Glenn Wiener - Investor Relations Thomas Thekkethala - President & CEO Rick Dinkel - CFO

Thanks you, and good morning -- excuse me, good afternoon, and welcome to Evolving Systems 2017 second quarter earnings call. My name is Glenn Wiener and I am President of GW Communications, the company's new Investor Relations firm.

Certainly look forward to speaking with all of you in the coming weeks, and should you have any follow up questions, please feel free to reach out to my office at any time. Joining us today are Thomas Thekkethala, the President and Chief Executive Officer; and Rick Dinkel, Senior Vice President of Finance.

Both will have prepared remarks, and we will then open up the call for questions. Before begin, 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. We're very excited, and at this time, I would like to turn the call over to Thomas.

Thanks, Glenn, and good afternoon, everyone. I would like to start with a quick overview of our quarterly results and highlight some of the key developments.

Rick will then briefly discuss our financial results, after which I will provide some updates and insights into our ongoing business transformation. We will then open the call up for questions.

I'm pleased to report the second quarter marked our 37th consecutive profitable quarter, which demonstrates our ability to maintain high margins while continually improving operating efficiencies. From a bottom line perspective, net income was up 13% sequentially and up 41% year-over-year.

Net income for the first half of the year was also up 72% year-to-date. Adjusted EBITDA of $2.2 million was up 15% sequentially and up 8% year-over-year, and earnings per share was $0.09 compared to $0.07 during Q2, 2016.

The big highlight was the close of the Business Logic Systems acquisition, which occurred July 3, just after the quarter closed, and will be reported in future quarter's results. BLS' solutions turn customer data into actionable insights and personalized contextual offers through customer engagement and value management solutions.

The real value BLS brings to us are their solutions and expertise as it rounds out our offering and further accelerates our managed service business model transformation, which started in 2016 with the acquisition of Sixth Sense Media. Let me expand on this further.

We are in the middle of a business transformation from a traditional upfront software product license model to a subscription-based Managed Service model which creates several benefits for us. Number one, this model generates a more stable, recurring revenue stream over the course of multiple years.

Number two, we are far more engaged with customers which leads to more expansion opportunities. Number three, the model is based on renewable, annual or multiyear subscription contracts with established customer budgets.

And this adds performance fees on top of the subscription fees we already generate, as we help drive business outcomes for our customers. Now similar to my remarks in previous quarters, this shift will continue to impact some of our key metrics, such as revenue, where we now record Managed Service fees over the life of the contract instead of all at once.

This is important to note as you evaluate our progress. Nevertheless, in the second quarter, we grew revenue sequentially by 6% and we posted a 2.4% revenue increase year-over-year basis.

In terms of nonfinancial developments, let me highlight just a few. During the second quarter and really since start of the year, we continue to see lots of business activity with our global customer base.

These included our solutions for customer acquisition and activation, up sell and monetization and retention and loyalty solutions. We sell these solutions and add-on services to international Tier 1 and Tier 2 carriers directly with our sales and solutions teams as well as through our industry leading partners, who are among the largest network equipment and systems integration firms of the world.

We are working closely with our partners to identify new opportunities, both with our installed base and with new accounts. And the BLS offering will only help us in this regard.

Feedback, thus far, has been very, very positive. On the customer front, in the second quarter, we secured several new wins, spanning across Africa, Europe, the Middle East, Asia and Latin America.

Some of the highlights include: a major Tier 1 European mobile operator expanded their customer activation solutions for voice over Wi-Fi and voice over LTE services as well as the migration of recently acquired carriers customer to their network. An existing strategic partner, who is a world leader in digital security and identification technologies, expanded their relationship with us to include our entire suite of customer engagement and value management solutions into their portfolio, which will now be positioned by their global sales force.

The same partner also upgraded two of our customer acquisition solutions at Tier 1 operators in the Middle East and Southeast Asia. Additionally, one of the largest [Indiscernible] Asia and Africa mobile operator groups closed a deal to improve the efficiency of their customer acquisition solutions with us.

And one of the largest Latin American operators upgraded their customer acquisition solutions to improve network utilization. Subject to customer and partner approvals, we intend to share more details of to some of these relationships in the near future.

Our strategy is focused on driving profitability both through organic and inorganic growth. Organically, we will continue to engage our approximately 90 customers with our Managed Service offerings that combines our solutions, our expertise and experience to drive increased customer acquisition, activation, up sell, monetization and retention for our customers.

We are also actively identifying and pursuing attractive acquisition candidates which can deliver value to our business in terms of customers, product, technology and talent synergies. The recent BLS acquisition is an ideal example of this.

BLS has a solid customer base with over 20 mobile operators in Europe, Africa, Asia-Pacific and Latin America. While this transaction is small, its real value is strategic, given the synergies; its existing network on customer partners bring; and a highly experienced team that has substantial expertise in customer digital engagement and value management.

In fact, Richard Lewis, BLS former CEO, has joined us as our new Senior VP of Worldwide Sales. He has already been actively involved in leading our global sales team and we have identified several new opportunities with our combined customers and partners.

We are excited about our prospects moving forward, though it will take some time to fully leverage BLS synergies and execute on our plan. With that, Rick, I'll turn it over to you for a detailed recap of financial results.

Rick?

Thanks, Thomas. I would like to comment on a few of the highlights of the second quarter, adding some detail and perspective to the information related [ph] to 10-Q and today's earnings press release.

We reported total revenue of $6.2 million, which is a 6% improvement sequentially and a 2.4% improvement over Q2, 2016. For the six months ended June 30, 2017, total revenue was $21.1 million, compared to -- I'm sorry it was $12.1 million compared to $12.6 million.

The modest year-over-year decline was expected as we continue to migrate to our Managed Services model and is aligned with our strategy of creating long-term recurring revenues over the life of the contract, as Thomas has indicated. Recurring revenues were 59% during the quarter and also year-to-date.

Cost of revenue in the second quarter was up $300,000 versus last year's second quarter. This increase is primarily attributable to our business model transition, where customers are more actively engaged in sharing the cost of new product feature development cost.

Our gross margin for the quarter was approximately 75%, a 1% sequential improvement and within our expected reach. We continue to focus on managing our overhead.

Operating costs declined by 9% from the second quarter last year, despite the increases in G&A related to professional fees spent in M&A activity and recently announced stock-based compensation. Second quarter operating income of $1.7 million increased by 9% compared to the same period in 2016, and our six month year-over-year operating income increased by 56% to $3.3 million.

Second quarter net income was $1.1 million, which is up 41% year-over-year and up 13% from Q1 2017. Additionally, net income year-to-date of $2.1 million increased 72% compared to the first half of last year.

Adjusted EBITDA in the second quarter increased to $2.2 million compared to $2 million in Q2 2016, which represents an 8% year-over-year improvement and was 15% better than our Q1 2017 adjusted EBITDA of $1.9 million. Adjusted EBITDA year-to-date was $4.1 million versus $3.8 million for the first half of 2016 or a 7% increase year-over-year.

Lastly, earnings per share of $0.09 in the second quarter was up $0.02 and earnings per share year-to-date of $0.17 was up $0.07. All bottom line metrics improved.

As for our balance sheet, our cash and cash equivalents were $5.5 million compared to $7.6 million as of December 31, 2016. You will note that the company also has restricted cash of $1.6 million escrow at the end of the second quarter for the acquisition of BLS.

Our contract receivables net of allowance of doubtful accounts increased by $1.7 million compared to our contracts receivable at year-end 2016 and working capital increased to $10.4 million from $8 million at year-end. With that, I would like to turn the call back over to Thomas for some additional thoughts.

Thomas?

Thanks, Rick. Before we open the call to questions, I wanted to share with you some of our views on the marketplace on -- and thoughts on where we are taking the business.

Mobile has transformed the way businesses are engaging with their customers. The first generation of mobile consumer engagement was essentially a copy and paste of Internet services that were relatively static and batch-oriented.

The tools of engagement included mobile e-mail, mobile websites, mobile apps, banner ads, and in some markets, text-based mass marketing. The next generation of mobile consumer engagement works to our advantage and has several major characteristics.

It is contextual and personalized based on location, current activity and time of day. The engagement is real time since mobile devices are always on and support instant communication and feedback.

And it is omnichannel, so the customers preferred mobile channel, be it Facebook, Twitter, in-app, IVR or text is used based on the consumer's context. Evolving system has repositioned itself as a next-generation mobile consumer engagement solutions company that drives contextual, real time, personalized, omnichannel consumer actions.

A big part of our strategy now is to move beyond just telecom to other verticals, such as retail, entertainment and financial services. And we have started making real progress, particularly in our traditional markets in South Asia, Africa and Eastern Europe, for these customer engagement and up sell solutions.

For example, in South Asia, we're engaged in three trials with one of the largest national banks and two regional banks, while in Africa, we have trials underway with two leading-edge banks in West Africa. In Eastern Europe, we're working on trials with three of Europe's largest retail chains.

And in Southern Africa, we have recently received an order for a trial with one of the largest food and beverage chains of the world. We are also increasing investments to upgrade our solutions to support Big Data and machine learning, as we believe this will enable us to scale to larger enterprises in the developed markets.

Finally, we are executing on the strategy I outlined last quarter with three key principles: number one, a highly efficient and more profitable Managed Services model as the baseline for all our solutions. Number two, a high touch customer engagement model with a team of on-site and offshore exports -- experts that drive both inorganic growth at our existing and new customers; and accretive acquisitions that accelerate growth and profitability by migrating acquired customers into our Managed Services model.

Our team remains focused on top line growth long term, but in the short term, the objective is to position the company for the future while improving our infrastructure, lowering our costs and enhancing our solutions and services capabilities. As I said earlier, it will take some time to fully leverage the BLS acquisition and generate the type of growth I believe our company is capable of, nevertheless, we will remain profitable and we expect that to continue.

Our balance sheet is in good shape and our focus is also on cash generation to improve our cash position further. It is through this focus that we continue to produce value for all of our stakeholders: our customers, partners, employees and our investors.

At this point, I would like to open the call for any questions. Operator?

Okay. Since there are no further questions, I want to thank everyone for joining us today.

We look forward to hearing from you and speaking with everyone next quarter. Thanks and have a good day.

Thank you.