Pareteum Corporation
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Elephant Talk Communications Corporation Second Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Alan Sheinwald, Capital Markets Group. Please go ahead sir.

[Alan Sheinwald:]

Thank you, operator. And good morning to everyone in the US, and good afternoon to everyone in European. And thank you for joining us for the Elephant Talk Communications 2015 second quarter financial results conference call. On our call today will be Mr. Steven van der Velden, Chief Executive Officer; Mr. Mark Nije, Chief Financial Officer; and Mr. Paul Burmester, Chief Executive Officer of ValidSoft. Following management's discussion, there will be a Q&A session open to all participants on the call, as the operator has already mentioned. Before we get started, I'm going to review the company's Safe Harbor statement. Remarks made on this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. All forward-looking statements are inherent uncertain, and they are based on current expectations and assumptions concerning future events or future performance of the company. Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions, and speak only of the date hereof. In evaluating such statements, prospective investors should review carefully various risks and uncertainties identified in this conference call and the matters stated in the company's SEC filings. These risks and uncertainties could cause the company's actual results to differ materially from those indicated in the forward-looking statements. With that I would like to turn the call over to Elephant Talk's Chairman and CEO, Mr. Steven van der Velden. Steven, the floor is yours.

[Steven van der Velden:]

Thank you, Alan. And thanks to everyone for joining us today for our 2015 second quarter financial results conference call. A lot has transpired since our last call. So in my opening comments I'll provide an overview of the most recent developments in a simplified manner so everyone can understand the financial and operational status of the company as we stand today. I'll then go into an update and the status of contracts we've discussed in the past as well as new initiatives we have underway. As always, Paul Burmester, CEO of ValidSoft will provide you his business update. And then Mark Nije, our CFO will provide commentary of the financials specifics. In June, we ended our relationship with Iusacell following the carrier's acquisition by AT&T, resulting in a global settlement of approximately $13.5 million, consisting of $12.6 million in cash and the remaining balance in exchange for certain obligations of Elephant Talk to Iusacell related to equipment. Because of this settlement Iusacell revenue previously reported on the balance sheet as deferred was not recognized in revenue. Therefore revenue for the 2015 second quarter totaled approximately $19.2 million as compared to restated $5.1 million for the same period to prior year. This revenue increase reflects the positive impact of this deferred revenue which was approximately $11.6 million. In addition to the settlement as described above, we repaid approximately $5.7 million in outstanding debt obligations including some expenses and entered into a new amended credit agreement with our existing lender for a term loan facility of $6.5 million. This will allow us to rollout a full restructuring plan that I will detail to you in a minute. Our non-GAAP revenue increased to $7.4 million during this quarter as compared to $6.8 million for the same period to the prior year. And contributed to a non-GAAP adjusted EBITDA of $2.2 million. Approximately the same level as the two prior quarters. We should however realize the substantial one time effect the Iusacell settlement it have on these numbers. In the third quarter, we will therefore see a huge quarterly revenue gap of around $3.9 million which needs to be bridged as soon as possible through substantial reduction of our cost base, pay out with a service level and efficiency improvement in combination with new quest for revenues and margins. Both also be in your function our strategic reorientation as we aggressively attempt to win over new customers and do what it will take to ultimately service them. During this entire process, our team has worked to undertake a comprehensive review of our current strategy, business modeling and organizational structure. The goal of this effort was to prepare a business to move beyond the settlement and to adopt a more aggressive go-to-market strategy on several fronts. From a shareholder perspective, these events have had a negative impact on our stock price. As shareholder ourselves management, the Board, as well as our employees are all very disappointed in the performance of the company share price. We understand that it is incumbent upon us all to perform at a highest levels and we believe that our new organization and commercial focus will translate into sustainable improved of our company's performance and we hope will also be reflected in a high evaluation. The cornerstone of this plan was the execution of Board approved restructuring effort as part of new strategic initiative to improve operational efficiencies, increase sales efforts, and reduce expenditures. Thanks largely to the unique talents, expertise and commitment of our staff, we've been able to smoothly realize this transition. The plan included dividing our mobile platform business into two organizations. One for Delivery and Operations led by Co-President Dr. Armin Hessler, and another one Sales & Innovation led by Co-President Martin Zuurbier. With these new folks, we are now able to pursue new business and a rollout more projects much more aggressively which I am confident will positively impact our growth in weeks and months ahead. The recent restructuring is expected to eliminate approximately $5 million of our 2015 cash staffing cost and SG&A consisting mostly of reduction in staff and the elimination of office locations. And the restructuring will bring a focus to more securing and supporting a growing number of mobile network operators as well as mobile virtual network operator customers in the Americas, Europe to Middle East and Asia. While streamlining operations our intent is to double the size of our existing sales team over the next 12 months. As ValidSoft operate separately they are not part of this restructuring. Our renewed focus is targeting global base in excess of 800 mobile network operators helping them to better service their own brands as well as their wholesale and enterprise customers. In addition, to the hundreds of larger mobile virtual network operator brands. All of which see cost efficiency and reliable and rapidly deployable core network and operating support systems such as Elephant Talk full suite of Software Defined Networking and Network Function virtualization so called SDN and NFV enabled platforms. Now more than ever as was noted in the recent case study developed and published by Hewlett-Packard, we are focused on delivering some of the industries most advanced flexible and cost effective mobile core network and backup office solutions available, backed by world class technology development, delivery and support capabilities. We believe that this unique capability combined was increasing the priorities of our sales organization while targeting numerous opportunities is critical as we ramp up our global growth initiatives. Management expects that this new operating structure and increased commercial focus will allow the company to quickly and cost efficiently scale the business in terms of staff and cost as it adds expected new clients later this year. Following the impact of these developments, in line with earlier guidance provided, and also indicated during the call last quarter, we anticipate a return to normalized overall revenue growth and positive adjusted EBITDA starting in the first quarter of 2016. Earlier we stated that by the end of 2015, the beginning of 2016, we expected to achieve once again the revenue and adjusted EBITDA base we had by the end of 2014, early 2015. Beginning the range total revenues of $7 million to $8 million per quarter, and positive adjusted EBITDA of around $2 million per quarter, and the same message can now be communicated again. We should however realize that when we speak about these amounts, and we talk about overall non-GAAP revenue and adjusted EBITDA and the largest increase in Q4, 2015 and Q1, 2016 to get back to the non-GAAP levels of last year will come from initial fees and installation charges, thus a substantial part may be reported as deferred revenues. I would now like to provide our shareholders with an update on our customer development activities. With existing customers and pending contracts at United States and South America. Each will be critical growth drivers for us for the next few quarters. First, mostly bringing in initial fees and installation revenues. But thereafter resulting in growing recurring revenues for 2016 and beyond. Let's start with current operations in Spain, Saudi Arabia and the Netherlands. It is exciting to be able to mention that LOWI is growing steadily. And over the last six months together with Vodafone we have been focusing on stabilizing to pretty good service and make swirl improvement. The service has been running fine since the start without any significant issues. And is being perceived as one of the very best MVNOs in Spain currently. Later this year, we expect to be able to share with you some service extensions and performance milestones, not only for LOWI but also for other end MVNOs we service in Spain. Even though the total installed base of mobile subscribers hosted on our platform is still relatively modest, we see continuing growth taking place in Saudi Arabia. An even though we certainly had hoped for a much faster growing revenue base over the last few years, it is still good to realize that our operation in Saudi Arabia has come to be over $5 million in billing so far since its inception and currently runs along annualized run rate of some $2 million to $2.5 million in overall billings while meeting our margin objectives. In the Netherlands, OpenMobile, a new MVNO brand hosted on the Elephant Talk platform will start their actual marketing launch in the Dutch market in early September. Even though they have now been operational for a few months on the platform. While this is small overall market, it is proving to present the number of opportunities for Elephant Talk as we now have several new MVNO prospects and expect to sign at least another MVNO before the end of this year. Now let me provide you as an update on two very important pending contracts. Please bear in mind that until such time as fully executed contracts are secured, I am not able to discuss specifics, but we want you to have transparency on these new customers and the activities we have undertaken since we last communicated with you. In North America, earlier this year as you all know, Elephant Talk was invited to Verizon Partner Summit in Miami, where it was introduced as one of three vendors. As the other two vendors not the mobile platform providers. Elephant Talk North America was highlighted from the stage as the intended partner to power Verizon Partner Solutions’ new pre-paid MVNO offerings in the North American market. In the United States ETNA will, if selected, provide the platform for Verizon Partner Services prepaid program as a branded powered by Elephant Talk solution. As you can imagine, working through a contract was an organization such as Verizon is an extensive process. One, it involves a large number of details and different business units, is complex transaction thus take time. At this point, I can report and we are finalizing a Master Services agreement and are currently completing necessary compliance and credit documentation required to commence service deployment and customer acquisition. We have no reason to believe that these matters will not be resolved over the next few weeks. With the first revenue be recorded in the fourth of this year. In Brazil, as we also indicated on our past conference call, Elephant Talk was selected as the platform provider for a new virtual operator to be operated on the network of one of the largest mobile operators in the country. We have been informed by our customer that a required license from Anatel, the Brazilian Telecoms Regulator will now be granted in a matter of weeks. In a time, we have completed initial pre deployment activities in support of this customer. So we are prepared to relatively quickly get this project up to full speed. Subject to the timely granting of the operating license, Elephant Talk will hopefully complete systems deployment later in the first quarter and commence operations either just before the end of this year otherwise early next year. Finally, Mexico, we are in the final stages of reentering that market. We hoped to be able to share this news further with you in the very near future. I'll now turn the call over to Paul to discuss ValidSoft in further depth. Paul?

[Paul Burmester:]

Thank you, Steven. After clear commercial progress at the start of 2015, we have continued our strong momentum into the second quarter of this year. Firstly, I am delighted to announce that our international proximity correlation capability has now gone live with both of the major UK banks currently using our Device Trust solution in partnership with FICO. This is testament not only to the unique capability of our technology, but also to the successful track record we achieve in partnership with FICO and the focus that we have put on data protection and high quality transaction processing within our existing Device Trust deployment. With these live Device Trust deployments in mind, I am very proud to say that we are now securing transactions for over 17 million individual customers in the UK. Additionally, we are currently running Device Trust proof of concepts with two additional major banks in the UK and given the benefits we've already delivered for our existing clients, we are very confident that we will see a positive conclusion to these trials before yearend. As a result of our participation in the Prestigious Payments Council Innovation event in June, I am pleased to announce that we have signed a new channel partner agreement with Virtusa Inc. Virtusa is a global information technology services company providing IT consulting, technology and outsourcing. And they are significant addition to our channel partner portfolio providing services to a wide range of industries from financial services and telecom to retail and healthcare. We've already seen very positive results from this new partnership and are currently supporting Virtusa in a proof of consent with a leading financial services company. On our last call, we announced that ImageWare Systems have selected ValidSoft as their preferred supplier of voice biometrics. And I am now pleased to announce that we have completed our integration with ImageWare Systems and already beginning the enrollment of some of ImageWare's existing clients while also working together on some exciting new opportunities. And I look forward to sharing further details on this successful partnership in the near future. At the start of the year, we announced a new large commercial contract with a major US corporation for our User Authentication platform featuring our voice biometrics technology. And I can now announce that the project has gone extremely well and that we are delivering the final integrated solutions to launch this month on time and to plan. The corporation will be using our voice biometric technology to authentic their staff access to their systems and data and initially they will be rolling it out to their 5,000 remote US based staff during September. As we see significant commercial growth in a voice biometrics market, we are investing in our team and technology accordingly. And to the end we've recently made the notable addition of Dr. Federico Alegre to our voice biometric team. Federico brings a range of expertise in speech and anti-spoofing technology which will be key to ensuring that our voice biometrics engine remains best in class. Understanding of this proving to be strong and agile commercial player with valuable technology in user authentication and voice biometrics. We now have many of the tools and resources required to build on our success so far this year and I very much look forward to announcing further progress in the near future. I'll now hand over the call to Mark to discuss our financial data. Mark?

[Mark Nije:]

Thank you, Paul. I will now discuss the company's financial results for 2015 second quarter. As mentioned in the previous earnings call as a result of the application of U.S. GAAP accounting rules going forward, we will provide investors with both GAAP and non-GAAP revenue information. GAAP revenue totaled $19.2 million in the 2015 second quarter as compared to $5.1 million for the same quarter last year. As Steven mentioned earlier, revenue during quarter reflected the accelerated recognition of $11.6 million from deferred revenue to recognizable revenue for this quarter as a result of our settlement agreement with Iusacell. On the US GAAP the build up of deferred revenue on the balance sheet of a particular customer is released in one go when a contract is terminated and no delivery obligations are left with the supplier in this case indeed. In addition to the deferred revenue release following the contract termination there was also revenue recognized from Iusacell settlement in the second quarter of 2015 of around $3.9 million that was recognized immediately. I would like to comment that with the release of the $11.6 million deferred revenue from Iusacell, not all deferred revenue is removed from the company's balance sheet. Since other customers of the company also carry deferred revenue elements which are recognized over an extended period of time. The non-GAAP revenue, which is the GAAP revenue adjusted for changes in deferred revenue, totaled $7.4 million during the 2015 second quarter as compare to $6.8 million for the same period the prior year. This year's non-GAAP $7.4 million included the earlier mentioned $3.9 million of Iusacell current revenue. A second major event this quarter was related to the Atalaya covenant agreement which had to be renegotiated. In anticipation of the final closing of amendment, the company paid approximately $10 million to Atalaya in June reducing the outstanding debt on the face of the balance sheet at 30 June, 2015 to around $2 million. Following the amendment agreements of 9 July, Atalaya paid to company difference in order to arrive at the new principal outstanding balance of $6.5 million. In addition to the reduction of the principal amount from $12 million to $6.5 million, the amendment agreement also increased the interest by 1% and additional warrants were issued to lender in addition to certain change fees. Furthermore, the customary covenants were adjusted. I'll now briefly turn to a number of other items of the income statement. SG&A and product development expenses exclusive of stock based compensation were $3.8 million this quarter compared to $5 million same quarter last year, a decrease of $1.2 million or 24.4%. For the six months period, the decrease was $2.1 million or 21.6%. The reduction is an expense for the second quarter 2015 was partly caused by exchange rate translation effects of $650,000. When adding cost of service to the above mentioned operating expense, total cash expenses were $5.2 million this quarter compared to $6.4 million same period last year, a decrease of $1.2 million or 18.5%. For the six months period this operating cost were $10.9 million compared to $12.5 million last year, a decrease of $1.7 million or 13.3%. Here again the favorable impact of exchange rate translations for the first three months ended June 30 were $860,000. Similarly to the favorable impact on expenses of lower value of euro against the dollars, revenues were impacted in an opposite manner by the euro devaluation. The $7.4 million on the reported non-GAAP revenues for the second quarter were negatively impacted by $633,000. In other words, the negative effects of the devaluation of the euro on revenue were largely compensated by the positive effects on operating expenses. Altogether net income for the 2015 second quarter was approximately $9.5 million as compared to restated loss of approximately $6.5 million reported in the second quarter of 2014. As mentioned before, this was largely the result of the release of the deferred revenue to the income statement equal to $11.6 million. Adjusted EBITDA was approximately $2.2 million for the second quarter of 2015 as compared to approximately restated $441,000 in the same quarter of the prior year. This will close our financial summary. And I would like now to turn the call back to Steven for his closing remarks. Steven?

[Steven van der Velden:]

Thank you, Mark. In closing, we are optimistic about the second half of 2015 as we ingrain our new organizational structure and begin to execute on the many opportunities ahead of us. We expect to sign a number of significant new global customers in the weeks and months ahead. Launching Elephant Talk Communications to new geographies including the Americas and possibly elsewhere. We have full confidence that our new operating structure will ensure, we continue to deliver the industry's best key performance indicators with the most responsive customer service throughout the industry. While the lot of a large client is certainly something we could have never predicted, I want to let our shareholders know that management is doing everything possible to replace the revenue from Iusacell with several exciting new opportunities before the end of 2015. It will enable us to get beyond our past and successfully grow the business once again. This concludes management update portion of the call. I'd like now to open the floor up for any questions that you may have. Thank you.

[Operator:]

[Operator Instructions] And our first question will come from John Nobile with Taglich Partner.

[John Nobile:]

Hi, good morning. I was hoping to get some clarification on deferred revenue, it was approximately $11.6 million on the quarter and yet when I look at the Q which is total deferred revenue adjustments were $11.9 million so I just want to make sure was that additional $300,000 compensation for termination of the Iusacell contract?

[Mark Nije:]

Yes, thank you for the question. The deferred revenue which you see in the balance sheet and I mentioned in my script just earlier is the deferred revenue is applicable to basically all of our customers. And the changes in deferred revenue therefore encompass all changes in deferred revenue for all of our customers. So that there is no tie out between Iusacell -- Iusacell settlement make sense because there are also other customers involved in the deferred revenue changes.

[John Nobile:]

Okay. So $11.6 million wasn't totally made up of Iusacell numbers?

[Mark Nije:]

Correct. No, the $11.6 million was --

[John Nobile:]

Okay. So the additional $300,000 were other customers only because in the Q it says, let me just make sure I have that correct, the $11.6 million related to the termination of the contract with Iusacell as well as compensation paid by Iusacell for the termination of the contract. So that included additional compensation for that termination besides the deferred revenue.

[Mark Nije:]

Now there are two elements related to the settlement. The deferred revenue settlement or amount that was released from the balance sheet is basically an autonomous exercise which is not immediate related to the financial settlement with Iusacell. Because the reason why the $11.5 million was released from the balance sheet, that was for past invoicing and billings done in prior periods to Iusacell. And the fact that we terminated the contract that as such releases those revenues. So that's one part of the equation accounting wise. The other part relates to the actual amount that Iusacell paid to us which consisted of $13.5 million of the gross settlement agreement of which $9.6 million was a payment for accounts receivable, so that they set off account receivables and $3.9 million actually went to let say normal revenue for the quarter.

[John Nobile:]

Okay. So that was current revenue.

[Mark Nije:]

Correct.

[John Nobile:]

Okay. Earlier comments there was mention that you plan to double your sales team over the next 12 months. Now you are looking to cut SG&A by about $5 million also on that time horizon so I was just curious now we are not see really sales and marketing expenses go down what we should see that increasing significantly the bulk of these cuts are going to be in the general and administration line. I am correct on that.

[Steven van der Velden:]

Let me address that. Yes indeed, John. You are complete spot on. So the overall reductions in cost are probably not larger, they also make up for the additional expenditures in our sales and -- currently we had a staff of around -- stated we expect that double over the next 9 to 12 months to somewhere between 15 and 20 people. Not only to have direct sales altogether but also to have better channel management, to have better bid management, to have good account management around over the globe wherever our customers are. And altogether we believe that our team somewhere between 15 and 20 people combined with the channel we can use from third parties gives us a pretty good coverage around the world.

[John Nobile:]

Okay. I am sorry; I didn't hear what the current sales team number was?

[Steven van der Velden:]

It is about 9 people today which consist of account and bid management and actual sales.

[John Nobile:]

Okay. And I was just curious if I get little more color on your relationship with LOWI. How is that brand of Vodafone been selling and I was wondering if you could also shed some light on your progress with OpenMobile?

[Steven van der Velden:]

Yes. Well let me start with the last thing as we stated earlier, OpenMobile is not connected for a few months. They will start and marketing campaign after the summer holidays. So we expect first serious effort in that to start in the months of September. Regarding LOWI, in general this is perceived as a very successful launch in Spain. It is not perceived to be one of the top MVNOs doing steadily and even though we cannot mention official subscriber numbers and that's privilege of Vodafone itself. There is a public number that you could check and that's the amount of 40 subscribers every month. And just the amount of 40 so customers moving their numbers from another operator into LOWI is around 8000 customers per month in net addition. So that gives you kind of a feeling that at least those customers are the ones that churn from other customers -- from other operators next to autonomous gross that LOWI realizes itself. So altogether it is a pretty successful take up in the Spanish market and I think that LOWI is at least meeting the objectives that Vodafone had. But probably doing better than originally expected.

[John Nobile:]

Okay. Well, that's good news. And as far as -- is concerned, on the last call you said that your expected growth to materialize to six digits. Are we still looking at this and in what timeframe?

[Steven van der Velden:]

Oh, yes. We said that we hoped to -- by the end of this year or early next year to indeed have an amount of customers hosted on the platform in the lower six digits and I think we are still on target to get there. And if you compare also the revenue based that we are realizing I think things are developing successfully even though slowly. I mean we can only admit that originally we had hoped for a much quicker growth rate, certain things just go sometimes a bit slow, but at least the direction is very positive. And I think we can repeat the guidance we gave earlier. So indeed we expect to have around six digit number by the end of this year or early next year of the host and fiber base of our platform.

[John Nobile:]

All right. Great and just one more question and I'll get back in queue. Back to the SG&A number, your current $5 million reduction, will the third quarter show the full effective of it which I guess if you would annualize it one in a quarter million a quarter or is this going to take you several quarters to implement? I just wanted to get a feel for how I could see these numbers progressing over the quarters.

[Steven van der Velden:]

Yes. Very good question because of course it always takes time and money to reduce your cost base. I believe that if you look at the overall objective that we are probably already 95% to 98% of the whole reduction process. So most of it is behind us. Also most of the cost to reduce your cost base is behind us. So I think indeed that Q3 should reflect virtually the full impact of that cost reduction program in our overall SG&A numbers, correct.

[John Nobile:]

Okay. So be -- it is mostly behind, it won't be a dramatic change from Q2?

[Steven van der Velden:]

It will be -- it will have a somewhat positive impact comparison to Q2, although Q2 already had somewhat lower cost base. But Q3 will show you the full impact.

[John Nobile:]

I don't know if you could quantify that or just leave it as general term?

[Steven van der Velden:]

No. It is always difficult because as Mark pointed out those are revenue and our cost base are heavily impacted by currency fluctuation, so I think we ward to general terms but I think the $5 million objective that we communicated looks still as being very, very realistic.

[Operator:]

Thank you. And we will continue on to Ed Woo with Ascendiant Capital.

[Ed Woo:]

Yes, thank you for taking my question and congratulation on the settlement. I just want to clarify did you say that you are expected to return the gross and positive EBITDA by the first quarter and to get $7 million to $8 million of revenue and $2 million is EBITDA by there.

[Steven van der Velden:]

Well, as we gave guidance earlier we expected by the end of this year, early or next year we will indeed reach back those levels. So whether Q4 will fully reflect that already that might be a little bit aggressive. I think that if you look to the development we certainly should be there in Q1 next year and hopefully we will be very close to those targets in Q4. But again, we gave guidance earlier that by the end of this year or early next year we would exactly be there where we were at the end of last year earlier this year. And I think that guidance can be repeated and wherever it will exactly or already be reflected in Q4 as I stated before that might be somewhat aggressive but you will clearly see the direction. And you will then no see that we will be comfortable reaching that number at least in Q1 next year.

[Ed Woo:]

Great. Well thanks for giving us your thought, like additional details on some of their contract that you are working on. What about contracts that you haven't discussed yet? How is the backlog and pipeline development of other contract?

[Steven van der Velden:]

Yes. That's always a repeating question. And of course a very good question. In general, we have a whole range of opportunities in the Americas, in Europe and in the Middle East, in the Far East. We have been recently working hard for example is HP in developing the far eastern market we've done workshops in Singapore and Hong Kong, in Japan together with HP. And there are quite a few opportunities around. And however it is very difficult to quantify what really will come out of that. It is -- these are very big contracts, long sale cycles and of course there is competition and most of these opportunities go through an RFQ. And we usually see ourselves positioned in the very short list of the last two or even the last three contenders. But it is always at a final decision whether you are in or out. And next to that quite a few of these RFPs and RFQs did not ultimately bring it to a winner simply because the process was abandoned by the principal. So it is a very difficult thing to give good guidance in that respect. I can only say that there is good reason why we are doubling our sales activities because we see a lot of opportunity out there. And even though we lost user sale, I think the very fact that we were able to service that customer pretty well generate revenues around $30 million, managed over 2 million subscribers was extremely high KBIs even though the outcome of the user sale contract is clearly disappointing, I think it is a very good proof of the way we can help mobile operators. And if you look at the back offices of mobile operators, they are now mostly 10, 15-20 years old and for IT that's a pretty old standard. And we believe that lot of these operators will need to switch to more modern architecture to the so called Software Defined Networking and Network Function and Virtualization platform. And as we've been able to get across to the market, we are clearly one of the front runners in that space. So we feel that the addressable market will definitely increase. We will instead of focusing on our three existing customers as we did in the past, really focus on the whole market, maybe not on all 800 mobile operators but to quite a big chunk of those, the real big ones like AT&T, they will be outside of our domain but there are many, many in the range of 5 to 10 million customers. And we believe that's really where our sweet spot is. And the effort that we are now taking to go after all of these customers is a clear sign that we believe that the opportunities are abound and we have a good product, we have good teams, we have very good people and altogether we believe that combination can really position us for a success in the future. But I would rather avoid going choose specifically into these opportunities. We will communicate and once they are there and as we've said, we expect to be able to communicate some of those over the next few weeks in the next few months

[Operator:]

Thank you. We will now go to Robert Gow, Private Investor.

[Robert Gow:]

Hi, Steven. Thanks for the updates. So if I understand it correctly $3.6 million in this quarter out of the $7 million in non-GAAP revenue was Iusacell itself, but then you mentioned there was going to be a $3.9 million drop in revenues. Where is the other $300,000 and how come there is no growth through the quarter?

[Steven van der Velden:]

No. No. Altogether from a budget perspective we had calculated $3.9 million revenue base per quarter moving forward. Most recent billing levels, they were close to that level. So that's the level we are looking for to see replace by other revenues.

[Robert Gow:]

I see. So but Iusacell was about $3.6 million in this quarter.

[Steven van der Velden:]

Well, it was actually little bit over $3.8 million.

[Robert Gow:]

Okay. So the difference then is growth there is couple hundred to a few hundred thousands in growth in the non Iusacell business and then of course the $3.9 million drop in Iusacell

[Steven van der Velden:]

Correct.

[Robert Gow:]

But with the -- you've always told us that the sale cycle is 12 to 18 months and were basically talking about first getting set up these in Q4 and Q1 and then I would imagine as the fees -- to set up fees starts dropping you expect the revenues to pick up follow that drop and then come. What are you doing to compressing the sales cycle so much to do that?

[Steven van der Velden:]

Well, first of all of course it is not just that we started selling services last month. We had services around to go after customers and the fact that we believe we are able to announce a couple of new contracts over the next few weeks and months is of course the result of a lot of work that has been behind us. So we indeed expect in Q4 and Q1 to see growth coming mostly from initial fees, from installation charges and I stated they will be mostly classified as deferred revenues. However, the most important part here is that once you go through the cycle of these initial fees and installation charges, that you will ultimately create a base of hosted subscribers on your platform generating recurring revenues. And we believe that even though in the beginning it will be mostly initial fees and installation fees, that over the next coupe of quarters that will be more and more replaced by an increasing number of recurring revenues. And that ultimate could take over the let say the gap in our revenue base caused by the fact the contract of usage is almost terminated. So this is a consequent of years of work and just if you look at what we are currently going after, it may take another 6, 9, 12 months before our current efforts will bear fruit. But the couple of contracts we hope to communicate over the next couple of months are really the result of one to two years of work that is now behind us. And that's why we are pretty optimistic that we are indeed able to fill in that gap in revenues relatively soon.

[Robert Gow:]

And what's the company's current breakeven level with all these change?

[Steven van der Velden:]

I think if you -- and this is very rough I mean very much highlight numbers, our current cash cost base would be around $5 million a bit over $5 million a quarter. So we need about $5 million in billings in a quarter to be at a breakeven level.

[Robert Gow:]

Okay. So you have only got about one quarter's breathing room since July with the current cash predictions?

[Steven van der Velden:]

Yes. And as we discussed before we expect to be getting back to where we were about the end of this year or early next year as just discussed a few minutes earlier. Q3 will be clearly more difficult and there was a question last time about breakeven in Q3 or positive adjusted EBITDA in Q3 and at least we said that we really aim to stay adjusted EBITDA positive in Q3. There are many moving targets; there are many elements that will put us altogether. But we definitely hope we will see billings that to be either close or be around that numbering cost. And thereby hopefully turning positive adjusted EBITDA and no cash loss for the quarter.

[Robert Gow:]

When you are still burn through $1 million of cash.

[Steven van der Velden:]

No. If we would have a billing and collections of somewhat over $5 million from a cash basis, are able to pay our bills, it would be certain US GAAP effects that will show up slightly different but from a cash flow perspective it should -- however there are always working capital changes in each quarter which can be positive or negative depending on quickly we get paid, how quickly we paid our own bills. But aside of that as I stated before our cash cost base is somewhat over $5 million on quarterly basis.

[Robert Gow:]

And you are going to have $3.9 million in revenues.

[Steven van der Velden:]

I am not sure where you -- we have $3.9 million or $3.8 million something in user sale revenues in Q2. We didn't say that we will have $3.9 million in revenues in Q3. At least I do not recall that number.

[Robert Gow:]

When I asked about the drop of $3.9 million I thought you said that would be our base amount of total revenues going forward.

[Steven van der Velden:]

In Q2 if you analyze the numbers that's close to that number, little lower but of course we anticipate certain growth for Q3 and as I stated before I think the best guidance we can give is that we are aiming to get billings close to around $5 million and thereby making sure that the quarter is low breakeven.

[Operator:]

Thank you. And continuing on to Dennis Dillon, Private Investor

[Dennis Dillon:]

Hi, thank you. There are two more questions and I apologize for the first one if I miss this. So where do you stand with growing concern opinion and the second question is with respect to ValidSoft, at what point can we expect you to begin to breakout the results of the ValidSoft separately.

[Steven van der Velden:]

Well, to start with the last question, we have not yet planned any move in the respect to breakout developed software revenue anytime soon. At some moment it may happen and we said in the past that once they are real substantial we may consider to do that. But at this moment, we are not considering that. With respect to the growing concern as you may have read in our Q there is still sentence that there is growing concern opinion in the Q so you can find it. So we have not yet been able to convince our auditors that we are fully in Safe Harbor is our plans moving forward.

[Dennis Dillon:]

Have they given you any insight as to exactly what they are looking for to lift that opinion?

[Steven van der Velden:]

Well, in general it is a 12 months window that you need to calculate to going forward, basically excluding new contract reflecting your current cost base. And we believe that once we will have a couple of these contracts that we hope to announce in the next few weeks and months, really in place that might be sufficient to convince our auditor that the window looking 12 months forward is fully covered.

[Dennis Dillon:]

Okay thank you very much.

[Steven van der Velden:]

There is of course no guarantee because that's at least finally decision by the auditors themselves.

[Operator:]

Thank you. [Operator Instructions] And then we will go to John.

[John:]

Yes, hi, guys. Thank you for taking my question. I had a couple of things on regards to announce price and partner program. Can you highlight for us as what your feelings are with regards to the size of this opportunity? I know there is no exact numbers and there is no telling based on what you have to procure from different -- but what are the amounts of actual MVNOs that are under the rising umbrella that you are targeting, rough number.

[Steven van der Velden:]

Yes, thanks. Very good question of course but as you can imagine not easy to answer. Also because we simply don't know the full impact yet. On the other hand you have to assume that the Verizon takes on a business like that, that they will be serious, that they are looking to a larger addressable market and that they need a good partner to service that market beating Elephant Talk. I think it is not wise to speculate on the size for Verizon being an extremely large company with clearly over 100 million subscribers being serviced in the United States. I think we ultimately will be able to service a meaningful number of those customers in a specific segments being the prepaid wholesale and the prepaid MVNO segment of that market through Verizon Partners Services. So I think altogether it will be a serious number that we can service but to speculate on any specific number now is really a bridge too far, however we as a team we take it very, very seriously because we see a huge opportunity. And we want to be completely ready to address that opportunity, where is the KPIs we are used to provide our customers. And so in the case of Verizon we will exactly do the same, make sure it works well and make sure that if it grows fast that we can handle it. And from that perspective you can be assured that we are dimensioning any effort with Verizon to make it into a very meaningful business.

[John:]

And Steven is that something that you will be servicing this potential opportunities or clients under Verizon with the platform in Mexico or is this requires additional capital expenditure to deploy new platform within the United States?

[Steven van der Velden:]

No. It is on initial platform we will deploy for Verizon will be so called wide platform which is mostly aiming at IT levels. So not necessarily the core network elements of no HLRs, GGSMs and STPs and so forth. It will be core IT platform which requires relatively limited investments. It is mostly the software that's a key element. And are able to deploy that software in the US. So it will be limited investment from our side. Although long run of course we might rate that effort to move from a light platform to a much more broader and more full platform down the road. But it will ultimately be up to Verizon to decide that. But we will certainly be willing and able to offer that to Verizon. But we will start with this IT platform which actually also an easier deployment. And also more easily scalable, and so from that perspective I think let's first take the first steps. Let's make sure we can start to service a meaningful number of Verizon customers and then let's just take it from there.

[John:]

Sounds great. With regards to Mexico, you mentioned possible reentry in the Mexican market. Is that part of your pipeline that -- one of the other additional providers currently in the market is looking at us to do what they essentially Iusacell did?

[Steven van der Velden:]

Well, Iusacell of course was a mobile operator. And you have three of those in used today AT&T which is what Iusacell used to be combined with Nextel, you have TellSell e which is part of America Mobile, and then you have Telefonica that is part of the Telefonica group. Those three mobile operators are hosting subscribers for virtual operators. And Elephant Talk is currently in talks with the couple of potentially large virtual operators that might be connected to TellSell or Telefonica or both. And we hope to conclude this in the very near future and then also be able to share that information with you.

[John:]

And then one of my last question was for ValidSoft, if you guys can give us somewhat of idea amount of transactions has been processed currently with the two banks that are on the platform. I know as of last year it was mentioned that it was in close to $20 million to $30 million for the year that was process, has that number obviously increased or what we are talking about now with the two clients on the platform?

[Steven van der Velden:]

Paul, can you address that please?

[Paul Burmester:]

Yes. Unfortunately well they don't allow us to do is actually state the number of transactions, as I mentioned we have just over 17 million customers and what that really means is they are customers of those banks who have enrolled their mobile phones into the service and we are checking things like SIM swap detection and international roaming correlation on the services. Now in partnership with FICO they actually run risk engines which generate query if you like, a transactional query upon us, we have no visibility into those risk engines and on a daily and transactional basis, they may raise one several times and another not at all, depending on what's going on the background. So obviously if we have 17 million registered customers you can do math and then it is awful of more than that on a monthly or annual basis. But we are not allowed to give exact transaction volume information on each of the bank I am afraid.

[John:]

Paul, do you have other opportunity with regards to voice biometrics side in the commercial or otherwise that you guys are working on.

[Paul Burmester:]

A very much so yes. So as I mentioned with ImageWare, actually if you look at ImageWare Systems, they had their earnings call yesterday and during that they gave a fair amount of information as to their existing clients and their pipeline and we are working with them as they deploy with the existing contracts and we are actually working with them on some new opportunities as well. That pipeline we believe is really going to start deliver as the year goes on. We have new channel partnerships with people like Virtusa. We have a commercial rollout with the large US corporate which are happening this month. And we have a number of other channel partners and direct corporate entities who are running major proof of concept who are actually in contract negotiations at this time. So there is a healthy pipeline is being developed there specifically around voice biometrics and it is pretty global as well. Some in Europe, some in North America and also in Asia now.

[Operator:]

Thank you. And with no additional questions in the queue, I'd like to turn the conference back over to Steven van der Velden for any additional or closing remarks.

[Steven van der Velden:]

Thank you. Again on the behalf of every one of Elephant Talk Communications and ValidSoft, I'd like to thank everyone for joining us on this call. And thank you to our long-term shareholders for their patience and commitment to the company. We look forward to providing additional updates on future development in the very near future. Thank you very much. And all have a great day.

[Operator:]

Thank you. And again ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.