Pareteum Corporation
Q4 2016 Earnings Call Transcript

Published: 29 Mar 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Pareteum Corporation 2016 Fourth Quarter Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Vivian Cervantes. Please go ahead, sir.

[Vivian Cervantes:]

Thank you, Pete, and good morning everyone. Thank you for joining us today for Pareteum Corporation's fourth quarter and year ended December 31, 2016 analyst conference call. After we closed yesterday, March 28, the company announced its financial results and filed its Form 10-K for the quarter and year ended December 31. You will find a copy of the press release and SEC filing in the Investor Relations section of our website. For today's call, Hal Turner, Executive Chairman; Vic Bozzo, Chief Executive Officer; and Ted O'Donnell, Chief Financial Officer; will provide some prepared remarks. They will also open up the call for your questions. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. 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 future economic conditions or performance, any 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 yesterday's press release titled "Forward-Looking Statements" and in the public periodic reports that 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, Executive Chairman of Pareteum.

[Hal Turner:]

Vivian, thank you very much, and good morning to everyone. Thank you all for your time and your interest in our company. As mentioned with me on this call today are Vic Bozzo, our Chief Executive Officer; and Ted O'Donnell, Chief Financial Officer. And following our remarks, both Vic and Ted will join me in our Q&A session. 2016 was the year dedicated to executing our restructuring plans and turning around the business for what we think is sustained profitability and growth, it's clear to us that based on recent developments and the continued positive momentum building for our company that we have made materially significant progress in 2016. We now are entering 2017 with a more stable and robust platform and it's one that is well positioned to capitalize on the major trends that are now impacting global communications. And thinking about 2017 and our outlook and as we look toward 2017, we acknowledge the apparent disconnect among with the market, the opportunities we see for our company and our well thought out plans to execute on these opportunities and the recent market movements. While we share all of our frustrations, our frustrations are amplified given the potential that we know exists, that which we understand is addressable and upon which we are executing as resources permit us to. The management team and Board of Pareteum are continuing to operate with a sense of urgency to execute and to deliver. We remain deeply committed to creating values for continued vision execution of our plans, to achieve what we see as sustainable accretive operating and financial results. We are on that pathway that I've described just as we said we would be at this juncture in our businesses turnaround. In 2017, we believe that we have turned the page, our business is going where it needs to be going. Vic will very soon elaborate on our further progress but let me provide you with just a couple of highlights. First of all, we have new logos and new brands that are positioned to come onboard. These are not just the organic growth from our two largest customers. We have nearly tripled the sales pipeline with extremely well, qualified opportunities. So since Vic joined the company in mid Q4 of 2016 and began building the professional sales team, I believe it's impressive performance in just four months. Secondly, we've opened up attractive new service segments that we are assertively addressing. These include the Internet of Things, IoT; these include enterprises and these include a broader population of communication service providers, and it is our carrier customers that are driving us in this direction. Thirdly, we led continued development in implementation progress on our announced transactions; these included partnerships for brands, for advertising or LTE technology and geographic market segments; these things will drive revenue. Finally, we've recently announced four new sales agreements. We had a key carrier customer to give us a global roaming enablement to you. We had an important addition of content streaming media capability to a major carrier MVNE customer. We had an all-important IoT technology enablement transaction and we had a focused subscriber and a multi-country network enablement agreement between India and the UK. It's -- Vic and his team have performed exceedingly well despite having almost no resources available to fuel our growth. Vic, I want to thank you and I mostly want to thank all of our Spain based, Netherlands based, UK based and Middle East based team members who continue to perform well as we recover our business. As I think about the growth strategy that we're on for 2017, that's a hard of all of these activities, it's the growth strategy that will take us in the 2017 and well beyond. On our third quarter call, we've talked about this as a three prong strategy and we're leveraging this as our software service platform to address the back office for every one ITQ now, very well understand back office means to us metering, charging and billing, and this is leverage that platform for the mobile virtual network enablement needs of three very distinct segments. Number one, the communication service providers, these are carriers like Vodafone of which there are almost 300 throughout the world. These communication service providers are in great need of our managed services platform which is tailored to meet their specific needs. Secondly, these are global mobility cloud platform service. This is bringing turnkey solutions to the enterprises and smaller communication service providers. And finally, strategy is addressing the application and exchange platform service. These are folks towards what we see as thousands of service providers, application developers, solution integrators who are providing application integration opportunities for other mobile virtual network operators, IoTs and enterprises. I wanted to press [ph] for just a moment because this is where the market opportunity explodes in our viewpoint and this is where we will likely see the replication of those who are using our services, of the strategies that have created companies like Uber. These are companies that have great potential. However, the Uberization if you will of telecomm and new market services will extend it to virtually every facet of our lives. This will come about and will likely be the cause of all things being connected and the fundamental need for this metering charging and billing capability which is uniquely meet by our refined software. It's more than just connected cars which we all hear about. It's ecosystems that has millions of individual components of seamlessly communicated act; think about connected villages, think about smart cities, think about smart ports, smart campuses, smart hospitals, smart anything; that's where we're taking this business. As we look at all of these strategies we have different sales cycles and the sales cycles for us is nothing more than the pathway to revenue generation from our subscribers; and this can vary anywhere from 18 months down to 12 months for the larger managed services deals; and again, these are sold to global carriers to just a few months with our global cloud services mobility platform and this is sold to the smaller carriers and the enterprises. Vic and I believe that the Holy Grail of our plans include on-demand self-services completely from a web interface using our global cloud services mobility platform for application and exchange services. Again, this is where we're driving the business. It is these strategies with their differing sales cycles which deliver for us a balanced approach for profitable sales growth and most importantly for forecasting our ability for attaining reasonable and sustainable predictable wins. As we look at our pipeline for 2017, we have reasonable visibility and pretty good expectation for new sales transactions to close in the near to midterm, and for us that means the next one to three quarters. This visibility and transparency is balanced against several variables and the most important of those is the size of some of these customers. Therefore, as we think about targeting the exact timing of signing an agreement, it's always both past and present and very challenging exercise to do that at best. So we choose not to compromise our negotiating position or our competitive position by any perceived need to prematurely announce any particular deal. With our growth strategy taking route and our sales prospects very positively increasing, we've added a new independent Director to our Board, Luis Jimenez-Tuñon. Luis is a very highly qualified senior executive who comes from within our industry. He has first 10 knowledge of Pareteum and where we're taking this business. The addition of Luis has already had positive impact for us, particularly in Europe and the Middle East. We also intend to add new senior sales operational product and financial staff. We believe that these new additions indicate that those who are closest to the marketplace and to the industry fully realize the opportunity and the long-term potential that we are set to realize and the immediate transactions which we have before us in coming months. In addition, the executive management team and board of Pareteum have also put our skin in the game [ph]. The Executive management team including Ted, Vic and I; plus two of our independent directors, Yves van Sante and [indiscernible] participated in a private off-market transaction to acquire an agreement 1,379,555 shares of common stock at the pre-split price of $0.11 which is a post-split price of $2.75. This was a conscious decision on our part, despite the somewhat predictable and custom area market behaviors that often follow a reverse split or a widely marketed public offer [ph]. Our team also intends to acquire additional shares of company stock subject to SEC in New York Stock Exchange regulations. So at this point with this brief overview I'd like to yield to Vic who is going to give you additional color on the market opportunity and a more granular view of our managed services, our global mobility and our application exchange platforms. Vic, over to you please.

[Vic Bozzo:]

Thank you, Hal and good morning to all. We have a large market opportunity in front of us. I've watched the telecommunications industry reinvent itself over and over for the last 20 plus years. I joined this company specifically because the market is making it change again. With the advent of Voice-over-IP and new applications that we now use to communicate via voice and text, the business has revolutionized again. It's clear that in the future, wireless eats everything; everything simply must be connected and every time these connections occur, they must be metered, charged, reported and built. There will only be a few companies like ours who can capitalize on this based on their technology, the people, the global reach, industry knowledge and most of all, timing. In the last four months I've had the opportunity to analyze the technology and see it virtualize very quickly and port it to the cloud. Therefore I'm proud to cooperate here a solid contender for the market leadership position. On the back of our technology and services platform, we've been able to track new people to the company who have successful backgrounds in the wireless internet and retail telecommunications industry. We recently made announcements bringing in top talent from the likes of Vodafone, Verizon and BT and more to come; these people share our vision and see our opportunities. We've also seen new customers join the cloud and we see new partners seek to join us in the endeavor of connecting our technology and our partners networks to more and more subscribers whether they are mobile phones or simply just a wireless device. It's in fact hard to think of anything that is not connected wirelessly anymore. This goes from industrial applications, supply chain, home, car, even the grocery store and a taxi cab. We're expanding our sales force globally and touching all points of the world now. We recently participated in the Mobile World Congress which was attended by over a 100,000 delegates which shows the strength of the mobile industry and we have several new exciting events coming up around the globe this quarter. We believe we can not only drive our thought leadership but also product and service leadership. In fact, right now we're participating in 10 new proposals and RPs around the globe; as we continue to invest in our sales force, we'll be able to attack more and more of those opportunities. Remember our business is aggregating subscribers onto our platform. On the heels of two additional contracts we signed with our largest customer last quarter, our optimism as we shift to the growth space is shared amongst the whole company and we truly are a global company. We believe new partnerships with folks like Air Fox which seeks to monetize data usage through advertising, new cloud customers who can access our platform from anywhere in the world very rapidly, and new emerging markets which seek to capital on the trending upside of mobile virtual networks are all within our site. We look forward to providing you with updates on the progress as we make it in. And let me turn the call now over to Ted for a review of 2016 results and operating activities.

[Ted O'Donnell:]

Thank you, Vic. Good morning everyone. 2016 was the year in which we worked to transfer the business operationally and financially, putting us on a path for stable growth in the future. Here are our 2016 financial highlights. Q4 2016 performance yielded revenue for the fourth quarter for the year ended 2016 totaling $3.1 million and $12.9 million respectively compared with $3.3 million and $31 million for the same periods previously. Much of the quarter-over-quarter and fourth quarter decrease in revenues attributable to divesture a balance off after sales in Q3 2016. However, revenue for the quarter of $3.144 million is 4.8% above our earlier expectations of Q4 of $3 million, a revenue run rate now $12.6 million. Decrease in year-over-year revenues primarily attributable to the loss of the UCL [ph] contract including the forward lease deferred revenue, $11.6 million in 2015; and as well compensation paid by UCL [ph] in June 2015 for the termination of the contract. At the end of fourth quarter 2016 and 2015, annualized revenue per employee was $200,000 to and $51,000 respectively with full-time equivalents for '16 and '15 up 62 and 253 respectively. Gross margins have increased on a quarterly basis from Q4 2015 through Q4 2016 from 62% and Q4 '16 to 66%, 70%, 72% and 79% respectively. Cost of sales and product development sales and marketing were reduced during 2016 by $4.56 million from comparable 2015 expenses. Restructuring cost to-date totaled $2.893 million or $1.254 and $1.638 for 2015 and 2016 respectively. Actual reported expense savings during '16 and '15 totaled $7.45 million. Adjusted EBITDA in the fourth quarter was $110,000 positive versus previous losses in the first three quarters of 2016 after the cross-over from breakeven at the end of the third quarter with the saleabouts. Adjusted EBITDA increases have also sequentially on a quarterly basis increased from Q4 2015 through Q4 2016. Over the last four quarters or five quarters rather, we have increased from quarterly losses of $3.1 million, to $2.1 million, to $1.2 million, to $600,000, then $110,000 in Q4 of 2016 as a result of our restructuring efforts. Of note, we've completed all the reductions in overhead without materially impacting customer services support levels. In fact, our services level has actually improved with our customers and their KPI's during the course of 2016. Turning to our balance sheet, cash and cash equivalents on hand December 31 were $931,000. Customer payments existing cash and restricted cash held by our senior secured lender should be sufficient to meet our senior secured lender requirement of $1.5 million in both March 31 and June 30, and we could have the required liquidity to pay our debt service requirements near term up to and through the Q3 principal repayments. We will continue to go ahead negotiate favorable terms with our lenders and preferred shareholders who have continued to work with us in the spirit of solving the challenges that mutually impact our company. We make great progress in cleaning our capital structure. This activity so far is expected to continue in 2017 as we work through overhangs in the [indiscernible] in both Q4 of 2016 and Q1 of 2017, we converted preferred and convertible notes in the common shares expected to seeing this process through '17 to simplify our capital structure. During 2016, the company restructure cost first increased margins, reduced cash burn, attained adjusted EBITDA positive in Q4 2017 and set the upper trend line towards EBITDA positive. In 2017, we look forward to continue these efforts relating to fine-tuning our cost structure while we reorganize our balance sheet. With that, let me turn the call back over to Hal.

[Hal Turner:]

Ted, thank you very much and we're now ready to take a few questions. Operator, if you would open the call to questions, please.

[Operator:]

[Operator Instructions] We'll take our first question from Peter [ph] with Dawson James. Please go ahead.

[Unidentified Analyst:]

Hey, Hal?

[Operator:]

Yes, sir. Your line is open.

[Unidentified Analyst:]

Can you hear me?

[Operator:]

Yes, sir. Please go ahead.

[Hal Turner:]

Yes, we can hear you.

[Unidentified Analyst:]

Good. I'm looking at the breakdown of the payments to LIA [ph]. You had a $1.5 million at the end of this month, which is pretty much showing and you got another $1.5 million at the end of June and you got another $1.5 million at the end of it. This $3.25 million is raised, as far as I'm concerned, ridiculous prices, but does that cover pretty much the end of the year? Or we didn't have to raise more money?

[Hal Turner:]

Ted, over to you.

[Ted O'Donnell:]

What we're going ahead within looking at -- like I went ahead and just said -- is we continue to look at our existing cash and restricted cash held by our senior secured lender. Would that be sufficient to go ahead and meet the requirements there. We'll have the required liquidity to pay our debt service for now and into the future. We will always go ahead. We're a growth company. You'll always go ahead and opportunities presented to us and are looking forward to growing the company primarily this year and while continuing to go ahead and clean up our balance sheet. With that, I'd like to go ahead and thank everyone for dialing in and turn it over for final comments to Hal. If he would like to go ahead and make any final comments.

[Hal Turner:]

Okay, thank you. No more questions, I presume then. All right. Thanks a lot, Ted. In closing, I just want to leave you with a couple final thoughts. We've substantially completed our restructuring and advanced the turn around, we demonstrated that by these reported results, the capital infusion, the amended debt agreement which is well under way and the inclusion of new industry leaders as a board member, new management and sales executives plus the growing roster of clients and prospective clients and partners. Attaining the adjusted EBITDA breakeven at the end of Q3 2016 was a specially hard-fought battle. For many reasons, the situation from Q4 '15 was much more deteriorated and had been immediately evident. Our team work tirelessly on behalf of all stakeholders to carry forward, witness progression of this EBITDA that's been noted by Ted. Operating Q4 in a modest adjusted EBITDA positive level was equally challenging for many reasons. During 2017, we intend to invest in growth to capture what we think is the continued vibrant market opportunity that's available to us. This may likely cause both positive and negative adjusted EBITDA results during individual months and quarters, but we persevered from Q4 '15 through '16 to literally save this company and we will continue to do so as we move forward. We've brought on these new and highly experienced team members, expanded our board because they are committed to our success and have invested in our business with us. We're fortunate to have the executive leadership of Vic Bozzo in every respect. He's a great partner and I certainly honor that he's a co-founder of this new business Pareteum, and that together, along with our board's full endorsement, Vic and I recruited Ted O'Donnell as our CFO and business partner. We have good people and strong teams in this company that's in Madrid, [indiscernible], The Netherlands, UK and the Middle East, -- others will join and we think this is the beginning of our movement where team spirits are high as that's been noted. We continue to receive the clear support of our largest client, Vodafone, who have demonstrated their commitment to our platform as a key enabler for their future growth and strategy. However, we can never take this for granted. The right to be a partner with Vodafone and all of our customers, frankly, has to be earned everyday through development, delivery, support of quality services and the demonstration of our company's financial stability and sustainability. This is especially where our stakeholders and shareholders are key to the future success of Pareteum. We believe our global cloud services bring immediate value to our customers. Our customers want what we are selling, the market opportunity is expanding. Vic and I will look at this in detail and we see a potential for a total available market -- a tam if you will -- of $270 billion by 2020. Subscribers are no longer just people, subscribers are both people and devices that we want to bring on to our network. All things connected, any device, anytime, anywhere. This is where our brave new world of Pareteum is taking us in opportunity. Building on this progress that we've made from November 2015 which was a low starting point. In carrying forward to 2016, we're confident in our ability to generate meaningful long term value and look forward to sharing these things with you as we talk about accomplishments and the reported results. Our company, our board, our continuing to operate with a strong sense of urgency. We thank you for your time and joining us on today's call. We appreciate your interest and your support and we do look forward to providing additional updates as progress comes to us during this year. With that, Operator, back to you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.