Kaleyra, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Kaleyra’s first quarter 2020 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Alison Ziegler, Investor Relations from Darrow Associates. Please go ahead.

[Alison Ziegler:]

Thank you, operator. Welcome to Kaleyra’s first quarter fiscal 2020 conference call. Kaleyra released unaudited results for its first quarter ended March 31, 2020 after market last night. 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.

[Dario Calogero:]

Thank you, Alison, and thanks to everyone who has joined us today for our first conference call as a public company. We are in unprecedented times with the impact from the COVID-19 pandemic affecting people and businesses around the world. Our hearts go out to all of those impacted. During these uncertain times, communication has become even more critical, be it to connect with citizens, employees, customers or even family. As a company, Kaleyra is doing everything it can to support our team, our customers, businesses, governments, and others in dealing with the emergency caused by the coronavirus outbreak. We continue to work with the Red Cross in Italy as well as organizations in India and in the United States. While our first quarter was not affected by the pandemic in a meaningful way, we anticipate that, like everyone else, we will see an impact in the second quarter. Longer term, we believe that our business model will prove resilient.

[Giacomo Dall'Aglio:]

Thanks Dario. For the first quarter ended March 31, 2020, we reported total revenue of $33.6 million. This was up 21.3% from $27.7 million in the first quarter of 2019. Some additional detail includes

[Dario Calogero:]

Thanks, Giacomo. Kaleyra has a powerful combination of innovative technology, product leadership and global revenue growth. Our extensive experience within the financial services industry has earned us a reputation as a trusted CPaaS provider, and our strengthened capital structure as a public company is already opening new channels and business opportunities on a worldwide basis. Just in the U.S. market alone, over the last several months, we have multiple new contracts with companies whose names you would recognize and that have significant revenue potential.

[Operator:]

Certainly, thank you. We will now begin the question-and-answer session. Our first question comes from Lance Vitanza of Cowen. Please go ahead.

[Lance Vitanza:]

Hi. Thanks, Dario, Giacomo for taking the questions and congratulations on your first public company call. And so, you couldn't ask for more interesting times to be coming out to the public markets. I guess, I wanted to start with the guidance and the COVID impact. And I guess I'm just trying to better understand how shelter-at-home is negatively impacting your business, the mobile transactions as you pointed out are going up in this environment. So is the pressure that you're seeing – is this Carriers and e-tailers pushing for lower pricing? Or is there something else that we need to be aware of? Or is it just the types of transactions, I mean, obviously airline would be going down, but we would just think that that would potentially be more be offset by other categories that are going up. So if you could comment on that, that'd be great.

[Dario Calogero:]

Thank you, Lance. This is Dario. Well, we have a very good question. Basically, the overall impact of COVID-19 on CPaaS business is positive. In specific countries and regions where the lockdown has been extremely harsh like Italy and India, basically the closing of the retail shops, reduced the number and the amount of retail transactions and also the international traveling, cross border transaction have been lowered down because people were stuck at home. Meanwhile, we observed an increase, a very significant increase in e-commerce and home-delivery. So the mix of that that goes limited contracture of the volume, no impact on the prices at all, it’s on the volume assets in April in Italy and in India. As of now, first week of May, we already experienced an increase in volume, which is a positive effect of the release of the lockdown in Italy. In general, I would say that we project a very conservative guidance for the second quarter for the simple reason, but it’s too early to know. Today is only the 11th, 12th of May and is still more than one half to go to the end of the quarter.

[Lance Vitanza:]

So, as, I mean, look nobody has a crystal ball, but it sounds like to the extent that shelter at home ends and we get back to work and the volume trends are same, it may be that Q3 is sort of a return to kind of the growth trajectory that that we had envisioned when we set the guidance at the beginning of the year, is that fair to say?

[Dario Calogero:]

Yes, it's absolutely fair to say. And possibly there might be even rebound because when people will be relieved from the lockdown and they will start going around and doing more transactions, in China it has been observed already. The point is that the curve reached a spike in end of March April, and it’s now getting much better and you see more people around. This is depending on the geography though, not all the geographies are even. Italy as I believe at least three, four weeks to add to the United States for instance. So year is getting better.

[Lance Vitanza:]

We've seen that geographic disparity in other companies that we cover; so no surprise there. Let me shift to that Campaign Registry, which sounds very exciting. Could you discuss the milestones toward the launch later in 2020? It sounds like that launch was pushed out. Was that the case and was that pushed out in response to COVID?

[Dario Calogero:]

More than pushed out, I believe that very large organization like the Carriers in the United States operationally have been affected by the shelter-in-place policies. So basically their decision processes gets a little bit more complicated. We are accelerating on all the services related to the emergency of the COVID-19 and the full commercial launch will be right after that. So the situation is pretty much like the last time we talked about it.

[Lance Vitanza:]

Got it. Okay. So turning to a couple of quick questions on the quarter and then if you –if you need to ask me to get back in the queue by all means, but the first quarter revenue growth obviously very solid, but wasn't quite on pace to meet the sort of the prior guidance, was the difference there? I mean, we were looking at I think revenue growth of around 30% for the full year. Was the difference between what you reported, was that sort of the fall off that you mentioned that you started to see in March? Or how did – I guess, how would you describe the first quarter revenue growth relative to your initial expectations where you’re always expecting sort of a ramp up in the growth over the balance of the year?

[Dario Calogero:]

Well, in general, first quarter is the lower quarter in the seasonality. We, as you perfectly know, withdraw the guidance for the full year due to the impact of the coronavirus outbreak, which is still to be fully understood. As many other company, basically we decided to withdraw our guidance for 2020. As of quarter one, we are pretty satisfied because basically we keep them growing and also keep in mind that on the overall three months of the quarter also March has been in a way impacted to some extent at least for two to three weeks by the shelter-in-place policies. However, the outlook associated to the recovery post-coronavirus is very promising because we are experiencing very significant accelerations of the companies that are now facing the constraint of interacting with the consumers remotely. So they are accelerating the usage of our platform for the customer relationship management and for the customer facing processes in general.

[Lance Vitanza:]

Okay, thank you. And then gross margin in the quarter was down despite the fact that the revenue growth was so strong. When can we and I guess maybe we have to think about this in the absence of COVID, but when could we expect gross margin to improve sequentially? And I guess if is it possible to talk about what gross margin would have been had – you not had the initial delivery phase of the mega-cap U.S. based enterprise customer that you talked about in the press release?

[Dario Calogero:]

Well, that that specific contract is used. It's accounting for $15 million on the fiscal year. So it’s a little less than 10%. In general in such a contract in the beginning you get the prices for the and initially you are compressed in terms of margin. We already recovered – in April and March we already recovered all the pressure that we had in the first two months. So I would confirm the outlook for the gross margin going forward. And my expectation is that we will return to our normal. The increase of the gross margin going forward is due to multiple factors including larger volume, better geographic mix, better product mix because there are piece of products, which have a much larger gross margin rather than the typical estimates at this. And in general, the company has an operating leverage that is basically not only at an EBITDA level, but also at the gross margin level improving because it’s getting bigger, larger, lots of volumes, better prices, better margins.

[Lance Vitanza:]

Great. If I could just squeeze in one more, so EBITDA in the quarter and I understand there was the $1 million of costs that were incurred as a public company. So understanding that EBITDA was actually up year-over-year on kind of like a – a like for like basis, but obviously you remain a public company. So are those $1 million of costs, are those recurring? Or were those in some sense one-time setup costs that are now behind you? I'm just trying to get a handle on how we should be modeling the next couple of quarters here.

[Dario Calogero:]

Okay, I will leave the answer to this question to Giacomo, the Chief Financial Officer.

[Giacomo Dall'Aglio:]

So, of course, the $1 million that you mentioned is recurring, so we can have in the future. We’ve given guidelines just to better confer with the previous year.

[Lance Vitanza:]

Got it. Okay, thanks guys. I appreciate it now.

[Dario Calogero:]

Thank you, Lance.

[Operator:]

Our next question comes from Mike Latimore of Northland Capital Markets. Please go ahead.

[Mike Latimore:]

Yes. Hi, Dario, Giacomo. Hope you're all well there. So, I guess, Dario on the – on some of your larger customers in Italy, can you talk a little bit about the activity there? I think they're fairly sticky. So, I guess, can you talk about if there's any customer churn and also maybe talk about your share at those customers?

[Dario Calogero:]

Of course, I can. The customer churn in Italy, the answer is zero. We keep on adding the same customers, which is basically a system – the system of the banking – retail banks and issuers in discomfort. So we’ll keep on working with them. Obviously, the volume of those customers have been impacted because of the lockdown in the month of April and maybe something also in March and in May, but the customers attention keeps on being around a percent.

[Mike Latimore:]

Great. And then it seems like there is a fair amount of new use cases services being developed in the current environment. I mean, can you talk a little bit about what you're seeing in that regard? And then when might some of those come into revenue?

[Dario Calogero:]

Yes, of course. One thing that we have been doing actively since March is that working together with the larger governmental and non-governmental organizations, including the Red Cross where we deploy very, very quickly, some mobile CRM services based on short code numbers. And this is also something that is now expanding. I can't disclose what we're doing, but it's going further what we’ve been doing in Italy, also in India we did a lot because in India, the lockdown made by the government has been extremely severe. So the citizen needed services related to the distribution of grocery and food the households and we help them with our services, both messaging and voice. Also in the United States, we are doing something in this perspective. So the first and most relevant use cases that we have been working on are related to the emergency of the COVID-19. We keep on investing significantly on the platform and the products to keep on evolving on the new services on the platform, which is an omni-channel platform. So it's absolutely independent from any specific bearer. And we will release new services going forward during the fiscal year. The good news is that notwithstanding the lockdown, Kaleyra being a digital company, the work from home to us was ready to normal, so it's not the new normal, it's normal period.

[Mike Latimore:]

Yes. Got it. You've clearly had some big wins in the U.S. already, I guess. Can you talk a little bit about the pipeline you're seeing for additional business there? And maybe that syncs up with your k-lab announcement as well.

[Dario Calogero:]

Yes, of course. This is another question that I liked very much. K-lab is the new initiative to be more effective in the U.S. domestic market going after large financial sector operators, issuer banks, credit card . And we are already working with some of them to define exactly what kind of services they want to implement. And this is also spamming over the United States domestic market because most of these players are multinational, global companies. So we are now working in Latin America with them to build up new services for the cardholders. And the k-lab has been fueled as an organic investment hiring senior executives with a very, very significant expertise in the field of payments and digital banking. So let me say it's only like two to three weeks, but we have launched the initiative, give me – allow me at least a couple of months to deliver good news.

[Mike Latimore:]

Definitely, definitely. And then just last two financial questions, I guess, what should we have as a stock-based comp for the second quarter as well as share count for the second quarter?

[Dario Calogero:]

Well, this question is a question that I would ask Giacomo to address. Giacomo, could you please take it over?

[Giacomo Dall'Aglio:]

Yes, sir. In the second quarter, as you know, we have some shares purchase agreements and maybe we can buy back about 2 million shares. And as I already mentioned, we also deliver already in the second quarter, 2.2 million shares in connection with the public company.

[Mike Latimore:]

Great. And then how about stock-based comp costs in the second quarter?

[Giacomo Dall'Aglio:]

Yes, these are also depends on the board and the release of the stock plan and how that suits.

[Mike Latimore:]

Yes. Okay, makes sense.

[Giacomo Dall'Aglio:]

That can – that can…

[Dario Calogero:]

Basically, if I can add, I can – if I can add two senses to this. Basically the executive, the management team is already there. So what we add to that in terms of our receivable is almost completely absorbed by the issuance that we have already done. There will be some very few more to be released during the second quarter because of the recent hiring.

[Mike Latimore:]

Got it. Okay. Very good. Thanks very much. Good luck.

[Dario Calogero:]

Thanks, Mike. Nice to talk to you.

[Operator:]

Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

[George Sutton:]

Thank you. Dario in your prepared comments, you referred to a couple of industry growth rates I think one was 40% over a period of time and one was 27%. So I wanted to think a little longer-term in terms of structurally how you think you will be able to grow relative to some of those industry growth rates.

[Dario Calogero:]

Well, when we released market data as you know we have to stick to sources that have been authorized for a public reference. So the analyst that we have referred reviewed our forecast in terms of growth lowering down to 17 – 27%. My feeling is that the CPaaS industry being fairly new is still largely underestimated by the market analysts. I think that the industry as a whole will keep on growing over the next two to three years at a steady pace of about 30% year-on-year with possibly some acceleration due to the minimum that we are all leaving now because this is basically creating the burning platform for the enterprises, which have not yet invested in digital transformation and on mobile and we'll accelerate. So my expectation is that going forward, the market will keep on growing at a steady double-digit around with the first digital round numbers.

[George Sutton:]

Got you. You also obviously have had some success growing through M&A given the environment that we're in, my assumption is valuations may change for some of your potential M&A targets. Is M&A – or can you just discuss how significant M&A may be as part of your future growth as well?

[Giacomo Dall'Aglio:]

Yes, of course. M&A, as you know, is absolutely relevant in this industry because the industry, again, is fairly new and is undergoing a significant consolidation process to lay that as being and keeps on being on the buy side. And we have a number of procedures that we are evaluating. And I do very much sure that there might be a correction in the body of the assets because of the coronavirus. And in general, the overall market adds a correction. And we will evaluate carefully with any new opportunity coming up or coming up to my screen, my brother's screen going forward. But in general, we will keep on investing both organically and strategically.

[George Sutton:]

Great. Thank you and stay safe.

[Dario Calogero:]

Thank you. Thank you, George.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Dario for closing remarks.

[Dario Calogero:]

Thank you very much, operator. Thank you all for joining in today's call and your continued support. We look very much forward to speaking with you again when we will report our fiscal second quarter results in three months from now. Thank you very much.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.