Pareteum Corporation
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day and welcome to Pareteum Corporation's First Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Stephen Hart with Investor Relations. Please go ahead sir.

[Stephen Hart:]

Thank you and good afternoon everyone. Thank you for joining us today for Pareteum Corporation's first quarter ended March 31, 2018 earnings results analyst and investor conference call. With us today are Hal Turner, Pareteum's Founder, Executive Chairman and Principle Executive Officer; Vic Bozzo, Chief Executive Officer; Denis McCarthy, Senior VP of Corporate Development; Ted O'Donnell, Chief Financial Officer; Rob Mumby, Chief Revenue Officer; and Ali Davachi, Chief Technology Officer and COO. Earlier today, Pareteum released financial results for the quarter ended March 31, 2018. If you have not yet received Pareteum's earnings release, please visit Pareteum's Investors Relations page at pareteum.com. Following management's discussion, there will be a Q&A session. During the course of this conference call, the company will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. The company cautions you that any statements that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the company's future financial results. Any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding anticipated new relationships or agreements, any statements regarding expectations for the success of the company's products in the U.S. and international markets, any statements regarding the future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the foregoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today's press release titled Forward-Looking Statements and in the public periodic reports the company files with the SEC. Investors or potential investors should read these risks. Pareteum assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. With that, I would like to turn the call over to Mr. Hal Turner, Pareteum's Founder, Executive Chairman and Principle Executive Officer.

[Robert H. Turner:]

Stephen, thank you very much. Warm greetings to everyone who's joining us today from wherever you are throughout the world. We thank you very much for spending time with us. We're very excited to discuss our record first quarter results and provide you with a very extensive update on our business progress. We have experienced what we think is a tremendous start to 2018. As I begin this, I'm very pleased to tell you that we have outperformed by 5%. The analyst consensus of 3.9 million revenue for Q1 with our reported 4.113 million in Q1 revenues. And on an earnings per share basis, our negative $0.04 was in line with the analyst consensus including the upper end level of negative $0.08. More is coming momentarily as we dig into both the top line and the bottom line of our Q1 performance, but we're very happy with where things are going. I'd like to bring briefly review our quarter one a bit. Our team during this period has reported and recorded quarterly record quarterly revenue. It is our best performance since we started to turn around in 2015 and transform the business throughout 2016 and 2017. Also extremely importantly we attained operating cash flow positive results from the ongoing operations. This is a huge milestone for us. We have achieved and done all of this and have important milestones for the full quarter, and this was done exceedingly quick. In our view, it's a full quarter earlier than we had expected on the operating cash flow, so we're very happy with that. It comes from our austerity program as well as sales results. Our team has laser focused on converting our 36-month contractual revenue backlog to production and billable revenues, servicing our clients and selling into new geographic markets and clearly building long-term shareholder value with growth, and make no mistake we are a growth company in every sense of the word. Following my brief remarks, we invite you to participate in the Q&A where I'll be joined by Vic Bozzo, Denis McCarthy, Ted O'Donnell, Rob Mumby, and Ali Davachi. There we will have additional comments and each of those guys will talk about the progress that we're experiencing in their areas as we answer your questions. I'm very confident that you will hear and feel their passion for our business every bit as much as I think you'll hear it from me today. I also, as I always do, want to take a brief moment to thank this whole extraordinary hardworking group of TEUM mates. I'll give you more on that later but simply stated the results we are about to speak of were generated by the tireless dedication of every TEUM member and the leadership of the key management and support team. So thank you Rob, Ali, Vic, Ted, Denis, with Susan, Fiorello, and Matias and all of our colleagues throughout the world including the man, Nick, Sergei, Mark, Eduardo, Paulo, Mehul, and Chris. We know where our revenues originate, that's what drives everything. We are in sales and we thank you for all of that each of you. You all have hopefully had the opportunity to see the earnings release, so I won't read that to you, I will simply focus on what we think are a few of the key highlights. First of all, I'm proud to reaffirm and announce that we did achieve the record revenue growth in the first quarter of 2018 which was noted in my opening words. We have now recorded four consecutive quarters of revenue growth and have been operating at fully adjusted EBITDA positive since Q2 2017, and this quarter we generated positive recurring from operations cash flow, again as mentioned, a full quarter earlier than expected. In operating our business at Pareteum, we use key performance indicators or KPIs as our barometer. It's a form of a daily dashboard. We are constantly measuring, reviewing, and acting on these KPIs to make course corrections when needed. The most important KPIs for Pareteum are connections, and this is industry speak for subscribers, devices, and their connectivity usage. Another important one is backlog conversion, that's turning the 36-month contractual revenue backlog into live, in production, services deployed, billable revenues. And of course, the connection revenue values themselves. Finally, we focus on revenue per employee and connection churn. All of our KPIs are moving forward. This is our RFM statement, relentless forward motion, and they're going in the most positive and right directions. Our KPIs are improving consistently and this comes from our increasingly raised benchmarks and expectations and holding people to higher accountability. These KPIs provide us confidence in our overall strategy and the business execution which we're undertaking. I invite you to look at the KPI slide, which is in the company overview that appears on our website which gives complete details. Simply stated, our plans are working and they're working very well. In the first quarter, we continued to strengthen our management and operating teams to create strategic corporate development opportunities and close sales transactions that create sustainable long-term relationships. All of this is based on the thrice awarded, industry recognized cloud services and solution platforms that we offer. Our team has also been bolstered dramatically. Denis McCarthy joined as our Senior Vice President of Corporate Development; Mark McLauchlan joined as our Vice President of Strategic Accounts and really works very closely with our anchor client. Mehul Vora joined us as our Vice President of Sales Engineering, and Fiorella Gallo has joined our corporate staff. This is all very important to our development. Our team mates have had tremendous sales successes, resulting in creating this great 36-month contractual revenue backlog which is up 567% since we began tracking this in late 2016. It's now at a $200 million level at the end of March. It is growing and you'll have some good news coming on that throughout the course of the second quarter. Pareteum is well positioned for outstanding sales and customer service, excellent continuing throughout 2018. Also very importantly and with our continued very careful corporate development planning and execution coupled with a continued what we consider to be flawless services deployment, development, and customer engagement, we expect many years of growth and value creation for this company. Our balance sheet is also very dramatically improved with more than 15 million in cash and no senior secured debt. We're very proud of that. We have what is needed to prime our futures organic sales growth and then to fuel our continued relentless forward motion march to mobility and application business models that disrupt the whole industry and hopefully will allow us to consolidate that industry. In the first quarter as a growth company, we continued to invest in our software product development and in sales and marketing expansion. This enabled us to be well positioned for our growth in the industry and to be able to offer what we think are superior services, connections, and customer experiences. This investment ensures our competitive positioning and our ability to ultimately dominate in the market. We've structured our global cloud services platform and our business operating support systems with highly productive and efficient teammates, most of whom are in Spain, Sao Paulo, Barcelona, and Madrid to scale as we dramatically grow the revenues, the connections, and do it efficiently and very effectively as we manage a vast amount of data that traverses our network and service platforms. We're very well positioned to continue the conversion of our 36-month contractual revenue backlog and that in recent months has converted on the revenue side at 103% of the customers contracted schedules and plans, and on the connections side it's converted at 170% of our customers contracted schedules and plans. This is certainly a great indicator for our future. We see the excellence demonstrated in our customer service deployments and customer account management, engagement. We see it continuing, we see it evolving, and improving and all of this will add revenue to the existing relationships, all while our professional sales executives are building our future with even more new sales and the resulting incremental addition to the 36 month contractual revenue backlog. I wish you could have seen our guys today at the ITW, we will speak some more about that in a second. It is this customer centric focus with relationships and strong relationships being established daily that we think in fact will fuel the increase of revenue from existing connections while maintaining a very low attrition rate or churn of connections and subscribers. This is the lifeblood of Ali Davachi and his chief operations role along with our fine team in Spain. As we continue to grow into other sectors of the globe these initiatives will significantly extend our geographic reach and as well allow us to more deeply penetrate markets where we already have presence. This also means a much broader engagement within the communications service providers and the enterprise customers and spaces where we focus our initiatives. It's with our new services and capabilities constantly being developed and deployed that we are able to partner in new revenue generating areas with our customers such as we have done over this past year with our anchor customer in Spain. We expect that this will accelerate the creation of company and shareholder value with stronger market multiples being applied to our results. To demonstrate our strong position in the first quarter of 2018 where we were awarded 14 new additional contracts aggregating to 60 million of revenue we added from that 53 million to our 36 month contractual revenue backlog. That's pretty good performance for a quarter. And that compares very favorably to our recently reported incredible full year of 2017 when we were for the full year awarded 26 new contracts totaling about 118 million. We're on a rapid torrid pace to outperform that in 2018. So our business wins are exhilarating. They are expected to continue to accelerate. Our reputation and position in the market is increasing and improving dramatically. One customer this past week said to Rob Mumby that Pareteum is now the big dog in the market. Now we're not taking victory laps quite yet but it's nice when your customers recognize the impact you're making not only for their business but in the industry as a whole. Another byproduct of this relentless forward motion is simply getting more unsolicited sales opportunities coming to us. This is a real opportunity that Vic, Rob, and the whole team focuses on. The simultaneous march to greater profitability including EBITDA, free cash flow, and earnings while adding sales and services and the resources necessary to fuel the growth that is always a balancing act. But be assured that our focus is on growth and as we speak as I've already mentioned our team is hard at work in Chicago at the ITW and we're going to get some growth out of that for certain. We increased our 36 month contractual revenue backlog from 147 million to 200 million at the end of Q1 2018. We've tracked this number from the beginning of Q4 of 2016 when it stood at 30 million. So we've grown this contract revenue backlog at a pace of about 567%. We hope to enjoy numbers like that going forward. This is an incredible accomplishment that comes from hard work of many people, the whole company, and it was led by Rob Mumby who is our Chief Revenue Officer. And he is our consummate road warrior. Rob and his team; Nick, Sergei, Paulo, Eduardo, Mark, Mehul, and Chris accomplished this with fearless sales and operational leadership also coming from Vic Bozzo who is our road warrior CEO. Thank you each and every one of you teammates on this. The strong leadership in the service platforms and solutions came from Ali Davachi our CTO and simply stated without Ali and his focus on development, deployment, and ongoing service, quality, and customer support we would not have converted the backlog as efficiently as we have done already and will continue to do so. Very importantly our long-term anchor customer's needs would not have been timely met as they have been. We were also awarded the following industry recognition as part of our drive for any device, any network, and anywhere. That is that we were the winner IoT Evolutions IoT Excellence Award for 2017. We are winner of the 2017 Communications Solutions Product of the Year Award from TMC and winner of 2018 Internet Telephony Product of The Year Award. Thank you Ali and thank you all the teammates again in Sao Paulo, Barcelona and Madrid for making this possible. We also published a blockchain whitepaper which defines our opportunities in the mobile market using blockchain primarily as security. We also published another whitepaper defining our smart city movement and our role in this transformation focusing on our expertise in the Internet of Things. We were granted a new patent for Cloud Security Solutions which adds to our arsenal of competitive weapons. Recently and subsequent to the end of the quarter we also executed a significant strategic alliance agreement with iPass. That's thanks primarily to Denis McCarthy who drove the strategic alliance and to our professional sales team led by Rob, Chris, and Vic which is where the opportunity originated as part of a commercial sales transaction. This brings us 64 million global WiFi spots. This indeed represents a wireless last mile for devices and their connectivity and it is a key in our future strategy for open mobility and application networks and the offering of fully integrated service offerings. The network access and reseller agreement with iPass was announced on Thursday, May the 3rd. We believe it has up to an eight digit multi-year revenue potential to our company and as we bundle those services and sell them into and through our customer base Vic, Rob, Nick, Mart, Chris are using this to great advantage today and for the balance of the week at the ITW. And they are in Chicago now as I said working very hard for us. Our team is ramping up. We signed 14 new agreements with 36 month contractual revenue backlog at 53 million in the first quarter alone. These agreements span the globe from the UK, U.S., Pan Europe, Africa, Asia, Mexico, India, Eastern Europe, and with smart city Internet of Things and MVNO and MVNE networks including gaming and over the top social media applications. This is the sweet spot of our future opportunity. Some of the new contracts I just briefly like to highlight thanks to Rob and his excellent sales team as well as Vic, Ali, and support of the TEUM mates include a 10 million three year contract with an established MVNO in the U.S. This is very significant because it is the beginnings of U.S. based successes that we are expecting to have more of. We also signed a $15 million five year managed services platform contract with an MVNO in Africa. This is important strategically for many reasons one of which is our ability to use the global cloud to help service providers skip forward to all wireless networks without heavy infrastructure investment and this is a trend we see more and more. The value of these customers will be significantly impactful to our future quarters. Turning now to our strong financial performance. I first want to thank our CFO, Ted along with Stan who is our Controller in the corporate staff support team in Spain which includes our financial team as well as Matias, Susan, and Fiorella for their leadership and diligence in the reporting and the filings that come about in the timeliness of that and importantly our daily management reporting which is key to our ability to scale the business because we got to know how we're doing. For the first quarter of 2018 our revenues increased by 47% to 4.113 million. That's well exceeds the consensus analyst expectations. It should also be noted that we used the first quarter of 2018 to become fully compliant with the accounting standards 606 Board which is the software industry standard for revenue recognition. And as a result of that, that changed 107,000 was not able to be recognized just because the way 606 works. We will certainly have this working to our advantage in the future. But had it not been for that change we would have actually recognized $4.23 million in revenue. So I think you can see how pleased we are with the way things are going on the conversion and certainly the expectation that we have of even more dramatic increases as we go forward. Going forward the new 606 standard will work to our advantage and that the service establishment fees and the upfront fees become recognizable upon milestone completion versus having to be recognized over the course of multi-year agreements as they were mostly in the past. So we think ultimately we're going to have good results from that. Of note and a very positive trend is that our two largest customers who use our managed services platform, our MSPs now represent about 85% of our revenue and that's down from 97% in previous quarters. And that's a real reflection of the diversification of our services and be assured that as we go throughout the balance of 2018 that's going to improve as we have more diversified cloud and application exchange platform customers coming on. This is very good for the company. This trend is going to continue throughout 2018 to 2020 as we sell and implement more cloud services platforms and the application IoT offerings. I'm also very pleased to report that our gross margins remain strong and actually increased 100 basis points from roughly 70% to 71% and we certainly see our ability to maintain performance like that. We generated an adjusted EBITDA profit of $283,000 as compared with a negative $198,000 for the first quarter of 2017. That's an improvement of 243% and it reflects our growth with an austerity focused results. We generated 29,000 of positive recurring operating cash flow for the first time in our history and reached this a full quarter ahead of what had been predicted initially. As we successfully convert our 36 month contractual revenue backlog to in service live production billings, the growth of revenue will be significantly greater and at a faster pace than our expense growth. This supports our ability to very efficiently scale our business and grow which is expected to lead to even greater multiples of our revenues and earnings including adjusted EBITDA, EBITDA, operating cash and finally free cash flows. And those are the profitability measures that we look at with particular focus on adjusted EBITDA and EBITDA as the real health of our business. I'd like to reemphasize that as we are measured against any of our KPIs, key performance indicators we're moving in the right direction and the trends are extremely positive. So that is relentless forward motion for us. Our 36 month contractual revenue backlog has accelerated roughly 567% since we started measuring that at the end of September of 2016. That's a phenomenal result for our sales team and the work that they've done. In parallel with our growth Pareteum's market opportunities also continued to expand and this is a result of our smart network which currently cover 73 countries and via our connectivity to 48 mobile network operators. This expands our addressable market making us more attractive to customers and partners and of course with iPass we add to that 64 million WiFi hotspots and with our strategic alliance partner Artilium we add roughly 1200 SMS messaging nodes. This is an extremely broad network which is a valuable weapon. Enhanced connectivity, speed of implementation, and reduced deployment cost are the real key differentiators that are driving our new contract wins. Our increased smart network reach has now gotten us 2.2 million connections which is up 30% from the 1.7 million that we reported at the end of the fourth quarter and it's up 94% over the first quarter of 2017. That is the single best lead indicator of our future revenues. Our contract revenue backlog conversion has been converting at 103% and is indicative of how effectively we're deploying the signed agreements into monthly recurring revenue and monthly recurring revenue is the biggest driver of our profitability as we go forward. This certainly supports our expectations of revenue growth in 2018. Connections which I noted as a lead indicator of revenue increased 94% over Q1 of 2017 and 30% over the sequential quarter of Q4 of 2017. And we converted that at a rate of 170% of what had been contracted schedules and planned by our customers that reflects a greater take rate and it also reflects that our connectivity variable usage rates are increasing which is very good for us. Customers like what we do for them. Our lifetime connection value of $277 is up from $224 at the end of the fourth quarter and is up from $157 at the end of the first quarter of 2017. This reflects a very low churn rate and the expectation of monthly recurring revenues ahead. Our average annualized revenue per employee was 256,000 at the end of the first quarter and that's up from 233,000 at the end of the fourth quarter and it's up from 177,000 at the end of the first quarter of 2017. From our inception on this measure when I joined the company in 2015 we've improved from roughly 50,000 revenue per employee to 256,000 which is a 412% increase, thank you teammates. That is a testament to productivity and efficiency. Our churn rate has remained very low by industry standards at 0.21%. We're trying to stay under 0.25% on a monthly basis and that's just a pure reflection of the customer's journey through our company, the relationship and the engagement that we have from our teams in Spain. We've increased our stockholders equity from a deficit of 3.2 million in March of 2017 to a positive stockholder equity level of 17 million as of the end of the first quarter of 2018. I'm also very pleased to report that our total assets at 13 million has grown to 27.2 million and our cash balance stood at 15.8 million with no senior secured debt at the end of the first quarter of 2018. We currently have 51 million shares outstanding with 13.3 million warrants outstanding and our stock is now trading a little bit under $3 so we're roughly in the 140 million to 150 million market cap range. I'll now turn to our raised outlook for 2018. I'd like to first direct you to our publicly available investor presentation which can be found on the Investor Relations section of our website. You'll see on slide 15 of that presentation which details our year-end n 2017 and also our first look at the 2018 $200 million contract revenue backlog. I would invite you to examine that very closely. We are exceeding our own internal targets or KPIs for conversion of that backlog and as already noted the connections have been converting at roughly 94% compared to last year. So based upon these things and these indicators we're raising our 2018 guidance as follows and this is under the context of forward-looking statements and is based primarily on the strength of our anticipated and scheduled connections or subscriber growth that are expected to accelerate in the latter part of the year and it's derived from our 36 month contractual revenue backlog. So we are raising our revenue outlook as follows; we're now expecting revenue growth of at least 60% up from our previous guidance of 50% for 2018 over the reported 2017 revenues. Also with our current cost structures we are affirming our expectation of positive EBITDA and cash from continuing operations for the full year of 2018. We will update this guidance quarterly in 2018 with our next statement coming in early August. As I noted when I began my remarks, we're very pleased to have outperformed by 5% the analyst consensus view of 3.9 million on the revenue and certainly we have met analyst consensus on our earnings per share at a negative 4% recognizing that their upper level included a negative 8%. So as we sum this up where do we go from here in the remainder of 2018. We're going to view large managed services platforms, we can't keep Nick out of Africa and the Middle East and that's where we're going. We're going to smart cities and smart things throughout the world including campuses and complexes and ports. We're going to more expanded global cloud services via our smart network and we're going to drive a significant amount of IoT business in 2018. We're going deeper into our customers businesses with the advent of predictive analytics and other block chain applications. We're going to the developers and the development communities because our APIs are very powerful and allow the ability to use this very powerful and broad cloud to create business models for others. We're going to dramatic organic business growth in all of our fundamental drivers of the company and we're also going to growth through corporate development in addition as we see accretive new channel partners and strategic partners and beyond. So how are we going to do this, I've already said it we're going to do it by investing in the growth of our business. I think a few comments are needed here to explain what I mean. We've reported that our cash from continuing operations is positive by 29,000. Our free cash flow is a negative 405,000. The difference in operating cash and free cash flow positive is attributed to the ongoing investments we're making in software and product development and in our highly efficient sales and marketing teams to further grow and fuel the explosive growth we firmly believe is available to this. That's how we're going to fund our organic growth and to create value. So now it's time for us to hear your questions and as well for Vic, Denis, Ted, Rob, Ali to comment on why we're going to these places I've just outlined and how we're going to get there. They will make comments as we address your questions so with that I'd like to turn it back to Stephen or the operator for questions.

[Operator:]

[Operator Instructions]. I will take our first question from Ashok Kumar with Forum [ph].

[Unidentified Analyst:]

Well thank you and good afternoon, Hal and team, congratulations on this significant financial and operating performance improvement since 2015. Hal, could you also talk about the backlog schedule [indiscernible] you earlier indicated 26 million, does that number still hold? And in terms of the mix of customers, any update in terms of the Greenfield opportunities, the fixed line established operators, and MVNE, are you seeing any mix change there? And then related to that, is the conversion timeline specific to the MSP, historically, you’ve had the contracted cash amount at 20 days and then the prospective contract of 90 days, you know with the significant strengthening of your management bench, do you see any changes there? Thank you.

[Robert H. Turner:]

Thank you very much Ashok. So in the first part of the question, if you look at the newly posted company overview presentation on the website, you will see that the 200 million of contract revenue backlog as well as the reported Q1 is now showing a 2018 number that exceeds 26 million, it is just shy of 27 million, it’s 26.9 million. And certainly as I have mentioned with our backlog conversion rate, at 103% on revenue and on connections, we certainly are aiming toward that and feel that we have a very good chance of that, if not even higher. Yet at this point, we're only affirming a 60% sales increase, which is a little bit less than that number, but I will update that as we move into the second quarter. Also in terms of the backlog conversion, as we’ve analyzed things and looked at the contracts, we are able to see that on an aggregate basis, we're able to get about 15% of the revenue from a new three-year agreement. In the first year of that agreement, we're able to get about 30% of the revenue in the second year of that agreement, and about 55% of the revenue in the third year of the agreement. So everything is tracking toward that so the implication for organic growth is above 26 million, and we'll watch very closely the ratios on that as we move into the second quarter. Relative to the revenue mix, we definitely are seeing more cloud services revenue coming and we're seeing more Greenfield opportunities coming, particularly on the IoT side and the application side, and actually I would like to just segue for one second to Rob Mumby on that because Rob and his team really have their pulse on the Greenfield piece. Rob could you make a comment or two before I come back and complete the question.

[Rob Mumby:]

Yes sure. I'm joining you actually from Chicago, where Hal had mentioned that we're at a trade show. We're today in the first day of three, attending ITW where we have global service providers from all over the world and so far through day one, which is today, we've had very positive meetings. And really excited about the enthusiasm in the market. We've done a lot of work with mobile network operators, we have had some very good discussions with some of those folks, but we've also talked to a number of companies that have developers that run IoT or could potentially be channeled to IoT and even enterprise. So, very positive discussions from Chicago so far, and we're very optimistic with what the outlook is for bringing new deals and scaling up the contract revenue backlog [indiscernible].

[Robert H. Turner:]

Thanks Rob, Ashok regarding the timeline, you may note that about three weeks ago we announced a sale in the U.S. It was for a rural provider, and this really was an important cloud opportunity for us and we got that implemented and turned up into service in three weeks. So it is getting better. By far the longest tent in our -- a pole in our tent is the managed services, and these are very tailored bespoke-type services which are unique to the larger operators. These are still running in the 90-day plus on the implementation and in some cases, the sales cycle from contact to contract is also running 90 days plus. We hope to be able to reduce that. The cloud itself is by far the easiest to implement and we see that we expect to be able to bring those implementation times down a bit. Ali is very focused on this and as you can imagine that will speed the revenue conversion and the amount of impact in 2016 and beyond. Ashok does that answer the basic question that you asked.

[Unidentified Analyst:]

Actually, one of the follow-up questions Hal is on your financial metrics that as indicated, continued top line growth at security measures in terms of operating expenses, so you are seeing blended margin expected to sustain about 70% given the mix of managed services, IoT and global cloud. And given that you have delivered operating cash flow positive one quarter ahead of expectations and your confirmed EBITDA positive for the full year, , can we still assume that you can deliver EBITDA positive for the current quarter, right given some of the positive top-end expense trends?

[Robert H. Turner:]

Yes, is the simple answer. The margins clearly, they vary by each of the service sets, the managed services having the highest margin because it's mostly software. It's well above 80% sometimes touching 85%. The in-global cloud is certainly in the 72% to 75%. And as we layer in the IoT, which is much more connection oriented, we see the margins dropping to the very low 70's, and in some cases into the 68% to 69% range. But on a blended basis, we still expect to be above 70% on that. As it relates to the ability to drive to EBITDA, we -- as you can imagine, we examine this pretty closely almost daily and we certainly believe that we will be EBITDA positive for the first time during Q2 which we are certainly half way through, we can see it. And for the full year, there's no question in our mind, it will be EBITDA positive and certainly moving to greater cash generation at that point in time.

[Unidentified Analyst:]

Congratulations and thank you very much.

[Robert H. Turner:]

Thank you very much, we appreciate your help.

[Operator:]

For our next question we will go to Bob Wasserman with Dawson James Securities.

[Bob Wasserman:]

Hey, good afternoon, thanks for taking my question and congratulations on a good quarter and a good year so far. I wanted to know if you could elaborate a little bit on the smart city case study on the Eastern European city that you have on the slide show that you just put and I think this is a new slide, maybe elaborate a little bit that is that maybe telling me the name of the city on the revenue model here, how big the community is, is it a pilot program in that country or it is just a capital only perhaps have one smart city per four country and is that a top model that you can move into other areas, more developed areas as well?

[Robert H. Turner:]

Thank you Bob. I will just say that it's an extensible model and we can see it going in many places throughout the world but I'm going to turn to Vic Bozzo who is working very closely with the consortium that is behind that particular implementation and Vic can share with you some of the very, very encouraging news we've got and things that are coming up. Vic, if you would please.

[Vic Bozzo:]

Sure, great, thank you. So yes, this is a capital city that's what I will say to start. So it's a large population center and the types of technology and devices that we see, that we will be managing range from air handling systems to first responder network to street lamps and light posts, CCTV cameras, advertising billboards. So what you see is a movement to a fully wireless system but also things like analytics and analysis of traffic patterns and people movement to get merchants and to get more and more information into the city itself. And also take advantage of resources that they may have that might be used in other cities around the world. So we see it as a very extensible model. The way we are being compensated for this model is very similar to how we would build an MVNO subscriber today on one of our typical managed service pipelines. So we get paid for platform itself by subscriber. In this case the subscriber might be actually a device and we get paid for connectivity and usage that's close to our platform where we're technically providing that connectivity. So we see it as a very extensible model as Hal said and we're actually chasing opportunities around the globe including some in the more developed countries including the U.S.

[Bob Wasserman:]

Okay, great and how long is the contract for or is there certain kind of test period until you fully roll out everything?

[Vic Bozzo:]

Yes, so this contract is for three years with an automatic renewal of two more. And that's typical of a contract like this. So we see very similar roadmap rollout of this to our standard kind of MSP 36 model.

[Bob Wasserman:]

Okay, great. Thanks a lot and congrats again.

[Robert H. Turner:]

Thanks Bob, we appreciate it, thank you.

[Operator:]

For our next question we will go to John Nobile with Taglich Brothers.

[John Nobile:]

Hello, good afternoon and thanks for taking my questions. I'm relatively new to the story so I just wanted to get a better understanding of a couple of lead indicators. You put up backlog conversion and connection values as lead indicators. I just want to better understand particularly backlog conversion of your remember prepared comments, it's talking about converting a backlog into billable revenue. Now when I look at your numbers they're above 100% which is great but I just want understand, 100% total backlog was converted into revenue I can understand maybe even a lesser number say but the numbers that you have which are greater than 100% conversion, I am just trying to wrap my hands around what exactly is going into this to cause that to be greater than 100%?

[Robert H. Turner:]

Okay, that's great I'm going to give you the top line answer then I'm going to turn to Denis McCarthy and Ted O'Donnell. So the bottom line is that we have a schedule from each of the customers contract schedules that define numbers of connections by month and by quarter and the amount of revenue. Within the revenue piece there is the platform charge and then there depending upon the level of connectivity whether it is IoT or cloud there's a variable usage charge. So when we see more than 100% it means that they have actually used more of the usage base than they had planned and/or they have converted more subscribers than they had originally planned to convert, that's the general basis of it. On the connections piece it is exactly that same thing and that's how we look at it so the two go hand in hand. Denis anything you or Ted would like to add to that.

[Denis McCarthy:]

I think you nailed it Hal, just to reaffirm that the increased usage and/or customers bringing on subscribers hasn’t been planned are the two main reasons for that outperforming our planned contractual conversion.

[John Nobile:]

Okay, no I mean that's phenomenal, that's great. And obviously even this quarter was over 100%, I expect you believe that this will continue to have a greater than 100% backlog conversion turning into billable revenue?

[Robert H. Turner:]

If you think about what I've said in terms of outlook I've respectively said to you that our guidance number is the bottom line of the derisking. So I don't think we're going to derisk down to 60% if you will. So, I can tell you that as we look ahead, as we see what's in the being converted by Ali Davachi and team we have a great visibility on it. I actually would like to have Ali comment because Ali is the guy who drives this and lives it every day. Ali, how do you respond to that and what do you see in the backlog conversion that's coming.

[Ali Davachi:]

Thanks Hal and John for question. Yeah, I completely reaffirm that as well. I think that our focus on delivery and execution as we look at ourselves in the operative model really contribute to our fund to live and driving those conversions to our customers and unleashing their capabilities. What's really interesting is watching our customers take a look at what we brought to them and really come up with interesting ways to drive additional opportunities and value both internally in our own businesses and to their own end customers. So I don’t see any reason to believe based on what we have talked about that we are going to convert at any lower rate than we are now expecting to accelerate as we go forward.

[John Nobile:]

Okay, great and one more basic question I wanted to find out is the connection values, I just wanted to get a better understanding also of what are the connection values, I see that's been trending up quarter-over-quarter so I want to get a handle on what that actually is and where do 1you see this going on, it looks like it's continuing to trend upward?

[Robert H. Turner:]

It is. I'll turn to Denis for that detailed answer but the bottom line is it's trending upward. Denis.

[Denis McCarthy:]

We look at connection values typically and if you take our largest stake there, they are roughly $0.80 per SIM per month and that gives us about $9.60 connection value annually. And then you start to add on top of that the things that Hal mentioned relative to usage for that subscriber or if the subscriber is now also utilizing multiple services with their additional charges that come with that. For example an IoT application is right on top. I will note that as we progress and we do more cloud, global cloud and IoT applications going forward some of the base fees are lower per connection. So we could see a trend down in that value over time but that will be coupled with much larger subscriber numbers per deal. So that I think sums up connection value.

[John Nobile:]

Thank you, I appreciate a very good response to those two questions. I just wanted to make sure I understood that. But if I could just ask one or two more questions, if you could talk a little bit about the success that you've had in regard to customers renewing contracts I was curious if you could actually a percentage of historical contracts that have been renewed and how many of these have led to larger contracts?

[Robert H. Turner:]

It's a very good question. So, you know that or you may not know but let me share with you that quite frankly prior to November 2016 the company as it was formally known had really not sold a new contract for almost four years. And during that time the company lost its second largest customer due to an acquisition by a major U.S. based operator AT&T buying a user cell. So the basic anchor customers have renewed every time and we have every expectation of continued renewals. We have one customer in the Middle East that their contract is coming to an expiration at the middle part of the year. We have accelerated that and by canceling the existing agreement and converting them to a new more usage and broader open contract that works for us by being able to bring other operators onto that platform and to have them continue to use the service also. So I would tell you that to my knowledge we have not failed to convert any customer that could be converted and keep them in a billable revenue and I exclude from that they user cell. Now as we go forward under the sales that were dramatically increased in 2017 with the 26 new contracts that we signed and the contracts that have already been signed in the first quarter it remains to be seen how the renewal rate will come. I think an indicator of that is the over conversion on revenue and the over conversion on connections to say they like what we're giving them. But let's be very candid, some of these companies are early stage companies not many of them but some of them are. They're Greenfield and they could have a business failure. A company could be acquired by another company and change the contractual relationship. So we have expectation of a fairly high conversion rate and all of the contracts that we execute have an automatic renewal period associated with them. So we have good thoughts on that. I'd like to turn to Rob Mumby for any additional comments on that.

[Rob Mumby:]

Yeah, I totally agree with everything you just shared. The one additional comment I'd add is that we do agreements with customers and generally we scope out and discuss what their go to market plan is. Over a short period time we've seen some customers very satisfied and pleased with the service that's being provided until they come to us and ask us if they could launch in a new market. So we will create an amendment and expand the relationship with the customer. And so it's not a brand new brand new contract or renewal and there is an expiration on the initial agreement but there is expansion. And so we do see that and so we have some of those discussions underway and we've gone actually into production with some customers on that front as well.

[Robert H. Turner:]

And John I would just add to it, just take a look at the churn numbers in the presentation to give you an implication of connection churn which I would also consider to be a lead indicator of whether they're going to stick with the contract or not.

[John Nobile:]

Yeah, okay, and I was looking over shareholders update letter, it was mentioned that you're looking to grow revenue by partnering or acquiring companies in some segments that you're currently not involved in. I was hoping that you could give us some examples of what you think would be synergistic to you?

[Robert H. Turner:]

Well that's a great question and I think all you have to do is look at the press release that we issued on iPass our newest strategic partner and that brought us 64 million WiFi hot spots and we don't have WiFi hotspots or did not. And when you think about our other strategic alliance relationship with Artilium. Artilium is very focused towards the what we consider to be the end user portion of the market, the business, the enterprise. So you think about that strategic alliance bringing vertical integration. You think about an iPass bringing a completion almost like the last mile on wireless to the network, smart network that we've brought together. So those are two great examples of strategic alliances that we've been able to enter into on conditions that we think are favorable to both companies and giving margins that are adequate to both companies and that's how we've done it. Denis drives that for us in corporate development, any additional comments you would like to make Denis.

[Denis McCarthy:]

I think we mentioned on last call and I will reiterate that we have a strong view to our ability to grow through 2019 and double year-over-year from an organic perspective. But from an inorganic perspective we think that there's -- we have higher aspirations and that's one of the things we will continue to look at. Companies that make sense for us synergistically and I think along the lines of how nice they describe the strategic relationships that we have. We will continue to look at things that bring us product, people, as well as geography to both or existing company. And some of those products would be certainly areas that are synergistic and the areas of IoT analytics and things of that nature.

[John Nobile:]

Okay, great. Well thank you so much for taking my question.

[Robert H. Turner:]

You're welcome John. Thank you very much. Stephen I think we're probably coming to the bewitching hour.

[Operator:]

We'll take our last question from -- we will go to Edward M. Woo with Ascendiant Capital for those last questions.

[Edward Woo:]

Yeah, well thank you for taking my last question. Congratulations on the quarter. Obviously you have done very well over the past year in terms of increasing the backlog. Can you just briefly talk about how much opportunities there are, is it still completely wide open space or have you got most of the easy…?

[Robert H. Turner:]

Well that's a great question and thank you for asking it. By no means have we exhausted the low hanging fruit so to speak and when Vic and Rob Mumby and I began talking about 2018 in the fourth quarter -- third and fourth quarter of 2017 we did a fairly exhaustive look at the opportunity not only at the mobile network operator side, the second and third tier communication service providers but also moving toward the enterprise. We think that the we have not even begun to scratch the surface of the opportunity that's out there and therefore we're very comfortable thinking that we're going to see a significant uptick in our contract revenue backlog as we end 2018. So we're very bullish on that.

[Edward Woo:]

Great, well thank you and good luck.

[Robert H. Turner:]

Thank you so much. You know what we believe luck has a part of it but it's mostly just perseverance, hardwork, and head down and keeping on doing what you need to do.

[Operator:]

This does conclude the question-and-answer session. So I'll turn the conference back to Hal Turner for any closing remarks.

[Robert H. Turner:]

Thank you very much John. So as we conclude this as we've said several times we've done what we said we would do beginning from late 2015. We strengthened the balance sheet, we operationally righted the ship, we've ignited the sales machine, we've moved to positive operating cash, positive adjusted EBITDA. As we have said multiple times today we're on a pathway of positive EBITDA. We see it, we know where it's coming and when. We're investing in our growth and we see dramatic positive future events coming for us. Our plan is very sales focused, our team has mastered sales and we expect to continue to do that. We sell great value adding solutions, we've got a real reach with our strategic partners which we're very pleased with, and we deploy those solutions quickly with customers which really reaps sustaining value and they do more business with us as Rob Mumby mentioned. So that's the virtuous business cycle and we like that. We expect to continue to facilitate, we're going to enhance and accelerate our very successful organic business growth plans but now we're going to bolster that even more demonstrably with strategic, accretive growth opportunities creating ecosystems where we will lead and participate in for the benefit of our customers. This is all about the customers. The enabling strategy will likely have us partnering for some new territories, new customer segments, adding new services and capabilities to our platforms, new people, expanding the professional skill sets that are already great inside the company with other good people. And we're going to be coming to our shareholders and our investors in the coming months, talking about our plans and how we're -- we continue to look at buy versus build analysis and how we're going to ask you to support us particularly as we go into our AGM. We're counting on your support and we expect that will unleash the full value of Pareteum. We're looking forward to what we think is going to be a continued great business progress for 2018 and beyond so, I want to thank all of our current shareholders. I want to thank our Twitter contacts particularly those who are the great defenders of our results and the success stories of our excellent company and also who recognize that we're becoming a very powerful force in disrupting the whole industry and that we actually act like dogs as was said to Rob Mumby by a customer. To those shareholders that are yet to come Denis and I hope to meet you in the course of our global road shows in the coming weeks and months. And for all of our support that has been afforded to us by the team and our Board, and our stakeholders. We certainly thank you. We are deeply grateful and appreciative. Our vision and our mission are unaltered, its open mobility and open applications that result in the ability for any network, any device to be connected, anywhere and with facilities and bringing mobility and software services to the underserved. We remain all in sales, that’s always at Pareteum. We will continue to persistently exhibit our relentless forward motion, RFM everyday and we will expand on our vision and mission. So, I want to thank you all and say good-bye for now. We appreciate your time today. Good-bye.

[Operator:]

This does conclude today's conference. Thank you for your participation. You may now disconnect.