Kaleyra Inc (KLR) 2021 Q1 法說會逐字稿

Greetings, and welcome to Kaleyra, Inc. First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your conference host today, Marc Griffin, Investor Relations. Please proceed, sir.

Thank you. Good afternoon, and welcome to Kaleyra's First Quarter Fiscal 2021 Conference Call. Kaleyra released unaudited financials for its first quarter ended March 31, 2021 after the market closed. The press release as well as today's replay can be found on the Investors section of the company's website at investors.kaleyra.com.

Joining us for today's call from management is the Founder and Chief Executive Officer, Dario Calogero; and the company's Chief Financial Officer, Giacomo Dall'Aglio. Management is doing this call from different locations today, so please bear with us as we transition between speakers and address your questions.

During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's annual report on Form 10-K, for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements.

Kaleyra cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law.

Throughout today's press release and on our call today, we will refer to adjusted EBITDA. This metric is not determined in accordance with generally accepted accounting principles and, therefore, is subject to varying calculations. A definition, calculation and reconciliation to the financial statements of adjusted EBITDA can be found in the tables included in our press release. We believe this non-GAAP measure of Kaleyra's financial results provides useful information regarding certain financial and business trends and results of our operations.

With that, let me turn the call over to Dario. Please go ahead.

Thank you, Marc, and thank you to everyone joining us on the call today. As you are all aware, the effects of the global pandemic continue to pose challenges worldwide but with certain geographies experiencing the continued temporarily negative effects of government-mandated lockdowns. While we see positive momentum building in the United States of America as the number of vaccinated citizens rise, meanwhile, a resurgence in Europe has lowered the modest recovery we have been seeing in Italy, and most unfortunately, India is now experiencing the worst effect of the pandemic as cases rise.

Moving on, some financial highlights. We reported quarterly revenues in Q1 of $39.7 million with an increase of 18% from the same period last year, demonstrating continued resilience in the recovery. We continued to experience growth in all of our major geographies with particular strength coming from regions in our Rest of the World segment that has been less affected by -- from the pandemic. The main drivers in the quarter were an uptick in our e-commerce customers in India, broad-based positive activity within our U.S.-based enterprise customers and new customers in Rest of the World.

In a seasonally challenging quarter, we were very pleased to see digital payments and transactions improve, which drove messages up 2% on a year-over-year basis. On the voice side, calls continued to increase year-over-year and were up 55% on that basis. For the quarter, we delivered 7 billion billable messages and connected 1.2 billion voice calls on behalf of our Kaleyra customers.

Now I would like to touch on some of our key initiatives in the quarter. Our k-lab initiative continues to gain momentum, and during the quarter, we signed an agreement with Visa covering the Latin America and the Caribbean region. As part of the agreement, k-lab will be creating communication solutions for Visa partners, solving digital communication issues that range from streamlining KYC to timely reminders of reward benefits and messaging to avoid transaction declines. The Visa agreement is in addition to the agreement we signed last quarter with Mastercard banking customers in Latin America and the Caribbean. As a reminder, we launched k-lab as a way to leverage our expertise in solutions development, digital innovation and go-to-market strategies for the financial sector to build more impactful mobile customer experience solutions for both new and existing clients. We continue to be excited by the pipeline for these new initiatives and believe our bespoke solutions for the financial service sector will quickly build sustainable momentum.

Another newly announced k-lab agreement is with Trellance, a leading provider of data analytics, business intelligence and professional services for credit unions. Together, we'll be creating communication solutions for credit unions powered by data from the Trellance M360 platform. Using k-lab services, credit unions will now be able to bridge the gap between their data sources and their member messages. Member and transaction data from Trellance M360 will be used by k-lab to integrate with the CPaaS platform of Kaleyra, which will result in a more contextually relevant way to communicate with members through multiple channels, including voice; SMS; application to person, A2P; and more.

The most exciting news of the quarter was our announcement of the planned closing of the mGage acquisition, which, pending approval by our stockholders at May 27 stockholder meeting, is set for June 1. We could not be more excited to welcome mGage, its customers and the entire team to the Kaleyra family. Kaleyra and mGage together are uniting 2 world-class enterprise cloud communication companies to create a top 5 global CPaaS platform with a diversified and balanced product portfolio and geographical representation. As a reminder, mGage is a best-of-breed mobile messaging solution that focuses on the mobile engagement market and allows enterprise clients to effectively engage with their customers through all mobile channels for a variety of use cases such as customer care, service alerts and multi-factor authentication.

Over the past few years, mGage has invested heavily to create 2 excellent solutions for their customers. The first is Communicate Pro, a cloud-based, enterprise-grade messaging platform that connects brands and their customers through all major mobile messaging channels. The second solution, Connect, is mGage enterprise-grade API that allows clients to seamlessly build on existing messaging programs without the need for extensive development. mGage has a diversified base of over 300 blue-chip customers, some of which are associated with the world's most valuable brand, and mGage's top 10 clients have an average tenure of more than 10 years. For these customers, mGage is processing approximately 20 billion messages over 150 countries. More importantly, mGage has presence in the U.S. as one of 4 mobile messaging providers with direct connection to all 4 major U.S. carriers.

MGage offering is very complementary to Kaleyra's, and this combination will accelerate and expand Kaleyra's opportunity to serve the CPaaS market, which is expected to reach 26 billion in 2025 with a compounded annual growth rate of 35%. And the consolidated application-to-person enterprise messaging market, which is expected to reach 78 billion in 2022.

In summary, we believe that Kaleyra is well positioned to execute on our initiatives with our broad product portfolio, global reach and unbelievable worldwide team.

Let me now turn the call over to Kaleyra's Chief Financial Officer, Giacomo Dall'Aglio, who will review our financials in more details. Giacomo, please go ahead.

Thanks, Dario. For the first quarter ended March 31, 2021, we reported total revenue of $39.7 million, an increase of 18% year-over-year and demonstrated continued momentum of the recovery. The revenue in the quarter was slightly below our expectation as the economic recovery was not as robust in Europe as we anticipated because of spiking COVID cases. Additionally, we churned off some extremely low margin and messaging route that lowered revenue but had a positive effect in our gross margins.

The main drivers in the quarter were an uptick in our e-commerce customers in India, broad-based positive activity within our U.S.-based enterprise customers and new customers in the Rest of the World. Our revenue base continues to move away from Italy with India, which grew 32% year-over-year, while U.S. grew 19% and the Rest of the World segment was up 64%. In the quarter, we processed 7 billion billable messages, up 2% from the prior year period, and we connected 1.2 billion voice calls in the quarter, up 55% year-over-year.

Gross profit in the first quarter of 2021 increased 34% to $6.3 million from $4.7 million in the year ago period. Gross margin was 16% in the first quarter of 2021, up approximately 200 basis points from the 14% we reported in the first quarter of 2020. The remaining drivers of gross margin expansion were revised product mix, an increasing trend toward higher-margin premium service and voice calls and the churning of low-margin routes.

Operating expenses were $16.3 million in Q1 2021 compared with $14.3 million in Q1 2020, mainly driven by the increase in human capital. Loss from operations was $10 million for the first quarter of 2021 and included $5.5 million of stock-based compensation, $2.5 million of transaction one-off costs. This compared with a loss from operations of $9.6 million in the first quarter of 2020.

Net loss was $10.4 million or $0.34 per share for the first quarter 2021 compared to the net loss of $8.8 million or $0.44 per share for the first quarter of 2020. Adjusted EBITDA loss was $1.1 million in the first quarter of 2021 compared to a loss of $300,000 in the first quarter of 2020. The decline in adjusted EBITDA is attributed to the increased head count predominantly in the engineering talent that has been hired to execute on our emerging growth opportunities to develop and deliver new products and services.

Cash used in operating activities was $8.2 million in Q1 2021, mainly due to working capital changes and transaction costs compared with cash used of $2.9 million in the same period of the prior year.

We have a very strong balance sheet with cash and cash equivalents and short-term investments of $39.8 million as of March 31, 2021. This cash position is after paying down the company's liabilities by $18.8 million during the first quarter, including eliminating any remaining obligation under forward share purchase agreement compared with $37.8 million in cash and cash equivalents and short-term investments as of December 31, 2020.

Before I discuss our financial outlook, I would like to highlight the strategic capital raise we are executing as part of the transaction with mGage. Kaleyra will found the consideration to mGage shareholders and related transaction costs with a combination of $200 million of Senior Unsecured Convertible Notes due in 2026 and the issuance of 10 million shares of common stock issuance at a price of $125 million. Both of the convertible notes and the common stock issuance will close immediately prior to the closing of mGage acquisition.

Now I'd like to expand our thoughts regarding our financial outlook. Kaleyra outlook does not take into consideration the mGage acquisition. We are [issuing] annual revenue guidance in the range of $183 million to $185 million, up approximately 25% at the midpoint of the range. For Q2, total revenue is expected to be in the range of $40 million to $41 million, up approximately 30% at the midpoint of the range.

Thank you for taking the time to join us on our call today. And with that, we would be happy to take your questions now.

(Operator Instructions) Our first question comes from Mike Latimore with Northland Capital Markets.

Yes. Great. Just with regard to the guidance for the year, it implies some solid sequential growth in the second half of the year. I guess can you just go through a few of your assumptions there? Do you assume there's kind of a -- more of a reopening in the third quarter again in India, Italy? And maybe what are you thinking about in terms of the Campaign Registry?

Mike, this is Dario. I'll let Giacomo to answer to this question.

Related to the revenue, I just want to underline that last year, we reported in the second half 56% of the total revenue of the year. And thanks also to the reopening, we think we are in the track with the guidance.

Okay. Got it. And then it sounds like mGage is about to close here June 1, I believe you said. Any color on how mGage is performing? I know they have a bigger kind of U.S. presence, and they're in some other regions. So any color you can give us on whether mGage is tracking to those original expectations?

Well, Mike, I would like to talk about mGage after closing and not before closing. So I will give more information and color when we'll do the financial reporting for the second quarter at this point in time.

In general, what I would like to stress is that mGage is like the perfect thing for Kaleyra because we ended up with past closing and past combination on a pro forma basis with about 1/3 of the revenues coming from the United States, which will definitely improve the financial performance profile of Kaleyra. And also, we'll have about another 1/3 coming from Europe, where mGage have very significant operations in the U.K. And the rest, the last 1/3, will be 50-50 split between Asia Pacific and Latin America, Middle East and Africa.

So what I can tell you about this combination is that mGage seems to be very, very promising. And altogether, Kaleyra and mGage is becoming a very relevant player in this space. And I'm very, very glad that we're, like, 3 weeks away from the closing. Thank you.

Okay. Got it. Got it. And then just last on the Campaign Registry. I think you had said that you wanted to see how the second quarter played out before you gave a little more color there. Is that still the plan on Campaign Registry?

Yes. That's exactly the plan because I said before -- as I said before, we need to have some data points before we can guess about the financial performances of the unit. The unit is doing well. It's doing great. The team is working very closely with the content service provider and with the operators, and the whole ecosystem seems to be, let me say, supporting the approach of the Campaign Registry. And the operators are starting to mandate the registration of the campaign, and the campaign service providers are still extensively testing but will start having also some revenues incoming.

So this is encouraging me in restating the affirmation that after the second quarter, we will have a better understanding of the volume, the revenues that we can make, I guess, for the second half.

Our next question comes from George Sutton with Craig Hallum.

I wondered if you could talk about the traction you're seeing so far with voice in the U.S. And what were some of the drivers behind the growth in voice volumes in the quarter?

Well, voice in the U.S. is at the very, very beginning, so it's not yet relevant in terms of volume. The increase in volumes, I would say, is mainly in India at the moment. And we have also launched the services in other geographies, but we are at the very beginning.

So I would say that basically, e-commerce is the one that is taking the lead of the increase in volume. And also, some COVID-related services like the one that we announced in India, which was called StepOne, the, let me say, CPaaS-supported triage system for COVID suspect, and this is going very well. But e-commerce is definitely the service which is leading the increase in volume.

Got you. So I wondered if you could quantify the impact from COVID and the impact on the low-margin routes you exited in the quarter.

Well, the impact on COVID is captured in a way because it depends not on the pandemic itself but on the reactions of the administrations and government calling for, let me say, very strict lockdowns. So wherever there is a very strict lockdown, in general, the society slowed down and the economy behind the society slowed down.

So the impact is captured and is depending on where and when the governments are doing the shutdowns. What I can tell you is that I start seeing a significant improvement in -- definitely in the United States but also in Europe because there is a very significant ramp-up in the supply of the vaccines in the world. In May, we are about to have, roughly, a couple of billion of doses delivered.

Getting to the routes, in general, Kaleyra has a policy where -- being a quality provider has a policy that is not willing to work in routes and market where the price competition becomes unsustainable especially because of the grave routes policy that some supplier are applying on some routes in some geographies. And so for this reason, we have started becoming more and more picky in deciding where we want to work and with whom we want to work. And this is already happening with a number of large accounts, especially the big digital giants, where we start seeing gross margin significantly improving per customer for this policy.

One other question, if I could. You referenced an industry study that suggested that this market would grow 35% compounded over the next handful of years. I wondered if you could just align that with what you anticipate your own organic growth opportunity should look like over that period.

Yes. Well, the market overall could be defined as the union of the strictly called CPaaS market that, for instance, analysts like Juniper Research said that it's going between $7.1 billion in 2020 up to roughly $25 billion in 2025. But this is not the whole market because this is excluding the application-to-person messaging, which is much larger, and it's going from $60 billion-plus to $78 billion in 2024, if I remember well.

So let me say, the 2 segments have different growth rates. The first one, being emerging, is growing faster, and it's the one that is considered to be growing at about 35%. The other one is growing a little bit less. If you blend the 2 markets together, I would say that the -- [end you with] a duplicate because there are some duplications seen in the 2 segments. You can say that the market is growing roughly between 25% and 30% on a year-on-year basis.

(Operator Instructions) Our next question comes from Allen Klee with Maxim Group.

For the Rest of the World segment, what were the factors behind the year-over-year increase?

Mainly, it's new customers because we are onboarding new customers in new geographies. So the increase is pretty much related to new customers or new routes for existing customers in new geographies. Especially when you work with large digital giants that are global players, you start having, on a quarterly basis, a selection of new routes and new geographies where they need to service.

Okay. Great. And then for India, India did quite well. I think revenues were up like 32%, and you mentioned e-commerce and voice. But your guidance for the year, what are you -- I mean what we're seeing from the outside seems to be that things are likely to get worse there rather than stable in at least next quarter or so. What are you assuming in your guidance? Are you assuming that India is going to be under some pressure?

I would ask Giacomo to answer this question.

Yes. Yes. We are conservative in the guidance for Q2 because the situation in India, starting from April and in May, is going a little worse than was expected on the pandemic. So we will see a growth, of course, because our guidance is 30% above Q2 last year, but we are conservative on India.

Great. And my -- the mGage transaction seems like it's going to be very transformative to your company. And so I just want to confirm my understanding that there's a shareholder vote, but the likelihood that this goes through seems to me quite high. Could you explain kind of the dynamics of that?

Well, the dynamics is in the filing, first thing. If you look at the SPA, it's all written in there. But it's very simple. There would be a special meeting on May 27, where the shareholders will be called to vote. And in the merger agreement already, the existing shareholders on the buy side, on the Kaleyra side have agreed to vote towards an approval. So we already know that we have X percent of the existing shareholders of Kaleyra voting in favor. And again, this is in the filing. So I'm not saying anything which is not in the public domain.

And so we expect this special meeting to go smoothly. It should be very easy. So it's kind of -- because, basically, we are issuing 10 million new shares. So this issuance is exceeding the threshold of 20%. So we have to go through the special meeting under the current regulation.

And -- this is Giacomo. And the closing is expected to be after the approval of the special meeting on June 1.

Okay. Great. And my -- I mean mGage is roughly around the same size in sales as you, not exactly but significantly more profitable even before any potential synergies. So it seems like this has the potential to be a nicely -- a very accretive type of deal.

Indeed, it is. Financially, it's definitely very accretive. Strategically also, it's very accretive. Zero overlapping customers, almost 0 overlapping geographies. But India, where we basically doubled the revenues, which is good because we've become more relevant, and this would potentially lead to significant savings in the [sourcing] of the termination with the mobile network operators and a lot of cross-selling opportunities because Kaleyra is an omni-channel platform. mGage is pretty much focusing on messaging on the 2 core technologies, which is the original, [standard] SMS and this evolution into RCS.

So we are looking very much forward to working together with the team at mGage to explore the opportunities. But yes, this is a very accretive combination. And also, they enjoy a better profitability because of the geography that they serve because they have the U.S., and the U.S. is basically the highest gross margin messaging market in the world.

At this time, I would like to turn the call back over to management for closing comments.

Thank you very much. So thank you, ladies and gentlemen, for staying with us during this call, and looking very much forward to talking to you again next time. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation and have a great day.