Kaleyra Inc (KLR) 2022 Q2 法說會逐字稿

Good afternoon. Welcome to Kaleyra's Second Quarter 2022 Earnings Conference Call. After the market closed, Kaleyra released unaudited results for the second quarter ended June 30, 2022. The press release as well as a replay of today's call can be found on the company's Investor Relations website at investors.kaleyra.com. Please review the release for additional information on what will be discussed today.

(Operator Instructions) Joining us today are Kaleyra's Founder and Chief Executive Officer, Dario Calogero; Chief Financial Officer, Giacomo Dall’Aglio and VP of Investor Relations, Colin Gillis. Following their remarks, we will open the call for your questions.

I would now like to turn the call over to Kaleyra's VP of Investor Relations, Colin Gillis. Sir, please proceed.

Thank you. Before we begin, we would like to remind everyone that 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 the 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 the statements to reflect new circumstances or unanticipated events that occur, except as required by law.

Throughout today's press release and on the call, we'll refer to adjusted gross profit margin, adjusted EBITDA and adjusted earnings per share. These metrics are not determined in accordance with the generally accepted accounting principles and, therefore, are susceptible to varying calculations.

A definition, calculation and reconciliations to financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of Kaleyra's financial results provide useful information regarding certain financial and business trends and the results of operations.

Now I'd like to turn the call over to Dario for an overview of Kaleyra's second quarter. Dario?

Thank you, Colin. Welcome, everyone, and thank you for joining us today. As usual, for those of you who may be new to our story, I'll begin with a brief overview of our business. Kaleyra is a communication platform as a service provider, and at a high level, we provide our global partner base with an omnichannel suite of powerful APIs and visual tools to bridge the communication divide between brands and their customers.

Brands often face coverage gaps when trying to communicate with their customers, especially in industries that require security and must prioritize reliability, such as financial institution and health care. Our mission is to build lasting business to customer relationships for our partner brands across channels and to do so while providing service that our clients can trust.

To reiterate, our growth strategy relies on 3 main pillars. One, we are focused on expanding our geographical footprint. Kaleyra revenues comes from global customer and is a priority for us to both expand to new geographies and maintain our diverse global revenue split. It is our view that the CPaaS market remains very fragmented and underpenetrated in many parts of the world, and we are well positioned to meet CPaaS demand in underserved areas.

After last year, expansion into American market through mGage infrastructure, we continue to have around 1/3 of our revenues from each of the Americas, around 41%; Europe, around 28%; and Asia, around 32%, a favorable balance that makes Kaleyra one of the most prominent and geographically diverse CPaaS companies in the world.

Two, we will continue to judiciously invest in our omnichannel suite of services. This is our goal to meet our partners on whichever channels they require to best connect with their customers. As video and voice communication proliferate globally, expanding into new communication streams remains an important area of investment for our team.

And lastly, we remain committed to securing reliable and trusted service. Our business thrives in industries that have the highest standard of security for their communications with their consumers, banks, financial institutions, healthcare, et cetera, only to be able to trust that their interactions with consumers are handled with the utmost security and consistency.

Kaleyra delivers on that in a way that no other industry player does. While others strive for partner volume, we know that our expertise in trusted CPaaS influences customer retention, and that with the right partners, (inaudible). Through our diverse geographic mix, concentrated investment in our omnichannel platform and secure service, we believe we have a real opportunity to scale and realize our long-term vision of being a trusted global CPaaS provider for our partners. Our Chief Financial Officer, Giacomo Dall’Aglio will discuss our financial results for the quarter shortly.

But before I hand over the call, I'd like to recap a few recent highlights from our second quarter. I'll start with a financial overview. Our second quarter revenue was $81.1 million, up 50% from the same comparable year ago period and in line with our revenue estimate. From a profitability perspective, we are encouraged that we were able to exceed the expectation and do so while continuing to invest in business in our growth strategy.

For example, our second quarter gross profit and adjusted gross profit were $18.7 million and $20.2 million, a 78% and an 82% increase from last year's Q2, respectively. While our adjusted EBITDA increased over 177% from the prior year period from $2.2 million to $6 million.

In addition, our cash and cash equivalent position remains strong at over $74 million, and our key metrics significantly improved as well. with our adjusted gross margin at 25% compared to 20.6% in the prior year period.

Also, the Campaign Registry continued to outperform, posting its first million dollar month and finishing with over $4 million in revenue in our second quarter with high profitability. While we don't plan to update Campaign Registry results every quarter, the Campaign Registry continues to be a key aspect of our trusted CPaaS offering, and we remain committed to driving significant shareholder value, both through the Campaign Registry as well as the rest of the business over the long term.

Moving to some of our key operating metrics. In the second quarter, we delivered 13.4 billion billable messages and connected 1.8 billion voice calls. In our largely volume-based business, this reflects our ability to leverage the benefits of scale and this is an area in which we hope to drive continued growth in the future. In Q2, our dollar-based net expansion rate was 103%, calculated based upon pro forma revenue from the same customer base in the corresponding year ago comparable period.

Moving to our operational highlights. In the second quarter, we joined the Russell 3000 Index at the conclusion of the 2022 Russell Index annual reconstitution. We appreciate being part of this select group and expect our inclusion to bring added visibility within the broader investment community. We also announced 2 key appointments in personnel. First, Zephrin Lasker, has been appointed to the leadership team as the Senior Vice President of Marketing and Strategic Alliances. Zephrin has a decorated career in messaging, e-commerce, digital marketing and Software as a Service platforms and will be instrumental in driving Kaleyra's effort to expand within new existing markets.

Second, Colin Gillis has been appointed as our Vice President of Investor Relations. Colin brings over a decade of industry experience from his time analyzing public and private companies as an equity research analyst. In his new role, Colin has already started engaging with the investor community to expand and to leverage visibility into the company's operations, growth strategy and results.

I'd like to extend a warm welcome to Zephrin and Colin, both of whom have already done tremendous work for Kaleyra. Colin is joining us today as well, and I'd like to give him an opportunity to introduce himself. Colin?

Thank you, Dario. I joined Kaleyra because I see a company with an attractive global customer base, balanced revenue sources, a strong management team, and a clear road map to help our clients connect with their customers. What separates Kaleyra from other companies is the ability to provide a deep level of service to large enterprise companies. In the latest investor presentation, we point out that 38.3% of revenue from the June quarter is related to our top 10 customers. It's simple to understand that mobile usage is only going to increase and that brands are going to continue to expand the way they reach out to customers.

In closing, I want to mention, I include my e-mail address in all the financial press release. I welcome all communications and look to be a resource for existing and potential investors. And with that, I'll pass it back to Dario to wrap up our operational highlights.

Thanks, Colin. Moving on to product delivery. We co-developed video interface with the Santagostino Italian Health Care Network to enable several of its clinics to offer remote assistant to patients. These integrated product developments are increasingly popular among service providers and help their existing operations with technical capabilities. We look forward to continuing our partnership with Santagostino and expect to develop integrations such as this one across industries and channels in the coming quarters.

Kaleyra's flexible omnichannel offering is one of our greatest strengths, and this is an area in which we expect to continue investing during the back half of 2022. Across our business, we were able to achieve these results despite persistent headwinds faced during the quarter. We believe that these things, short-term challenges in Brazil that we discussed last quarter have now passed. However, additional overlapping geopolitical and macroeconomic factors influence the environment for many global companies.

When combined, these factors including a slowing global economy, recent market volatility, adverse effect on foreign exchange rates and uncommonly high food and energy costs caused in part by the war in Ukraine can affect our previously projected growth for 2022. Specifically 2 new phenomena stands out. First, we continue to face significant foreign exchange headwinds, fueled largely by the ongoing geopolitical turmoil in Europe.

Although we are still free of direct exposure to Russia and Ukraine and maintain a diverse geographic customer mix overall, nearly 30% of our revenue comes from within the European countries and many of those contracts are transacted in euros. We saw increased volatility within the foreign exchange rate market in the past few months, enough that when compared to the last year Q2 exchanges rate, this year's revenue was reduced by nearly $3.5 million in the second quarter. This impact, when calculated on a pro forma basis relating engaged perimeter, translate to our European revenues being worth nearly 15% less in 2022 than it was in 2021.

Second, broader economic downturn has started to shift enterprise purchasing behavior. Due to our commitment to secure service, our enterprise partners relationships require significantly more upfront diligence than for other areas of our industry. While these add time to our sales cycle, the trust we build with our partners through this process helps us maintain our strong net retention and 0% churn rates within our top 10 customers.

Unfortunately, in periods of more careful enterprise spending, this creates an even more elongated sales cycle and backs up customer acquisition pipeline as a result.

These global external impacts are not expected to persist forever. And as the market and our broader economic environment adjust to our upcoming new work, we expect the sales pipeline to turn back on and for our diligent customer acquisition work over the past few quarters to be recognized.

Until then, however, we remain mindful of our forecasting ability in an uncertain landscape and have decided that it is prudent to revise our guidance for the third quarter and full year.

So as Colin will discuss at the end of the financial section, with those challenges in mind, we have made an approximately 4% downward adjustment to our revenue outlook for the 2022 fiscal year and align our outlook for the third quarter to match this reduction overall. However, while we adjust to our current climate, our focus remains on maintaining consistent profitability metrics and driving healthy growth across our business. What was originally perceived as an isolated quarterly downturn for the world has proven to be more expensive. And we are cognizant that prospective lines of business development are more difficult to generate in the current climate.

We remain focused on the fundamentals of our business and understand the high-quality product and service development and implementation will continue to reap increased economic benefits in the long term. We are proud to our team's perseverance and their unwavering commitment with the sustainable and valuable business moving forward.

And with that, I'll turn the call over to our Chief Financial Officer, Giacomo Dall’Aglio, to discuss our financial results for the quarter in greater details. Giacomo?

Thank you, Dario. Turning now to our financial results for the second quarter ended June 30, 2022. As Dario mentioned, our total revenue in the second quarter increased 50% to $81.1 million from $54 million in the comparable year ago period.

The increase in revenue was mainly driven by the fact of the business combination with mGage, which contributed $30.2 million and organic growth of Kaleyra legacy business representing 16% of the aggregated growth period over period. Gross profit in the second quarter increased 78% to $18.7 million from $10.5 million in the comparable year ago period. The increase in gross profit was mainly driven by the effects of business combination with mGage.

Gross margin in the second quarter 2022 increased to 23%, compared to 19.4% for the second quarter 2021. The increase in gross margin was mainly due to the mGage and Bandyer integration and increased performance by Kaleyra Video and Kaleyra Voice as well by the Campaign Registry.

Net loss totaled $15.8 million or $0.36 per share based on 43.4 million weighted average share outstanding, compared to a net loss of $4.5 million or $0.13 per share based on 34.3 million weighted average shares outstanding in the comparable year ago period.

The increase in net loss was mainly driven by the amortization of acquired intangibles and the core interest on convertible notes. Adjusted gross profit, a non-GAAP measurement of operating performance increased 82% to $20.2 million from $11.1 million in the comparable year ago period. Adjusted gross margin in the second quarter of 2022 was 25% compared to 20.6% in the comparable year ago period.

Adjusted net income and non-GAAP measure of operating performance decreased by 89% to $55,000 or $0 per both basic and diluted share based on 43.4 million and $53.7 million weighted average share outstanding, respectively.

From $504,000 or $0.01 per basic and diluted share based on 34.3 million and 44.9 million weighted average share outstanding, respectively, in the comparable year-ago period.

Adjusted EBITDA, a non-GAAP measurement of operating performance increased 177% to $6 million or 7.4% of total revenue compared to $2.2 million or 4% of total revenue in the comparable year ago period. The increase in adjusted EBITDA was primarily due to the effect of the business combination with mGage and Bandyer and the cost synergy between the 2 legacy businesses.

At the end of the second quarter, cash, cash equivalents, our [resulting] cash and short-term investments were $74.8 million compared to $97.9 million as of December 31, 2021.

This completes my financial summary. I'd now like to turn the call back over to Colin to provide our financial outlook for the remainder of the year.

Thank you, Giacomo. I'll now take a few minutes to provide our financial outlook for the rest of the year, which ends on December 31, 2022. As a reminder, Kaleyra currently provides annual and quarterly revenue guidance as we believe these metrics to be key indicators of the overall performance of our business.

As Dario explained, our outlook for the rest of the year factors in previously unforeseen global headwinds that both affect our industry and the broader technology market. The pooled effect of these headwinds have lengthened our sales cycle, backlogged our pipeline, and it will take additional efforts to return to our prior levels of top line growth.

Due to this environment, we continue to believe that it is prudent to adjust our full year outlook. We currently expect revenue for the third quarter to range between $83 million and $87 million.

For the full year of 2022, we expect revenue to range between $345 million and $350 million. I would remind investors of the seasonality in Kaleyra's business, where we expect to see positive catalysts in the fourth quarter, including the 2022 U.S. election cycle, Diwali, Black Friday, Cyber Monday and the December holiday season.

This completes my financial outlook summary. I'd now like to turn the call back over to Dario to wrap up our remarks for the call. Dario?

Thank you, Colin. In summary, we are encouraged by our positive momentum in many strategic areas of our business as we have moved into the second half of the year. While we were confronted with the broader global economic landscape that impacted our overall growth, we believe that we took meaningful steps forward in the second quarter, as we continue to invest in our omnichannel platform and partnerships while driving profitability.

Our product shift continues to grow in both depth and breadth, and the quality of our service is as strong and trusted as ever. Our geographical footprint continues to expand into a healthy global balance that we will look to build on moving forward. And our stride into new growth areas, including Kaleyra Video and Voice, along with promising results from the Campaign Registry have continued to drive leverage into our operating model.

As we move into the second half, we do so with conviction in our long-term growth strategy, supported by a strong balance sheet and a healthy business fundamentals. We are confident that we have the team and the processes in place to remain agile in the face of challenging environments and that our overall business remains very healthy.

Above all, we look forward to driving sustainable value across our business as we advance along our journey to become the trusted partner in the expanding and massive CPaaS market.

And with that, we are ready to open the call for questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question will come from George Sutton of Craig-Hallum.

I really wanted to focus in on the guidance, particularly for Q4. So last year, it looks like sequentially, you grew 7%. It looks like at the midpoint, you're assuming a 20% growth in Q3 to Q4 this year. And I appreciate the political campaign opportunity. Can you just walk through the thought process of that 20% versus the 7% last year?

Yes. This is Giacomo, so...

George, I want to...

Yes, Colin. Please go ahead.

Okay. Yes. George, I understand how the numbers look, right? But we did sit down and go through all the baseline cases and feel that with the existing customer base, particularly a new customer that is very active and is escalating quickly that generates a significant amount of revenue in the December quarter, that was the realistic number that we wanted to provide.

Just to be clear, you're saying there are new customers that you've brought in recently that you're expecting to have big contributions in the back half of the year. Is that what you're saying?

Yes, correct.

Okay. We believe that...

And I'm also pointing out that there are many other positive factors that I gave in the script, right, political elections, Diwali, right? And then, of course, your typical Black Friday, Cyber Monday and the holiday season.

Okay. Just want to make sure I understood that. And we're excited about your expansion into the U.S. It does look like you've opened an office in Atlanta. I assume that gives you some more boots on the ground in the U.S. Can you just give us an update on your U.S. expansion?

Yes, this is Dario. The opening of the office in Atlanta is simply a new office that we have established to host our people in Atlanta that are coming from the mGage acquisition. And also, we are hiring in Washington, D.C., in Virginia. And also we have operations in Los Angeles. Obviously, the growth of the company is not only in the U.S., but it's also in other geographies, including India, Dominican Republic and, in Europe, in the U.K. and in Italy.

Got you. Can I just ask one other question? You mentioned -- I think you said, I may not be quoting perfectly, but the challenges like we had in Brazil from a pricing perspective have ended. Could you just talk about that? That does now seem like a very isolated event in your view?

Yes, exactly what we said. The events that we acquired during the second quarter, during the first quarter, deploy over the second quarter, and it's absolutely as planned. We are obviously working together with the account to expand our business in other geographies, and also we are onboarding other accounts, but that specific event didn't appear on our radar in other jurisdictions.

The next question comes from Tim Horan with Oppenheimer.

This is Ed Yang for Tim. Two questions, if I may. First, can we quickly go around the world and, by vertical, rank order from strongest to weakness geographies? Is U.S. still outperforming Brazil and Europe? Which sectors are picking up or slowing down? Any trend -- any changes in trends since the prior quarter? And just related to that, the 4% reduction in revenue guidance, is that concentrated in any specific area? Or is that all broad-based?

So starting with question #1, we still have a sizable 30.5% of revenues coming from financial services, banking, fintech, et cetera. Then we have almost 70%, 16.8% coming from e-commerce. Health care, travel, transportation is 15.7%. And technology is 14.5% in Q2. Then we have all the other operators CPaaS aggregators that are accounting for about 22.5%. And this is the split by vertical.

The other question is related to the dynamics of the different industries, different geographies. So the revenue by country breakdown is United States, 33.8%. Second in line is India with 24.2%. Italy, which is still sizable, but it's relatively smaller is 20.5%. And all the other European countries, excluding Italy, are accounting for 17.3%. South America has been in Q2, 6.9%. And other Asian countries, including Middle East and Africa accounts for 7.3%. Overall, no individual customer accounting for more than 10% of the revenue.

And Dario, just for clarification, I'm asking amongst those different geographies and amongst those different verticals, any changes within any of those segments that stand out in terms of getting stronger or weaker since the prior quarter?

No, not really a significant dynamic. The business is being quite stable for Kaleyra. This is a volume business. So you may have a specific segment, having a higher volume performance and other segment lagging a little bit behind, but it's like not very relevant. [Speed] banking is -- digital banking, in particular, mobile banking is still definitely the king of the hill. And in general, we tend to work on transactional services. So e-commerce is still very steady, home delivery, digital transportation and app play is still very strong. So I would say that I haven't experienced -- we haven't experienced a significant variance or deviation from the standard trend that we have observed over the last few quarters.

And that applies to guidance as well in terms of -- I'm not sure that 4% reduction applying to just broad-based across your business as a whole?

May I answer that one?

Sure, Colin. Go ahead.

Okay. So briefly, I think everyone understands that we are in a very unique economic situation, right? We have inflation. We have the economy contracting. We've got central banks tightening, right, with the U.S. Central Bank leading the way, right, which is driving a strong dollar. We're back below parity, right, to the euro.

And then we've got -- on the other side, these incredibly strong payroll numbers that are coming in. And so that just causes a certain degree of caution among executives as to where exactly are we headed, right? Is this a shallow recession? Is this even a recession at all? Now we're back to talking about a 75 basis point rate hike for the Federal Reserve, right?

Are they going to overshoot? And so it's just more prudent to bake in caution in terms of what consumer activity is going to be, right? And the length of time that executives are going to take to make their business decisions. And so that's a big part of the driver. There's really -- I was -- when I joined, I was very pleased to find that Kaleyra is able to grow to the current economic environment. So does that make sense?

Fair enough. Fair enough. And just a final question for me, and this is more longer term, just on pricing. Obviously, a lot of uncertain macro cross-currency, FX, I understand that. And Dario, historically, you said you've relied mainly on volume growth. And now you handle billions of text messages and voice messages and so on. But now that double-digit inflation is the norm across the world, has there been any change in customer thinking or opportunity for you to open the pricing discussion with customers given the value and some of the cost savings that you provide?

This is a good question. We are carefully evaluating the pricing dynamics. At the moment, we do not experience an increase in sourcing costs. And the same moment, we will -- we have contracts that allow us to revert to the customers the increasing sourcing cost. We are cautious about being proactively enhancing the pricing again, because this is a volume business, and we do not want to put in a difficult corner our business model rising prices may bring due to the elasticity of demand to lower volume. So at the moment, we stay put, but this is something that we are thinking about.

The next question comes from Jonnathan Navarrete of Cowen.

Good afternoon. So I'll start with revenue. Just want to understand what was the dollar impact on revenue from foreign exchange in the quarter? And how much is it -- how much is baked into the third and the fourth quarter individually?

This is Giacomo. On a pro forma basis, just in Europe, the difference in revenue for adverse foreign effect is about $3.5 million.

[$3.5 million] in the quarter. Okay. And that's affecting rev. And then for the third and fourth quarter, can we expect like what, maybe $3 million or $2.5 million like according to what you guys have to plan?

Yes, of course. We saw a decline quarter-by-quarter, in particular from euros. So yes.

Okay. Got it. And the reason I'm asking is mainly because I want to see if the reduction in guidance is it really because businesses is weakening or is more of an FX-driven, so that's helpful.

If I could just chime in on it, right? It just seems that you can't model enough of a change it keeps just dropping and dropping. And we are stuck in this situation where the U.S. Central Bank looks like it's going to be the world leader in rate hikes.

Got it. For adjusted EBITDA, I know you guys don't provide guidance for this, but can we expect a sequential improvement through the third and fourth quarter? And presumably, it would be -- it's already better, I guess, than what it was in '21?

So this is a question for Giacomo. This is related to the seasonality of the adjusted EBITDA.

Yes. Usually, we have a better quarter in Q3 and Q4 EBITDA on seasonality. Of course, we have to think about this adverse effect in revenues and the inflation can be -- go a few downturns in EBITDA, but we have confidence to have a good [second quarter].

Okay. And if I may, just one more question. I know we're just in August. But in terms of '23, just what are you guys thinking of in terms of new customer acquisitions? And where -- what type of growth can you expect year-over-year?

Well, we are investing into expanding our business development capabilities. The pipeline of new leads, new prospects is constantly increasing. And so let me say, I think that we will perform better than in the past in terms of growth on new customers.

But our growth is explained not only by the new customers, new business, but also by the increasing volume of existing customers. And this is possibly the part that is more difficult to model because, basically, this is depending on the overall performance of the economy. And that's the challenge in a way. It's hard to predict '23. So it's a good question, and it's a tough answer. But the only way that we can end this is to keep on investing in the growth, and that's what we're doing.

And when you say growth, the way I'm kind of interpreting, and please correct me if I'm wrong, is just more U.S.-centric investment? Or is this just wide, broad, all over the world, India, Brazil, Europe?

Well, the macroeconomic dynamics most likely will be more challenging in Europe due to the war in Ukraine, due to the very steep increase in the cost of raw materials, energy. This is also depending on the monetary policy of the European Central Bank, which is following, at the moment, the U.S. Federal reserve but maybe going forward, will be in a difficult corner. So let me say, overall, we expect Europe being more challenging, U.S. going fairly well and Asia Pacific going fairly well.

The next question comes from [Vivek Plani] of Northland Capital.

I'm Vivek on behalf of Mike Latimore. So I have a couple of questions with me here. So the first one is, how much did the Campaign Registry contribute in the second quarter?

As Dario said, contributed $4 million in the second quarter.

Oh, that's good. My second question is about the headcount. So what are the current level of headcounts and what might that be at the end of the year?

Good question. So at the end of June, the overall headcount, I'm looking for the right figure, was about 600, exactly -- hold on, one second. In terms of growth -- well, we were exactly 607 at the end of June 2022. We are slowing down the hiring. In the second half, we are slowing down the hiring because we think that we must stay more conservative, also considering that we have adjusted our overall guidance for the full year. So I do not expect this figure get much higher than that. I think that it's reasonable if we'll end up at roughly 650 at the end of the year.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Calogero for his closing remarks.

Okay. Thank you very much, operator. And I want to thank again all of you for joining us in the call today. And we want to thank our extensive worldwide network of partners investors, but also, we want to thank all of our employees for their continued support. Operator?

I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for Kaleyra's First Quarter 2022 Earnings Conference Call. You may now disconnect.