Kaleyra, Inc.
Q3 2020 Earnings Call Transcript

Published: 9 Nov 2020

[Operator:]

Greetings! Welcome to Kaleyra's Third Quarter 2020 Results Call. At this time, all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. At this time -- now my pleasure to introduce Marc Griffin.

[Marc Griffin:]

Thank you. Good morning and welcome to Kaleyra's third quarter fiscal 2020 conference call. Kaleyra released unaudited financial results for the third quarter ended September 30, 2020 earlier this morning. The press release as well as the replay of today's call can be found on the investor section of the company's website at investors.kaleyra.com.

[Dario Calogero:]

Thank you Marc and thank you to everyone joining us on the call today for our third quarter conference call. As you are all aware, the global pandemic continues to evolve and while we believe we are most likely through the worst of it, the residual assets on the global economy are still present. We saw a modest recovery in our two largest market, Italy and India and an exceptional growth in the U.S., which is now our third largest market. We reported our highest quarter of revenues in Q3 at $38.3 million exceeding our guidance of at least $36 million. Most importantly, Q3 revenues meanwhile up 23% from the flu we experienced in Q2, which demonstrates the strength of the recovery. Q3 revenue was also up $8.3 million year-over-year. Economies around the world started to reopen and we saw volumes recover with amount over amount increase from June through September, and this momentum continued into October. Our main driver in the quarter was ramping of a large U.S. base enterprise customer. Other enterprise customers added to the momentum with an increasing number of digital payments and transactions, which stood at 19% sequential increase in messages.

[Giacomo Dall'Aglio:]

Thanks, Dario. For the third quarter ended September 30 2020, we report total revenue of $38.3 million beating the guidance disclosed in the previous quarter. Q3 revenue was up 23% from Q2 which demonstrate this change of the recovery and was also up 8.3% year-over-year. The main driver of revenue growth this quarter was the ramping of our first mega enterprise U.S. customer which need a geographical mix shift towards the U.S. In Q3, the U.S. was 20.8% of our revenues up from 6% in the third quarter of 2019. In the quarter, we processed 6.3 billion messages inline with a three year period, but up 19% on a sequential basis. We connected 1.1 billion voice call in the quarter, up 22% year-over-year and up more than 120% from Q2. Gross margin was 19.6% in the third quarter of 2020 and significant improvement compared to the 14% of Q2 and broadly in line with the 19.8% in the third quarter of 2019. The main drivers were the reopening of economies, which led to an increase in a higher margin premium service in voice calls.

[Operator:]

[Q - Mike Latimore:]

Great, thank you. Good morning. Congratulations, great rebound in this quarter here. Dario or Giacomo, as you look to the fourth quarter, you've given solid sequential growth in the fourth quarter what would be some of the main drivers that you're looking at the three set number in the fourth quarter?

[Dario Calogero:]

Thank you Mike, this is Dario. The driver of growth is increase in volume in general. We are experiencing increase in volume in all of our segments. And we also see the increase in our volumes in products with the highest margin like Voice for example, for instance, where we are doing pretty much, we are still seeing a very significant increase in volume in India. And, also there will be the initial phase of the launch of Kaleyra Cloud that will start in Q4 and will proceed over to 2021. Giacomo, if you want to add anything?

[Giacomo Dall'Aglio:]

Now, also the Q3 number shows the high increase and the recovery of the economies after the lockdown in the spring. So most of the premium service in Italy is continuing to increase in volume and revenues.

[Mike Latimore:]

Great. And I guess, you talked about I think 120% increase in voice volumes I believe in the third quarter. I guess as that continues to grow in the fourth quarter, should that further help gross margin?

[Giacomo Dall'Aglio:]

Yes, yes, it will.

[Dario Calogero:]

Go ahead, Giacomo, excuse me.

[Giacomo Dall'Aglio:]

Yes, the answer is yes.

[Mike Latimore:]

Okay. And then I guess just last, obviously there's been a lot of headlines about just potentially more restrictions in Europe and Italy. How do you think about that as it relates to your kind of volumes in Italy, in the fourth quarter?

[Dario Calogero:]

Well the restrictions that the government are putting in place in general are very selected. They are trying to contain the spread of virus in the regions where the numbers are most. So at the moment in Italy, for instance, if you take Italy, we have only three regions out of 20, where there is the so called red zone. My expectation, our expectation is that the government will keep on doing taking similar decisions not to squeeze, to match the societies and the economies, because very simply any developed country can afford another economic downturn, like the one that we experienced in history such that said that the pandemic is a strange animal, so nobody exactly knows what's going on. But so far, so good. I would say, if I look at the numbers in October and the first days of November.

[Mike Latimore:]

Okay, perfect. Thanks very much.

[Operator:]

Thank you.

[Dario Calogero:]

Let me say that the only one thing that medical saw in general, what we experienced is now traction in the acceleration of the digital transformation and multiple customer and multiple industries. One thing that is very interesting is that the analysis of Gartner say that by 2023 90% of the companies of the enterprise, will be connected with CPaaS. That's their expectation. And the moment at the moment, only 20% of the enterprises are connected. So let me say there is still very much room for growth for communication platform as a service company that will keep on evolving on product, technology and services, but believes a strong demand is very important.

[Operator:]

The next question comes from the line of Tim Horan with Oppenheimer. Please proceed with your question.

[Tim Horan:]

Thanks, guys. Can you give us a little bit more color on Campaign Registry? That maybe just kind of the carrier's like the quality of what's going on? And can they monetize it? And when will they really ramp up? Thanks a lot.

[Dario Calogero:]

Thank you, Tim. Hi, this is Dario. So Campaign Registry, it's a very complex take-off made also more complicated by the Coronavirus itself. We have the two time the contract Campaign Registry is put under contract was to major tier 1 mobile network operators in the U.S. and discussing with others, not only in the U.S., but also in other geographies in America. And, and this is good. I do not expect significant revenues coming in 2020 in a range of few hundred thousands of dollars maximum. Because still it's like testing invalidation of the overall process, which is a complex process, because go through the operators, ourselves. The operators again, the company service providers and the enterprises. So it's not something that you can really turn around overnight. But it's proceeding well. And it's also very promising, I would say.

[Tim Horan:]

And where are you with U.S. based customers? And I guess maybe a little bit more color on what really drove, the U.S. and where are we in that growth process? I guess can this growth continue in the U.S?

[Dario Calogero:]

Our growth in the U.S. in the U.S. is mainly explained by very, very large U.S. accounts, which are riding traffic towards multiple destinations worldwide. And we basically, we deliver this traffic to the geographies where we are very well penetrated, let me say where we have the best upgrade. So what's happening is that most of the big digital giants and the companies that you can think of, the top 10 players. They are basically global players, which deliver strong customer authentication and senior services worldwide not only on the U.S. domestic market. And we are one of the preferred partner for the international traffic. So the explaining the highest part of the growth. The other thing that it's important to let me say, highlight is that Kaleyra it’s almost one year now that it’s a public company in the U.S. and this is validating in the vendor rating. Kaleyra is a trustworthy, trustworthy partner, multiple fortune 500 companies in the U.S. And this, obviously helping in penetrating the U.S. market, where we typically work with very large accounts at the moment.

[Tim Horan:]

And those very, very large accounts that are ramping up, where are you in the process? Do you think you have like, 10% of the potential traffic you can get, 50%, just any kind of rough idea where we are in that in that adoption process?

[Dario Calogero:]

No, we do not make any assessment on the market share that we can win in the U.S. domestic market. At the moment, we have a niche player, which is working selectively, with very large accounts willing to deliver traffic internationally. So at the moment, we do not compete against the U.S. and kind of cheapest provider working in the United States domestic enterprise market. I can't make any disclosure statement.

[Tim Horan:]

Dario, I understand the U.S. but we're, I guess the part of the question is, where are you in the process of delivering their international traffic? Are you still in the early innings? Or, are you kind of ramped up that you're carrying a lot of they're not?

[Dario Calogero:]

Yes, we are still very, very early at the very beginning of the process, and really huge potential if you think the overall market has been estimated values market analysts in the range between $60 billion and $90 billion. And, we are in between 140 and 150. And very, very, very lean market share high growth company, great growth opportunities.

[Tim Horan:]

Thank you. Thank you.

[Operator:]

Thank you. The next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question?

[George Sutton:]

Thank you. Dario, I wonder if you first could talk outside of the you obviously talked about Verify, you talked about Campaign Registry. Wondered if you could talk about any other developing use cases that you're particularly excited about and seeing traction with?

[Dario Calogero:]

Well, there are several things that we are very, very excited. The thing that which is providing more traction now in terms of revenue growth is Voice. We see Voice services becoming kind of the flavor of the year, I would say 2020. Another thing that we are very excited about is Video. We have been working in the labs on Video solution using WebRTC as the protocol. And this is potentially and can find application in multiple use cases, both in banking, financial services, processing like KYC, for instance, where you can add the Video validation of the user to the insurance where you can have the claim process settling directly on online real time at the moment of the accident, people can have for simple situations, which are ranking the highest number of gains a fast settlement of the claim. And this is very exciting. And also we are pretty much bullish about the channels in the omni-channel platform. A lot of business is going fairly well. It's ramping up in volume and in revenues. And now we have this Google partnership which is good, because Google is unveiling a number of products and services which are aimed at the Android users that still account for more than one half of the smartphone users worldwide. That are fitting very very well in the Trusted CPaaS space, a play of Kaleyra services like Verified SMS, Verified calls are very very well sitting with our product portfolio.

[George Sutton:]

Super. We are getting particularly good feedback channel check wise on your Flow Builder. I wondered if you could just walk through what that's doing for you in terms of opportunities?

[Dario Calogero:]

Well Flow Builder, it's an interesting feature of Kaleyra Cloud platform because it's addressing the final users, not the IT or ICT guys that have to implement an application using API. So it's like a self-service from them that anyone can test and try out, because you should go on the website at kaleyra wwwkaleyra.com. And you can open an account and have like a free credit to test it. And the idea is that anybody with non-technical skills would be available, would be able to design a service using omni-channel, multi-channel, SMS, what’s up voice for beginning, but we love your channel going forward, and can design service testing prior to sell the service in a sandbox and then deploy it. And this is completely because it's not addressing developers or ICT department in the enterprises. It is addressing directly the legacy of the businessman who are designing the processes, processes, like marketing or customer relationship management, just to give you an example, without any involvement of the idea.

[George Sutton:]

Got you. Again, we hear good things there. Thank you very much.

[Dario Calogero:]

Most welcome, George.

[Operator:]

Thank you. The next question is from the line of Allen Klee with National Securities. Please proceed with your question.

[Allen Klee:]

Yes, hello. Could you give us a little commentary on how you're thinking about India and potential growth prospects there?

[Dario Calogero:]

Hello, Allen, nice to talk to you. Yes, sure. We didn't touch India. India is still one of the in general Asia Pacific, and India within Asia Pacific is one of one of the highest growth markets in the world. In terms of population, Asia Pacific accounts for 60% of the worldwide population. But what is amazing in India and Indonesia and multiple Vietnam, Philippines is the growth of the real economy, which is very, very strong, much stronger than in western countries. So in India, the growth has been over the last few years, around 6.5%. When you have a country of 1 billion and 300 million inhabitants, where at least one half of the population have let me say a level of lifestyle and offer, let me say spending capabilities in line with the European one. This is to say it's their huge market. So we will keep on investing, we are hiring very much in India, we keep on investing. We will keep on adding our IT lab and hub in Bangalore. We have commercial offices in seven locations in India. And we keep on seeing a significant growth in revenues. In fact, in fact, we have appointed Mr. Aniket Jain, as Chief Revenue Officer worldwide, whilst he was adding the business in India. And so he will manage from Milan, the operation worldwide, including the Americas. And he will keep on fueling the growth of India as well.

[Allen Klee:]

Thank you. And then can you give us an idea of what the diluted share count would be for next quarter?

[Dario Calogero:]

Sure, yes. Giacomo can address this with the number in hand.

[Giacomo Dall'Aglio:]

Yes. So at the end of Q3, the share count was about 28 million per size. As of now the shares outstanding are 29 million point 3 due to the conversion, partial conversion of some warrants in shares up at the beginning of October. And we are expected to have 30.2 million outstanding shares by the end of the year.

[Allen Klee:]

Thank you. And then the working capital changes during the quarter. Could you, it looks like it was the accounts receivable and accounts payables. Could you talk about what was behind that? And do you view that as a timing issue or, or how did we think about that?

[Dario Calogero:]

Yes, it didn't change very much on the account receivables that we are in line, in terms of dollar as well as the end of the year. But we clean up the accounts payable. So there is a change in net working capital. About 10 million that we would like to clean up our balance sheet as much as possible. So we accelerate our payment policy. As we promise after the capital increase, so we pay the share purchase agreement, we pay the note and also we pay a certain amount of accounts payable.

[Allen Klee:]

Thank you. And then my last question is related to k-lab, where you're going after financial customers in the U.S., how is your progress there going?

[Dario Calogero:]

Well, k-leb is working closely with a very large financial services. Blanda is now focusing more on Latin America, and Caribbean rather than the U.S. domestic even though being based in the U.S. the team, partially San Francisco and partially New York, we have multiple interactions with potential large financial services customers in the U.S., especially issuer of credit card, debit card, and big banks. It's an activity as explained multiple times during the course with the analyst. It's a typical account development activity on very large accounts. You do not really get flu overnight, it takes time. It's building relationships and those relationships been genuine in last multiple years. If you take the average of the banking customer in Kaleyra, I have been with Kaleyra for more than 10 years, some of them for more than 15 years. Maybe to win one of this customer, it takes 12 months. Also because in general you have to substitute another vendor and the other vendor has a contract is established. So before you get a look, you may get -- the make a parallel, you perform better, it takes time. But we are -- we keep on investing. We are also hiring within the k-lab team. We will have another edition later this month. And we think that is a good move because we think that the very nature of Kaleyra is to be the fastest cheapest and the banking and financial services institution made trusted outsourcer and partners with a very stronger knowledge and capability and expertise in the vertical.

[Allen Klee:]

Okay, thank you so much.

[Dario Calogero:]

Thank you, Allen.

[Operator:]

Thank you. This will conclude today's question and answer session. I will now hand the floor back to Dario Calogero for closing remarks.

[Dario Calogero:]

Thank you, operator and thank you all for joining us for today's call.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.