Kaleyra, Inc.
Q2 2021 Earnings Call Transcript

Published:

  • Operator:
    Greetings. Welcome to the Kaleyra Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Marc Griffin. Thank you. You may begin.
  • Marc Griffin:
    Thank you. Good morning, and welcome to Kaleyra second quarter fiscal 2021 conference call. Kaleyra released unaudited results for the second quarter ended June 30, 2021, earlier this morning. The press release as well as a replay of today’s call can be found on the Investors section of the Company’s website at investors.kaleyra.com. Joining us for today’s call from management is the Founder and Chief Executive Officer, Dario Calogero; and the Company’s Chief Financial Officer, Giacomo Dall’Aglio. During today’s call, management will be making forward-looking statements. Please refer to the Company’s SEC filings, including the Company’s annual report on Form 10-K for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Kaleyra cautions investors not to place undue reliance on any forward-looking statements. The Company does not undertake and specifically disclaims any obligation to update or revise the statements to reflect new circumstances or unanticipated events that occur, except as required by law. Throughout today’s press release and on the call today, we’ll refer to adjusted gross profit margin, adjusted EBITDA and adjusted earnings per share. These metrics are not determined in accordance with generally accepted accounting principles and therefore, are susceptible to varying calculations. A definition, calculation and reconciliation to the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of Kaleyra’s financial results provide useful information regarding certain financial and business trends and the results of operations. With that, I’d like to turn the call over to Dario. Please go ahead.
  • Dario Calogero:
    Thank you, Marc, and thank you to everyone joining us on the call today. Kaleyra reported another strong quarter, with Q2 exceeding our revenue expectations along significant improvement in our gross margins. Our financial improvements validate both our strategy and execution as we continue on our journey to becoming a global CPaaS platform. The second quarter was transformational for Kaleyra as we completed the landmark acquisition of mGage as well immediately following the closing of the second quarter, acquiring Bandyer, and through this acquisition, we have accelerated our growth, expanded our geographic reach and broadened our product portfolio. For the second quarter, our revenues were $54 million and increased by 73% year-over-year. More impressive, revenue was $43.8 million, excluding mGage, an organic increase of 40% year-over-year, demonstrating the value proposition of our offering and the other economies are property worldwide. The global pandemic continues to post challenges worldwide, with positive action from the vaccination process, but also increasing number of hotspots as the Delta variant of COVID-19 reverts certain communities. The team has continued to execute very well through this another challenging period. The main drivers in the quarter were the economic recovery with the reopening of the economy in Italy an uptick in our e-commerce customers in India, broad-based positive activity within our U.S.-based enterprise customer and new customers in rest of the world. We were pleased to see digital payments and transaction improved, which drove messages up 52% on a year-over-year basis. On the voice side, calls continued to increase year-over-year and were up 195% on that basis. For the quarter, we delivered 8.5 billion billable messages and connected 1.4 billion voice calls on behalf of Kaleyra. Now I would like to touch on some of our key initiatives in the quarter. In the second quarter of 2020, we officially launched the campaign registry, and we are very pleased with the progress today. As a quick reminder, the Campaign Registry, a subsidiary of Kaleyra, and provides application to person at the sanctioned 10-digit long-code messaging campaign station services. The Campaign Registry collects the who of the brand and campaign is and the what were the use cases, industry segment and additional carrier mandated information. For business messaging programs in which a plan via its campaign service provider communicates with end users. The registry is similar to a yellow pages for business messaging service, which enables identification to ecosystem participants and do sending messages and what they intend to send in order to support improved service quality and the reduction of spam and unwanted messaging to consumers. As of the second quarter, Campaign Registry has signed Tier 1 carriers in the U.S. and other carriers, representing estimated plus 98% of the U.S. carrier market. Moreover, hundreds of campaign service providers representing an estimated of plus 95% of existing 10-digit long code traffic volumes have signed up and are participating in the registry. After spending time to develop the registry and sign up carriers, we are pleased to announce that Campaign Registry has been executing services, generating revenue and the significant momentum. We are projecting an increase from our initial revenue estimates of . We are continuing to invest in the Campaign Registry and have identified new use cases and the working with carriers to implement new APIs. Campaign service providers are not be testing these new APIs and integrating them into their programs. These additional services are embedded as now and should be generally available in the fourth quarter. We are very pleased with how the Campaign Registry is developing and look forward to sharing more progress. Most exciting news of the quarter was the acquisition of mGage. We could not be more excited by Campaign Registry, its customers and the entire team to the Kaleyra family. Kaleyra and mGage together are uniting two world-class enterprises, communication companies to create a top five global CPaaS platform, with a diversified and balanced product portfolio and the geographical diversification. As we continually look to expand our product portfolio and build on our acquisition of mGage, we agreed to acquire Bandyer and their highly complementary audio video APIs and SDKs. Bandyer offers cloud-based audio/video communication services to financial institutions with the companies, utilities, industries, insurance, human resources and digital health care organizations. We look forward to integrating this technology into our platform and expanding our service offering to our customers. Finally, Kaleyra was recognized as one of the top chatbot solution providers by CIO Applications and will be featured in the CIO’s magazine for the chatbot 2021 addition. We are very proud to have our solution recognized by CIO Applications, and Enterprise Technology Magazine recognized as a go-to resource for senior-level technology buyers and decision-makers to learn about products, services, technologies and technology trends. Chat bots are becoming critical in delivering 24/7 support customers, thereby helping various industries streamline and optimize the customer experience they offer at every stage in the process. The global chatbot market is expected to reach $10.5 billion by 2026, with a compound annual growth rate of 23.5% in the 2020-2026 period. In summary, we believe that Kaleyra is well positioned to execute on our initiatives with our broad product portfolio, global reach and worldwide team. Let me now turn the call over to Kaleyra’s Chief Financial Officer, Giacomo Dall’Aglio, who will review our financials in more details. Giacomo, please go ahead.
  • Giacomo Dall’Aglio:
    Thanks, Dario. For the second quarter ended June 30, 2021, we reported total revenue of $54 million, an increase of 73% year-over-year. mGage contribute 10.2 million. Revenue, excluding mGage, was $43.8 million, an organic increase of 40% year-over-year, demonstrating the value proposition on our offering and the modest economic recovery worldwide. Organic revenue in the quarter was of expectation due to the significant increase in volume compared to the same period of prior year. The main drivers in the quarter were the COVID recovery with the reopening of the economy in Italy, an uptick in our e-commerce customers in India, broad-based positive activity with our U.S.-based enterprise customer and new customers in the rest of the world. We continue to geographically diversify our revenue base with Italy coming in at 35%; India at 25%; and U.S. at 20%; and the rest of the world at 11%. The acquisition of mGage train our position in U.S. and South America, which now represents 5% of revenues. In the quarter, we processed 8.5 billion billable messages, up 62% from the prior period, and we connect 1.4 billion voice call in the quarter, up 195% year-over-year. Gross profit, second quarter of 2021 increased 140% and to $10.5 million from $4.4 million in the year ago period. Gross margin was 19% in the second quarter of 2021, up more than 5% from 14% we report in the second quarter of 2020. Adjusted gross profit, second quarter of 2021 increased 147% to $11.1 million from $4.5 million in the year-ago period. Adjusted gross margin was 21% in the second quarter of 2021, up more than 6% from the 14% we report in the second quarter of 2020. The main drivers of the adjusted gross margin increase were the organic expansion of gross profitability for Kaleyra legacy business, representing 81% of the year-over-year increase and the revised product mix due to the acquisition of mGage. Operating expenses were $21.3 million in Q2 2021 compared with $11.9 million in Q2 2020, mainly driven by the recent acquisition of mGage and investment in sales and marketing and research and development talent. Loss from operations was $10.8 million for the second quarter of 2021 include $6 million of stock-based compensation and $4.5 million of transaction one-off costs. This compares with a loss from operations of $7.5 million in the second quarter of 2020. Net loss was $4.5 million or $0.13 per share for the second quarter of 2021 compared to the net loss of $8.1 million or $0.39 million per share for the second quarter of 2020. Adjusted net income was or $0.5 million or $0.01 per share basic or diluted for the second quarter of 2021 compared to the adjusted net income of $1.4 million or $0.07 per share for the second quarter of 2020. Adjusted EBITDA was $2.2 million in the second quarter of 2021 compared to a loss of $300,000 in the second quarter of 2020. The improvement in the adjusted EBITDA is attributed to organic growth in Kaleyra legacy business and to effect to the business combination with mGage. Kaleyra continues to strongly invest in human capital, and in particular, in R&D talent, enhancing the head count grow year-over-year to strengthen the omni-channel platform and continuous investment in the global sales operation. Cash used in operating activity was $4.9 million in Q2 2021, mainly due to the working capital changes and transaction costs, which were cash settled for more than $50 million in the quarter compared with a cash use of $1.6 million in the same period of the prior year. We have a very strong balance sheet with cash, cash equivalent and short-term investment of $124.7 million as of June 30, 2021. This cash position includes net proceeds from the pipe and issues of convertible notes after payment to acquire mGage. Now, I’d like to expand our regarding our financial outlook. We are returning annual revenue guidance in the range of $258 million to $262 million. For Q3, total revenue is expected to be in the range of $79.5 million to $80.5 million. Thank you for taking the time to join us on our call today. And with that, we would be happy to take your questions now.
  • Operator:
    Thank you. At this time, we will be conduction a question-and-answer session Our first question comes from Tim Horan with Oppenheimer & Company. Please proceed with your question.
  • Tim Horan:
    And I have a few questions, but feel free to cut me off. First, on the Campaign Registry. When will carriers start blocking or really implementing Campaign Registry where it’s the only way to do blast text messages to -- for people to do text messages? When will that kind of kick in, in full force.
  • Dario Calogero:
    Hello, Tim, this is Dario. Well, this is a process which is ongoing now. Operators are mandating the campaign service provider to register the campaign of the brand and they start sanctioning, if they don’t. For this reason, all the major campaign service providers in the U.S. have subscribed with the Company service provider and we are now starting registering campaigns massively. I believe that any operator has its own policy in terms of sanctioning. But in general -- as a general, the idea is that the price of termination will vary significantly if you do not register the campaign. So there’s no convenience for the brand to do unregistered campaigns.
  • Tim Horan:
    Got it. So by year-end, do you think it will be pretty well implemented, I mean it depends on each carrier, but our most carriers -- or will it be -- will it happen before that? I mean could it happen at the end of this quarter where the carriers really implement this product.
  • Dario Calogero:
    Well, we are in a ramp-up period, which is definitely ongoing on the Q3. And I assume it can be completed by the end of the year. So, we’ll be full throttle with the registration process, I believe, by the end of the year.
  • Tim Horan:
    Great. And then secondly, could you maybe quantify somewhat the -- what you think the impact to mGage was from COVID or to the Company? Like what could revenues have been, if it wasn’t for COVID? I know it’s a hard, hard question, but I guess at some point, as we exit COVID you think mGage can resume growth.
  • Dario Calogero:
    Well, to answer to this question, I must segment by geography because the impact of COVID is barring significantly on a geography-by-geography. Definitely in second quarter, there has been an impact in some geographies, including Brazil, Latin America as a whole in Brazil in particular, whilst the U.S. have been absolutely clean. Most of the business of mGage is coming from the United States, but also from Brazil and also from India. India, again in the second quarter with the Delta variant has been hit in terms of volume. Nevertheless, the volume -- as a whole, on a consolidated basis went up significantly with the growth of the revenues organic without mGage of 40% year-over-year Q2-on-Q2 and 74%, 73%, including one month of mGage. So let me say, we keep on monitoring on a weekly basis, the performance of the platform and the volume but you can say that there is an even situation in the world is very different on a geographical segmentation.
  • Tim Horan:
    Well, I guess, said another way, as mGage started to resume growth again yet here in the third quarter? Or is COVID still holding them back?
  • Dario Calogero:
    No, no. mGage is recovering well and volumes are going up. And we only consolidated in the second quarter, the month of June. So it’s only contributed for $10.2 million, if I remember well, Giacomo, correct me if I’m wrong, which is definitely improving compared to the previous months.
  • Tim Horan:
    Great. And then lastly, can you just give us a sense of the synergies, what you kind of expect now from the two companies, both from, I guess, more so expense synergies. And then roughly kind of some rough ideas where EBITDA margins can kind of get to by the end of the year? I know you have a lot of levers to pull on that.
  • Dario Calogero:
    Well, firstly, let me say that we do not provide any guidance at least until now. We haven’t provided any guidance for the EBITDA. So I’m pretty tight in any forward-looking guidance about EBITDA. I can tell you that in the second quarter, EBITDA has been way better than what we had budget. So if you’re proving this is the result of the continuous process in expanding the gross margin and being more picking, selecting the drought and the geographies we want to serve our customers. Basically, we are working towards an expansion of the gross margin profile, which has definitely in a platform company, a strike impact on the bottom line. What was the other question, please?
  • Tim Horan:
    So I was just trying to get a sense of the synergies, maybe particularly the synergies.
  • Dario Calogero:
    Yes, the synergy. Yes. Yes, the well, the synergies with mGage are more on the top line rather than in the cost reduction. What is opening now is that most of the very, very large accounts that we serve on both the two companies, Kaleyra and mGage, taking advantage of the larger footprint of the group now, activating new traffic or new geographies. There are many CPaaS, which are very global, like we are in the world. And this is unlocking very significant opportunities with the top 10 accounts, which are now working together with our business development teams to expand revenues in new trajectories that both ways are originated by Kaleyra and by mGage.
  • Tim Horan:
    And just lastly, I know mGage had lower cost determination here in the United States, and you had lower in some other countries on the expense side. So are you able to start implementing expense improvements to improve the gross margin here?
  • Dario Calogero:
    Yes, indeed, we are working on this. This is a process. It’s not something that you turnaround overnight because it’s required to sit down with carriers and geography to negotiate volume. But definitely, the addition of the volume of mGage to the volume of Kaleyra is providing very, very significant efficiency in the sourcing of termination for multiple geographies. I’ll give you an example. In India, we were running roughly $40 million, $50 million in revenues. So we are now adding a significant amount of volume coming from mGage and obviously, we’re cherry-picking the best, the least possible combination cost, at a consolidated level; basically, we have integrated day one the sourcing. So, sourcing is global, it’s no longer my company. It’s Kaleyra Group, which is managing the sourcing and the operation globally.
  • Operator:
    Our next question comes from Mike Latimore with Northland Capital Markets. Please proceed with your question.
  • Mike Latimore:
    Congratulations on the quarter. I guess, Dario, you’ve had mGage in the fold now for a couple of months. Can you talk a little bit about what you’re hearing from their customers about the acquisition? Do they like the opportunities they see here, any kind of cross-sell opportunities? Or expansion with mGage customers you’re seeing? Just a little more color on that would be great.
  • Dario Calogero:
    Mike. Good to talk to you. Well, first thing, let me say, I had personal one-to-one call with all the top accounts of mGage. All of them were very, very positive about the integration of mGage and Kaleyra because they see the benefit of having a larger supplier order, which is also a listed company. And when you talk to the Fortune 500 companies, they prefer -- they tend to prefer to work together with public company rather than private companies like mGage used to be before getting into the Kaleyra Group. Also, as an outcome of all these one-to-one costs that I had, the business development team and the go-to-market team are working together with the major mGage accounts to expand the business towards the new geographies that Kaleyra is providing, and this is our messaging, but it’s also very much focusing on the new channels and new technologies that we provide that mGage was not able to provide. mGage was basically a messaging provider, only doing some RCS, the largest part of the revenues and the traffic was SMS. Now we are working together on voice. We are working together on video. Also thanks to the acquisition that we have completed with Bandyer, which was already working over the last year together as a partner in Kaleyra. So we see multiple opportunities to expand the omni-channel play with the mGage customers. And this is the focus at the moment.
  • Mike Latimore:
    Great. And then you talked a little bit about traffic dynamics in Italy, India, Brazil in the second quarter. Can you give any color on how they’re playing out so far in the third quarter? Have there been any kind of changes in those regions kind of in the third quarter here in terms of traffic volumes?
  • Dario Calogero:
    Well, the trend is positive. The trend that we already observed, in multiple geographies were recovering from the outbreak of the pandemic, the Delta variance in particular. Beginning in the second quarter and it’s continuing in the third quarter. This is pretty much depending on the pace of the vaccination. Where you have countries like Italy, for instance, where the vaccination rate is possibly the third in the world in terms of results, thanks to the Prime Minister, Mario Draghi, and very strong focus on accelerating the vaccination program. Then the volume and the traffic and in general, the functioning of the society and the economies, it’s taking off again. I believe that Italy now GDP is growing over 5%, which is absolutely unexpected only like four, five months now.
  • Mike Latimore:
    Okay. Great. And just last one on the Campaign Registry. You said you’re seeing significant momentum there. And I think you made a comment around revenue, but I wasn’t sure. Are you giving any color on kind of revenue from the Campaign Registry?
  • Dario Calogero:
    Well, in the second quarter, we didn’t recognize much of the revenues because basically, we entered significant contracts roughly at -- in the second half of June. So we start having a revenue recognition in the third quarter. I would say that in general, we double the guidance on the Campaign Registry in the second half at the time. Most importantly, Mike, the most important Mike is the gross margin profile of the Company registry, which is over 80%.
  • Mike Latimore:
    I guess on that topic, any general guidance for gross margin in the second half of the year?
  • Dario Calogero:
    Not really. We haven’t given any guidance about the gross margin. Giacomo, again, correct me if I’m wrong.
  • Giacomo Dall’Aglio:
    Yes. We can say that we expect to improve our gross margin in the second half for -- because of the seasonality of the Kaleyra legacy business. And the second half is much better than the first and the impact of mGage in Q3 and Q4 will be fully consolidated.
  • Operator:
    Our next question comes from George Sutton with Craig Hallum. Please proceed with your question.
  • George Sutton:
    Guys, I wondered if you could provide a bigger picture expectation for Campaign Registry in the U.S.? In other words, how big could this be once it’s definitionally more mature?
  • Dario Calogero:
    This is a very good question. Hi, George, how are you doing? Well, the Campaign Registry is definitely very promising because of the very wide adoption of the system. This is a system initiative. So it’s absolutely precompetitive. But I would say that over 95% of the campaign service provider and over 98% of the mobile carriers in the U.S. have endorsed and adopted the Campaign Registry. How much it could be in the longer term is still to be, let me say, analyzed because it’s very early, and it’s very difficult. But I think that it’s going to be like several million, several.
  • George Sutton:
    Got you. Okay. And as, we look at your Bandyer acquisition, I understand it’s a small acquisition, but it reminds me a lot of the TokBox acquisition by Vonage a handful of years ago, which really, I think, became a defining strength for that brand given their focus on high-value APIs. Is there any sense that Bandyer could represent a similar kind of opportunity for you?
  • Dario Calogero:
    Absolutely, yes. Bandyer, it’s a very, very nice suite of programmable APIs and SDKs to embed video using WebRTC technology into the application of the customers. And it’s the kind of a flagship channel for Kaleyra. It’s not a market share acquisition. It’s not a revenue acquisition. It’s a product and technology acquisition, which was very much fitting into our micro service overall architecture. So basically, it’s already embedded and integrated into the platform. And we definitely will keep on investing on it to expand the capabilities of Bandyer across the board in the world. Because Bandyer originally was a European operation with carriers only in Europe, but now we are already working together with mGage team in the U.S., and we are working with the team in India to expand the video capabilities, which is, let me say, kind of a flavor of the month because of the pandemic, everybody wants to do video.
  • George Sutton:
    Got you. Okay. And lastly for me, when we look at mGage, you took it over after a little bit more of a delay than you anticipated. And I think when you took it over, it had started to see some slowdown, and I just want to be clear where you feel it is today under your relatively short leadership?
  • Dario Calogero:
    Well, let me say, as I told -- as I told you before, and as I told the market before -- the acquisition of mGage went through a process -- compliance process with the customary approvals between February and June. So basically, the Company suffered a little bit the lack of visibility and management because we couldn’t manage and the seller was not really on top of it during those months. As soon as we integrated mGage in the month of June, we brought together the management team of local two companies in one single value, work together on the integration program, and this is also motivating market people and also the customers that were a little bit uneasy with the uncertainty of the acquisition have been absolutely secured. So let me say, the outlook for the business of mGage in the second half is absolutely in line with our expectations. So, I’m positive.
  • Operator:
    Our final question comes from Allen Klee with Maxim Group. Please proceed with your question.
  • Allen Klee:
    Yes. Could you provide a little more information on how your markets are doing in India and Brazil? And how you think about the timing to get back to kind of more pre-pandemic levels?
  • Dario Calogero:
    Hi, Allen, I think it’s a pleasure talking to you. Well, if you want to know exactly how we perform in terms of volume in those geographies, I would hand it over the answer to Giacomo and access to data. Again, as a general rule or the thumb rule, I would say that what is making the difference is the speed and the pace of the vaccination from where the vaccination program are deployed and are reaching 40%, 50% of the population, then the number of hospitalization and the number of that is getting down significantly and the economy got spending again. So at the end of the day, the country that is lagging a little bit behind now, I think Brazil, but more for political reasons rather than for technical reasons. India has made a significant improvement in the process, because they are British at the end of the day, so that process oriented and they -- I don’t have the last figure, but I think that they are going over 20%, 25% now in the accounting. Giacomo, do you want to add anything to this?
  • Giacomo Dall’Aglio:
    Yes. India is developing well, end of June and starting Q3. We see also starting a recovery also in Brazil. So, I believe in the second half of the year, we will have a better number from these two countries.
  • Operator:
    Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Dario Calogero for closing remarks.
  • Dario Calogero:
    Thank you, operator, and thank you, all of you, ladies and gentlemen, for joining our call today and I’m looking very much forward -- meeting in-person as soon as possible because it’s important that we get together, we will start working here. Talking to you soon and stay with us. Bye.
  • Operator:
    This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.