Pareteum Corporation
Q4 2017 Earnings Call Transcript

Published: 28 Mar 2018

[Operator:]

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Pareteum's fourth quarter ended December 31, 2017 analyst and investor conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded today, March 27, 2018 for playback purposes. And now I would like to turn the conference over to Hayden IR's Stephen Hart, Investor Relations. Please go ahead.

[Stephen Hart:]

Thank you Cynthia and good afternoon everyone. Thank you for joining us today for Pareteum Corporation's fourth quarter ended December 31, 2017 earnings results 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 and year end December 31, 2017. If you have not received Pareteum's earnings release, please visit Pareteum's Investors 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 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 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.

[Hal Turner:]

Stephen, thank you very much and greetings to everyone joining us today from around the world, wherever you may be. I want you to know just how excited we are at Pareteum about what's been accomplished this year and what we think is an exceptional year and the story will unfold as I go through this. However and now more importantly, where we are going in 2018 takes center stage and as well the understanding of what our plans for 2018 mean to each of us as shareholders. You will hear a lot about that today. To say that Pareteum is ready and is performing and is expected to continue that performance and exceed new levels of results really does not do justice to those words. You will see this throughout the call because we will show you. Following my remarks, we will invite you to participate in our Q&A where I will be joined by Vic Bozzo, Denis McCarthy, Ted O'Donnell, Rob Mumby and Ali Davachi and where we will have a lot of additional comments during that time as we answer your questions. I am confident that you will hear and feel their passion for our business every bit as I think you will hear it from me today. I also want to take just a brief moment to thank this whole extraordinary hard-working group of teammates. More on that later, but simply stated, the results that we are about to speak of were generated by this dedicated team and the leadership of our key management team and support team. So thank you, Rob Mumby. Thank you. Ali Davachi, Vic Bozzo, Ted O'Donnell, Dennis McCarthy, Susan and Matias and Alex. All of our colleagues throughout the world also receive our thanks. Now it's time. Hopefully, you have had an opportunity to see the earnings release. So I won't read that to you, other than to point out our Q4 revenue of $4 million, our first $4 million quarter, which is up 28% year-over-year and our phenomenal growth of backlog which stood at a growth of 390% at the end of 2017. So we are very, very pleased with this and we did achieve record growth in the fourth quarter and for the full year of 2017. We have now recorded three consecutive quarters of growth and have been operating at fully adjusted EBITDA positive since Q2. As you know, we still have several restructuring and re-organizational charges that account for the adjustments to EBITDA. Details will be coming forth soon as we go into the discussion later on. We are expecting many more growth and earnings records to be set in 2018 and beyond. And as we drive forward with our continued austerity and spending in cash management, we have a singular focus on our customers and their needs. Key performance indicators or KPIs are our barometers and these are constantly measured by everybody on our team. Everybody owns at least one of them, sometimes two. And the KPIs focus on connections which are a codeword for subscribers, backlog conversion which talks about how we convert the 36-month contractual revenue backlog to billed and booked revenue and the connection revenue values which look at how much money do we get for every time we hook somebody up and keep them on, on a monthly recurring basis. Another key measure that we look at is revenue per employee and churn. And I am very pleased to tell you that every one of these are favorable and most are trending in the right direction at a steep slope, which is really good for us. This past year's focus on strengthening our management and operational teams to create and close sales opportunities based upon our twice industry recognized and awarded solutions and cloud service platforms has been highly successful. The new teammates that joined us and our resulting success in creating our 36-month contractual revenue backlog which, I think as you all know, now stands at $200 million and is growing at an increasing rate despite the laws of big numbers, all this perfectly positions Pareteum for another excellent year in 2018. And with our continued careful planning and execution, we expect this to occur for many years to come. Our balance sheet has been dramatically improved as we successfully executed on capital raises in the fourth quarter that allowed us to fully retire our senior secured debt and enter 2018 with a very strong cash balance to fuel our future growth. We are well positioned for growth and profitability having structured our global cloud services platform and operational systems and our teammates, our human resources to scale as we dramatically grow the revenues, the connections and the vast amount of data that traverses our networks and service platforms. Our smart network came alive in 2017. This is our overlay network that allows us to connect to the world. We are well positioned to continue the conversion of our 36-month contractual revenue backlog. And in recent months, we have been converting that at near 120% of the scheduled and planned connections. We see the excellence of customer service and customer engagement continuing, it's evolving and it's improving, which will add new revenue to existing relationships. And this is all the while as our professional sales executives are building our future with even more new contractual revenue backlog. These initiatives will take us further in geographic reach, deeper into markets where we already operate and as well very much deeper into our customers' organizations with new services and capabilities which are constantly being developed. We expect this will accelerate our creation of shareholder value. To demonstrate our strong position in 2017, we were awarded 26 new contracts totaling $118 million with the majority of those new agreements coming in the fourth quarter of 2017 alone as part of our business search which was widely reported. We also increased our total 36-month contractual revenue backlog from $50 million to $147 million at the end of 2017 and which has now accelerated, as I just said, to $200 million as of today. Since we began tracking that number from the beginning of Q4 2016, when it stood at $30 million, we have grown through Q1 of 2018 at 254% compounded annual growth on the backlog. This is an incredible accomplishment and portends for what is coming with our booked revenue as we convert it. This is an accomplishment that was led by the hard work of the whole company and especially by Rob Mumby, our Chief Revenue Officer and his team, which is including Nick, Sergei, Paulo and Eduardo. We also had fearless sales and business leadership coming for this team and with this team almost on a daily basis with Vic Bozzo, our CEO. Leadership in all of our service platforms and solutions came from Vic and his team led by Ali Davachi, our CTO that resulted in the following industry recognition awards we received which really drive our any device, any network, anywhere view of the world. We won the IoT Evolution IoT Excellence Award for 2017. We won the 2017 Communication Solution Product of the Year Award from TMC. We were the winners of 2018 Internet Telephony Product of the Year from TMC. The industry recognizes what we do and the customers are buying it. So I want to thank Ali and the team in Sant Feliu in Spain and Madrid and especially Matias and Susan who drove this award process for us. Also, ongoing services and software developmental work is underway that utilizes blockchain and many other new forward thinking technologies and all of this is geared to clear the needs and make certain that we have trustful information ledgers for security and privacy in our data transactions. Additionally, software development work continues in the areas of information insights and are focused toward predictive analytics and the use of machine learning for our customers. We expect these ongoing developments to play central roles in our smart city. And actually I want to caution that it's actually much more than smart city, it's a smart anything and it uses our smart network and our strategies and execution plans to grow that. Our strategic alliance and teaming agreement with Artilium was created to jointly address new market areas with particular reference to Africa and Asia as well as mutually enhance our respective service offerings. To-date, we have closed one joint sale. We have two joint pending sales and opportunities. And we have four additional transactions in our active pipeline in our teaming agreement with Artilium. This is a big move for us. With our team ramping up, we signed new agreements with 36-month contractual backlog valued at $68 million in the fourth quarter alone in 2017. Some of the new contracts that I would just like to briefly mention and again, thanks to Rob, Vic, Ali and the team, include the $24 million managed service contract that we did with an MVNE in Eastern Europe, an $8 million managed services contract for a smart city in Eastern Europe, a $4 million cloud IoT security contract in Europe. Some of them have asked us regularly, why don't we publish the names of our clients? It really comes down to two essential things. Large companies who are our primary targets and we do operate in a very highly competitive marketplace. From these large companies do not want their names disclosed because they don't want to be the target of a number of competitors trying to unseat the challenge, the decisions that they actually just made. So for these competitive reasons and also in many cases contractual reasons, we simply don't name the customers. Although, some were named the 2012, 2015 timeframe. I have to tell you, it angered some of those customers because literally they get bombarded almost on a daily basis any time their name is put out in print by people trying to unseat Pareteum. Competitively, we are not going to let that happen, but that's the primary reason we don't do it. It's really competitive. Also while we do occasionally, we will sometimes seek approval to identify a customer and use their names, but this will be in a special situation where we have as much to gain by being named as they do by being named and we feel that the competitive risk is minimal. So I hope that this will address that point once and for all. We would like to point you to our 10-K filing when it is filed, which does disclose names of several of our partners and clients. Now turning to our very strong financial performance. For the full year 2017, our revenues increased by 5% to $13.6 million. Our revenue for the fourth quarter was $4 million, a quarter-over-quarter 28% increase compared to 2016. You may recall that my guidance had been a 25% increase and that was over the $3 million and $7.50 that we did in the prior year. So we are very pleased with that. I am also very pleased to tell you that our gross margins for the year increased from 72% to 73%. And for the full-year, we generated an adjusted EBITDA profit of $1.6 million. This was compared to a negative $3.9 million adjusted EBITDA for 2016. Adjusted EBITDA profit for the fourth quarter in 2017 was $708,000 which is an improvement of $598,000 or 544% compared to the same period in 2016. I would also like to note for you as I briefly mentioned earlier that at least $125,000 of these expenses during the fourth quarter are still related to past 2015 and 2016 restructuring and severance expenses. And these will begin to fall away as we traverse through Q1 and into Q2 and we expect these to be fully burned off by June 30, 2018. As I have said, measured against any of our key performance indicators, we are moving in the right direction. We are on very positive trends. Our contractual revenue backlog, which you will hear me mention often, stood at $147 million at the end of the year. That's now accelerated to $200 million for today's call and that represents a 565% growth since we started tracking that number on September 30, 2016. We expect our growth rate to continue and certainly we are going to do everything we can to make it higher. In parallel with our growth, Pareteum's market opportunities continue to expand. The smart network currently covers 65 countries. And this is via connectivity to 45 mobile network operators. This expands our addressable market making us much more attractive to customers and partners. And it will grow, thanks to Chris Hills who is part of Vic's team. Our enhanced connectivity and speed of implementation with reduced deployment cost are more of the key differentiators that are driving new contract wins and are expected to drive more wins. Our increased smart network reach, contract wins and implementations drive our connection volumes. Connection is the word we use today for subscribers. Those connections have now increased to 1.7 million at the end of December 31, 2017. And that's up of 42% from the 1.2 million at the end of the third quarter of 2017. We very pleased with that. It's up 55% from the 1.1 million at the end of 2016. We formerly referred to this measure as subscribers, but it's connections now, all the way. Our contract backlog conversion rate throughout the year has varied between 104% to 124% throughout 2017. And this is indicative of how effectively we are deploying the signed agreements into monthly recurring revenue. And I think as you all know, monthly recurring revenue is our biggest driver in the business. And certainly supports our expectations of revenue growth in 2018. Another key measure for us is the lifetime value of the connection. That's up to $224 and that's up from $191 at the end of Q3 2017 and up $157 at the end of the first quarter. This KPI reflects the low churn rate and the fact that we haven't lost any customers in the past two years. Our average annualized revenue per employee was $233,000 at the year-end. That was up from $225,000 at the end of the third quarter and $177,000 at the beginning of 2017. From my joining the company and the inception of when this measure came into use in Q4 2015, we have improved from approximately $50,000 revenue per employee to $233,000. That's an improvement of 366%. So I want to thank the team for that. Our churn rate by month remains very low which is great and it's in the range of 0.2% to 0.3% monthly. This reflects our excellent customer service and engagement teams and the value and the satisfaction that's derived from our customers through the global cloud services, managed services and the application exchange and development services. The customers like what we are providing and more importantly they are buying more and they are paying use increasingly for the service solutions and they are paying us on time. In November and December 2017, we raised significant capital, a net of about $20 million in common equity and we subsequently retired 100% of the $10.1 million of our senior secured debt and we extinguished that senior secured note. As a result, we increased our stockholders equity from a deficit of $9.4 million to a positive stockholder equity level of $15.4 million. I am also very pleased to report that we have increased our total assets from $13 million to $25.3 million and our cash balance stood at $13.5 million at the end of 2017 with zero in senior secured debt. We currently have approximately 50.5 million shares issued and outstanding and about 18.1 million warrants and with our stock trading in the $3 range, it certainly gives us a much healthier market cap than we have enjoyed in the past. And one of the higher priority items for me personally, when I came on board to the company, our financial team was successful in working with our auditors for the anticipated removal of the going concern qualification as of 12/31/17. This is a major milestone of significant and strategic importance and it required the concentrated efforts of many. I want to really think our CFO, Ted O'Donnell, who is to be congratulated for leading this with our expanded financial team. I want to tell you this also eases our sales situations in our larger deals because it will help us in not having to every time address the question of, are you a viable company? The answer is yes, we are. I will now turn to our outlook for 2018. I would first like to just redirect you to the publicly available Investor Presentation which can be found in our Investor Relations section on the website. You will see there on slide 14 of our presentation, details of our year-end 2017 36-month contractual revenue backlog of $147 million and which is now increased to $200 million as of today. We are exceeding our own internal targets, KPIs for conversion of that backlog revenue. So with that background and context, Pareteum would like to issue its preliminary 2018 guidance as follows under the context of the forward-looking statement and based primarily on the strength of the anticipated and scheduled connections or subscriber growth. They are expected to accelerate now and through the end of the year from our 36-month contractual revenue backlog. We are minimally expecting revenue growth of at least 50% for 2018 over 2017 reported revenues. And this is well ahead of the published research analyst report which forecasts for the year for us between $16 million and $16.5 million. Also, with our current cost structures, Pareteum is expecting positive EBITDA, full EBITDA not adjusted EBITDA and cash from continuing operations for the full year and we expect to make that turn in the second quarter. We will update this guidance quarterly in 2018 and our next statement is actually expected in mid-May. On a side note, in the month of January alone, we signed new contracts that have a total contract value of $20.5 million. Our team will not let up towards sales pace. So how do we take this forward and where do we go in 2018? In 2018, we go to new large managed services platforms, sales in new geographies and we see these as large dollar contributors and also large contributors of the connection volumes. In 2018, we are going to see smart things. And it's not going to be just cities. We are talking smart campuses. We are talking smart office complexes, smart ports, smart anything. So that will be a real focus and already is a real focus for us. In 2018, where we go will include expanding global cloud services via our smart network. So it takes a smart network to support a smart city and it takes a smart city to support IoT business in 2018. That's where we will be. Two, where we will go will include new channel partners and new strategic partners. We will go deeper into our customers' businesses and we will go more to developers and development communities. We will go to dramatic growth in all of the fundamental drivers of sales and profitability in our business. So now it's time to hear your questions and as well for Vic, Dennis, Ted, Rob and Ali to comment on why we are going to these places I have just mentioned and how we will get there. They will make comments as we address your questions. Operator, could you open up the bridge, please?

[Operator:]

[Operator Instructions]. We will take our first question from Ashok Kumar with Joseph Gunnar. Please go ahead.

[Ashok Kumar:]

Congratulations to your team on the multiple milestones that you achieved in your transitioning to adjusted EBITDA positive, cleaning up the balance sheet and [indiscernible]. So kudos on that. A couple of questions. One is, could you compare and contrast the cloud and IoT deals to the relationship opportunities that you have within MVNO. I assume that even though the individual deals are smaller, but when they aggregate they do compare positively with the MVNO opportunities? And you mentioned about cryptocurrency. I assume that is growing much beyond press release and this would be embedded as part of your services enabling people or your customers not only to pay [through their phone but also use their phone][ph] as an IP address and POP, pay for services , could you just clarify on that? And the last question is, in terms of furthering your financial goals, moving from adjusted EBITDA to EBITDA positive, what are the steps you are taking to focus on monetizing the contractual backlog of $147 million? Thank you once again and congratulations.

[Hal Turner:]

Thank you very much, Ashok. On the first question, the compare and contrast, the smart cities and IoT to the MVNO, I will turn first to Vic Bozzo and Rob Mumby for addressing that and then we will take the other questions. Vic, Rob, please?

[Vic Bozzo:]

Sure. So we categorize our platform in three ways, managed service, global cloud and our application exchange and developer platform. So if you look at the contracts we did, we did three MSP deals, 14 global cloud deals and five exchange and developer platform deals. So I think that, yes, that puts in into perspective that we are seeing more, higher volume of global cloud deals than the MSP deals and it certainly takes a few more of the global cloud to make one of the MSP deals, but they do set up much faster and they are supported by our connectivity from our smart network. In terms of blockchain, as you mentioned and cryptocurrency, blockchain settlement is very hot today and we are in active discussions with almost all our customers in terms of being able to settle that currency. So we do support that today but we are also continuing to evolve that platform and the technology.

[Hal Turner:]

Vic, thank you very much. And regarding the point about the conversion of backlog, I would like to turn to Ali on that and then we will come back to Dennis and Ted to address the movement from adjusted EBITDA to EBITDA positive. Ali, if you would to address Ashok's question regarding backlog?

[Ali Davachi:]

Sure, Hal. Thanks. So Ashok, thanks for the question. I think that for backlog conversion, we continue to meet our goals and our plans. We expect to continue to exceed those based on our 2017 and further performance. To that end, we have already onboarded two MSPs. We have onboarded six global cloud and three application providers. And we are starting to generate revenue there as well. So it's not something that we expect to slow down and we expect to continue to accelerate through the end of the year.

[Hal Turner:]

Ali, thank you. Dennis, I would like to turn to you and Ted to address the question of the movement from adjusted EBITDA to EBITDA positive and our expectation of positive cash for the year.

[Denis McCarthy:]

Sure. Thanks, Hal. I will start first and then Ted, I ask you to join in. As you look at 2017 and how we finished the year, I would like to note, reiterate what Hal said earlier that we had various restructuring charges that we are working through which hit the EBITDA number and we removed from our adjusted EBITDA that once again was $1.6 million for the year. We also, as Hal is building his team and brought on the fine folks that you hear on the phone today, we had various stock-based compensation charges which we also removed from adjusted EBITDA. As we move forward in 2018, we anticipate those charges on both fronts are less and as well, as we are implementing our contractual revenue backlog, we will quickly in the second quarter overtake those numbers and be EBITDA positive as well as cash flow positive, as Hal mentioned earlier. Ted?

[Ted O'Donnell:]

And to further that point, as we go ahead and implement these contracts, we will go ahead switch over from managed services implementation revenue which has lower margins into monthly recurring revenue that will also go ahead and allow us to maintain margins up in the high 70s, low 80% range for traditional SaaS, software as a service revenues. So those margins will go ahead and also drive the push from adjusted EBITDA as well.

[Hal Turner:]

Ted, thank you very much. Ashok, thanks for the question. Cynthia, we are ready for another question.

[Operator:]

We will take our next question from Bob Wasserman with Dawson James Securities. Please go ahead.

[Bob Wasserman:]

Good afternoon. Thanks for taking my question and congratulations on a good year. My question is related to revenues and geographic diversity. I know that at one point you were pretty focused on just a couple of countries, but it seems like you signed a lot of new contracts in new territories. Maybe you could talk a little bit about some of the new markets you are entering and what 2018 will look like in terms of revenues by territory?

[Hal Turner:]

Thank you very much for that question, Bob. I am going to turn to Rob Mumby and Vic to answer that. But the straightforward answer is, we have people in many places throughout the world now that we did not have before. So Rob, if you would address that please?

[Rob Mumby:]

Sure. Thank you very much. Deals came from all corners of the globe, North America Europe, Latin America, Africa, Middle East, Eastern Europe and Asia. Our history as a company is such that the lion's share of the businesses come out of Europe. But we have had great success in other areas and are very encouraged by not only the deals that we have done, but also the deal flow. One of the things that we have done as a company is we have invested in resources so that we can be very aggressive in other parts of the world that we haven't had feet on the street in. And so we anticipate more success coming from all corners and I look forward to that. So in general, the world is hungry for the mobile evolution and Pareteum is powering it. I think that's being recognized by the market. Thank you.

[Hal Turner:]

Rob, yes, I think it's also safe to say that if one looks at the company overview presentation on the deck, there are two slides in there that depict some of our market partners and also the geographies where we are focused on for 2018. So Bob, we would invite you to take a look at that.

[Bob Wasserman:]

Okay. Thanks.

[Hal Turner:]

You are welcome. Thank you. Cynthia, we are ready for another question.

[Operator:]

[Operator Instructions]. We will go next to Lisa Thompson with Zacks Investment Research. Please go ahead.

[Lisa Thompson:]

Hi. Well, thank you so much for all the information. And I have to say that you folks have probably won the award for both transparent company and you are sending press releases every time you sign another deal. That's very impressive.

[Hal Turner:]

Thank you.

[Lisa Thompson:]

Yes. So let me just ask a few questions. First off, when will the 10-K come out?

[Hal Turner:]

So the 10-K will come out before Monday at 5

[Denis McCarthy:]

Yes. We will go ahead be filing before the deadline on Monday and are looking forward to going ahead and providing that information to everyone out there as well. We are just finalizing a few minor items right now.

[Lisa Thompson:]

Okay. All right. I will look at it then. So let's just go back a little to the first quarter and typically I know it's a weaker quarter, seasonally speaking. But given all your contract backlog, is that going to be different this year?

[Hal Turner:]

It is. We expect it to be different. The beauty of the work that's been done throughout 2017 is, it's broadening the geographic base, it's broadening the customer base and it's taking the dependency off of some of the customers that have seasonal swings. So we are expecting to have less of a roller coaster ride in Q1.

[Lisa Thompson:]

Okay. Great. And then Q4, it looks like you had about $4.7 million in G&A which was quite a jump. Would you expect that to grow going forward?

[Hal Turner:]

I am going to turn to Dennis and to Ted for details on that. But we certainly don't expect it to increase and we certainly believe that the company will grow around that platform and we will do everything we can to reduce it also. Dennis? Ted?

[Denis McCarthy:]

Sure. Thanks, Hal. Lisa, as I mentioned earlier, relative to the adjustments to adjusted EBITDA, there was a fair amount of stock compensation charges that came in during the fourth quarter. And again we duly noted that we added several team members throughout the late third quarter and fourth quarter to the team as well as had other options and awards there we are vesting from the management team that was brought on when Hal first took over the restructuring efforts. And then lastly, those restructuring efforts continued on through the fourth quarter. And as I mentioned earlier, most of those will be wrapped up by end of first quarter, early second quarter. We do not anticipate that type of G&A reoccurring at any point in time during 2018.

[Lisa Thompson:]

So what would you say would be the more normal quarterly level?

[Ted O'Donnell:]

Go back to where we were in the third quarter of this year will be somewhat of a norm. Now, there are going to be some of the elements in there that will be somewhat variable expenses. And not just in G&A, when we look at sales and marketing, that would be somewhat variable dependant upon the growth in sales that we go ahead and expect. In addition to the great answer that Dennis gave, there were some couple of non-recurring accruals that we may add to the fourth quarter that we don't expect to be in the P&L in future.

[Lisa Thompson:]

Okay. And so, well, based on your new level of expenses, do you have a revenue number that you expect to breakeven for profitability?

[Hal Turner:]

We will make the crossover in, we believe, Q2 and we are very close to that number now. So we see generation of cash. I will let Dennis Ted answer more directly, but we are very, very near it right now. Ted? Dennis?

[Ted O'Donnell:]

I am really looking forward -- go ahead, Dennis.

[Denis McCarthy:]

I was going to say, sure, I think Hal's right on. We are in that our fourth quarter revenue number from 2017 puts us in an area that with modest growth, we will cross over to cash flow generation as well as EBITDA generation. There's some fluctuations in margins that will happen as well as fluctuations in where we continue to invest in sales and marketing, but generally within a less than 5% increase in sales, we will break into profitability for both cash or EBITDA. Sorry, Ted, go ahead.

[Ted O'Donnell:]

And one of the great things that's happened is, billings and revenues go ahead and convert to cash flow as well and from the implementations that we are going ahead and doing to continue growth from our existing clients. So the combination of these elements, we are going to have $2 million worth of AR at the end of this year. In the first two weeks of January, we went ahead and received $1 million and another $1 million by the end of the month. So we are very actively managing on the cash side, our accounts receivable and look forward to continue to do that, which is no easy task as you go ahead and grow revenue spread. We are looking forward to being a double win on both of those fronts.

[Hal Turner:]

Lisa, anything else? Cynthia, we will take the next question.

[Operator:]

We will take our next question from Peter Ruggiere with Dawson James Securities. Please go ahead.

[Peter Ruggiere:]

Congratulations, by the way.

[Hal Turner:]

Thank you very much.

[Peter Ruggiere:]

You have $200 million in backlog. My question is, how much money this year would we see in revenue from that backlog so it's free of backlog?

[Hal Turner:]

If you go to the slide on the investor deck that we mentioned, it shows that the backlog scheduled for conversion is expected to be $26 million. We have given guidance that increases our revenue about 50% from the year we have just ended. So as we have more visibility moving quarter-by-quarter, we will certainly expect to update that. But those are signed contracts that have connections that are scheduled to go into revenue generation in 2018.

[Peter Ruggiere:]

So all the revenue is your money? That's yours? And then you have 70% margins on that?

[Hal Turner:]

Yes. This is revenue to us. So all of the cost of revenues certainly are absorbed. And once that's done, as noted, we moved from 72% to 73% gross margin for 2017. And we certainly expect to be in that range. It is dependent upon the service category, whether it's managed services, which is mostly software, whether it's IoT which has a lot of connectivity with it or it's the global cloud. But the blended margin is expected to remain above 70%.

[Peter Ruggiere:]

Okay. There is the thing I have wondered most about, explain it a little myself on this, so you have $200 million divided by or just say $180 million divided by three, you are making $60 million a year. I am trying to understand, how [indiscernible] backlog --

[Hal Turner:]

It's not a straight line. That's the thing. So think about some of the customers that are contractually signed are greenfield opportunities. So they are early in their business. Some of the customers are existing established operators who have had mostly fixed business, fixed line or fixed type services who are now adding mobility to their subscriber base. And in some cases in the situations with a large MVNEs, there are large subscriber or connection bases that are transferring over. I want to turn just briefly to Vic and Rob and make sure I properly captured that. Vic, anything to add to what I just said?

[Vic Bozzo:]

No. I think that's a fair way to look at it. As they move subscribers over, there are ramp times to do that. So they get fully loaded as they trend.

[Peter Ruggiere:]

Sounds great. You guys have been doing a great job. I think you guys should Twilio [indiscernible].

[Hal Turner:]

Believe me, that's one of the reasons we don't want to put our customer names out there. But we are very happy for Twilio to do that. Get behind and start to speak to go after. Thank you very much.

[Peter Ruggiere:]

Thanks for taking the question.

[Hal Turner:]

You are welcome. Cynthia, I think we have time for another question.

[Operator:]

[Operator Instructions]. We will go next to [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hi Hal.

[Hal Turner:]

Scott, how are you?

[Unidentified Analyst:]

Fine. Thank you. I am restricting my questions to manage services deal with an MNO customer. Given the large decrease of OpEx using Pareteum's technology over legacy integrated systems, my question is, do MNOs using Pareteum technology garner a competitive advantage? Number two. And number two, can someone like maybe Rob Mumby help us understand the flexibility of the platform which I thought was going to or currently does help sales and marketing of MNOs or MVOs? Thank you.

[Hal Turner:]

Thank you, Scott. I would like to turn actually to Rob to answer the question and Vic and I will add on as may be necessary. Rob?

[Rob Mumby:]

Yes. Sure. Thanks. So the first question. So our Software-as-a-Service does a couple of things. A, by MNOs using Pareteum's managed service, they reduce OpEx, as you noted. So it requires far less people on their side to manage their bundled service offerings to the market. Secondarily, our software is integrated with, we call, mobile core element. And what that means is, that there is a great degree of control and flexibility that MNOs have by using our technology. And what that translates to in the market is they are able to offer the service bundles that the market wants to buy. The legacy infrastructures that MNOs typically have is very cumbersome. And so it would be costly. It require a lot of people. And require additional technology or modifications to it for them to address what's going on in the market. So by working with us, it gives them a very flexible tool to address the needs that they need to address for their customers. Now I think that my answer might have crossed over to both of your questions. But could you clarify what the second question is, so I make sure I tie that off?

[Unidentified Analyst:]

Well, back to the first one, I have been told and I don't what the number is. I don't know if anyone knows the number. But the total expense of back office as percent of total operating expenses of MNO, I am guessing, is only maybe 10%, 15%. I am not sure. But we decrease that by 90%, for an MNO wouldn't that make them have a competitive advantage over their competitors?

[Rob Mumby:]

Yes. So I was trying to articulate that, yes, it does, from just a pure OpEx standpoint, give them a competitive edge because they have far less cost to manage the services they are putting in the market and it also gives them upside in terms of offering the market bundled service offerings that the market wants to buy.

[Unidentified Analyst:]

Right. Does anyone there know generally what the operating expenses are for back offices as a percentage of total operating expenses? Is it 5%? 20%?

[Hal Turner:]

Rob and Vic, I can tell you from my experience that the MNO typically is somewhere in the 18% to 23% range on the back office and the support expenses. And as that began to grow in the early to mid-2000s, growing with the lack of system automation, that's what gave advent to the platform of Pareteum being a value-added. Scott, I would tell you one other piece is that many of the MNOs take that advantage and turn it into their own margin, returning it back to profitability to support other less profitable sections of their business or to put it into areas that they want to grow. So it doesn't always translate into end-user pricing or competitive advantage, as I have observed. Vic, you have any additional thoughts on that?

[Vic Bozzo:]

Yes. The only other comment I would make is, if you look at kind of the trajectory of what's going on, they are putting all their capital into 5G, the MNO. And that means very little capital for marketing programs, for new customer acquisition, for back-office systems, for automation, for adding things like blockchain or AI, the things that need to manage this new Internet of Things opportunity. And that's a real opportunity for us because we come in and we say, we look at them and say, we can do all that for you and therefore all the capital that you would have put into that, you can put back into your 5G deployment which they need. And so as a result of that, we do see, as Rob mentioned, a major operating ROI The second part of this is, once we have done that, now we have begun to talk to them about moving to the cloud and that provides a whole another set of ROI or OpEx savings, when we move them to that next step. And what we are finding is that some of the MNOs that we have been talking to about managed services who in the past would want to put technology into their network, have said, you know what, let's look at the cloud from the start. I think that's the series of events that's happening and so yes, we know we can save them a lot of money by coming into their network, but we also know there is a second savings amount coming when we get them to think about virtualizing their platforms.

[Hal Turner:]

Vic, thank you very much. Scott, thank you for your questions.

[Operator:]

And ladies and gentlemen, due to time limitations, this concludes the question-and-answer session. With that I will turn the call back to Hal Turner for closing remarks. Please go ahead, sir.

[Hal Turner:]

Thank you very much. I just would like to leave you with a few brief things. I was recruited to the company to fix it back in 2015 and we have done what we said we would do. We have strengthened the balance sheet. We have ignited our sales machine and are able to grow profitably. We have exceeded analyst views of financial performance in 2017. And we expect to do even better in 2018 with material sales growth and full year positive EBITDA and cash. Our plan, which we have mastered and will continue to do so, is sales focused. We celebrate value and these are value-adding solutions to our customers. We deploy these solutions very quickly. The customers reap very good value from it and they are buying more from us. We leverage those wins into new markets and deeper into the business of our customers and that's a virtuous circle. We will keep doing it. Repeat it. We expect to facilitate, enhance and accelerate our successfully executed organic business growth plans with strategic growth opportunities. That's principally what Dennis is here to work with me on. This enabling strategy may have us partnering for new territories or customer segments, adding new services and technology capabilities to our already award-winning global cloud platform and bringing new people and skills to our company. We will be coming to you in weeks and months ahead with more details on our creative plans to look at buy-versus-build analysis and particularly as we plan and convene our Annual General Meeting. We are counting on you and your support ongoing as we work to unleash the full value of Pareteum. We look forward to continuing to update you on our business progress and we look forward to a strong 2018 and beyond. Thank you to all of our current shareholders. Thank you to any person who is considering being a shareholder and may join us. For the support that's been afforded to us, we would not be here, had it not been for that. So our vision and our mission are unaltered. It's any device, anywhere, any network. We are all in sales at Pareteum always. We don't count the days. We are working hard to make the days count. So we ask you to be with us and to work with us and we are just getting started. With that, I conclude the call. Thank you all very much. Good bye now.

[Operator:]

Once again, this will conclude today's conference call. We thank you for your participation and you may disconnect at this time.