Kaleyra, Inc.
Q1 2022 Earnings Call Transcript

Published: 9 May 2022

[Operator:]

Good afternoon. Welcome to Kaleyra's First Quarter 2022 Earnings Conference Call. After the market closed, Kaleyra released an unaudited results for the first quarter ended March 31, 2022. The press release as well as a replay of today's call can be found on the company's Investor Relations website at investors.kaleyra.com. Please view the release for additional information on what will be discussed today. Joining us today are Kaleyra's Founder and Chief Executive Officer, Dario Calogero; and Chief Financial Officer, Giacomo Dall'Aglio. Following their remarks, we will open the call for your questions. 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 the Form 10-K for a summary of 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 or specifically disclaim any obligation to update, 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, we will refer to adjusted gross profit margin, adjusted EBITDA, adjusted earnings per share, these metrics are not determined in accordance generally accepted accounting principles and therefore, are not susceptible to varying calculations. A definition, calculation and reconciliation to the financial statement of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of Kaleyra financial results provide useful information regarding certain financial and business trends and the results of operations. Now I would like to turn the call over to Kaleyra CEO, Dario Calogero. Please proceed, sir.

[Dario Calogero:]

Welcome, everyone, and thank you for joining us today. For those who are new to our story, I'll begin with a brief overview of our business. Kaleyra is a Communication Platform as a Service or a CPaaS provider. At a high level, we provide our global partner base with an omnichannel suite of powerful APIs and visual tools to bridge the communication divide between businesses and their customers. Brands often face coverage gap when trying to communicate with their customers, especially in industries that require security and mass prioritize reliability, such as financial institution and health care. Our mission is to help build lasting business to customer relationships for our partner brands across channels and to do so while providing service that our clients can trust. After continuing to execute against our growth strategy, our 2022 first quarter represents another meaningful step forward in many areas of our business. The Kaleyra of today has increased capabilities and influence across our geographic footprint and channel offering and we have a real opportunity to compete in more markets and at a greater scale as we move closer to realizing our long-term vision of being the trusted global CPaaS provider for our partners. Our Chief Financial Officer, Giacomo Dall'Aglio, will discuss our financial results shortly. But before I hand over the call, I'd like to recap a few recent highlights from our first quarter. I'll start with a financial overview of the quarter. Our first quarter revenue was $80.5 million, up 103% from the same comparable year ago period. From a profitability perspective, we are encouraged that we were able to exceed expectations across the board and do so while investing in the business and in our growth strategy. For example, our first quarter gross profit and adjusted gross profit were $17.7 million and $19.3 million, 180% and 198% increase from the last year's Q1, respectively, while our adjusted EBITDA increased over 600% in the first quarter totaling $6.2 million. In addition, both our operating cash flow and adjusted earnings per share remain positive. Our cash and equivalent position remains incredibly strong at over $95 million. On a pro forma basis, giving effect to the mGage acquisition as it had occurred on January 1, 2021, our key metrics significantly improved as well, with our adjusted gross margin outpacing that of last year at 24% compared to 21.4% in the prior year period, and adjusted EBITDA almost doubling from the prior year period from $3.2 million to $6.2 million. We were able to achieve these results despite certain headwinds we faced during the quarter, namely distinct regional challenges and overlapping geopolitical and macroeconomic factors, including the ongoing global pandemic, the war in Ukraine and recent market volatility and adverse effect on foreign -- ex foreign exchange rates. These headwinds have persisted, which we believe may affect our previously projected growth for 2022. Specifically, there were 2 significant challenges in the quarter that contributed to our top line. First, we faced significant foreign exchange headwinds in Europe. In the first quarter, the broader geopolitical landscape in Europe began to show signs of turmoil. Although we were still free of direct exposure to Russia and Ukraine and maintain a diverse geographic customer mix overall, nearly 30% of our revenue comes from within the European countries and many of those contracts are transacted in euros. We saw increased volatility within the foreign exchange rate market in the first quarter, enough that when compared to last year Q1 exchange rates. This year, revenue was reduced by nearly $2 million in the first quarter. This impact when extrapolated over the full year translates to our European revenue being worth 10% less in 2022 than they were in 2021. And second, we were faced with ash pricing competition in one of our geographies, Brazil, due to what we believe to be unique circumstances in that region during Q1. We decided to avoid compromising our business fundamentals and stay true to our financial priorities as a business. In doing so, we maintain the healthy sustainable revenue source and margin that we have prior since our founding and continue to deliver high-quality services for our partners. Due to this environment, it will take additional efforts to course correct and return to our prior level of top line growth. As many of you know, our business is characterized by deep relationships and we are committed to continuing to drive our sales engine and integrate new customers into our business to foster our growth. We typically find that our sales cycle can last between 3, 6 to 6 months and we have a robust pipeline of new customers to work in enabling this growth. Also, when it comes to foreign exchange rates, we believe that it's prudent to view rates between euro and the dollar as a headwind in the near term. Although we expect rates to stabilize in the coming quarters, we have accounted for these headwinds in our current models. So as Giacomo will discuss at the end of this section, with those challenges in mind, we have decided to update our revenue forecast for the year. We have made a 10% downward adjustment to our revenue outlook for the 2022 fiscal year and align our outlook for the second quarter to match this reduction overall. However, while we adjust to our current climate, our focus remains on maintaining our consistent profitability metrics and driving healthy growth across our business. We believe that revenue growth -- the expense of an underlying fundamentals of our business is unsustainable, and we are committed to linking our growth to our ability to drive profitability and maintain our improved margins. We are proud of our team perseverance and their unwavering commitment to build a sustainable and valuable business moving forward. Before I pass it over to Giacomo in just a moment, in addition to our financials, there were a few operational highlights that stands out as well. Looking at some of our key operating metrics. In the first quarter, we delivered 14.4 billion billable messages and connected 1.6 billion voice calls. In our largely volume-based business, this reflects our ability to leverage the benefits of scale and is an area in which we hope to drive continued growth in the future. Also, last quarter, we introduced a new KPI, dollar-based net expansion rate, which highlights the rate at which customer accounts increase their usage of the product, extend their usage of a product to new applications or adopt a new product within the Kaleyra platform. We think that dollar-based net expansion rate is a meaningful indication of our efforts to increase wallet share and revenue from existing customers, and are pleased to report that our Q1 dollar-based net expansion rate was 130% in line with the best in the industry. Also, as many of you listening to a well-known, in the first quarter, we were selected by Bosch Group, a leading global supplier of technology and services as their trusted vendor to power the Bosch Mobility Solutions cloud communications in India. This win reflects the success of our efforts to expand our presence in this region, a geography that we see as a valuable opportunity with a flourishing tech and software ecosystem and young population. And with this win, we have added another Fortune 500 brand to the already extensive list of top global enterprises that choose and rely on Kaleyra. We look forward to our continued partnership with the Bosch team and the additional expansion opportunities we are posting in the Indian market. In addition, Kaleyra supported India's rapidly expanding Unicon start-up system, providing our platform to 18 unicors in India, including Mobile Premier League, Vedantu, Licious, Pharmeasy, ShareChat, Cure.fit, Grofers, BlackBuck, and the Good Glamm Group. Also, we partnered with Banca Sella, a leading Italian bank to provide an innovative video communication solution for the bank's new wealth management platform. Kaleyra's video technology facilitates Bancasellas remote customer interactions, which has managed customer relationships. Partners like this, one, provide a foothold in video communications, an area of our omnichannel strategy that we are expanding. In addition to new wins and partnerships, Kaleyra was recently named CPAS Provider of the Year at the Juniper Future Digital Awards 2022. Recognition from a major market reserves group validates our team work to build the most comprehensive and innovative platform of services. In summary, we are encouraged by our momentum in many strategic areas of our business as we move into the second half of the year. Although headwinds have dampened our growth in 2022, we are confident that we have the team and the processes in place to remain agile in the face of challenging environment and that our business remains very healthy. We look forward to driving sustainable value across our business in the quarters ahead and continue to believe that our growth strategy has as positioned to be successful in this initiative. As a reminder, our growth stabilizes on 3 main pillars

[Giacomo Dall'Aglio:]

Thank you, Dario. Turning now to our financial results for the first quarter ended March 31, 2022. As Dario mentioned, our total revenue in the first quarter increased 103% to $80.5 million from $39.7 million in the comparable year ago period. The increase in revenues was driven by the addition of Engage, which contributed $32.1 million in the quarter. On a pro forma basis, given the effect of an mGage acquisition if it had occurred on January 1, 2021, our revenue growth was 12.4%, while all other KPIs outpaced those of the prior year period which pro forma adjusted gross profit increased by 25.6% and adjusted EBITDA exceeding 90% period-over-period. Gross profit in the first quarter increased 180% to $17.7 million from $6.3 million in the comparable year ago period. The increase was driven by the effect of business combination with mGage. Gross margin in the fourth quarter of 2022 increased to 22% compared to 16% for the first quarter 2021. The increase in gross margin was mainly due to the -- integration and increased performance by Kaleyra Video, Kaleyra Voice as well as by the company registry. Net loss totaled $13.2 million or $0.31 per share based on 42.2 million weighted average share outstanding compared to a net loss of $10.4 million or $0.34 per share based on 30.4 million weighted average shares outstanding in the comparable year ago period. The increase in the net loss was mainly due to the amortization of acquired intangibles and the secured interest expenses on convertible notes. Adjusted gross profit, a non-GAAP measurement of operating performance increased 198% to $19.3 million from $6.5 million in the comparable year ago period. Adjusted gross margin for the first quarter of 2022 was 24% compared to 16% in the comparable year ago period. Adjusted net income, a non-GAAP measurement of operating performance increased 219% to $2.3 million or $0.06 per basic share based on 42.2 million weighted average shares outstanding and $0.05 per diluted share based on 52.1 million weighted average shares outstanding from negative $2 million or negative $0.07 for both basic and diluted share based on 30.4 million weighted average shares outstanding in the comparable year ago period. Adjusted EBITDA and non-GAAP measurement of operating performance increased 641% to $6.2 million or 7.7% of total revenue compared to negative $1.1 million in the comparable year ago period. The increase in adjusted EBITDA was primarily due to the effect of business combination with mGage and Bandyer and cost synergy between the 2 legacy business as well as by the campaign registry. At the end of the first quarter, cash, cash equivalents, restricted cash and short-term investments were $95.2 million compared to $97.9 million as of December 31, 2021. Quarterly net cash provided by operating activity was $3.2 million in the 3 months ended March 31, 2022, compared to net cash used in the operating activity of negative $8.2 million in the -- year ago period. Our solid financial position at the end of the first quarter is also reflected in our net current assets, which exceeds $74 million. Our debt financing strategy is only marginalized exposed to the foreseeable raise in the interest rate with over 80% of our financing burden a coupon interest rate and an average variable interest rate under 3% being on our loans with Italian banks. Before I turn the call back over to Dario, I'll now take a few minutes to provide our financial outlook for the remainder of the year, which ends on December 31, 2022. Overall, we continue to highly confident in Kaleyra's financial health as well as our ability to sustainably and profitably grow for the foreseeable future. Dario explained, we are proactively reassess our current climate and decided to adjust our full year guidance to prioritize the quality of services and products delivered to our customer over unsustainable revenue growth and compressed margin. We currently expect revenue for the second quarter to range between $81 million and $83 million, representing 52% growth at the midpoint compared to the same year ago period. For the full year 2022, we expect revenue in the range between $360 million and $365 million, representing 35% growth at the midpoint compared to 2021. This completes my financial summary. I'd now like to turn the call back over to Dario to wrap up our remarks for the call. Dario?

[Dario Calogero:]

Thanks, Giacomo. Looking back, while we were confronted with the broader global economic landscape that impacted our quarterly revenue, we believe that we took meaningful steps forward in the first quarter as we continue to invest in our omnichannel platform and partnership while driving -- still driving profitability. Our product suite continues to grow in both depth and breadth, and the quality of our service is a strong and faster as ever. Our geographical footprint continues to expand into a healthy global balance that we will look to build on moving forward. And our stride into new growth areas, including Kaleyra video and voice, along with the promising results from the campaign registry have continued to drive leverage into our operating model. As we move into the summer months, we do so with conviction in our long-term growth strategy, supported by a strong balance sheet and healthy business fundamentals. Above all, we'll continue to build on our track record and positive momentum as we advance along our journey to become the trusted partner in the rapidly expanding in massive CPaaS market. And with that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.

[Operator:]

[Operator Instructions] Our first question is from Timothy Horan with Oppenheimer & Company.

[Timothy Horan:]

Dario, did you focus a little bit more on profitability and cash generation in the quarter than growth was that a conscious effort? Because I noticed your gross margins were up really strong. And I guess related to that, is this a good run rate for the gross margin percentage?

[Dario Calogero:]

Yes, indeed. We are focusing on the quality of the revenues as we did in the previous quarters, the Q3 and Q4. And obviously, we have to face the volatility of the exchange rate. But I believe that apart from the top line, all the other metrics of the profit and loss are positive and also the cash generation is positive. So it has been intentional, yes, indeed.

[Timothy Horan:]

And so obviously, it's a balancing act. Do you think the industry can still grow 30% per year after this year? And can you grow in line with the -- Do you think -- because it looks like you grew around 15% normalized for currency this quarter? Or do you think the industry is maybe more like a 20%, 25% grower and maybe you'll grow a little slower to but with higher margin?

[Dario Calogero:]

Firstly, it's better to segment by geography because every geography is its own dynamics. And now Europe is in because of the war, because of the pressure on the energy cost and inflation and -- the United States is going well. I see the United States not effected. And Far East, India, in particular, is still very much growing. So I expect the industry -- the market as a whole to keep on growing, maybe with some differences between geographics and maybe with a temporary slowdown during this unexpected and undesired situation that we are in Europe.

[Operator:]

Our next question is from Lance Vitanza with Cowen & Company.

[Q –Lance Vitanza:]

And nice job managing through a tough environment. My question is actually to drill in a little bit more on the gross margin. It seems like the biggest organic driver of the improvement was favorable mix shift with a lot more of the video and the voice versus the text. Could you remind us the margin differential for those 3 products? And then if you could talk about the revenue share, the volume share for each of those products, today versus maybe where you think that, that share goes over the next year or 2? Just to sort of try to get a sense for maybe how digital progress on the mix shift could further augment the margins going forward?

[Giacomo Dall’Aglio:]

Yes, sure. This is Giacomo. So in terms of volume, we grew about 20% in messaging, and we grow about 33% in voice. And this is a pro forma growth. And this is very important because on voice, we have a profitability that is, on average, it depends on geography, but it’s double the messaging. So growing much more on voice, video is a new product with a profitability that is almost 3x or 4x – 3x the messaging and was not included last year. So again, yes, with a better mix, we can Imp–ve our margin going forward to the aim.

[Q –Lance Vitanza:]

Okay. Great. And then if I could just – my follow-up on the cash flow and liquidly. You did better than we had odelled in the first quarter. But for the full year, we had previously expected that Kaleyra would generate at least a little bit of cash, and that now seems unlikely. What do you think a reasonable estimate would be for cash at the end of this year? Should we be thinking like in the $85 million range?

[Giacomo Dall’Aglio:]

Yes. So this quarter, we generate – we are looking very carefully at the operating level. This quarter is positive by $3.2 million. And as you know, this quarter for seasonality, the weaker quarter in the year for the cash generation. So next quarter will be better and Q3 and Q4 are stronger. So we are looking for better generation – operating generation of cash in the future.

[Q –Lance Vitanza:]

So okay. So then I had it wrong. So my premise that you would actually be burning cash over the balance of the year, you’re saying no, you’ll actually do better as we go throughout the year here. Okay. I appreciate that.

[A –Dario Calogero:]

If I may just add a little color. At the end of the year, also, we will have paid back more than $10 million of the principal income and that from the European banks. So including the free cash flow is the payback of more than $10 million.

[Operator:]

Our next question is from Michael Latimore with Northland Capital.

[entified Analyst:]

I'm Vivek on behalf of Michael Latimore of Northland Capital. I have a couple of questions here. The first one is, what are the opportunities for the campaign registry outside the U.S.?

[Dario Calogero:]

Well, the company registry is still looking for opportunities outside of the U.S., and it's posting opportunities in multiple defections, especially in the western countries. And we think that we can exploit this business model in other geographies, definitely. We are working on it.

[Unidentified Analyst:]

All right. My second question is, are any specific verticals showing particular strength or weakness?

[Dario Calogero:]

Well, we have the banking and financial institution, very stable, keep on growing steadily like it did over the last few years because more mobile bank in the world rather than less mobile banking. And also the tax base, especially in India, is booming. We won business with a number of new Unico in India in year 2021, India generated 42 new unicorns out of which 18 are Kaleyra customers. And I see a lot of traction over there.

[Operator:]

And our next question is from George Sutton with Craig Hallum Capital Group.

[George Sutton:]

So guys, the estimates for the quarter were about $85 million, and you came in at $80 million, and you referenced $2 million related to FX. So I just wanted to walk through the other deltas. And you did point out Brazil, I wanted to better understand the dynamics in Brazil. Did you walk away from customer opportunities? Did you walk away from specific programs? Are those programs you can go back after? So that's the gist of my question.

[Dario Calogero:]

Well, the only thing that I can say is that there has been kind of a price war in Brazil, and we do not like to play price wars. So basically, with -- And that's very peculiar of Brazil because of the dynamic of the market in Brazil. So -- that's why considering how we want to keep them working on the quality and the sustainability of our revenues, we basically walk away from a situation that wasn't healthy. But we definitely retain the customer. This is a global customer, it's not a local customer, and we're working together with them towards other geographies. So I'm not concerned.

[George Sutton:]

And again, if I'm trying to account for the $3 million delta, where would you point to the $3 million delta from original expectations?

[Dario Calogero:]

That's explained in the delta basically. It's large account, less volume in Brazil as well as in Brazil and -- explaining. If we take off the FX effect and that specific participation in Brazil, the organic growth of the rest of the group has been over 20%, 22%.

[Operator:]

At this time, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Calogero for closing remarks.

[Dario Calogero:]

Okay. Thank you very much for joining us on today's call. As always, we would like to thank our extensive worldwide network of partners and investors as well as our employees for their continued support. Operator?

[Operator:]

Thank you. I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us for Kaleyra's first quarter 2022 earnings conference call. You may now disconnect.