Evolving Systems Q4 Results: Licence Fees And Services Up 80%

FY12 was a buoyant year for Evolving Systems (EVOL), with revenues, adjusted EBITDA and end of year cash all slightly ahead of our forecasts. Revenue rose 38% to $26.2m while adjusted EBITDA surged to $6.5m from a small loss in the prior period, reflecting strong operational gearing as incremental revenues flowed through to the bottom line. The group is seeing very high levels of interest in its SIM card activation product DSA, and, given the growing interest in machine to machine (M2M), management is optimistic that it will achieve initial revenues with its connected device solution, Intelligent M2M Controller, later this year. The shares look attractive, trading on c 12x when adjusted for the $8.8m cash pile, and with a 4.9% yield, given the strong growth drivers, healthy operating margins and highly scalable business model.

Unique quoted pure play activation business
Evolving Systems has essentially two business lines: Tertio Service Activation (TSA), which is relatively mature, and Dynamic SIM Allocation (DSA), which is targeting a new market with significantly more potential. We estimate that only 16-18 of the c 850 global national mobile telecom operators have a DSA-type solution. Evolving Systems is the market leader, with 12 operators using the group’s patented solution. The group also has a solution for the M2M market, which could open up incremental revenue opportunities. The industry dynamics are favourable – according to market research company IMS Research (part of IHS), SIM card shipments are set to rise from 4.8bn in 2012 to 6.6bn in 2017, representing 6.6% annualised growth.

Q4 results: Licence fees and services jump 80%
Group revenues jumped 38% to $26.2m, ahead of our $26.0m forecast. Licence fees and services soared 80% to $17.6m as new DSA revenues came on stream and TSA benefited from upgrades on the back of network migrations to 4G/LTE technology. The group ended the year with $8.8m of cash, which was ahead of our $8.2m forecast, and has no debt. The Q113 quarterly dividend is boosted by 60% to 8c.

Forecasts and valuation: Highly scalable SIM card play
We have tweaked the revenue mix in our forecasts and added initial revenue from Intelligent M2M Controller from FY14 and hence our earnings forecasts edge up. Adjusted for the cash pile, the stock trades on c 11.7x our FY13 normalised earnings, falling to c 11.0x in FY14.The stock trades at 2.1x FY14 sales, which is a premium to a handful of quoted peers, reflecting the group’s faster growth profile, strong margins and its leading position in the fast-growing dynamic activation markets.

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