KORE Group Holdings, Inc. Q1 FY2022 Earnings Call

Greetings and welcome to the KORE Wireless Group First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Vik Vijayvergiya from Investor Relations. Please go ahead.

Thank you, operator. On today's call, we will be referring to the first quarter 2022 earnings presentation that will be helpful to follow along with, as well as the press release filed this afternoon that details the company's first quarter 2022 results, both of which can be found on the investor relations page at ir.korewireless.com. Finally, a recording of the call will be available on the Investor section of the company's website later today. Please note that this webcast includes forward-looking statements. Statements about the company's beliefs and expectations, containing words such as may, will, could, believe, expect, anticipate, and similar expressions, are forward-looking statements and are based on assumptions and beliefs as of today. The company encourages you to review the Safe Harbor statements, risk factors, and other disclaimers contained on this slide and today's press release, as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this webcast. The company also notes that it will be discussing non-GAAP financial information on this call. The company is providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today’s earnings release and presentation. I'll turn the call over to Romil Bahl, the Company's President and Chief Executive Officer.

Thank you, Vik. Good afternoon, everyone, and thank you for joining us today for our first quarter 2022 earnings call. With me is Paul Holtz, KORE's Chief Financial Officer. The first and key objective of today's call is to provide an overview of our financial results for the first quarter 2022. I will start with a summary of our results and then Paul will take you through our performance in more detail. Second, we want to help the market understand the massive opportunity ahead of KORE as the first publicly traded IoT pure-play company. Last quarter's deep dive focused on our world-class IP, and this quarter we will discuss KORE's connected health segment and the market trends driving our largest industry practice. We will then hold a Q&A session to round out the call. So let's move on to Slide four to look at our Q1 results. First quarter revenue was $68.9 million, up 25% year-over-year. IoT Solutions revenue was $24.8 million, up 70% year-over-year. DBNER for the first quarter was 122%, up from the first quarter of 2021, but please keep in mind that this metric continues to benefit from the LTE transition project at our largest customer, which was nearly complete at the end of this first quarter. Additionally, we are reiterating our guidance, which will result in KORE exceeding our combined two-year revenue forecast from our go-public model by at least $50 million. Before discussing KORE's connected health business, I want to take a step back and note that we delivered these strong quarterly results despite ongoing supply chain disruptions, the 2G and 3G sunsets, and geopolitical uncertainties. As IoT adoption accelerates, it will unlock massive value for KORE and our customers across our five focus verticals. With that, I will present a couple of slides to provide some business context, and then we will move on to the deep dive topic of this earnings call, which is our exciting connected health segment. Many of you have seen KORE's seven-by-seven chart on Slide five before; for those of you new to our story, I will say that this is one of my favorite charts because it represents the customers' IoT journey. No matter the use case, how simple or sophisticated, every one of these seven major steps has to be taken to deploy an end-to-end solution. This slide clearly showcases why IoT deployments are so complicated and how KORE is making IoT easier to adopt with our one-stop shop approach to enabling end-use cases and IoT applications. It should then come as no surprise that we build our capabilities along these steps, and we continually think about how to embed more intelligence into our software and platforms so we can drive more efficiencies for our customers, who need to adopt IoT to stay competitive in what they do. Slide six takes those same steps from the seven-by-seven chart and aligns them down the side of this page. We have prioritized how we are building out the horizontal or cross-industry capabilities that we take to market. These capabilities include IoT strategy and technology selection, IoT connectivity, which is really a combination of connectivity management, device management, and data management; the series of managed services around device logistics and configuration represented by steps four, five, and six; and finally, analytics. For 20 years now, we have been building the world's leading IoT connectivity capability. More recently, we have introduced a comprehensive set of IoT managed services. Our analytics capabilities are in the early stages but represent a significant opportunity for the future. We would classify our capabilities across steps three, four, five, and six as advanced, and while the others are advancing, we are excited to further our capabilities in steps seven, or analytics, because of the SaaS nature of these services. As should be clear, most of KORE's global team members, or IoT-ers as we call them, are organized in teams that build and deliver these capabilities. Now we take these capabilities to market in two ways. The first is our regional go-to-market approach. Historically, this was the only way KORE went to market, and we have organized our sales teams in this area by the Americas and Europe and Asia Pacific. However, with the expansion of our offering portfolio, it is critical to understand our customer use cases and become more of a trusted advisor. So we are increasingly going to market by industry. We started this just last year by launching two of our five target industries, where we expect IoT to have a meaningful impact. In fact, over 80% of the IoT spend today is across these five sectors. We are already seeing a lot of traction with these initial industry practices, and this has strengthened our resolve to increase our go-to-market industries over time, which leads us to Connected Health. KORE Connected Health includes both key industry sectors, healthcare and Life Sciences. Use cases in healthcare include: Cardiac Rhythm Monitoring, Chronic Disease Management, and Medical Equipment Diagnostics. Key use cases in Life Sciences include clinical trials with electronic data capture and digital biomarker telemetry. I will go into more detail about both our segments and use cases in just a moment, but first I want to set the stage by talking about the broad trends we see in Connected Health overall. As you can see on Slide seven, connected devices in both Healthcare and Life Sciences are growing rapidly. Industry analysts estimate that the Connected Health market will exceed $500 billion in 2025. Further, organizations that successfully deploy IoT devices deliver better outcomes, improve their patient experience, and realize significant cost savings. Given IoT's success in improving both patient outcomes and cost efficiency outcomes, it is not a surprise that IoT adoption and spending are expected to grow over the next several years. So what is the challenge? What is hindering IoT adoption? As you have heard us say before, launching an IoT end solution that can scale effectively and securely is incredibly difficult, and it is no different in Healthcare, where the connectivity needs to work while meeting stringent data privacy and security regulations like HIPAA. Slide nine shows the complexity that Healthcare organizations must manage and overcome if they want to launch a device that leverages the full capabilities of IoT. This complexity requires considerable time and resources that even large blue-chip organizations do not have, certainly not without IoT experience and real expertise. What KORE fundamentally does for our Connected Health customers is bridge that gap. We have done this with scores of customers, helping with different parts of our seven-by-seven services. And now, consistent with what you have heard us say before, we are focusing on pre-configured enablement solutions, which focus on key problems that almost all companies deal with in these use cases. Across Connected Health, we have launched just such a pre-configured solution that, with relatively minor tweaks, can address several use cases across Healthcare and Life Sciences. Our Connected Health Telemetry Solution or CHTS massively simplifies the complexities of IoT, overcoming significant barriers to entry and shortening adoption times. KORE's capabilities enable superior coverage, reliability, and regulatory experience to provide real-time data insights to unlock significant value for customers and their patients. As IoT adoption accelerates, so too will demand for our Connected Health Solutions, especially with IoT's rapid growth; we are confident that IoT adoption will continue to accelerate in both Healthcare and Life Sciences, and we will show you why we think that in the next several slides. Slide 11 covers trends for chronic disease treatments. Chronic diseases include diabetes, hypertension, chronic kidney disease, and the other conditions listed on the left side of the page. The CDC estimates that 60% of Americans have at least one chronic condition, and 40% of all Americans have at least two chronic conditions. The cost of treating these conditions is broken out on the left. As you can see, treatment costs are already well into the billions of dollars, with diabetes costs alone reaching a whopping $327 billion. These costs are a burden to patients and providers alike. IoT has emerged as a critical tool to help contain these costs while improving patient outcomes. However, enabling IoT for medical devices can be difficult due to medical device regulations. Current regulations consider anything integrated into the wireless module firmware, including cellular modules, to be a fundamental aspect of the medical device. Because of that, any change or update to the firmware requires regulatory submission and approval, even if it does not impact the core function of that device. This is a significant challenge in launching an IoT device; many medical device OEMs and integrated therapy providers are looking for ways to enable IoT solutions using existing technology to overcome this regulatory challenge and improve their time to market. KORE addresses this opportunity by adapting existing wireless technologies that are not integrated with the medical device and therefore do not require regulatory approval for every update. Additionally, KORE leverages common gateway architectures that IoT enables within a variety of devices, including dialysis cyclers, oxygen concentrators, and infusion pumps. For example, KORE's sensor technology and scalable gateway architecture help enable an innovative congestive heart failure treatment that incorporates IoT solutions. Congestive heart failure has two traditional crisis indicators: weight gain and blood pressure. Unfortunately, a congestive heart failure crisis may have already begun by the time the two crisis indicators manifest. KORE's Healthcare Solutions help address this issue. KORE enables our customers to launch a pulmonary artery pressure sensor, which is a remote patient monitoring device. The pulmonary artery pressure sensor incorporates a Bluetooth sensor, which is inserted into the pulmonary artery. Once the device is running and connected, it provides real-time analytics to healthcare organizations without the need for a patient to show up at a healthcare facility. This device provides lifesaving medical alerts 10 to 14 days ahead of traditional crisis indicators. This IoT-enabled medical device is an incredibly powerful tool that can prevent a potentially fatal health crisis and the associated treatment costs. In parallel to these trends in chronic disease treatments, there have been three trends driving IoT adoption in Life Sciences. The first is the movement towards electronic data capture from patients who are otherwise manually inputting data. In the past, clinical trial data was captured by having patients physically fill out a form. After that data was painstakingly collected, it had to be sent to the clinics for analysis. This whole process could take between 12 weeks to more than a year. With electronic data capture, this process can be done in real-time, with the data ready for analytics as soon as the data collection stage of the trial is complete. The second trend is incorporating digital biomarker data into clinical trials. This is a growth area that is just getting started. Historically, the lack of an off-the-shelf, plug-and-play solution was a roadblock to IoT deployment in clinical trials. However, KORE has recently launched the CHTS solution, which allows devices to easily and reliably connect and transmit biometric data that bridges that gap. These two trends are resulting in trend three, which is an explosion in DCT or Decentralized Clinical Trials. While the industry was cautiously evaluating DCT technology before the pandemic, COVID-19 forced rapid industry adoption. As you can see on the chart on the right, approximately 28% of CROs ran DCTs before the pandemic. That figure increased substantially during COVID and is expected to continue growing with 95% of CROs planning to increase the use of DCTs within the next 12 months. However, the exponential growth in sensors used in clinical trials is not limited to DCT. Industry analysts estimate that up to 70% of all clinical trials will require sensors by 2025, which means that 70% of all clinical trials will utilize IoT by 2025. This is a massive opportunity for KORE, and we have positioned ourselves accordingly. In summary, these three powerful industry trends are driving IoT adoption in both our Connected Health Sectors, and we are confident that these trends will drive growth in that business for the next several years. Based on these trends and market insights, Slide 14 summarizes KORE's go-to-market strategy for the two key industry sectors that comprise Connected Health. In Healthcare, we have remote patient monitoring, medical equipment diagnostics, and medical alert monitoring, and within Life Sciences is clinical trials. But I will not spend time detailing each use case, but as you look across those 12 boxes, you should recognize some use cases we just talked about, including chronic disease management and DCT. And I want to highlight a critical point; while there are 12 different use cases on this page, KORE is not building 12 different solutions; rather, we can build once and deploy many times because of the commonality across these use cases in the areas we serve. On Slide 15 is another view with some of our top priority use cases. As you can see, we can serve customers deploying end solutions in these areas with a variety of our seven-by-seven services, as showcased by the green check marks. We are actively recruiting and developing our sales team to have the ability to sell multiple services to each customer. And then we overlay our innovative pre-configured solutions as discussed; and as we have solved the problem for one use case, we can integrate that solution architecture into a common base. Then, with slight tweaks to that base, we can go to market in several ways, targeting multiple use cases. So our investments in our technology are extendable and scalable across different use cases. For example, the only thing we must alter between our chronic disease management, our cardiac rhythm monitoring, and medical equipment diagnostic solutions is the sensor interface on our gateway. So now let's look at our CHTS solution, which is outlined at a very high level on Slide 16. On the far left, you can see KORE's cellular gateway, which can interact and receive data from various medical sensors and devices. That data is transmitted to KORE's Connected Health data telemetry platform. KORE's role in the process includes medical device and sensor integration, gateway device management, global connectivity management, and data telemetry to the customer endpoint to ensure that data is delivered quickly and securely. However, it is important to note that KORE's role ends with the data telemetry to the customer, as represented by the vertical dotted line on this slide. Once our customers acknowledge and accept the data we project from our platform, KORE is an IoT enabler; it is our customers who use and apply that data we help collect. Moreover, as you can see on the right side of the slide, data telemetry is helpful across a wide array of use cases. A simple way to think about our CHTS solution is that essentially everything in orange on the left side of the dotted line enables all five use cases on the right, including chronic disease management, medical equipment diagnostics, and clinical trials. With CHTS, KORE has created a product where 80% of the solution is standard across use cases and only 20% must be tweaked. So in summary, the beauty of CHTS is that it is simple to install, cost-effective, and allows us to target a variety of use cases. Slide 17 provides an overview of our Connected Health practice as it stands today and what we think the business can do longer-term. Healthcare costs are rising, and IoT is one of the best-equipped technologies to reduce healthcare costs while improving outcomes and patient experiences. Those trends drive massive adoption and spending in IoT and create a massive opportunity for KORE. We are allocating our time and capital in proportion to that opportunity. These investments are already paying off; we have a large and growing customer count and a large customer pipeline with numerous cross-selling opportunities. We are confident in our Connected Health business and expect it to grow more rapidly than what we included in our go-public forecast through 2025. That forecast is represented on the left side of the page. On the right side of the page is our stretch goal of growing at more than 30% CAGR in Connected Health. In conclusion, I will say that we are very proud of our Connected Health team, and further, we believe that this innovative and strategic approach to helping our customers adopt IoT is extendable across industries. As 5G matures and IoT progresses, we expect additional use cases to open up, and we will launch new industry practices to tackle them and work to ensure that KORE is the best positioned service provider to unlock value for those use cases. With that, I will now hand the call over to Paul to cover the financials in more detail. Paul?

Thank you, Romil, and good afternoon everyone. Per Slide 18, we had a solid start to 2022, and we are well on our way to meeting the upper half of our 2022 revenue guidance range. Total revenue for the first quarter of 2022 was $68.9 million, an increase of $13.6 million or 25% compared to the same period last year. Revenue for the quarter was comprised of the following: IoT connectivity revenue of $44.1 million, representing 64% of total revenue, and increased by $3.4 million or 8% compared to the same period last year. The increase was driven by organic growth of our existing IoT connectivity customers net of LTE price adjustments, as well as from newly acquired customers, including customers from the BMP and Simon acquisition. These increases were offset by revenue loss from the devices retired due to the various networks sunset by U.S. carriers, which began in early 2022. The remaining $24.8 million of total revenue came from IoT solutions, which represented 36% of total revenue and increased by $10.3 million or 70% compared to the same period last year. IoT Solutions revenue was mainly impacted by organic growth from our existing IoT solution customers and the additional revenue added from the BMP and Simon acquisition. The overall gross margin percentage in the first quarter was 49.3%, compared to 55.9% in the same period last year. This decline in our overall gross margin percentage was primarily due to the growth in IoT Solutions revenue, which comes at a lower gross margin percentage compared to IoT connectivity revenue. We also continue to see margin pressure within IoT solutions in the first quarter year-over-year due to the growth at our largest customer, which has lower than average gross margin, an increase in hardware costs from supply constraints, and continued higher shipping and labor costs. IoT connectivity margin remained flat year-over-year at 62%. Total connections at the end of the first quarter were 15.3 million, an increase of $2.4 million or 19% compared to the first quarter of 2021. The dollar-based net expansion rate or DBNER for the 12 months ended March 31, 2022, was 122%, compared to 108% in the prior year. As mentioned last quarter, we expect DBNER to decline as the LTE transition project with our largest customer concludes. However, we expect DBNER to remain above 100%, and we expect to grow this metric over the long-term. Operating expenses in the first quarter were $40.8 million, increasing $10.2 million or 33% compared to the same period last year. Increased salary and benefit costs, higher stock-based compensation, costs associated with the BMP and Simon acquisition, and go-public company costs drove the increase in operating expenses. Net loss in the first quarter was $10.9 million, compared to $1.1 million in the prior year. Adjusted EBITDA in the first quarter was $15.6 million, a decrease of $0.9 million or 5% compared to the same period last year. The decrease was primarily due to the increase in costs associated with going public that didn't exist in the prior period. Our adjusted EBITDA margin for the quarter was 23%, compared to 30% in the previous quarter. Now moving on to cash flow. KORE used $4 million from operations in the three months ended March 31, 2022. This compares to the business using $12.3 million in cash for the same period in the prior year. As a reminder, cash flow from operations will vary quarter-to-quarter based on the timing of payments, accounts receivable receipts, and prepayments of inventory. Note the first quarter of every year will typically have lower cash flow from operations as annual incentive plan payments are made during this quarter. Cash and cash equivalents stood at $31.9 million, compared to $86 million at the end of December 31, 2021. This change was primarily related to the financing of the BMP and Simon acquisition. With that I'll pass it back to Romil.

Thanks, Paul. Again, we had a great start to the year, and I am very proud of our global IoT use. I will now wrap up with a couple of thoughts on where we're going and then we will open the call up for Q&A. KORE is growing our connection count and executing against our 2022 guidance. The first two industry verticals we have launched to initiate Phase 2 of our overall transformation last year are gathering momentum and receiving market and customer recognition, and we are just getting started. We are excited about building out our other focus verticals as 5G matures and IoT adoption accelerates. When we went public, the model we were using had us generating $457 million in revenue for 2021 and 2022 combined. At the time, this was seen as an ambitious goal. On the last earnings call, I said that we expected to outperform this go-public revenue forecast by at least $50 million, and I am pleased to say that after the strong quarter, we are reaffirming that message. Despite volatile market conditions, KORE has continued to execute and deliver on the promise of the decade of IoT. With that, let's start the Q&A.

Thank you, we will now begin the question-and-answer session. Our first question today is from Mike Latimore at Northland Capital Markets. Your line is open.

Great start to the year for you, and thanks for the healthcare overview, that's helpful. Romil, you reiterated your guidance for the year; you had a very strong first quarter, and some of that strength came from this large customer. Should we expect revenues to possibly decline a bit sequentially in the second quarter before seeing resilient growth afterward? How should we consider that general pattern?

Yes, you know, thanks, Mike. And really good question to kick us off with, and I appreciate that you're following the story closely, and therefore, you know that we've been transparent over several quarters in a row about the fact that we have this very large engagement, the LTE transition with our largest customer, right; let's call it customer number one, and that's been running and is substantially complete now as of the end of the first quarter. So obviously, the thought process would be, hey, that’s a significant amount of millions of dollars that we need to fill from to ensure that we're not sequentially declining quarter-over-quarter. Now we've got both organic and inorganic help in doing that, right? We've been obviously focused on organically growing our business. The team is certainly focused, and we've been seeing reasonably good traction despite the supply chain and other constraints. And then, inorganic obviously, we pulled off the BMP and Simon tuck-in, sort of, halfway through the last quarter. So we'll get a full quarter of that helping us as well. So we're working real hard to not have the sequential dip and yet, obviously the year sort of sets up like that, doesn't it? Because of that big one-time engagement with customer number one.

Got it. And I think you've mentioned that maybe you're tracking toward the upper end of your guidance, did we say?

Yes, I think that's right; we pointed to that in Paul's script, yes.

EBITDA was strong, exceeding our estimates, and the margin improved nicely compared to the previous period. Could you elaborate on what contributed to that? Should we consider this margin as a new baseline for future growth?

Yes, I'll just kick off with a couple of high-level comments, and then I'll let Paul finish up on the question or the answer to that question. As we sort of pointed to on the last earnings call, you know, Q4 was a real low point on margins. It was the peak, if you will, of that one-time engagement at customer number one, which obviously is some of our lowest margin work that we do, given their volumes. But also on the connectivity side, we had a series of one-time true-ups and things like that, that happened in the year that caused that margin to look even on the IoT connectivity line to look relatively low. We sort of said we were going to improve it from there, and we're starting to show what we can do here in Q1, and I suspect there is a little bit more improvement to come from there. But I'll let Paul address some more detail.

Yes, exactly; I’d go there that we had indicated that Q4 was kind of our low point on both connectivity and the IoT Solutions side of things that we see improvement. Now as the number one customer gets back to kind of normal baseline volumes, you'll see we get higher margins from that business versus the one-time LTE project. And then on the connectivity side, we just keep getting better and better at optimization pricing, better pricing from the carriers and so forth. So we hope to continue to see additional margin improvement as we go along.

Great, thanks a lot. Good luck this year.

Thank you.

Thanks, Mike.

Thank you. Next question today is coming from Lance Vitanza from Cowen. Your line is now live.

Thank you, everyone. To start, congratulations on a strong quarter. You exceeded our revenue and EBITDA expectations, which I believe were the highest on the Street. Can you remind me when the BMP deal closed and how much revenue it contributed this quarter? More broadly, I would like to understand the balance of factors in play. I know you had some positive impacts, such as the large customer contributing positively and the merger and acquisition activity being beneficial. However, I also suspect there may have been some negative impacts from the 2G and 3G sunsets and possibly from planned attrition. Could you discuss those factors to help us grasp the true underlying growth in the core business for the first quarter? You reported growth figures of 21%, 20%, or 15%, and I'm trying to clarify which is the accurate number. Thank you.

Yes. And, you know, the nature of your question is year-over-year there; is it Lance on the quarter?

Yes, thank you.

Let me address the first part of your question regarding BMP, Simon. Their revenue for the quarter was between $5.5 million and $6 million, and this was only in about half of the quarter since the close date was February 16th. We did see some early opportunities as we integrated the companies and their capabilities. However, I want to emphasize how well they performed in March, which has been beneficial. As you noted, in comparison to the first quarter of last year, our revenue from our number one customer is entirely positive this quarter, but we saw no contribution from them in Q1 last year since the project began in late June. The revenue impact was really felt in Q3 last year. Given this context and the partial quarter from BMP, the declines we anticipated matched our expectations. The sunset causing that kind of forced churn, if you will, and reduced ARPU levels, which again, we've said we would rather well. And we are, I mean, the fact that we're up even sequentially quarter-over-quarter, almost 700,000 connections right, I mean. Yes, there were something that thought the sky was falling as of 2022 and AT&T 3G sunset started; but both because the sunset has been time-phased and managed, and because we're ready to really handle this, I think we've done even better on connectivity than we thought the business would do. So we felt really pretty well in Q1, but I'll let Paul get into any more specifics.

Yes, the only thing I would add on the connectivity side of things: we did see customers hold out pretty much on the AT&T side right to the very end of the sunset. So in any of our modeling for both the AT&T 3G, the T-Mo, and Verizon CDMA sunsets, we have it modeling that they would drop during this year, not waiting right till the end. So by a lot of the customers on the AT&T side waiting right till the end of February here, it did give us a little extra revenue. And if the customers on T-Mobile and Verizon and Sprint do the same thing, then there could be some upside to our model also for the rest of the year.

Thank you for the information. I have one more question regarding cash. With $32 million at the end of the quarter and the revolving credit facility available, is that sufficient liquidity for you? Was any amount drawn from the revolver at the quarter's end? I understand you mentioned that some seasonal factors impacted cash flow during the first quarter. Could you share your thoughts on the outlook for free cash flow and your cash position for the remainder of the year?

We did not utilize our credit line in the quarter and do not plan to do so for now. However, as I mentioned earlier, we typically see a significant portion of our annual incentive payouts at the end of March, which affects our cash flow for this quarter. Looking ahead, we anticipate our free cash flow will grow by about $10 million to $12 million each quarter, depending on how much we need to prepay for inventory. The supply chain is having a noticeable impact on us, as vendors are asking for immediate payment for products. The amount we have to prepay can fluctuate, so our free cash flow may vary between $10 million to $12 million per quarter.

Thanks for your help. I appreciate it. Congrats.

Thanks, Lance.

Thank you. Next question is from Scott Searle from Roth Capital. Your line is now live.

Hey, good afternoon, and thanks for taking the questions. Romil, I appreciate all the color that you provided on the healthcare front. Maybe just to dive in on some of the financials; I just wanted to clarify a couple of things: Paul, I'm not sure if I heard your number in terms of legacy connections or still to be sunset 3G connections. But I think the expected number was somewhere in the ballpark of around $0.5 million. Is that kind of where we were on the supply constraint front? I'm not sure if you quantified the number; I know it's difficult out there in terms of getting modules. I'm wondering if you could quantify the impact in terms of what was left on the table? And then two other elements; on the ARPU front, Romil, we've been talking about that stabilizing; do you continue to see that stabilizing and perhaps improving, now if that mix is going forward? And then I had a couple of follow-ups?

Okay. We can keep this organized. I’ll address a couple of points, and I think we’re aiming for May. Scott, please keep me honest; or if we need to adjust, we will.

You know, I do so.

So the first one that I think in my direction was ARPU; certainly, we're seeing that stabilization. I'm not, again, I'm not ready to say there's upward momentum here or anything like that, but vis-a-vis the levels that we were at Q4, are we relatively in the same zone from an ARPU perspective in Q1? We are, and we're not seeing any alarming trends that would suggest that's not happening is one answer to one of your questions on the ARPU; is that good enough there, Scott, before we go to the next one?

Yes, that’s perfect. Yes.

Let's see, on the 2G, 3G total connections, let me try to walk a bit of a waterfall here, right? Because I think you've been diagnosing this at every step of the way. So we disclosed that at the end of the year last year, we had about a 1 million 2G, 3G SIMs that we're facing a sunset at some point this year between AT&T 3G, well, Sprint 2G networks, CDMA networks, obviously T-Mobile 2G, 3G and then Verizon CDMA right? So about 1 million that, and about half of that was on AT&T. Again, AT&T's run a very sort of time-managed process, where we still actually have a few connections up and running a couple of months later. So I'm not ready to call that 500K down to zero just yet, but we're getting really close; it's not going to go on forever, this extra little gray cloud we got here. But to your point, if the reason you were asking what the half million, were you thinking, 'Okay, that AT&T parts all gone now?' Not quite, is the answer to that, Scott, does that help?

That's perfect.

All right. I forget.

Yes, forgot, yes.

Services increased, like from a revenue standpoint; should we expect services revenue has been increasing sequentially throughout the year?

Yes, and I think Scott, we've talked about this before, too. We do expect services to ramp up as the year comes on. Now how much that will be determined by each quarter, but we had talked about on the hardware side of things too; depending on when orders come in, a particular quarter may have a ton of hardware revenue versus services in it. So it will vary, but to answer your question overall, the services in dollar terms, I'll put it not as a percentage or increasing as the year goes on.

Great. And then the supply chain impact, right? There's certainly been difficulty getting modules in certain business segments and been constraining; I think some of the new connections coming online. I'm wondering if there were some thoughts around quantifying that?

Yes. So the best we can do for you, Scott, is kind of what we've said is, look, the last few years, pretty regularly grown volume at about 20%, right? This year we're pointing to something closer to 10%, maybe we beat that biased measured, and our sales teams are out there fighting hard et cetera. So, but if indeed that comes through, that we're closer to 10%, that's obviously a different. So what's causing that? About half of that is what we just talked about, right, familiar or not; as soon as that the forced churn, if you will, or 750K, that add anyway that will lose this year presumably. And so the other, and I'm just doing the math on 20% of $14.6 million, $15 million is about $3 million, right? So half of that 10% is $1.5 million, let’s say half of that is the forced churn from the sunsets; the other half, $1.75 million, the only thing we can really point to is the supply chain issues, the fact that our customers are unable to get their devices, deploy those devices and so we're not getting the revenue, right? Now, if we can get more precise over time with that, we'll certainly share it, but again it's a largely indirect impact. Now, the only direct impact I can tell you we're seeing, and it's disappointing, but this too shall pass, is the is eSIM adoption; yes, any new technology, right, has sort of been put a little bit to the side, where our customers are just focused on bidding into their supply chain and their vendors are getting supplementary, complementary their products to meet their needs. So the overall eSIM adoption curve that we were hoping would really start to take off this year is slower than we'd like to see, perhaps pushed back into 2023, 2024 when the supply chain opens up and the newer devices come back and focus.

Okay, very helpful. And then if I could, given all the color on healthcare, we could flush out a couple of things a little bit more in terms of your expected growth rate; if you look at your customer set today, you've been doing very good in Cardiac Telemetry, and now with the acquisition you've added CROs. What do you think that gives you with the existing customer base today versus needing to add new logos, right? I think the range; if you do the math of Connected Devices and the growth in the marketplace looks like it's 20% to 30%, 30% being the aspirational number for you; I think by 25%, 26%, kind of, help us understand some of the gives and takes in there? And also diabetes keeps showing up in your presentation as part of a chronic condition; historically, that's not been part of your product portfolio and offering or customer set? I'm wondering, is there an opportunity for you there? Or given where things like constant glucose monitoring have evolved from Bluetooth to smartphones, that's not a market that you necessarily plan, but it seems like Cardiac Telemetry is still very strong, and CRO it seems like it's just very early days in getting started; so a lot in there. But I was wondering if you could kind of flush out how you see the evolution there and if diabetes is part of it? Thanks.

Yes, I want to emphasize that diabetes is definitely a significant focus for us. Several of our clients in the remote patient monitoring sector are dedicated to diabetes and continuous glucose monitoring, and some have even expanded their efforts beyond that. One of my favorite initiatives during the early months of the pandemic in 2020 was the implementation of remote monitoring solutions for continuous glucose monitoring in hospitals. Given the circumstances, medical staff were hesitant to visit patients to check their blood sugar levels due to the risk involved, especially for older patients. We quickly installed these remote solutions to help manage that situation and also to conserve personal protective equipment, which was in short supply at the time. Regarding our growth projections, we believe we might not need many new customers to achieve the goals we set when we went public, especially since we recently secured a substantial contract with a large CRO, a process that took nearly a year. Now that the contract is finally in place, we expect to see some revenue in the latter half of the year. Additionally, thanks to the BMP and Simon acquisition, we can now cross-sell to various large players in the market. The data indicating the exclusion of trials using technology shows positive trends as well. We're confident in this area and, even if we were to suddenly gain new customers, which is unlikely, we're not concerned about meeting our projections. The real question is how much more upside we can capture.

Very helpful. Thanks so much, guys.

Thanks, Scott.

Thanks, Scott.

Thank you. Next question is coming from Matt Niknam from Deutsche Bank. Your line is now live.

Hey, guys. Thank you for taking the questions. Just two, if I could; first maybe higher level question maybe Romil, if you can talk about the state of customer demand to start the year whether you've seen any sort of belt tightening or pull back from customers just given some of the rising concerns around the macro backdrop? And then just secondly, but more of a follow-up for Paul, I just wanted to clarify that saving around $10 million to $12 million in cash flow. Is that an improvement relative to 1Q? Or is that more of an absolute number we should be modeling? And is that cash flow from ops or is that free cash flow?

Sorry. I'll go first. The cash from operations is expected to be between $10 million and $12 million, which is an improvement from a negative $3 million this quarter to a positive $10 million to $12 million.

Great.

Yes, and then on the macro question around sales and demand, I mean, if there is incremental to the supply chain type issues, any belt tightening that we're seeing or that's happening, we're not really seeing it, Matt. I mean, I can tell you that our inbound demand is actually up almost a third, you know, the first quarter of this year versus the first quarter of last year. So when pipelines are relatively full, salespeople are relatively busy, it's not happening, and perhaps that's because IoT can drive and thus drive cost efficiencies as much as it drives great insights and everything else, right? I mean, just back to connected out for a second: the fact that you can save lots of dollars while getting data quicker, while serving customers in their homes or wherever they are comfortable being. I think that's an important aspect of what we do, and that's what's kept us resilient through this entire pandemic. I mean, go back two years in time and everybody was panicking, and we were pulling cash out of our revolvers and all the stuff and yes sure travel, tourism, some use cases tightened up, but we had explosions in Connected Health and remote education and other use cases. And so that's likely the case here, and it just ties back, Matt, I think to our strategy of being this broad enabler, right? We're not in any one business; I'm not dependent on the dynamics of any one use case; some of our customers across the 3,600 of them are going to do really, really well almost no matter the state of the economy, and I think the strength of the business just keeps showing through.

That's great and congrats on the quarter. Thank you, both.

Thank you.

Sure, Matt.

Thank you. Next question today is coming from Meta Marshall from Morgan Stanley. Your line is now live.

Thanks and congratulations on the quarter. Paul, I have a couple of quick questions for you and then one for Romil. Paul, you mentioned that Simon and Business Mobility Partners generated between $5.5 million and $6 million this quarter, with some of that possibly front-loaded. I’d like to understand if you still expect a contribution of $15 million to $20 million for the year from those acquisitions; could that be higher now? Additionally, I'm looking at the average connections for the period, which showed a 6% increase quarter-over-quarter and a 5% increase quarter-over-quarter. How should we interpret this in relation to the IoT connectivity revenue? Is there a correlation or a way to view the increase in connections against the rise in connectivity revenue? I also have a follow-up.

Sure, I'll start with the connection question. So yes, depending on when we actually see the connection; so we have a customer who obviously went up a bunch at the end of the quarter, that’s going to obviously help future quarters here, and we have been seeing probably pretty evenly throughout the quarter, other than this one, because of the AT&T sunset during the quarter. So there were some drops and some increases, but then March, we saw it picked back up again into the positive territory. So I think it's more of an indication of future connectivity growth. Now, in the quarters to come, supply constraints and all that sort of stuff will affect how many we're going to continue to add. We are also concentrating a lot more on the kind of the high bandwidth use cases, which see a lot less connections, but higher revenue dollars, which will also help the top line; so hopefully that answers that one. Regarding the first question from BMP about the $5.8 million added during the quarter, that amount exceeded our expectations. We believe it may be somewhat front-end loaded, as some of our larger customers began the year by ordering more, possibly due to concerns about the supply chain. You are accurate in mentioning the $15 million to $20 million range. We anticipate our figure will be slightly above $20 million, and based on the strong performance in Q1, we now expect it to be a bit over $20 million in revenue, potentially reaching the mid-20s. I hope that clarifies your question.

Got it. No, that's super helpful. And maybe, Romil, just for you, you laid out a pretty impressive opportunity on the healthcare side. Yes, OpEx growth is somewhere in the range of 5% for the year. And I just wanted to get a sense of where you are finding that additional efficiency to go after some of these customers? Is it some of the hires you've made in the past that can go after that? Just how are you best allocating resources to go after that opportunity? That's it from me.

No, that's great, and thanks Meta. First of all, I'd like to elaborate on BMP. The IoT Solutions business line, which constitutes the majority of BMP's revenue, differs significantly from the recurring IoT connectivity, which resembles a more CaaS ARR-like business that has a consistent run rate. Therefore, it's quite risky to take the first half of a quarter and project that based on what Simon may predict for the year. That said, we will continue to assist them with cross-sell opportunities from other industries, and I believe they will perform better under the core umbrella. This was the main reason for our acquisition, and we are hopeful for their success. However, it's important to avoid simply multiplying the month of March's figures by twelve in that business. Regarding Connected Health, I want to share a couple of macro points. During our business planning in October, November, and December last year, we decided to focus our organic investments on the first two industries we launched early last year. We concluded that the return on investment in Connected Health and fleet was sufficient, and launching a new industry organically may not be the best approach based on our ROI models. We thought it was more effective to allocate resources to what we already have. Additionally, we are working on building horizontal capabilities to maintain our leadership in areas like e-SIM and OmniSIM. The increase in operating expenses includes various public company and finance-related costs, which can add up significantly in a quarter. Our priority will be to manage the additional costs of being a public company while ensuring that investments go towards the highest potential returns, with Connected Health being a focus. Lastly, as a private company, we operated with adjusted EBITDA margins closer to 30%. In the public market as a SaaS company, we had aimed for growth and adjusted EBITDA around 20%. This year, we are targeting a 24% margin, and we may adjust it down slightly in the future to support top-line growth of about 20% while keeping EBITDA above 20%. If I haven’t addressed your question, please feel free to follow up, Meta.

Yes, I think that's helpful. My question is the opposite; are you feeling like you're having to manage a lot of the increases in operating expenses due to being a public company? I'm trying to understand whether you believe you're able to make all the necessary hires to pursue the opportunities you've outlined.

Yes, I appreciate that, and I believe we are in a good position regarding this. Our Board leadership team is very aligned on the opportunities, and I don't think we would limit ourselves unnecessarily. If we believed that investing an additional couple of million in EBITDA this year would be beneficial, we would consider doing something different, even if it meant barely meeting our guidance. However, that's not the situation we’re currently facing; we are confident that we can manage a responsible level of investments.

Okay, perfect. All right, congrats guys and move on.

Thanks, Meta.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

No, thank you very much for joining our call and for those excellent questions. We certainly appreciate the engagement, and we'll talk to you next quarter. Have a great summer.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.