Evolving Systems, Inc. EVOL
December 29, 2017 - 10:07pm EST by
2017 2018
Price: 4.70 EPS .30 .40
Shares Out. (in M): 12 P/E 15.6x 11.8x
Market Cap (in $M): 56 P/FCF 0 0
Net Debt (in $M): 2 EBIT 0 0
TEV ($): 58 TEV/EBIT 0 0

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Evolving Systems Inc. (EVOL)

Share Price: $4.70

Market Cap: $56MM

Enterprise Value: $58MM

EV / Rev:  2.3X (LTM) 1.7x (2018E)

EV / EBITDA:  7.0x (LTM), 5.5x (2018E)

P/E:  15.6x (LTM), 11.8x (2018E)

Unlevered FCF Yield:  LTM (11%) 2018E (12%)

Price Target Range:  $7-$8 a share (50-70% upside from current levels)


Type of Investment

·        Microcap, non-followed, under the radar telecom software and services provider undergoing a business transformation led by a former VC executive CEO with a track record of building and selling telecom technology businesses

·         On a standalone basis, the Company has been consistently profitable for over nine years and generates meaningful free cash flow (11% LTM unlevered FCF yield) and has an opportunity to meaningfully grow revenue and cash flow through an ongoing business transformation



·         Evolving Systems Inc. (“EVOL” or the “Company”) provides mobile telco related software and services to network operators with more than 100 customers in 65+ countries worldwide

·         Through a number of targeted acquisitions, EVOL is transitioning its business from a one-time activator of SIM cards to a provider of technology and managed services that provide Telcos with Customer Lifetime Value (“CLV”) solutions

o   The new CEO (a former VC executive and telecom tech entrepreneur) who came from the ~$10MM Q315 acquisition of Sixth Sense Media is taking the business in a new direction  

o   Management cut the dividend in Q316 and began to reallocate capital toward selected M&A ($2-10MM of deals)

o   With two follow on acquisitions, BLS and Lumata, in July and September of 2017, respectively, the CEO is focusing the business toward providing customers with customer lifecycle management solutions

·         Most of EVOL’s revenue is generated from overseas where customer and growth dynamics are much different from US based wireless carriers 

·         EVOL’s value proposition has moved from cost savings to revenue increases for the carrier while EVOL’s business model is changing from classic capex licenses to opex models based on recurring managed services with performance fees.  As a result, revenue growth and margins have remained flat but revenue streams will be more recurring in nature and margins will expand as SaaS revenue matures

o   EVOL’s real-time engagement solutions have also been targeted toward the in the retail and financial sectors

·         EVOL is favorably valued on all metrics (on an absolute and relative basis), which provides downside protection and significant upside optionality should the Company continue to execute on its growth plan by capitalizing on carrier demand for customer retention solutions

·         With continued execution, the stock should trade closer to its telecom services peers which trade 10x+ EBITDA equating to an $8+ price target for the stock (70%+ higher than current levels)

·         Once scale has been achieved, this asset is likely a sale to a larger competitor (DOX, CSCO) looking to enhance their mobile solutions portfolio


EVOL’s Key Solutions

Subscriber Acquisition and Activation solutions used to sign up new subscribers and to activate complex bundles of voice, video and data services for traditional and next generation wireless, wireline and cable networks;

Mobile Analytics, Engagement and Upsell enables carrier marketing departments to innovate, execute and manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time;

Retention, Loyalty and Fulfilment solutions that reduce subscriber churn, encourage service usage, and reward subscribers with value from the carrier and from loyalty program partners;

Consumer Information Monetization enables mobile service providers to monetize their consumer information and context through the up-selling of digital services like games and apps and mobile advertising.


Industry Backdrop and Growth Drivers

·         Over the last five years carriers around the world have spent a lot of money building out spectrum and have not focused as much on driving top line revenue growth 

o   Meanwhile, there is a lot of technological innovation that is driving revenue from mobile users including mobile banking, games, advertising, etc. 

o   GOOG, FB and others have experienced explosive growth in mobile advertising and while mobile advertising increased brand recognition, lead generation, etc by helping brands grow in the short-term, it does not necessarily lead to long-term customer loyalty

·         Retailers are making customer personalization a priority this year which plays into EVOLs business strategy as they can help brands increase their customer lifetime value by:

o   1) Up-selling more products and services they need though highly personalized real-time engagement over multiple channels

o   2) Retaub customers with real-time personalized loyalty experiences

o   3) Increase a brand's enterprise customer lifetime value by driving rapid increases in customer acquisition and retention

·         Example 1:  Orange PLC is engaging customers with offers like a discounted two-for-one ticket and concession stand items for any movie anytime nationwide on Wednesdays (typically a slow day at the theater)

o   Customers receive vouchers they can swipe at the ticket booths and concession stands to avoid lings – this real time digital solution has engaged over 100MM Orange customers over time, increased their average spend and increased tenure by 40%

o   EVOL provides this technology in return for a monthly fee for providing the cloud service as well as a performance fee based on customer engagement and program participation

·         Example 2:  The largest mobile operator in India is using another EVOL solution.  In India, there are more than 900MM people with mobile phones and only 15MM that have internet connections at home.  India is a bring-your-own device market where getting to a carrier store to stand in long lines is a bad customer experience

o   EVOL’s tech solution can allow carriers to flood the market with blank SIM cards where a customer can self-enroll anywhere, anytime by installing the Evolve-powered SIM which then launches an app which navigates the consumer through the know-your-customer process which is required by local law using fingerprint technology

o   After onboarding the customer the operator can up-sell the customer a higher level data plan, additional apps and services.  One of India’s largest carriers is up-selling 4G services to over 100K customers a day which results in higher priced 4G services that drive longer customer tenures and total enterprise customer lifetime value


EVOLs Business Transformation

·         Strategy shift:  Prior, EVOL was selling a software solution (perpetual software licenses or capex) to clients which is somewhat discretionary and a large upfront cost  

·         In 2015, EVOL acquired a company Sixth Sense Media for approx. $10MM that provided managed services (think SaaS) to telco carriers

·         In 2016, EVOL continued its pivot toward consumer digital engagement with the follow on acquisitions of Business Logic Systems and Lumata (2016)

·         Since this acquisition, mgmt. has pivoted its business model from a “one and done” software sale to that of a monthly service fee 

o   Quick math on a 5 year horizon: 

§  Old model:  Carrier might buy license for $500K +75K in support for 2-5 years for a total of $800K of revs 

§  New model:  EVOL provides onsite and offsite resources to help develop the relationship and drive sales.  $25K a month over 5 years = $1.5MM of total revs which is greater, more consistent and higher margin than the old model

·         In Q2, EVOL had had four carrier wins including a Tier 1 global group in Asia with 200mm subs – they won this RFP because of their experience with 25 carrier implementations. EVOL has a positive reputation in the market 

·         With over half of revenues now on a recurring basis (57% YTD), this trend should continue with an increased mix of managed services revenue


 Future Market Opportunities

·         EVOL is working on getting into retail financial services verticals where it can provide its technology to communicate with mobile users (account balance, credit card offers, up-selling product and service opportunities) 

o   EVOL is paid a monthly fee for running the software in the cloud and a performance fee based on certain thresholds achieved as they become the sales person of record if a transaction is consummated with the end user

·         Tesco has created a branded phone (purchased wholesale from Vodaphone) with the intent to leverage Tesco mobile as a gateway behind all of their services (bank, retail, etc.), wrapping everything together which is the future of consumer digital engagement.  EVOL is providing the technology engine behind all of this

·         The market should expect to hear future announcements from EVOL regarding such initiatives in the future


 Competitive Landscape

·         Subscriber Acquisition / Activation: Comptel-Nokia, Amdocs, Oracle.  Analytics, Engagement & Upsell:  Knowesis, Pontis (acquired by DOX for about $85-90MM) and some products in CRM suites from SAS and Oracle

·         AMDOCS (DOX), the large publicly traded telecom solutions provider recently purchased a company CONTIS that specializes in digital engagement.  Pegasys is a product currently employed by VZ in the US


Valuation, Shareholder and Management Considerations

·         Top line has been flat with run rate revs in the $30-32MM range with recent acquisitions

·         Rev mix:  License fees (10%): software licenses.  Managed Services (90%): Development, integration, SaaS, managed services, maintenance, upgrades, warranty

·         Margins are strong (low 70s GM, low 30s EBITDA) and consistent allowing the company to generate cash for future capital allocation

·         The stock is thinly traded and closely held by a number of insiders including the Singer Family (23% ownership), which have been involved with a number of telecom companies in the past, many of which have been sold as well as Piton Capital Partners / Kokino lLC (18% owner) a family o ffice.

·         CEO Thomas Thekkethala comes from a 30 year background in telecom responsible for launching two software companies (Cybertel as one of them) which were eventually acquired.  He then launched a venture fund and sold companies to Netscout and Cisco 

o   The last of his VC portfolio companies, Sixth Sense Media was the one sold to EVOL and he came to the run EVOL following the sale


Risk Factors

·         Customer Concentration / Consolidation:  At present, not one customer exceeds the 10% threshold of revenue or A/R concentration, but a loss of a customer to consolidation may present revenue risk 

·         Revenue Recognition:  As a Company that does business around the globe, this could lead to inconsistencies in collections, etc. as customers have different payment terms, etc.  While the Company is paying fair prices for its assets, it cannot be assured it will be able to fully collect A/R from the target companies.  Last quarter, ADA increased approx. 5MM to 10.8MM and management has claimed that the finance and audit team is taking a “very very” conservative approach toward understanding payment practices when evaluating M&A, etc

·         Competition / Bundling:  While the industry is fragmented, it is undoubtedly highly competitive.  EVOL’s recently acquired scale and large base of customers should provide somewhat of a mitigant to this risk, it is one that should be considered.  Furthermore, it is possible that a larger telecom tech / services provider could bundle such functionality to their suite of products / services to gain market share 

·         Integration Risk / Workforce:  M&A is always an organization challenge and may prove to be disruptive to EVOL’s current workforce.   A majority of staff is based in India and labor shortages may cause disruptions in the business

·         Macroeconomic Considerations:  Operates globally so potential currency risks, gov’t instability, etc.

·         Limited Management Ownership / Changes: When asked, the CEO could not tell me how much stock he owned (which I thought was a little strange), but as of the last proxy he owns approximately 2.8% of the Company or 342K shares.



·        Thomas Thekkethala, 55, was promoted to CEO in January 2016 after being named President and a Director of Evolving Systems when RateIntegration, Inc. d/b/a Sixth Sense Media, was acquired by Evolving Systems on September  30, 2015. Mr. Thekkethala was a founding investor, Chairman and CEO of RateIntegration from February 2004 until the company’s acquisition by Evolving Systems in September 2015. Prior to Sixth Sense Media, from December 1999 until September 2015, he was Founder and Managing General Partner at JT Ventures, an early stage technology venture fund where he led investments in Allegro (acquired by Cisco), Fidelia (acquired by NetScout) and Ibrix (acquired by HP)



Stock Price       $4.70  
FD Shares Outstanding     12.0  
Market Capitalization     56.4  
Debt       9.4  
Cash & Equivalents     7.6  
Enterprise Value     58.2  


Income Statement Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417E 2015A 2016A LTM 2017P 2018E
  License fees              0.8              0.6              0.9              0.6              0.3              0.7              1.1                  2.9              2.7    
  Managed services              5.7              5.4              5.3              5.6              5.5              5.5              6.5             21.9           23.1    
Total Revenue              6.5              6.0              6.2              6.1              5.9              6.2              7.5              8.8           25.6           24.8           25.7           28.4           35.0
Gross Margin              5.0              4.8              4.9              4.8              4.3              4.6              5.0             19.0           19.5           18.7    
EBIT               1.3              1.6              1.7              1.8              1.6              1.8              1.2                5.2              6.4              6.4    
D&A              0.5              0.3              0.3              0.3              0.2              0.4              1.1              0.6              1.4              2.0    
Total EBITDA              1.8              2.0              2.0              2.1              1.8              2.2              2.3              2.8              5.8              7.9              8.4              9.1           10.5
% Growth and Margin                          
  License fees           16.7% 18.7%            
  Managed services           1.9% 22.2%            
Total Revenue           3.3% 21.7% 43.0%          
Total Gross Margin 78% 80% 78% 78% 74% 75% 66%   74% 79% 73%    
% EBITDA margin 28% 33% 32% 34% 31% 35% 30% 32% 22% 32% 32% 32% 30%
EV / EBITDA                     7.0x 6.4x 5.5x
EBIT                     6.4   8.0
Taxes (30%)                     1.9   2.4
EBIAT                     4.5   5.6
D&A                     2.0   2.5
Capex                     (0.0)   (1.0)
Unlevered FCF                     6.4   7.1
% EV Yield                     11.1%   12.2%



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued realization of managed services revenue and growth

Continued wins in the retail / financial services sector

Successful integration and anniversary of recent acquistions

Sale to a larger company

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