Pareteum Corporation
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good day everyone and welcome to the Pareteum 2017 Third Quarter Financial Results Call. Today's call is being recorded. And at this time I would like to turn the call over to Laura Moonie [ph]. Please go ahead.

[Unidentified Company Representative:]

Thank you, Operator, and good afternoon everyone. Thank you for joining us today for Pareteum Corporation's third quarter ended September 30, 2017 analyst conference call. With us today are Hal Turner, Principle Executive Officer and Board Chairman; Vic Bozzo, Chief Executive Officer; 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 and filed its Form 10-Q for the quarter ended September 30, 2017. If you've not received Pareteum's earnings release please visit Pareteum's investor page at www.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 statement 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 agreement, 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 the press release titled forward-looking statements and in the public periodic reports that the company files with the Securities and Exchange Commission. 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, Principle Executive Officer and Board Chairman of the company.

[Hal Turner:]

Laurel, thank you very much and greetings and welcome to everyone joining us today from around the world. Following my remarks we will invite you to participate in our Q&A Vic Bozzo, Ted O'Donnell, Rob Mumby, and Ali Davachi and they will have a real opportunity to talk about our progress and make additional comments as we all answer your questions. You've all hopefully had that opportunity to see the earnings release in the file 10Q so I won't read that to you other than to note a few highlights. Some of the headlines describing Pareteum today reads and we're very proud of this. Pareteum exceeds analyst expectations with Q3 three revenues of $3.5 million which is up 10% year-over-year and 7% quarter-over-quarter. Pareteum built a record 36 month contractual revenue backlog of $114 million as of October 31, which is up 90% over Q2. Pareteum virtually attained breakeven in both EBITDA and net earnings. Pareteum achieved positive adjusted EBITDA for the three months quarter and three months year-to-date ended September 30, 2017 and totalling close to $1 million for the first nine months of the year. These are really astonishing results and now sets the bar really high for new milestones and achievements in Q4 and in 2018. This performance also clearly demonstrates and has been proven time and time again that we have turned the corner and we're delivering fully on our promises, we intend to continue doing that. More good news comes from our very successful capital raise last week where we raised $12 million gross on a fully subscribed firm commitment S1 offering that was led by Dawson James Security as our sole book-runner. Importantly this offering was also fully oversubscribed for an additional 15%. This was extremely critical to us for several reasons. The first is that we now have most of the resources we need to execute our highly ambitious growth and scaling plans. Second, with this capital raise the tactical capital raises that we did earlier we have now increased our stockholders equity to $10.4 million, this means that we have remedy the New York Stock Exchange listing deficiency and we will no longer have the threat of delisting which will be removed as of November 27th with our filing of an 8K, again we are delivering on our promises. On the sales implying front, our largest customer Vodafone continues to add new services to our existing agreements as well as using our superior service and product development capabilities to add new services and features that will translate into their growing number of connections and corresponding new revenue for Pareteum. By the way I just used the word connections and that's the new industry term that you will hear us repeatedly use and replaces the use of subscribers or simcards, devices or equivalent uses of our software that are utilized on a per transaction basis. In other words it's the way the Internet of Things or as we like to say at Pareteum, the Internet of Everything will now be known. There is no better barometer we believe than when you have your long-time customer, eight years now and that's Vodafone and they continue to buy more from you and they agree to sell and market all of their companies and affiliates with you on a direct basis and that's simply because of the value that we bring to them period. Momentum continues to build in our sales and growth of the corresponding 36 contractual revenue backlog. The backlog that is the signed customers under contracts grew an astonishing 20.5 million during the month of October alone, this is significantly diversifying our customer and revenue base, it lessens the Vodafone concentration and all the while Vodafone our strategic account is continuing to grow and in fact is expected to accelerate its growth in 2018. Over the coming 36 months as these contracts deploy and new connections the new industry word that I spoke of are turned into revenue production per their scheduled volumes and per their prices and our reported revenues will then increase on a monthly recurring revenue basis. This is the basis of our whole business model and the software as a service business model that we operate in. Our concentrated focus now is to accelerate that pathway to revenue or said in other words implement the contracts we've sold more quickly than in prior times. This rolling 36 months snapshot view of contractual revenues and the run rates net of churn from long time existing customers like Vodafone and Zain provides transparency, it provides confidence for the realisation of these contracts into GAAP revenues, EBITDA and free cash flows over the contractual period and then we see these customers as has Vodafone for eight years continuing their monthly recurring revenue and growth. Monthly recurring revenue is the beauty of our model. Look at companies like Salesforce to witness how similar model began in the late 90s and now it's grown to create literally billions in value. Look at BroadSoft, software as a service model and their recent acquisition by Cisco is another indication of how business models such as ours may create value. Overall since the end of Q2 our team has delivered about a dozen new contracts which have added $54 million to the 36 month contractual revenue backlog and this will significantly diversify our customer and revenue base as these contracts are implemented and realized into production and revenue. Pareteum stellar sales performance reflects a value delivered to communication service providers, their enterprises and their IoT customers on a worldwide basis. This value derives from our innovative mobile network solutions delivered from our managed services platform, our global mobility cloud and our IoT which is applications exchange and developers platform. We believe the number of contracts we have signed with new customers to provide Pareteum's mobility cloud platform points to our unified and connected solution being simply the best in the market today. Customers have seen the value that our cloud based platform can unlock for them and they're signing on in record numbers. These customers span geographies including the U.S., Latin America, Africa, India, Europe and the Middle East. They span application areas including IoT and API's with important application to people or as it's known in the industry 8P and machine to machine use cases or as it's known M2M. We're very pleased with our performance indicators in the third quarter of 2017. You may all review our published press release and 10Q filed with the SEC for a very detailed description of our financial results. I'll touch on the trending, the momentum and the highlights that are clear indicators of our company's performance. First of all revenues beat analyst estimates and we're up 10% year-over-year and up 7% quarter-over-quarter. We expect this trend to continue and accelerate as our contractual revenue backlog is converted and becomes recognized revenue per the new SaaS revenue recognition guidelines that come into practice in 2018 and to which we will strictly adhere. Gross margins further improved to 77% from the low 70s in the prior quarter and the same quarter last year. We achieved positive EBITDA two quarters in a row and for three of the past four quarters and we achieved total adjusted EBITDA of $869,000 just shy of a $1 million for the first nine months of the year 2017. We were only $35,000 short of achieving full breakeven. This is the result of significant hardwork on our teams part and a very well-conceived and executed turnaround strategy. Now I want to talk about some of our KPIs and we'll take a look at how some of our other key performance indicators are looking. The most important metric of course is the one I've mentioned several times already and it's our indicator of future potential and performance and that is our 36 month contractual revenue backlog. At the end of Q3 it was $94 million which was a 56% increase over Q2's backlog of $60 million, just one month later October 31 we achieved a new record breaking backlog number of $114 million which was a 90% increase over the end of Q2 and a 22% increase in just one month. Most astoundingly this is nearly a four-fold increase in our compounded annual growth rate, CAGR of 393% over the fourth quarter of 2016 when we began really tracking this. Our revenue per employee as a key performance indicator we began tracking in Q4 of 2015, we increased this important productivity indicator to $222,139 in Q3, that is a compound annual growth rate of 373% since Pareteum started tracking revenue per employee in Q4 2015 at which time it was about $47,000. Year-over-year revenue per employee is up 44% from a $154,663 in Q3 at 2016 and quarter-over-quarter it's up 3% from $215,945 in Q2 of 2017. These numbers are a direct result of our operating efficiencies , our cloud based business model and Pareteum's top high performing executive and sales team and operations teams. Our CEO Vic Bozzo, who you'll hear from in a moment along with Rob Mumby who we recently promoted to our Chief Revenue Officer and Nick Barter who is our VP of Sales for Europe, Middle East and Africa have performed and delivered for our company in demonstrable ways. They've delivered for our customers and our shareholders and we want to thank this team of sellers for their leadership. During the third quarter we were pleased to have Laura Thomas join Pareteum as our second new Independent Director this year joining Luis Jimenez-Tuñon who joined our Board in March of 2017 as well as joining Yves van Sante, who is our longest serving Director and myself on the Board. Laura also serves as our Audit Committee Chair. I want to thank Luis who has helped us in so many ways on the commercial side and for what is yet to come from his many relationships. Yves van Sante has worked so closely with me on strategic alliances and things that are in development for 2018. We have a stellar program lined up. I want to thank Laura for jumping in with Ted and the financial team as we continue to pull forward on all things financial with this team. We also appointed Ali Davachi, who's an entrepreneurial hands on executive as our Chief Technology Officer and Chief Operating Officer. Under Ali's leadership our platform capabilities will be advanced to meet new customer requirements and that will enable our customers to more effectively manage their businesses and add growing numbers of connections. Ali is a high performing executive that both Vic and I have known for years who's delivered projects for Fortune 500 firms, in e-Commerce, AP. Development, security and financial technology. Ali has the practical daily mission of implementing the 36 month contractual revenue backlog. He has made important headways already and that is expected to accelerate dramatically in the coming months. Last month we entered into a strategic alliance and teaming agreement with Artilium Plc, that's a leading Belgium based Software and Communication Service Provider Company. They're listed on the London Stock Exchange and listing. We concluded a minority share exchange agreement with Artilium and now look forward to our mutually beneficial teaming arrangement as we go out and sell together. In fact Vic tells me we've actually closed our first joint transaction under the teaming agreement which we expect to announce soon once the documentation is fully completed. Pareteum's innovation was also recognized in the industry during the third quarter when we received the 2017 Communication Service Provider Solutions Product of the Year Award for mobile networking software and services by TMC. As I summarize, this we continue to believe that we are trading at valuations that are dramatically below comparable companies. A recent capital raising strategy and its execution and ongoing investor interest reinforces the view that some investors take toward our value and the risk adjusted opportunity for upside based on our performance and growth an expectation in this explosive market where we will do everything we can to connect everything that's our mission. The capital raise also removed as I've previously touched upon the risk of The New York Stock Exchange delisting. Ladies and gentlemen we're here to stay. We're here to grow. We're here to create some profits, hopefully a lot of profits and to create shareholder and stakeholder value while we achieve our expansive strategic gains. While our valuation has increased somewhat over the last quarter as measured by stock at market cap we believe that the intrinsic value of our business has grown dramatically especially by leaps and bounds when measured by our key performance indicators specifically the 36 month contractual revenue backlog, very little of this intrinsic value is reflected in my opinion in our market cap and price per share. We've more than proven Pareteum's ability to build an impressive contractual revenue backlog which stands at $114 million. Next we will convert this into recognized revenue from in-production customers and their connections. These newly recognized revenues as the connections come in line and generate new billings will continue our expected and planned March to become fully EBITDA positive without adjustments and fully levered cash flow positive flow and provide us the self-sustaining capability to fund our growth. All of this is expected while our sales team continues to outperform and add sequentially even more contractual revenue to the growing backlog. Our team is executing on the substantial market opportunity. We have converged what we believe is the right team at the right time. We are disruptively transforming the space in which communications software, content, entertainment and technology services intersect, it's our intent to be the market leader, fulfill our vision and mission in these cloud communications areas. We have executed for you our stakeholders and we will continue to do so. Now we want to hear from you by your questions as well as for Vic, Ted, Rob and Ali to comment as we address your questions. At this point Operator please open the call to a few questions. Ted will you announce the questions please?

[Ted O'Donnell:]

Yes.

[Operator:]

[Operator Instructions]. First we will take Lisa Thompson from Zacks Investment Research. Your line is open.

[Lisa Thompson:]

Good afternoon.

[Hal Turner:]

Good afternoon, Lisa. How are you today?

[Lisa Thompson:]

Good. Let me just first clarify one thing you said because I had about five minutes to look at the number. I didn’t quite figured it out. You said something about your almost at breakeven, what are you referring to there?

[Hal Turner:]

Our break -- what I referred to is that we were $35,000, we were negative $35,000 on EBITDA and then an additional $35,000 would have put us at breakeven on the fully unadjusted EBITDA. Ted O'Donnell do you want to expand on that or clarify at any?

[Ted O'Donnell:]

Additionally we wouldn't -- and had $603,000 just got this quarter, $869,000 for the nine months ended. So we have made continuing that great progress not only on the adjusted EBITDA side but also on the EBITDA side the interest influence [ph] leading upto almost adjusted EBITDA [ph].

[Lisa Thompson:]

Okay, so that was the unadjusted EBITDA? Okay, got it. Then you also said that you expected that you would continue to improve revenue growth year-over-year as well as sequentially and gross margin is that what you said?

[Hal Turner:]

I said the revenue I didn't say the margins but we certainly expect that depending upon the blend of services if it's mostly software, our margins can go up to 85%, if it's the cloud with connectivity our margins typically are in the mid to low 70s. So we're well positioned for a strong margin performance.

[Lisa Thompson:]

Do you ever feel for the fourth quarter given that you're bringing on a bunch of new customers?

[Hal Turner:]

So Ted you want to take that I know that we've looked at it very closely and certainly feel very confident about our fourth quarter.

[Ted O'Donnell:]

In the second half of last year we announced that we would have an annualized revenue run rate by the end of this year of $15 million which would equate into $ $3.25 million [ph] so we look forward to going ahead and making those estimates in the fourth quarter. Traditionally all revenue ramped in the first quarter through the first quarter so in the second -- fourth quarter subscriber growth is norm for our customers. I think what will happen by the fourth quarter time there are subscription packages two for one and several promotional items. So sometimes in the first quarter some of those things churn out but we will also go ahead and except from the first quarter, and the second quarter to go ahead and getting ramp up. So as you can see from our first three quarters of this year, there has been incremental growth for the second and third quarter we continue that, we expect that trend to continue going forward.

[Lisa Thompson:]

Okay, that helps. I think you've got your money now so I guess what you 30.1 million shares outstanding, is that right?

[Hal Turner:]

Ted, on the cap table I you can spell 31 million right.

[Ted O'Donnell:]

That’s absolutely right as far as outstanding.

[Lisa Thompson:]

Okay, and do you know the fully diluted numbers?

[Ted O'Donnell:]

Fully diluted is going to be close to two.

[Lisa Thompson:]

Okay, that’s with all of the options and warrants, no matter what. Okay.

[Hal Turner:]

Right.

[Lisa Thompson:]

All right. So given that you've gotten money and you've been starved for it for quite some time, are we going to see some increased spending in the fourth quarter and the beginning of next year?

[Hal Turner:]

So the spending will ramp based upon how we bring the backlog into revenue production. So it will not get out of balance with that but clearly we will certainly expand some of our sales and marketing. So yes we'll spend more money there particularly as we segue into 2018 and clearly we will continue our focus on service and software development for even more new features, so yes we will spend some money.

[Lisa Thompson:]

All right and I guess my last question is you've brought [ph] so many new customers who do you say would be the Top 3 as far as revenue contribution next year other than Vodafone so that we just know which are the big ones to pay attention to?

[Hal Turner:]

Other that Vodafone I believe that we can safely say that our Eastern Europe opportunity will be a major revenue producer which was announced earlier. I believe that we will see Brazil that agreement which was announced earlier be a major revenue contributor and we have probably another deal that will come online in the fourth quarter not yet announced that will also be among the Top 3 but I'd like to turn to Vic and get his perspective and Rob Mumby's on that. Vic?

[Vic Bozzo:]

Sure. Thanks, Lisa for question. So one thing that we have been focused on is continuing to distribute our revenue and so while the three or four deals that Hal mentioned which are traditionally our MD&E [ph] managed service business deals are also going to be bolstered by many of the new contracts which are actually getting to revenue more quickly. So while the cloud deals may not always be as big, when you begin to add them together you begin to get a -- the move the needle quite a bit. So one thing we're looking to continue to do is to sell between four and five cloud deals for every one of the managed service deals sort of a traditional large subscriber deals that we do.

[Hal Turner:]

Rob, do you want to add anything to that? Rob Mumby, do you want to add anything?

[Rob Mumby:]

Yes, yes, yes. So I think everything that Vic said makes great sense. At the end of the day we have two main ways that we deliver our service. We began a service platform where we put a dedicated equipment to our customers sites and then when we had the cloud with [indiscernible] mechanism and so whatever way our customers would like to work with us were able to work with them. We have highlighted that in typically that the dedicated solution takes a period of time to deploy and actually to begin to see subscriber growth on it while the cloud although it may not be as big at full ramp you realize revenue quicker. So we like the balance of the two and we continue to pursue both customer types or deliver our service based on what our customers or how our customers would like to work with us.

[Lisa Thompson:]

The top customers are those people that are supporting current customer bases over?

[Hal Turner:]

Yes these are combination of current customers that they have as well as new customers which would also be in the internet of things area as well as kind of traditional NB&Os [ph] virtual operating companies as well as branded marketing companies.

[Lisa Thompson:]

Okay, great. I will let somebody else ask some questions. Thank you.

[Hal Turner:]

Thank you, Lisa.

[Operator:]

[Operator Instructions]. We take John Ford. Your line is open. One moment.

[John Ford:]

Hi, guys, just a quick question. How does the -- this huge backlog transfer into actual revenue and when does that happen? How do we figure that out? Because it seems to be slow.

[Hal Turner:]

Thanks. John, the contract revenue backlog has associated with it most of these are three year contracts, some are five years, some are seven years and you've heard both Rob and Vic talk about the large managed service providers, may take as much as six months to begin the implementation because of service establishment down to the cloud which can take as little as a month to three months. So each of these agreements has its own schedule of revenue recognition, if you go to our website and you look at the investor deck that is currently on there and I believe it is Slide 14 you will see not only the total of the revenue backlog but you will see the 2017, 2018, 2019 effectively 36 months out how that is scheduled per the contracts to come online. So that gives you your answer right there.

[John Ford:]

Perfect. Yes, I will take a look at that. Thanks, guys.

[Hal Turner:]

You're welcome. Thank you for your question.

[Operator:]

At this time we have no further questions. I will turn it back to you for any closing remarks.

[Hal Turner:]

Well thank you very much I really appreciate as do all of my executive team members and teammates from Pareteum, the time that you've spent with us. There's a question that I get asked almost all the time virtually every day and the question is how do you really differentiate from our competitors. I want to spend just a moment of my closing remarks to address that. Very quickly many of our competitors try to buy and sell -- resell telco services and they try to do that as cheaply as possible. Many of our competitors are very willing to sacrifice quality of service for low pricing. In the case of Pareteum we partner with mobile network operators who offer services and that's like Vodafone, it's like Zain and in fact we've got 65 of these types of customers throughout the world and we offered with those mobile network operators in a symbiotic manner. This means that the operator actually gets paid directly for the connections and our customers and their customers get a high quality of service since it is our service platform that is deeply integrated software into that operator, that's a material differentiator from most of our competitors. Many of our competitors offer communication services as a platform for developers so they can incorporate communications into their applications, mobility being one of the primary ones. Yet we think our customers have voted on Pareteum's mobile solutions and they voted big time with their contracts all of which were competitively won by us and that we really believe that no one can match currently Pareteum's level of integration with the mobile network operator, our connectivity and reach again 65 customers and countries and counting and we do it with a world class newly developed front-end software management portal which is for our solution. That's in our minds the moment of truth because that's what the customer uses, interfaces with and lets their customers use. This is where and this is why we are winning those battles and we continue to win and we do this with this world class newly developed front-end management portal which did not exist in our company before we assembled this team, it did not exist in 2016, it did not exist in early 2017, we built it and we've built much more and we're going to build even more onto that services roadmap, this is why we went in the marketplace. We have such deep core integration of our software and services with our mobile partners, mobile network operators throughout the world that we've created our own ecosystem. Many competitors are part of a developer ecosystem but most simply provide a software developers tool kit and let the developers worry about making it work and delivering it with other possible ecosystem partners. Pareteum is unique in creating its own ecosystem where our partners can build and benefit from the other ecosystem members and we do this by identifying those opportunities and then bridging our partners into a full solution. We do the hard work of the telecom and software connectivity integration. In the case for example of IoT we've got a smart city opportunity ready to go in Eastern Europe and we've got other locales worldwide that are showing strong interest. We work with our current customers to enable those services. Most of our competitors are not full solution providers and do not include the all-important integrated connectivity. They operate with a sort of a fast food mentality order from the menu. Pareteum's approach is a classic consultative sales model, after we have created pain in the minds of the customers we offer an identification of that problem and how it effects them and then we solve the problem and we actually solve it end to end, that's a big deal. Our competitors mostly post documents and codes on their websites and they leave it up to the developers and the API customers to figure it out. It's kind of like going to McDonald's with them versus Smith & Wollensky's or Del Frisco's or Keens Steakhouse in New York. Many of our competitors are developer in AbelNet Company [ph] run by developers. Many of our competitors don't really know telecom from an operator perspective with a teen such as we have at Pareteum who possesses a lifetime of experiences to show for it, we do understand that market. Many of our competitors have great upfront API's but they're less than sophisticated on the backend including the integration of telecom connectivity This is where we shine and differentiate. Pareteum also offers and operates a robust platform as you heard Rob Mumby and Vic talk about. Also with API's and we have got what we think is the great technical sophistication throughout our software technology and solutions stack including the connectivity and usages into our partners and their supplier operations. Our customers do business with us and choose us because of trust and track record. Our team has had multiple successes. Pareteum as we are today is going to be another one of those successes as we continue to show the world what we can and will do. Our vision is and has been to enable and secure communications, transactions and applications for the connected world via our globally deployed cloud services. This vision is underwritten by our mission, "Any Device. Anywhere", we expect to continue to translate both our vision and mission into clear and valuable solutions for customers enabling them to capture more market share and compete on their terms. We expect these achievements to continue the growth in the inevitable march to profitability for all of our stakeholders. With that we thank you for all of your time and attention and questions and support. We will conclude the call. Goodbye now.

[Operator:]

That does conclude our conference today. Thank you for your participation. You may now disconnect.