market.

Once a carrier has standardized on DSA-enabled SIMs -- in other words, once all the SIM cards in their inventory are DSA Sims, they are then in a position to leverage the unique functionality of DSA. For example, the carriers can then bring to market new promotions and campaigns with lightning agility in a matter of hours versus the 2 to 3 months it usually takes a carrier to turn over its static SIM card inventory.

Taking a look at our customer base. We continued to expand our global footprint in 2011.

It's worth mentioning Evolving Systems generates 100% of its revenue outside the U.S., so we clearly are a company that knows what it takes to sell, implement and support customers in the international markets which, of course, includes the high-growth emerging markets.

Today, we support over 50 customers in over 40 countries, and that is a remarkable accomplishment for a company our size. For 2011, we added Russia and the Philippines as new countries in which we do business and added our second customer in Malaysia.

You may recall, last year, we closed an order with LightSquared here in the U.S. to be their activation partner.

And as you may have read, the LightSquared business is running through some setbacks with the SEC. Today, we have no outstanding invoices or collections due from LightSquared and as a result, have no exposure.

That said, we do wish them well and hope they'll be able to resolve their issues.

To be clear, we'd be happy to do more business in the U.S. Recall our numbering unit had a majority of its revenue coming from U.S.

carriers. But the facts are given our current product direction, the largest and best opportunities for us exist in the international markets.

Today, the majority of cellphone subscribers in the U.S. are postpaid users or contract customers.

Conversely, according to wireless intelligence, of the 6 billion wireless users in the world today, 76% are prepaid users. And it's with prepaid users that DSA provides its strongest value.

And while there are prepaid users in the U.S., their numbers compared to other regions in the world are much smaller. For instance, it's not unusual for us to talk to a wireless operator outside the U.S.

with more than 90% of their subscriber base are prepaid users. And again, a large subscriber base plays to DSA's sweet spot.

As a result of our international business, Evolving Systems has amassed a core competency in doing business outside the U.S., which extends beyond selling, implementing and providing support but also includes finance, our ability to transact business, to bill and collect, as well as efficiently account for local tax jurisdictions and legal, knowing how to execute contracts taking into account local laws, and import-export restrictions. So EVOL represents a company that is well versed in conducting business outside the U.S.

A few words on our partnerships. To remind you, we have partnerships with 2 of the leading SIM card manufacturers, and we continue to make progress.

We currently have several opportunities in the bid and closing stages, where we are working very closely with both our SIM card partners. Looking forward, we believe that 2012 will be our most successful year for this channel.

Intellectual property. In today's technology world, it's not only important to be able to innovate and develop new technology, but it's equally important for a corporation to protect its IP.

From an IP point of view, we have also been active. We continue to work with our patent attorneys and have several applications in the advanced stages of review.

In summary, 2011 was a transformational year for Evolving Systems. We sold our Numbering business and became an activation pure play with our full attention on subscriber activation, SIM card activation and connected device activation.

We have sharpened our focus on the wireless market with the further concentration on the international markets where subscriber growth is strongest. And for 2011, this strategy paid a good dividend, again, highlighted by strong order bookings we posted for both Q3 and Q4.

As I mentioned earlier, our outlook for 2012, given our backlog in our sales funnel, is very positive. And as I do every quarter, let me remind you, we remain a small company where the delay of a single key order can have a pronounced effect on our quarterly results, so we believe it's more accurate to judge EVOL on an annual rather than quarterly basis.

That said, for 2011, DSA orders were up 68% with total L&S backlog, up 182%. And we think that puts us on the right track to be an exciting growth company for 2012 and beyond.

With that, we thank you again for joining us today. And we're now happy to take your questions.

The new DSA Tier-1A carrier in the Asian market, can you describe that process? Was that a bake-off similar to what you saw with MTS, or was that different?

Yes, no, it was a bake-off. And I'm glad you brought that up.

There is some competition out there. But as you know from prior discussions, we never fear competition, especially in the DSA space.

So it wasn't a cell source. We had to compete.

And as you come to expect, we've earned the business. We've won the business, and we beat the competition in the sector of DSA.

And as with the MTS competition, did that competition include any of your non-exclusive SIM card partners?

No. In that case, I'm not sure that we were competing against the SIM card providers.

So I think in that case, it was a straight heads-up competition.

Okay. And then regarding pipeline, is there any -- can you do your best to quantify to the extent you can, number and scope of deals that are kind of at the front end and deeper into the pipeline?

As I said, we are pleased with the shape and the size of it. It is comprised of a lot of international carriers.

And then the other thing that I would add is that funnel also includes direct opportunities we're working on, as well as some of the opportunities we're working on through the channel, i.e. with our SIM card partners.

Okay. And then, can you talk a little bit about what the status of your IMC product under development is, and as well as share your general sense of how -- you got from your meetings in Barcelona?

Yes, sure. So a couple weeks ago, we were in Barcelona in Mobile World Congress, which is really becoming the worldwide event.

It's the place where everybody meets at the crossroads, and we can get done in 3 days what normally takes 3 months in terms of scheduling sales calls. And I would say the takeaway from that, it was clear that people recognize us as the leader in the DSA space, not just carriers but our competitors.

So I think we have the high ground and we plan to keep the high ground within DSA. Specifically to your question about IMC, IMC is still a developing market as is the M2M market.

But it's an area that we're seeing increased interest. One of the discussions we had while in Barcelona is if you put a SIM card on a container or a palette and it travels around Europe, when it arrives at those European countries, that SIM card is then going to be in a roaming mode.

And we believe carriers could leverage our technology to reactivate that SIM as a local SIM and then have the shipper avoid the roaming charges. And if you're shipping a lot of palettes, a lot of boxes, a lot of containers around the world, avoiding roaming charges could be very significant.

What I will say though is, we still expect IMC for 2012 to be a developmental project and one where we're looking to get our first customers in beta SIM trials. So again, I think as we said in the past, we don't expect IMC to contribute materially to 2012 revenue.

The material contribution for 2012 revenue is going to continue to come from Dynamic SIM Allocation and Tertio Activation product.

Okay. And then final question would be just maybe back on the pipeline again.

So you have these great customers, whether it's a division of Telefónica or of MTS, to what extent are you able to get leads, high-value leads into other sister companies like, say, MTS' second-biggest network is their Ukraine operations.

Well, that's exactly our strategy. So we want to do an excellent job with these early customers, so they become lighthouse references, not only within the group but within the region for our competitors.

And just to make a mention, we closed our MTN South Africa deal and then got an MTN Nigeria deal. So we do have the experience of selling a second DSA within the group already.

But a lot of our early DSA customers are members of very large groups, so I think your question implies the right inference, which is if we do a good job with those initial implementations, we expect we should be well positioned to go after more DSA business within the group. And that's exactly what we plan to do in 2012 and beyond.

As I'm trying to deepen my understanding of your company -- this pertains to DSA. I'm aware of the inventory savings for the carriers as well as the headache saving, the self provisioning.

You sort of alluded to on this call a couple of additional benefits. You talked about a marketing or a promotional campaign later on and how that may be easier if converted to all SIM cards under your platform, and you also alluded to this container example of switching to a local provisioning.

Can you talk about some of the -- I've always been focused on the kind of initial and the inventory benefit, but it seems like there might be more to it. Can you talk to that a little bit?

Yes, sure. You're exactly right on.

I mean, typically, we would enter an engagement focusing on the benefits DSA could provide around the supply chain, around simplified logistics of having universal SIM cards. And in addition to that, we've seen benefits on more efficiently using the network switches that starts in the database.

We've also talked about the marketing benefits of being able to select the number at time of activation. But increasingly, what we're seeing and we see the byproduct of the increased dialogue we're having with marketing organizations that DSA holds more benefit than we've communicated in the past.

And again, once a carrier gets a universal SIM out there and they're all DSA SIMs, the flexibility of that SIM in concert with the SIM applet that's on the SIM card will allow carriers to bring out new offers, new tariffs, new pay plans much faster than they have in the past. Most of our customers, when they put their SIM inventory in the field, it takes weeks if not months for that SIM inventory to burn off.

So a carrier who wants to introduce a new program has 2 choices before DSA: either pull back those old SIMs which is costly and put our new SIMs, or wait for those old SIMs to sell through the channel and then replace them with new SIMs with a new promotion. Well, with DSA, that all changes.

Because of the flexibility of our software, we can modify the screen flow. We can then attach different tariffs, different campaigns, different marketing campaigns immediately to those SIMs that are in the channel.

And a lot of the dialogue we're having is making sure that the packaging of the DSA SIM is flexible enough, so that if the carrier chooses to either lead with the campaign or respond to a competitor's actions, the packaging of the SIM is flexible enough so that if we introduce a new tariff, we introduce a new campaign that the channel and the distributors will be able to promote it. And if you're a marketing VP or if you're in charge of retail operations at a carrier, the idea that you could respond in a matter of hours or a day rather than weeks or months obviously is extremely appealing.

And that's where we're beginning to have our most intense discussions with our carrier customers. And you can imagine, the discussions are very powerful because of the functionality and the capability that the system provides them.

And I must be missing something here, but if I were a carrier and want to run a promotion, I mean, couldn't I just change, for example, the rate plan or something at the back end in the billing system? I mean, why do I need to -- yes, why does the SIM card have to necessarily be touched?

Well, without DSA, the SIM cards are extremely static. So what happens, if you buy a prepaid SIM and let's say it has a $10 minutes of use balance, the phone number is already burnt onto that SIM.

The balance of $10 is already burnt onto that SIM, and you're very constrained in terms of what you can do with that SIM. Now in the case of DSA, that's not the case.

Because we have an exchange between our server and the SIM applet, that gives us the ability to change fields dynamically during the activation process. And those fields could include the phone number, which we've seen many times.

It can deal with prepaid user registration. It can deal with what are the packages the end user can choose, what are the programs or the products you're selecting, is it a voice product, is it an SMS product, is it a mobile broadband product.

All those things can be changed on the fly with the DSA SIM. Obviously, you can't do that if the SIM is hardcoded and burnt at the time of production.

So this time to market aspect of DSA is becoming more and more important in our discussions with our carrier customers.

Okay. And then, one final question also around products.

How did the DSA tie into the Tertio? I mean, are you selling them together or separate?

I mean, how is that working?

Well, they're separate products. They may deal with separate challenges within the operators' ecosystem.

We do have customers that are using both Tertio for Service Activation and DSA for SIM card activation. And we also have customers who are Tertio only or DSA only.

It's not that common that a carrier goes to replace the Service Activation layer and the SIM activation layer at the same time, but the products do work wonderfully together in concert. They do solve different issues.

And again, as we say as this activation pure play, Tertio deals with subscriber activation. DSA focuses on SIM card activation.

And then, the new connected device product is really focused more on the emerging M2M space. So when we come to work in the morning, we're always talking about what are the challenges, what are the needs, what are the opportunities within activating service within our wireless carrier community.

And that's our core competency, that's our focus and that's where we're directing most of our R&D and product development today.

Just a question on the margins here. Your

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For the year, your total operating costs after your cost of goods sold ran around $12 million, and your gross profit was around $12 million. And you've been working down some of those expenses.

And I know you had some write-offs in the fourth quarter. And you tightened your headcount a little bit further.

I'm just curious as to what looks like going ahead in 2012 in terms of those costs.

Well, Mike, as you know, we're very tough on cost savings. And I may ask Dan to add to my answer as well.

We always run a tight ship in terms of keeping costs under control. We're very pleased with the direction of our customer support margins.

And we'd like to improve the margins of our license and service. And to a certain extent, some of the L&S margins reflect early adopter pricing.

To a certain extent, some of the L&S margins reflect some of the economic challenges that existed in 2010 and 2011 within the marketplace. But our directional statement would be, we're pleased with CS.

We'd like to keep it where it is. And we'd like to improve the LS margins.

We think we do that as our funnel gets larger, and we don't have to be as aggressive perhaps to pull an end of quarter deal.

Dan, is there anything you'd like to add to that?

No, I think you hit everything that you needed to. But yes, we expect the L&S margins to rebound as the revenue -- as we increase the revenue volumes due to the kind of the fixed factory costs we have here.

And we expect the top line to increase, which will obviously improve that. And then, as Thad mentioned, in 2010, there were some deals with some lower margins that in the tough times that we had to take.

Well, yes -- I know that going back a couple of years, you can see that your L&S margins tended to run up, I guess, towards 60%. And in the most recent quarter, they were around 38%.

So that was a little bit concerning. But also, I'm just looking at your operating costs, you brought your sales and marketing cost down to $1.3 million from $1.6 million in the prior quarter, but most of the other costs that you break out, G&A and product development, et cetera, have reined[ph]pretty consistent quarter-to-quarter for the last couple of 3 quarters.

And so I'm looking at that and thinking that, that sort of needs to be continued to be pushed down or at least conversely, the revenue line needs to really grow to support what you're spending on the operating side.

Let me add a comment to that, Mike. I mean, G&A has come way down, so we've taken a lot of G&A out of the business in the last year.

Sales and marketing has come down a little bit, although it's going to come back next year with commissions because we keep selling so much product. Costs of revenue came down, so that's another area.

The only area where we really protected our expenses in the last couple of years was product development, and that was a conscious decision on our part. But all other areas have come down correspondingly as the business either waned or waxed in terms of growth.

But cost of revenues, year-over-year down. Sales and marketing, down.

G&A significantly down year-over-year.

What about as you look at the upcoming year income tax-wise, if you begin to hit some revenue numbers that support your cost structure, are you going to see a tax implied on your earnings?

Well, we have a couple of different tax jurisdictions. So one in the U.S., we'll still have approximately $12 million of NOLs left to shield a lot of that revenue from tax obviously.

We'll burn off our deferred tax assets during that time, so the effective rate will still be closer to that 37%, but the cash rate is only that AMT rate of 2%. The U.K., we expect to stay somewhere in the low teens.

I would expect our effective rate in the U.K. to be probably around the 12% to 14% range.

And so it's really going to depend on where the revenue is obviously. But the effective rate on a company-wide basis should be somewhere around or somewhere similar between 8% and 10%.

Well, that's fine. We'll just go with the closing comment.

I just like to thank Dan and his team for all his work. As you can imagine with the reconciliation and the onetime impact of selling Numbering and with the small team we run here in Denver, I think Dan and our audit department did a great job.

And I know it took a lot of late nights to complete the audit. And I just want to thank the team and congratulate them.

And we look forward to now reporting some year-over-year and quarter-to-quarter results that don't have so many extraordinary charges in it. And I think it'll get easier for everybody, including our investor community.

So thank you for joining us again. And we look forward to reporting Q1 results in the mid-May time frame.

Thank you.