Kaleyra Inc (KLR) 2020 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Kaleyra First Quarter 2020 Results Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Alison Ziegler, Investor Relations from Darrow Associates. Please go ahead.

Thank you, operator. Welcome to Kaleyra's First Quarter Fiscal 2020 Conference Call. Kaleyra released unaudited results for its first quarter ended March 31, 2020, after market last night. The press release as well as the 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. In line with social distancing practices, 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 calculation. The definition, calculation and reconciliation to the financial statements of adjusted EBITDA can be found in Exhibit A of 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'd 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 first conference call as a public company. We are in unprecedented times with the impact from COVID-19 pandemic affecting people and businesses around the world. Our hearts go out to all of those impacted.

During these uncertain times, communication has become even more critical, be it to connect with citizens, employees, customers or in your family. As a company, Kaleyra is doing everything it can to support our team, our customers, businesses, government and others who are dealing with the emergency caused by the coronavirus outbreak. We continue to work with the Red Cross in Italy as well as organizations in India and in the United States. While our first quarter was not affected by the pandemic in a meaningful way, we anticipate that, like everyone else, we will see an impact in the second quarter. Longer term, we believe that our business model will prove resilient.

Given this is our first call, I would like to provide a brief introduction of Kaleyra for those of you that do not know us well. While Kaleyra may be new to the public market, we have been around for 20 years. Kaleyra is a communication platform as a service or CPaaS company. We love to call ourselves the trusted CPaaS because we work for complicated and sophisticated industries. This includes banking and financial services, which have very high bars in terms of level of complexity, security and compliance. Kaleyra solutions include identity authentication, mobile and voice notification on transactions, banking services authorization through different integrated mobile channels to our platform across several industries.

I founded the company, known then as Ubiquity, back in 1999 in Italy, and we have grown through a combination of organic means and strategic acquisitions. In 2017, we added India-based Solutions Infini. In 2018, we added Virginia-based Buc Mobile. In February 2018 also, we were rebranded as one unified company, renamed Kaleyra.

Throughout our history, we have consistently delivered innovative technology and product leadership in CPaaS market. This market is projected to grow at an approximately 30% compounded annual rate. To accelerate our path to the public market and for the purpose of strategic growth and enhancing our platform, in 2019, we partnered with the GigCapital Group, a private to public equity firm. They provided the platform as well the financial, operational, legal and executive entry to accelerate our journey to become a U.S. publicly traded company. We celebrated our listing on the NYSE American Stock Exchange in November 2019.

That brings us to today. Our first full quarter as a public company was solid, with a 20.3% (sic) [21.3%] gain in revenues over the first quarter last year. We saw expanded business with existing customers as well as the addition of our first large new United States mega enterprise customer. In the first quarter, Kaleyra processed 7 billion billable messages and 900,000 voice calls, increases of 6.1% and 12.5%, respectively. While the first quarter tends to be our seasonally lowest quarter, we still saw volume increases, driven by the increased number of digital transactions made by end user and by the increasing penetration rate of digital payments in the underlying payments market.

We have a diversified and growing global customer base. We have more than 3,000 customers and business partners worldwide. Over 80% of revenues in the first quarter came from customers that have been on our communication platform, or API, for at least 1 year. Our product base and expanding sales presence is driving more strategic relationships with new and existing customers. Volume increases were driven by the higher number of digital transactions by end users and by the increasing penetration rate of digital payments. We also continue to have success at the new high-profile customer, both in the United States and abroad.

Kaleyra addresses one of the fastest-growing market in the telecommunications, media and technology where communication platform as a service becomes a key enabler in the new digital transformation processes that multiple industries are going through. Market analysts prior to COVID-19 outbreak forecasted an average growth rate of about 27% year-on-year between 2019 and 2024. Social distancing practices and shelter-in-place policies are the perfect storm that have created the burning platform for the enterprises to accelerate the digitalization process and both the industry peers and the market analysts converge on the expectation of an increased demand for CPaaS services by the market. E-commerce and e-banking are literally booming since the end of March 2020, and these new customers and users are here to stay and will remain post COVID-19.

Kaleyra is the leading CPaaS provider for banking in Europe and for large digital giants in India, and we are set to capture the opportunities implied by the acceleration of the adoption of mobile communication in the foreseeable future. Also, 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 issuing and other Fortune 500 customers. I am confident we have the right mix of resources, products, customers and people to continue the growth and expansion of Kaleyra globally. And through our organic growth and the planned strategic expansion, we will come out of 2020 and into 2021 and beyond into a much stronger and larger company and unlock significant value to our shareholders.

Let me now turn the call over to Kaleyra Chief Financial Officer, Giacomo, who will review our financials in more detail.

Giacomo, please take the call.

Thanks, Dario. For the first quarter ended March 31, 2020, we reported total revenue of $33.6 million. This was up 21.3% from $27.7 million in the first quarter of 2019. Some additional details include: total revenue was driven by volume increase with an increased number of digital transaction made by end users, such as credit card transaction and an increasing penetration of rate of electronic money in the underlying markets, such as e-commerce, mainly in the European and the APAC geographies, as well as penetrating our first mega enterprise U.S. customer since our listing in November 2019.

Gross margin was 14.1% in the first quarter of 2020. This compares with 18.9% in the first quarter of 2019. This is due to higher connectivity costs during the initial delivery phase and the service ramp-up of the new U.S. mega customer.

Operating expenses were $14.3 million in Q1 2020 compared with $6.4 million in Q1 2019. These operating expenses included $6.3 million in stock-based compensation, reflecting our first quarter of establishing the publicly trade company employee stock plan; $2.4 million of transaction costs for the business combination; and $1 million of costs pertaining to the initial public company compliance. Excluding these costs, operating expenses would have decreased by $0.9 million compared with the first quarter of 2019. Loss from operation was $9.6 million for the first quarter 2020 and includes the $6.3 million of stock-based compensation and $2.4 million of transaction cost I just mentioned. This compares with a loss from operation of $1.2 million in the first quarter 2019.

Net loss was $8.8 million or $0.44 per share for the first quarter of 2020 compared with a net loss of $1.4 million or $0.13 per share for the first quarter 2019 when the company was still private. Adjusted EBITDA was a loss of $0.3 million in Q1 2020 and includes approximately $1 million of costs incurred as a public company that were not recognized in the year ago period. Excluding this cost, adjusted EBITDA would been $0.7 million compared with adjusted EBITDA of $0.3 million in Q1 2019.

Cash used in the operation activity was $2.9 million in the first quarter of 2020 compared with $3.6 million in the first quarter last year or decrease of about 20%. Cash and cash equivalents were $16.2 million at the end of March 2020. In addition, the company also had $20.8 million of restricted cash to be used for forward share purchase agreement, which as of March 31, 2020, contemplated the expenditure up to $31.5 million. As a result, the net cash liability associated with a forward share purchase agreement is $10.7 million.

Before turning the call to Dario, I want to offer some color on our current capital structure.

As of the end of the first quarter, there were approximately 20 million shares of Kaleyra issued in outstanding common stock. In addition, we issued 2.2 million shares in connection with becoming a public company, bringing the total share count to approximately 22.2 million shares. In addition, there are approximately 5 million shares of common stock reserved for the Kaleyra equity incentive plan and approximately 11.18 million shares of company stock related to the stock warrants with a straight price of $11.5.

I will return it back to Dario now.

Thanks, Giacomo. Kaleyra is a powerful combination of innovative product technology, product leadership and global revenue growth. Our extensive experience within the financial services industry has earned us a reputation as a trusted CPaaS provider and our strengthened capital structure as a public company is already opening new channels and business opportunities on a worldwide basis. Just in the U.S. market alone, over the last several months, we had multiple new contracts with companies whose names you would recognize and that have significant revenue potential.

A few recent highlights include: a series of specialized cloud telephony services have been launched to help our clients and other firms communicate with their employees, clients and sustained business operations remotely; executed a $15 million fixed purchase order with a U.S.-headquartered global mega-cap media customer in February 2020. The revenue will be realized in full over the course of 2020.

Kaleyra is working with governments, start-ups and others, including the Red Cross to create specialized cloud telephony services that will allow the general public to access information or emergency services via Kaleyra's technology.

We launched k-lab, a dedicated innovation lab for new product development to support enterprise mobile customer experience. And this will strengthen the company commitment to delivering solutions for the financial services industry, particularly in the United States.

Announced the appointment of 3 new senior executives who have joined Kaleyra as managing directors for k-lab in the United States to augment the business development and banking accounting capabilities towards the U.S. financial services customer.

Also, we recently completed a trial with a major U.S.-based telecommunication customer. This program is designed to reduce spam by collecting robotically-driven campaign information from messaging companies and process and share that information with mobile operators in the messaging ecosystem. To support these efforts, we created a subsidiary, Campaign Registry Inc. This is a newly sanctioned ecosystem for businesses to communicate with their customers using 10-digit long code services. The benefit will be increased reliability and quality for message senders as well as less unwanted messages in the form of spam for mobile users. The service is currently experiencing an acceleration due to the new COVID-19 services and is expected to be extended to our campaigns later this year.

Building on Kaleyra's success to date, we will maintain the same dedication and passion to growing the business that we have had when we started 20 years ago. Kaleyra remains well positioned in between the enterprise and the end user to help communicate over mobile. Whether it's voice, messaging, push notification or e-mail, enterprise communication continues to get more and more digital and more and more mobile. In fact, many applications that an enterprise invests in today may be mobile-based only. App-based services, banks rely on Kaleyra to deliver secure and compliant antifraud or user spend control notification to their credit or debit cardholders. Other examples include 2-factor authentication or strong customer authentication and monthly account updates. As the digital wall goes mobile, it drives our business because we see it at the crossroad between the enterprise communication to their customers and mobile.

Before I open the call to your questions, I want to offer some comments around the coronavirus and its potential impact to our business.

While January and February were in line with budget, beginning in March, we did see some volatility in our banking and payment business as social distancing measures and shelter-in-place took effect. The company's largest market, Italy, remains one of the epicenter of the COVID-19 outbreak. The lockdown in India, another large market for the company, has also been quite severe due to the government measures. As an immediate observation, we have seen the electronic payment transaction volume related to e-commerce and on delivery over the last 2 months of the COVID-19 impact being increased, while some retail, travel and transportation and cross-border payment cards have been impacted by the outbreak.

For our second quarter outlook, Kaleyra is providing a revenue range that incorporates the observed slowdown in the month of April as a result of the restricted shelter-in-place environment and the uncertainty surrounding the ongoing impact of COVID-19. While Italy is beginning to reopen, there is still ongoing softness in the local economy. India is seeing the pandemic expand. And while it could affect the volume of certain retail and transportation services, it is expanding other such as on delivery and e-commerce.

Based on current expectation of a recovery in the economies of Italy and India, revenue in the second quarter should be in the range of $30 million to $31 million, representing a small decline over the first quarter 2020 and essentially in line with the second quarter 2019. Despite these near-term headwinds, we are confident in our strategic course and long-term opportunity globally. While we are withdrawing our full 2020 year guidance in the face of the current economic environment, we are confident that over the longer term, we will see an even more profound acceleration of the digital transformation of many industries. We expect consumer digitalized transactions to increase during and post COVID-19 as the trend of transforming customers into e-commerce and online transactions are growing rapidly.

This yields opportunity for Kaleyra and should have a positive impact on the volume of the services we provide. We will keep monitoring the effect of our business -- on our business and update our investment community accordingly.

In closing, I want to thank our customers and shareholders to their support as well as we enter the public market and establish ourselves in the U.S. geography as part of our global expansion. I would like 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 and with our reputation as a trusted CPaaS provider, recent listing on the NYSE American Stock Exchange and expanding blue chip customer base, we believe our future is bright and that we are moving to establish ourselves as a major player in the fast-growing CPaaS industry.

With that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Lance Vitanza of Cowen.

Dario, Giacomo, congratulations on your first public company call. You couldn't ask for more interesting times to be coming out to the public markets.

I guess I wanted to start with the guidance and the COVID impact. And I guess I'm just trying to better understand how shelter-at-home is negatively impacting your business. The mobile transactions, as you pointed out, are going up in this environment. So is the pressure that you're seeing -- is this carriers and e-tailers pushing for lower pricing? Or is there something else that we need to be aware of? Or is it just the types of transactions? I mean, obviously, airline would be going down. But we would just think that, that would potentially be more -- be offset by other categories that are going up. So if you could comment on that, that would be great.

Thank you, Lance. This is Dario. Well this is a very good question. Basically, the overall impact of COVID-19 on the CPaaS business is positive. In specific countries and regions where the lockdown has been extremely harsh, like Italy and India, basically, the closing of the retail shops reduced the number and the amount of retail transactions and also the international traveling cross-border transaction have been lowered down because people were stuck at home. Meanwhile, we observed an increase, a very significant increase in e-commerce and on delivery. So the mix of that had caused a limited contraction of the volume. No impact on the prices at all. It's on the volume assets in April, in Italy and in India.

As of now, first week of May, we already experienced an increase in volume, which is a positive effect of the release of the lockdown in Italy. In general, I would say that we project a very conservative guidance for the second quarter for the simple reason that it is too early to know. It is only the 11th -- 12th of May and it's still more than 1 month to go to the end of the quarter.

So as -- I mean, look, nobody has a crystal ball. But it sounds like to the extent that shelter-at-home ends and we get back to work and the volume trends you're seeing, it may be that Q3 is sort of a return to kind of the growth trajectory that we had envisioned when we set the guidance at the beginning of the year, is that fair to say?

Yes, it's absolutely fair to say. And possibly, there might be even a rebound because when people will be released from the lockdown, they will start going around and doing more transactions. In China, it has been observed already. The point is that the curve reached a spike in end of March, April, and it's now getting much better and you see more people around. This is depending on the geographies though. Not all geographies are even. Italy is, I believe, at least [3, 4] weeks ahead to the United States, for instance. So all here is getting better.

We've seen that geographic disparity in other companies that we cover. So no surprise there.

Let me shift to the Campaign Registry, which sounds very exciting. Could you discuss the milestones toward the launch later in 2020? It sounds like that launch was pushed out. Was that the case? And was that pushed out in response to COVID?

More than pushed out, I believe, that very large organizations like the carriers in the United States, operationally, have been affected by the shelter-in-place policies. So basically, the decision processes get a little bit more complicated.

We are accelerating on all the services related to the emergency of the COVID-19 and the full commercial launch will be right after that. So the situation is pretty much like last time we talked about it.

Got it. Okay. So turning to the couple of quick questions on the quarter. And then if you need to ask me to get back in the queue, by all means. But the first quarter revenue growth, obviously, very solid, but wasn't quite on pace to meet the sort of the prior guidance. Was the difference there -- I mean, we were looking at, I think, revenue growth of around 30% for the full year. Was the difference between what you reported was that sort of the falloff that you mentioned that you started to see in March? Or how did -- I guess, how would you describe the first quarter revenue growth relative to your initial expectations? Were you always expecting sort of a ramp-up in the growth over the balance of the year?

Well in general, first quarter is the lower quarter in the seasonality. We, as you perfectly know, withdrew the guidance for the full year due to the impact of the coronavirus outbreak, which is still to be fully understood. As many other companies, basically, we decided to withdraw our guidance for 2020. As of quarter 1, we are pretty satisfied because basically, we keep on growing. And also, keep in mind that on the overall 3 months of the quarter, also March has been, in a way, impacted, to some extent, at least for 2 to 3 weeks by the shelter-in-place policies. However, the outlook associated to the recovery post coronavirus is very promising because we are experiencing a very significant accelerations of the company that are now facing the constraint of interacting with the consumers remotely. So they are accelerating the usage of our platform for the customer relationship management and for the customer-facing processes in general.

Okay. And then gross margin in the quarter was down despite the fact that the revenue growth was so strong. When can we -- and I guess, maybe we have to think about this in the absence of COVID. But when could we expect gross margin to improve sequentially? And I guess, is it possible to talk about what gross margin would have been had you not had initial delivery phase of the mega-cap U.S.-based enterprise customer that you talked about in the press release?

Well that specific contract is huge. It's accounting for $15 million on the fiscal year. So it's a little less than 10%. In general, in such a contract, in the beginning, you get to get the prices for the value that you're selling. And initially, you are compressed in terms of margin. We are already recovering. In April and March, we already recovered all the pressure that we had in the first 2 months. So I would confirm the outlook for the gross margin going forward. And my expectation is that we will return to our normal increase of the gross margin going forward due to multiple factors, including larger volume, better geographic mix, better product mix, because there are a piece of products, which have a much larger gross margin rather than the typical estimates held. And in general, the company has an operating leverage that is basically not only at an EBITDA level, but also at the gross margin level, improving because it's getting bigger, larger, larger volumes, better prices and better margins.

Great. And if I could just squeeze in one more. So EBITDA in the quarter, and I understand there was the $1 million of cost that were incurred as a public company. So understanding that EBITDA was actually up year-over-year on kind of like a like-for-like basis, but obviously, you remain a public company. So are those $1 million of costs -- are those recurring? Or were those, in some sense, onetime setup costs that are now behind you? I'm just trying to get a handle on how we should be modeling the next couple of quarters here.

Yes. Okay. I will leave the answer to this question to Giacomo, the Chief Financial Officer.

Thank you. So of course, the $1 million that you mentioned is recurring, so we can have in the future. We give these guidelines just to better compare with the previous year.

Our next question comes from Mike Latimore of Northland Capital Markets.

So I guess, Dario, on the -- on some of your larger customers in Italy, can you talk a little bit about the activity there? I think they're fairly sticky. So I guess, can you talk about if there's any customer churn? And also maybe talk about your share at those customers.

Of course, I can. The customer churn, it's an easy answer because it's 0. We keep on having the same customers, which is basically a system -- the system of the banking -- retail banks and issuers in this country. So we keep on working with them. Obviously, the volume of those customers have been impacted because of the lockdown in the month of April and maybe something also in March and in May. But the customer retention keeps on being 100%.

Great. And then, it seems like there's a fair amount of new use cases services being developed in the current environment. I mean, can you talk a little bit about what you're seeing in that regard? And then when might some of those come into revenue?

Yes, of course. One thing that we've been doing actively since March is working together with the large governmental and nongovernmental organizations, including the Red Cross, where we deploy very, very quickly, some mobile CRM services based on short code numbers. And this is also something that is now expanding. I can't disclose what we're doing, but it's going further what we've been doing in Italy. Also in India, we did a lot because in India, the lockdown made by the government has been extremely severe. So the citizen needed services related to the distribution of grocery and food to the household, and we add them on our services, both messaging and voice. Also in the United States, we are doing something in this perspective. So the first and most relevant use cases that we have been working on are related to the emergency of the COVID-19.

We keep on investing significantly on the platform and the products to keep on evolving on the new services on the platform, which is an omnichannel platform. So it's absolutely independent from any specific bearer. And we will release new services going forward during the fiscal year.

The good news is that, notwithstanding the lockdown, Kaleyra being a digital company, the work-from-home to us was already the normal. So it's not a new normal. It's normal. Period.

Yes. Got it. You clearly had some big wins in the U.S. already. I guess, can you talk a little bit about the pipeline you're seeing for additional business there? And maybe that syncs up with your k-lab announcement as well.

Yes, of course. This is another question that I like very much. k-lab is a new initiative to be more effective in the U.S. domestic market, going after large financial sector operators, issuer banks, credit cards, debit cards, and we are already working with some of them to define exactly what kind of services they want to implement. And this is also spanning over the United States domestic market because most of these players are multinational, global companies. So we are now working in Latin America with them to build up new services for the cardholders. And the k-lab has been fueled as an organic investment, hiring 3 very senior executives with a very, very significant expertise in the field of payments and digital banking. So let me say, it's only like 2 to 3 weeks that we have launched the initiative. Give me -- allow me at least a couple of months to deliver good news.

Definitely, definitely. And then just last 2 financial questions. I guess, what should we have as a stock-based comp for the second quarter as well as share count for the second quarter?

Well this question is a question that I would ask Giacomo to address. Giacomo, can you please take it over?

Yes. In the second quarter, as you know, we have some share purchase agreements. And maybe we can buy back about 2 million shares. And as I already mentioned, we also delivered already in the second quarter, 2.2 million shares in connection with the public company.

Great. And then how about stock-based comp cost in the second quarter?

Yes. This also depends on the Board and the release of the stock plan and RSUs.

Yes. Okay. Makes sense.

And basically, if I can add to sense to this. Basically, the executive -- the management team is already there. So what we had to grant in terms of RSU is almost completely absorbed by the issuing that we have already done. There will be some very 2 more to be released during the second quarter because of the recent hiring.

(Operator Instructions) Our next question comes from George Sutton of Craig-Hallum.

Dario, in your prepared comments, you referred to a couple of industry growth rates. I think one was 40% over a period of time and one was 27%. So I want to think a little longer-term in terms of structurally how you think you will be able to grow relative to some of those industry growth rates.

Well when we release market data, as you know, we have to stick to sources that have been authorized for a public reference. So the analysts that we have referred reviewed their forecast in terms of loss lowering down to 27%.

My feeling is that the CPaaS industry, being fairly new, is still largely underestimated by the market analysts. I think that the industry as a whole will keep on growing over the next 2 to 3 years at a steady pace of about 30% year-on-year, with possibly some acceleration due to the new normal that we are all living now because this is basically creating the burning platform for the enterprises which have not yet invested in digital transformation and on mobile and will accelerate. So my expectation is that going forward, the market we keep on growing at a steady double-digit, around with the first digit around 3.

Got you. You also obviously have had some success growing through M&A. Given the environment that we're in, my assumption is valuations may change for some of your potential M&A targets. Is M&A -- or can you just discuss how significant M&A may be as part of your future growth as well?

Yes, of course. M&A, as you know, is absolutely relevant in this industry because the industry, again, is fairly new and is undergoing a significant consolidation process. Kaleyra has been and keeps on being on the buy side. And we have a number of those yields that we are evaluating. And I do agree with you. There might be a correction in the value of the assets because of the coronavirus. And in general, the overall market had a correction. And we will evaluate carefully if, with any new opportunity coming up or coming up to my screen, my value screen going forward. But in general, we will keep on investing, both organically and strategically.

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

Thank you very much, operator. Thank you, all, for joining in today's call and your continued support. We look very much forward to speaking with you again and when we will report our fiscal second quarter results in 3 months from now. Thank you very much.

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