Kaleyra Inc (KLR) 2020 Q2 法說會逐字稿

Thank you, operator. Welcome to Kaleyra's Second Quarter Fiscal 2020 Conference Call. Kaleyra released unaudited results for its second quarter ended June 30, 2020, after market today. The press release, as well as a replay of today's call, 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 Dario Calogero, Founder and Chief Executive Officer; and Giacomo Dall'Aglio, the company's Chief Financial Officer. 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 our call today, we will refer to adjusted EBITDA. This metric is not determined in accordance with generally accepted accounting principles, and therefore, is susceptible 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 operations.

With that, I would like to turn the call over to Dario. Please go ahead.

Thank you, Alison, and thanks to everyone who has joined us today for our second quarter conference call. These are very difficult times and one of the most challenging periods in our 20-year history. Two of our largest markets were locked down for much of the second quarter. However, the adaptability of our employees around the world, who seamlessly began working from home, the flexibility and functionality of our platform as well as the strength of our customer relationships has enabled Kaleyra to grow revenues year-over-year. Overcoming the impact of COVID-19, revenues were $31.2 million in the second quarter, up 1.1% and above our guidance. Beginning in June and continuing into July, as economies around world reopened for business, we have seen volumes recover. This has been driven by the increasing penetration of digital payments and an increased number of digital transactions. We believe the worst is behind us and are confident we will see improving revenue growth as we move throughout the year.

Longer term, the pandemic is driving an increase in the usage and reach of our platform, while simultaneously unlocking new segments, including government and nongovernment customers in the United States, Europe and Asia Pacific. The CPaaS, or communication platform as a service, industry continues to offer tremendous potential for growth and Kaleyra is very well positioned to ride this wave. Being a publicly listed company is opening up for Kaleyra multiple opportunities with large accounts in the United States, including big digital giants, banking, card issuer and other Fortune 500 customers. We are seeing enterprise customers increasingly looking for new ways to engage with their customers, expanding into new channels like live chat, chatbots and IVR, accelerating the digital transformation by multiple years in many cases.

In addition to the purchase order with a U.S. global media company we announced last quarter, which has already led to additional purchase orders, we have further expanded our connectivity service footprint, adding contracts with 5 of the world's largest over-the-top Internet media and lab services companies to deliver messaging traffic globally. We expect to announce additional agreements over the second half of the year of the year, further supporting our annual revenue outlook.

Kaleyra is also leveraging our position as the leading trusted CPaaS provider for banking and financial services in Europe and bringing our expertise, complexity, security and compliance to the United States. Our K-lab initiative provides a platform for new product development to support enterprises, mobile customer experience, including identity authentication, mobile and voice notification on transactions, banking services authorization through different integrated mobile channels. Despite having begun to target this market only a few months ago, we are already receiving very positive feedback. We are also working with major U.S.-based telecommunication providers on a system initiative to reduce spend by collecting robotically driven campaign information and processing and sharing that information with mobile operators and messaging ecosystem. A soft launch of our campaign registry service began earlier this year, and the commercial launch is expected in the third quarter.

Finally, a series of specialized cloud telephony services have been launched to help our clients and other firms communicate with their employees, clients and sustain business operations remotely. I am confident we have the right mix of resources, products, customers and people to continue the growth and the expansion of Kaleyra globally and with a strengthened balance sheet from the $51.7 million of financial resources comprising $36.2 million of capital raised in our recent public offering, including the additional $4.2 million from the exercise of the over-allotment and an additional $15.5 million in attractive loan agreements, we will come out of 2020 a much stronger company, ready to accelerate our revenue growth trajectory and begin to unlock greater value to our shareholders.

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, take the call.

Thanks, Dario. For the second quarter ended June 30, 2020, we reported total revenue of $31.2 million. This was up a 1.1% from $30.9 million in the second quarter of 2019. Some additional detail includes total revenue benefit from shifting geographical mix and our first mega enterprise U.S. customer. This was partially offset by the decline in premium services in Italy related to the credit card usage and voice, particularly in the Indian region related to the taxi service usage during the lockdown related to the COVID-19 pandemic. In the quarter, we processed 7 billion messages and 0.5 billion voice calls. As Dario noted, starting in June, we began to see an increase in transaction as the economies recover and new contracts are implemented.

Gross margin was 14% in the second quarter of 2020. This compares with 19.5% in the second quarter of 2019. This is due to a decrease in higher-margin premium service and voice during the lockdown related to the COVID-19 pandemic. Operating expenses were $11.9 million in Q2 2020 compared with $6.8 million in Q2 2019. These operating expenses include adding nearly 30 employees from the beginning of the year, a majority of which support enhanced engineering development and global sales, $4.8 million stock-based compensation, $1.8 million of transaction and one-off costs and $1.1 million of costs pertaining to public company's compliance we did not have in Q2 2019. Excluding these costs, operating expenses would have decreased by $0.8 million compared with adjusted operating expenses of $5 million in the second quarter of 2019.

Loss from operation was $7.5 million for the second quarter of 2020 and includes $4.8 million of stock-based compensation, $1.8 million of transaction and one-off costs and $ 1.1 billion of public company costs I just mentioned. This compares with a loss from operations of $0.8 million in the second quarter of 2019.

Net loss was $8.1 million, or $0.39 per share for the second quarter of 2020 compared with a net loss of $1.3 million or $0.12 per share for the second quarter of 2019 when the company was still private.

Adjusted EBITDA comparable with the previous year was $0.8 million in the second quarter of 2020 and include approximately $1.1 million of costs incurred as a public company that were not recognized in the second quarter of 2019. Without adjusting those costs, but including the engineering and sales head count increase, adjusted EBITDA would have been negative $0.3 million and compares to $1.7 million on the second quarter of 2019.

Cash used in operating activities was $1.6 million in the second quarter 2020 compared with the cash provided of $2.2 million in the second quarter last year.

Cash and cash equivalents were $37.2 million as of June 30, 2020. Cash position is after the payment of substantially all the obligations under the forward share purchase agreement and a large portion of promissory notes and compared with $37 million in cash, cash equivalents and restricted cash of December 31, 2019.

For the tail of the 6 months ending June 30, 2020, I will refer you to the press release and our 10-Q filing. Before turning the call to Dario, I want to offer some color on our improved capital structure. As of the end of the second quarter, there were approximately 28 million shares of Kaleyra-issued outstanding common stock. This included 7.8 million shares sold in the public offering in June that raised $32 million in net proceeds. In July, we sold almost 1 million shares through the over-allotment option, bringing in $4.2 million of additional net proceeds. Payments under forward share purchase agreements related to the closing of the company's business combination with Kaleyra S.p.A. in 2019 have either been prepaid in the case of Nomura or made or these obligations have otherwise been discharged. An additional 0.5 million shares were repurchased in July.

These actions have greatly simplified our capital structure, and we currently have approximately 28.5 million shares outstanding moving forward. There are still approximately 11.15 million shares of common stock related to the outstanding warrant with upfront price of $11.50 maturing in 2024. We also secured $15.5 million of loan agreements with Intesa Sanpaolo in July. These loans have 6-year terms with an interest rate of approximately 1.7%. In the first 2 years, payments are interest only.

I will turn it back to Dario now.

Thanks, Giacomo. The future is very bright for Kaleyra. Looking out to the second half of the year, we are at a very significant inflection point. Kaleyra is uniquely positioned to help enterprises communicate with their customers in expanded ways and take advantage of the growing opportunities the pandemic has created in the already fast-growing CPaaS market. Whether it's voice, messaging, push notification or e-mail, enterprises communication continues to get more and more digital. And Kaleyra is ideally positioned to benefit from the growth.

For the third quarter, we anticipate reporting revenues of at least $36 million, which would represent at least 15% sequential growth and result in a record revenue quarter for Kaleyra. This guidance assumes that the company's largest market, Italy and India, will continue to see improvement in the economies, even though India is in an earlier stage of its recovery. Our guidance also assumes that there could still be continued pressure on transactions level in certain regions and on certain business lines like transportation.

For fiscal year 2020, we expect revenue in excess of $142 million. This anticipates a double-digit sequential increase in fourth quarter revenue from the third quarter of 2020.

Adjusted EBITDA in the second half of 2020 is expected to see a significant increase from the first half levels. For some reference, in 2019, the vast majority or approximately 80% of adjusted EBITDA was generated in the third and fourth quarters. This seasonality is expected to benefit 2020 as well.

The CPaaS marketplace continues to offer tremendous potential for growth, and the pandemic is a catalyst to accelerate the digital transformation of many industries. Mobile technology is bridging the distance between the organizations and their audiences, and Kaleyra is designed to help the enterprises to seamlessly communicate with their customers through mobile services. With our reputation as the trusted CPaaS provider, our expanding blue-chip customer base, new product initiatives, recent strengthening of our balance sheet and growing footprint in the United States, we look forward to a strong trajectory of growth ahead.

In closing, I want to thank our customers and shareholders for their support as we establish ourselves in the U.S. geography as part of our global expansion. I would like to also recognize the Kaleyra team for their hard work and the excellent results, particularly under such difficult conditions. I'm very proud of what we have accomplished together, and I am excited for what's to come.

With that, operator, please open up the line for questions. Thank you.

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

Congratulations on the great results there. Say, Dario, you mentioned 5 customer wins. Do you expect all of them to start generating revenue in the third quarter? And then maybe talk a little bit about kind of why you won them. Was it quality of service and regional exposure? Any color on that would be great.

Thank you, Mike. Well, since we have been listed in November, we homologated Kaleyra as a trustworthy vendor on a global basis for big digital giants and large customers in general. And after we won the deal with the big digital social media back in February, our companies accepted to use Kaleyra services in multiple geographies. One of the strengths of Kaleyra is to be a global player with a global footprint. So basically, most of these large over-the-top customers are using Kaleyra to deliver traffic to multiple geographies internationally in Asia Pacific and Europe and in Africa as well. And yes, they will provide additional revenues during the third quarter. And I believe that what really made the difference is the fact that we are now a public company, and this is creating the very platform from multiple over-the-top large multinational accounts to use our services.

Great. And then with this kind of work from anywhere, engage from anywhere environment that's sort of emerging given COVID-19, it seems like there's the potential for new use cases and services to be in demand. I guess, are you seeing, particularly among your kind of Italian and Indian customers, new use cases, new -- demand for new services emerge here?

Yes, of course. What happened since March is that multiple, large, nongovernment organizations, including Red Cross, informational and similar entities, started using mobile telephony and mobile communication to engage with volunteers and donors worldwide. And COVID-19, being a perfect storm, created also the burning platform for those organizations to take advantage of the platform services to be -- to close the gap and to bridge the distance with their audiences. And this is happening also for government institution. For instance, in India, we are providing an interesting service, which is like a triage for suspect COVID-19 patients. That instead of showing off at the -- showing up at the hospital, they can call in the service with a number that we provided, together with other technology providers. And we bridge this communication with medical doctors that volunteer across India to assess and qualify the need for those patients to go to the hospital. And this is a good example of government initiatives that we have done for government institutions.

Great. And then just very last question on gross margin. As you look to the third and fourth quarter, I'm guessing you have some of your core regions and premium services growing, then you have new customers coming online and you have some natural seasonality. So how should we think about kind of gross margin, third, fourth quarter?

It's definitely improving, in general, the seasonality considering the way the contracts with operators are shaped in the second half, we, in general, have a better profitability at a gross margin level and at an EBITDA level. Last year, we recorded about 80% of the EBITDA in the second half. And this is going to happen again in 2020. In the first half, definitely, we had an impact for COVID-19 due to the very severe lockdown we have in Italy and in India. But now this is releasing, and already starting from July, we start seeing volume up and also high-margin services like SMS premium in Italy and voice in India taking off again. So I'm quite positive about the increase of gross margin profile during the second half.

The next question comes from Lance Vitanza from Cowen.

Congratulations on the quarter. I guess I wanted to start to sort of maybe go into a little bit more detail to follow up on Mike's questions regarding some of the new customer wins. And could you talk it a little bit more? I mean, not just about whether or not the revenue is going to be coming in the third quarter, but I guess I'm just trying to get a better sense for the pace at which that revenue kind of ramps up. Could you -- is that something where we should expect a 6- to 12-month period before we hit sort of the normalized revenue contribution from these new customers? Or is it more -- you turn the spigot on day 1 and what you see is going to be what you get on a run rate basis? And then I have some other questions as well, but maybe you could start there.

Thank you, Lance. This is a very good question. So large accounts, in general, have a ramp-up period before they get in full-fledged volume, but this is not lasting long. It's lasting between 4 to 6 weeks. And we observe that every time we launch a new customer, it takes like 1 month, 1.5 months before you get in volume. And when it gets in volume, also we get the pricing point on the sourcing side, on the supply side. So let me say that the larger the account, the longer the cycle, both for the sales cycle and for the ramp-up of the revenues, but it's not lasting very, very long. 4 to 6 weeks before you're getting volume. So we expect already in the third quarter volumes and revenues coming from those new customers.

Okay. And then I guess there's relative to at least our expectations, right, you're doing better in terms of new customer wins. And that's helping on the revenue side. It's obviously putting some pressure on gross margin in the near term. But I'm wondering, could you -- what should we assume for sort of like a steady-state, longer-term gross margin potential? So I'm thinking when you're at scale, and then also when you're no longer incurring the additional new customer start-up expenses, and this may be more of a theoretical question than anything else because, hopefully, you're always going to be adding new customers. But if we were to think about it without the dilution from the new customer start-up expenses, what kind of gross margins would you expect in this business?

Well, in general, the gross margin is the result of multiple factors. And not all the product lines have the same gross margin. The one that is getting the most significant cost of goods sold is SMS. But as long as we launch new services using IP like voice or a software, we will manage to widen our gross margin because the mix of the product will change. Also, the customer mix is going to be changing because we have about 72% of our revenues in second quarter coming from the top 30 customer out of 3,000 that we serve. But we are launching Kaleyra Cloud, which is aimed at small, medium enterprises in the second half, and this will change the mix of customers. And a smaller customer comes with a much wider gross margin so this will be another mean to widen the gross margin going forward.

Okay. And then I guess the new customer wins have been mostly in the media OTT side, which is great. How is it coming penetrating the U.S. financial institutional market -- financial institutions? And I know that it's -- we've talked about this in the past, it's a long sales cycle, but have you been continuing to make progress there?

Sure. We are continuing to make progress there. I think that in the third quarter, we will announce at least one new deal with a large circuit, credit card, plastic card circuit. We are already working with them, and I believe we will start seeing revenues starting in the third quarter. Again, large accounts in banking and financial services with long sales cycles. We launched K-lab back in May. Now we are in August. So in 3 months, it's very short time to deliver and accomplish, but we are on the right track, and we see a lot of traction because the competencies and the experiences that Kaleyra is providing with this K-lab team is impressive and very well received and accepted by the customers.

Sorry about that. My phone was stuck. One last question for me, if I can, and that is on Slide '18, I believe it is basically you gave some detail around the volume of messages and voice calls, obviously down quite a bit in the second quarter. Can you provide any kind of update on those metrics in terms of how close to pre-COVID levels, amongst your existing customers, would you say that we are -- as we sit here today, roughly halfway through the third quarter?

Again, this is another good question. Maybe Giacomo can help me in answering to this question. In general, what I would say that starting from July, we were back to normal in Italy for banking and financial services. And starting from July, we are recovering on voice in India, especially due to a large e-commerce platform, which is using our voice services. Previously, they were using only messaging. Giacomo, could you add some more color to the last question?

Yes, starting from July, we see a very good recovery in Italy and from the end of July also in India. So we project -- we give a guidance revenues of $36 million, and this is the high quarter average in Kaleyra. So we are recovering volume and revenues.

The next question comes from Tim Horan of Oppenheimer.

Can you give us just maybe more color on like K-lab and the positive feedback from financial institutions? What do they like about what you're doing? And how does that kind of compare to what they're doing now? And maybe do you have the right go-to-market strategy there? I guess, do you have the right salespeople and right sales support in that market right now? Or do you have to invest a little bit more there?

Sure. Okay. Thank you. So basically, selling mobile banking services to large financial institution is a strategic sale. So it's not like off-the-shelf product placement. It's advisory, helping them in defining and designing new services on loyalty programs, on alert notification, on transactional events, on anti-fraud protection and security. We have an incredible experience in this in Europe and Europe is much advanced on banking and mobile banking. And we are now providing this knowledge and expertise with the scale-up team, which is made and populated by senior executives with multiple tens of years of experience in the industry. And we are in talks with about 50 prospects and we're already working with one of them that, unfortunately, it doesn't allow us to disclose the name. So I can't be more explicit on this. And we see a lot of traction because, basically, in the United States, no one of the CPaaS player is security, compliance and integration first, top of mind.

Whilst we are like this, that's what we have been doing over the last 20 years in Italy and in Europe, and we know exactly how to handle this and we know how to add them in designing the new services. So that's what's going on now. Obviously, it takes some time. And also, COVID and the lockdown and work-from-home practices didn't help much, but we are now managing to speed up the process, and I'm very, very positive about the results of K-lab going forward. Second half would be amazing.

Good luck. And then could you give a little bit more just color at a high level how new customer bookings are going and sales and maybe both of existing customers and just adding new customers on? Has that process -- was that hit by COVID? Has that kind of started to pick up? And maybe how does it compare to pre-COVID?

Well, obviously, the ways of working changed significantly over the last few months. All of us, we are having different experiences, no more one-to-one, face-to-face meetings and a lot of voice calls and video calls. And obviously, the whole system is adjusting to this new normal. With large accounts, what's happening is that, basically, the COVID-19 has created the benign platform for them to accelerate the process of getting transformed, digitally transformed to bridge the distance with their audiences and their customers. And also, a lot of online services, transactional online services require strong customer authentication to make sure that the ones that are logging in and are trying to do the transactions are the ones that are allowed and are entitled to do that.

And one of the things that is definitely leaning is the strong customer authentication, the onetime password, PIN code and these kind of things. But this is just the beginning because basically, this thing is getting more and more conversational, adding some right tickets also of artificial intelligence, natural language processing. We will see an improvement in the design of the services that will change the way brands interact with their audiences and their customers during the transaction and also aftersales, post-sale services, customer care and these kind of things. And that's why I think, like many other industry peers and research analysts, that at the end of the day the pandemic has been a bad thing for the society and the economies, but definitely is fueling the development of the CPaaS space.

Great. And then lastly, could we get a little bit more color on the gross margin for the second half of the year? Last year, you were in, I guess, the 21% range for gross margin for the second half of the year. You've been more down 14% for the first half, and the volumes are pretty close to being back to where we were. But then I know you have a lot of new contracts that are initially gross margin dilutive. So any kind of -- little bit more color on the second half? I know they'll be up, but can they kind of compare to last year's second half in that 20%, 21% type range? Or should we look for something in between 14% and 20%?

Okay. I will let, Giacomo, answer to this question more specifically, but I want you to consider also that notwithstanding the decrease in gross margin, the company is still profitable and it's generating cash flow, which means that now all the proceeds that we have raised with the primary, and with that, over $50 million will be used for investments because we do not burn cash, we are still cash positive and we'll keep on making money. So Giacomo, could you please answer to the question related to the gross margin in the second half?

Yes, yes. I think we'll be in the middle between 14% and 21% of last year. And I think with the recovery of premium and voice, we can increase the gross margin from the first half. Of course also, as you know, we have a seasonality on some contracts and sourcing contracts. They are on a cumulative days yearly. So as much as you say messaging, less you pay, so in the second half, we can trigger some level and we have a better price. But of course, we have to consider also the start-up of these new big contracts in the connectivity and enterprise sector. So I think we'll be in the middle of the 14% and 21%.

The next question comes from Allen Klee from National Securities Corp.

If we look at your operating expenses and what they've been running at in the first quarter and second quarter of 2022, is that -- with the exception of the $1.8 million of onetime costs in this quarter, is that a reasonable run rate going forward for the second half?

Again, I would like Giacomo to address this question. Allen, nice talking. And yes. Sorry, one thing that I would like to say is that in the comparison between 2020 and 2019, we better keep in mind that in 2019 Kaleyra was still a private company. So now it's bearing a number of compliances and of costs that are related to the status of a public company that were not accrued and recognized in the same quarter of 2019. So the comparison between 2020 and 2019 might be misleading also for this reason. And yes, if you could please rephrase the question for the benefit of Giacomo.

If we look at operating expenses this quarter, if you exclude the $1.8 million of transactional expenses, is that a reasonable run rate for where operating expenses will be in the third and fourth quarter?

Yes. We -- as I say, we added almost 30 new employees in the first half. So we can have a little increase in the cost of labor. But I think we'll be not very different in this color.

Great. And then could you help us a little bit more on what you said about guidance on adjusted EBITDA for the -- that the second half should be around 80% of the full year? The challenge I have with that is in the first half, your first 2 quarters, you had negative adjusted EBITDA. So I'm not sure what...

Not yet.

80% or more is, if you could maybe help.

No, no, no. What we say is that last year, 82% of the adjusted EBITDA was coming from the second half. So what we can say, even in this year, the vast majority of the adjusted EBITDA will be coming from the second half. And the adjusted EBITDA in the second half will be positive, not negative as in the first half. And we are -- expect a positive, a much higher adjusted EBITDA than the first half.

And then could you just help us -- educate us on the India market in terms of where it stands in -- with the pandemic and the outlook for them opening up their economy?

Yes. Well, India is a complex reality. It's a huge country with 1.3 billion inhabitants with multiple states and towns, which ranking in range of 12 million to 25 million inhabitants. And obviously, when you manage such a large country with such a huge number of inhabitants, you must be careful in terms of containing the pandemic. And also, it's a federal state. So you don't have the same line -- pretty much like in the United States. You don't have the same line across the board in all the states. So you may have maybe new daily in Mumbai, which are more closed now. And you may have other states and other towns, which are getting a much better situation. But in general, what the Indians are doing, they are managing very well the impact of the pandemic. If you look at the numbers, the number of cases and the number of deaths, it's definitely lower than expected considering how complex is the reality of the country.

What is happening now in India is that they are opening up progressively. And also the economic system has been able to quickly adjust on new digital interaction between citizens and consumer and the organization, the government and the enterprises. So going forward, I'm pretty positive about the impact of the pandemic over the CPaaS services in India, but it's extremely difficult to make thorough predictions about the future. Because the pandemic is weird and it's also affecting in a weird manner the society, the economy. But my feeling and the feeling that we have is that also in India, maybe a month later compared to Italy and Europe, it's improving.

The next question comes from George Sutton from Craig-Hallum.

For the benefit of the investors who are on the call and see the stock down 20% or so in the aftermarket, I think it is because the guidance, the revenue guidance was below where The Street was, which is a bit surprising given that we spoke just a handful of weeks ago and established numbers in. So could you just discuss your $142 million or better guidance relative to the overall outlook? I think that would be helpful.

Sure. Well, in general -- first thing, let me say that the guidance that we gave has been exceeded by the results of the quarter. We are over the guidance. We gave a guidance between $30 million and $31 million, and we are a little over $31 million. Giacomo, could you help me in answering to this question about the guidance from George?

Yes. What we said is in excess of $142 million, and The Street consensus is around $145 million. So we are very close with the consensus of the analysts. Okay.

Okay. So there's been nothing in the last handful of weeks that have necessarily changed your perspective. This is just your way of guiding, is to provide a single point number and potentially in excess, and you're not uncomfortable per se with the $145 million consensus. Just trying to be clear about the mean. Okay.

Yes.

(Operator Instructions) The next question comes from Jeff Bernstein from Cowen.

So you said in the press release, there are some headwinds from the cost of initial delivery phases. And in the conversation, we talked about margins improving as volumes scale. But can you just go through the mechanics of what the costs are when you bring on a new customer? And if you can split those at all between the scale-up versus other initial costs, to whatever extent you could do that, would be great.

Sure. Thank you. Well, in general, when you open up a route to a specific geography where you still don't have volume since all the contract with the operator for the termination of traffic are volume based. So you get better prices when you get higher volume. In the beginning, you don't have yet the volume, but you open up the route, and the cost of termination is fairly high compared to the price that you sell the service. As soon as the volume goes up, you get a better price. So you may start with the first few weeks at a very, very lean gross margin. As soon as you get the volume and you start delivering and also a lot of traffic to that specific geography, say, Ghana or Nigeria or Cambodia, then you start having a better price on the sourcing side, and you keep fixed the price that you have made to the customers, and this is widening the gross margin. So every ramp-up of the volume on a specific geography came together with a very low gross margin at the beginning. But going forward, it's improving and is getting in the range of the typical connectivity gross margin, which is about 15%.

Got you. Okay. And so is -- are you -- you are opening up new geographies for all kinds of customers? Or are they really for these new customers that you're bringing on, which is a little bit of a new experience for you?

Well, there are customers that are worldwide players. There are companies that have a global footprint, delivering traffic to 190, 195 geographies in the world. All of them, they multisource and we are selectively serving them on some specific geographies. Obviously, there is a win-win situation. When you start delivering for customer traffic to this geography X, then you add the customer B, which is willing to deliver traffic at the same geography X. And you enjoy a better margin because you get much more volume on that specific geography. Obviously, there are geographies where we are incumbent. We are very strong, like Italy, India, Philippines, Malaysia, Indonesia, and there are geographies where we are new business, like in Africa, in Ghana, in Nigeria. And to open up a new route, you need to pay a ticket. And the ticket that you pay is that initially, we get lower margin. Then when you have volume, you get better margin.

Got you. Understand. Okay. And so as you potentially add other customers who are desirous of the same routes, you won't see the same level of dilution headwind at the beginning of their contracts. Those will come in at those better margin rate.

Exactly, exactly, exactly. It's the metrics where the cost of termination is the same across the board for every customer. So the more you add customers to that specific route and that specific geography, the higher the volume, the better the price and the better the margin.

Great. Fantastic. And I just wanted to follow up on one other thing. You were talking about K-lab and how you're helping customers and sort of the value added wrapped around the pure messaging, and that you've had a lot of experience now in Europe with more financial services-related application, security, et cetera. And that you feel that, that is a differentiator versus other U.S. kinds of players or players from other parts of the world that have not been compliant with the kind of requirements that are issued in the European financial services market.

That's right. That's absolutely right. I believe that we bring an expertise and knowledge, which has been built over the last 15 years,in banking, financial services, credit card issuing and acquiring. And we are now exporting this expertise to the United States by the mean of K-lab as a trigger to engage with the customer and help them in designing their services to becoming more effective and more efficient in the mobile communication with their audiences. Most of the services are related to anti-fraud protection, but we are also working on loyalty. We are working on other notification on status of the account.

Most of the traffic of payment cards due to COVID, ramp-up of e-commerce as being related to prepaid plastic card. Prepaid plastic card had typical issues like you better understand in advance that you are running out of credit on the card and you better refill the card. And we are handling notification on such an event to make sure that the customer knows in advance that next month, Netflix subscription won't be paid because your card doesn't have enough balance. So we send a notification to let the customer know, the cardholder know that they better refill the card, not to lose the subscription of their favorite video provider like Netflix. This is an example.

Got you. Understand. All right. And then my last question. In the U.S., a consortium of the carriers are investing in this CCMI for a new rich-messaging platform. I guess, the same thing is happening with 3 carriers in Japan. How are you guys thinking about these RCS kinds of platforms? Are you going to sort of take your customers there? Or are you going to wait for customers to be looking to get involved on those platforms?

We are working closely with CCMI and with Google on RCS. We already delivered significant new services on verified SMS, which is a new way of certifying that the sender is an outright sender of the message. We have done a trial in India, and we are working now with them to trying to anticipate not to follow the opportunities on RCS. RCS has been around for years, for many, many years. Now it sounds like it's getting real with the backing of Google and the mobile network operators that are willing to take advantage of RCS as the new bridge, a mean of interacting with customers, which is the next-generation of SMS. And Kaleyra is positioned to work together with all of them on this.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Dario Calogero for any closing remarks.

So thank you very much, operator, and thank you all for joining today's call and for your continued support. We look very much forward to speaking with you again when we will report our fiscal third quarter results in November. Please feel free to reach out Kaleyra for anything, and our Investor Relations team is always available to provide any answer to any question that you may have. Thank you, ladies and gentlemen, and talk to you soon.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.