KORE Group Holdings, Inc. Q4 FY2022 Earnings Call

Greetings and welcome to the KORE Group Holdings Fourth 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. Please note that this conference is being recorded. I would now turn the conference over to our host Charley Brady, Vice President, Investor Relations to begin. Thank you.

Thank you, operator. On today’s call, we’ll be referring to the fourth 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 fourth 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 Investors 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 that 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 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 now turn the call over to Romil Bahl, the company’s President and Chief Executive Officer.

Thank you, Charley. Good afternoon everyone, and thank you for joining us today for our fourth quarter 2022 earnings call. With me is Paul Holtz, KORE’s Chief Financial Officer. As always, we will start with an overview of our key announcements, including our separate announcement this morning that we are acquiring Twilio's IoT business, which we believe is a fantastic fit with our growth strategy. The Twilio business unit strengthens KORE's eSIM leadership position and expands KORE's existing deploy, manage, and scale value proposition by adding build services, thereby bolstering our competitive positioning as a one-stop shop for IoT connectivity and deployment. Following this, we will present an overview of our financial results for the fourth quarter and full year 2022 and provide financial guidance for 2023. We will finish with a Q&A session. This morning we announced that KORE has signed a definitive agreement to acquire Twilio's IoT business. In this transaction as consideration for KORE's acquisition of Twilio's IoT business, Twilio is taking an equity ownership position in KORE of 10 million shares of common stock. Upon closing, Twilio will become one of KORE's largest shareholders representing a vote of confidence in KORE's leading pure play IoT position. We expect the acquisition will be slightly diluted to EBITDA in 2023 and accretive beginning in 2024. Our initial 2023 guidance, which I will discuss shortly, includes the addition of Twilio's IoT business from an assumed closing date of June 1st. We believe this transaction is a win-win-win for KORE, Twilio, and customers of both companies. There are several dimensions to the overall strategic rationale of this deal. First, KORE is a leader in the IoT connectivity market and we intend to be one of the few large IoT hyperscalers following the inevitable and ongoing market consolidation. We believe adding the Twilio IoT business accelerates our journey to fulfill this vision and with Twilio taking an equity ownership interest in KORE, it bodes well for potential future go-to-market collaboration and lead flow. Second, Twilio has pioneered the digital purchase and consumption of IoT connectivity just like AWS and others did for compute and storage services. At KORE, we believe this is the future of IoT connectivity and with Twilio's IoT business, we believe we are adding the industry's strongest capability for the digital consumption of IoT. This will form a critical component of our future distribution strategy and profitable growth as it reduces customer acquisition costs. Third, the combination of KORE OmniSIM and Twilio Super SIM represents the leading IoT connectivity product in the market, combining the best of global connectivity with compliant local access, which is more important than ever for global IoT deployments. Fourth, Twilio has incubated their IoT business with significant investments, including attracting the developer persona by enabling the rapid design and build of devices that ease the adoption of IoT. KORE gains the benefit of these investments, and we add build to our deploy, manage, scale story. Finally, outside the five largest global MNOs, the combination of Twilio's and KORE's connections will position KORE as the largest provider of IoT connectivity outside of China. I will add that the combination of KORE's white glove customer experience and Twilio's digital experience provides a solid foundation for strong growth through the decade of IoT ahead, powered by a culturally aligned world-class pool of talent from both organizations. The diagram on slide five represents the power of bringing together Twilio IoT and KORE. If you just work your way down those lines, the combination of KORE's OmniSIM and Twilio Super SIM provides the leading global proposition. KORE has invested in building out our deploy, manage, scale value proposition, and by adding Twilio's device builder capability, we broaden our value proposition to build, deploy, manage, and scale, a further step in our one-stop shop positioning. The new KORE has the ability to optimize our cellular network from two best in breed solutions. Importantly, while KORE has begun the implementation of a developer portal, Twilio is a recognized leader in digital experience and has established relationships with thousands of IoT developers whom we welcome to KORE. The introduction of these developers to KORE's offerings creates expansion opportunities into this rapidly growing segment of the market. We are already building a Twilio-like web console, which we will accelerate upon closing the acquisition. This in combination with our white glove customer support represents an important dimension of our growth strategy. To the Twilio IoT team, let me say we are very excited to add such great talent and expertise to KORE, and we cannot wait to start working together. Now let's move on to other highlights from the quarter, which demonstrate the continued execution of our strategy to help customers deploy, manage, and scale solutions, and simplify the complexities of IoT. Most notably, our December announcement of a multi-year go-to-market alliance with Google Cloud Platform, wherein KORE will provide Google Cloud customers with a one-stop shop for IoT services by leveraging KORE's IoT solutions and Google Cloud's infrastructure. We also introduced OmniSIM Safe using AWS IoT KORE to mitigate security challenges associated with global massive IoT deployments complete with device to cloud integration. The KORE OmniSIM Safe connectivity solution is an innovative eSIM approach that uses the GSM IoT safe standard and supports zero touch provisioning to allow pairing a device to the cloud with minimal physical intervention. And finally, we were excited to announce that KORE will be providing IoT connectivity and managed services for Care Daily, an in-home senior care SaaS company with an AI assistant IoT platform aimed at helping seniors age in place safely and autonomously, while also providing communication with healthcare providers and family. KORE's IoT Managed services ensure that Care Daily's device and hardware needs are met seamlessly through procurement, configuration, kitting, shipping, and reverse logistics. Now let's look at our fourth quarter financial results on slide seven. Our fourth quarter revenue was stronger than expected, resulting in full-year revenue coming in above the guidance range, which we had already increased following our third quarter results. For the full year 2022, our net activations overcame the forced churn of approximately 1.2 million 2G and 3G SIMs. Fourth quarter revenue of $62.4 million declined 3% year-over-year, primarily due to a difficult comparison as the year-ago quarter included significant revenue from the LTE transition project at our largest customer. Additionally, the 2G/3G sunsets in the U.S. impacted our fourth quarter performance. These two factors have masked KORE's underlying growth for the past several quarters. Excluding the impact of the LTE transition project, fourth quarter 2022 revenue increased 11% year-over-year, indicating the true organic growth must be attributed to these transitory factors. From this, we believe the fourth quarter represented a near-term revenue trough and we continue to expect revenue in the first quarter of 2023 to increase sequentially. Gross margin increased 600 basis points year-over-year to 54.1%, due to continued optimization of our carrier costs and the absence of lower-margin LTE transition project volumes with our largest customer. Fourth quarter adjusted EBITDA of $15.7 million increased 20% from the fourth quarter of 2021 and adjusted EBITDA margin was 25.1% compared to 20.3% in the year-ago quarter. Turning to slide eight, we present an overview of our full-year 2022 results and our guidance for 2023. Total revenue of $268.4 million increased 8% year-over-year, and gross margin improved by 80 basis points to 51.9%. Adjusted EBITDA of $62.8 million increased 6% compared to 2021. Finally, cash provided by operating activities improved by more than $32 million year-over-year. Paul will discuss the full-year results in more detail later in the call, but before I turn it over to him, I'd like to present our 2023 outlook. To provide context on prior calls, we estimated the 2023 headwinds from the 2G and 3G sunsets and the LTE transition project at our largest customer to be approximately $12 million each. And despite this $24 million headwind, KORE's 2023 revenue is forecasted to grow in the mid to high single digits. With the acquisition of Twilio's IoT business and an assumed closing of June 1, year-over-year revenue growth is now projected to be in the mid-teens. As such, our guidance for 2023 is revenue in the range of $300 million to $310 million and adjusted EBITDA in the range of $60 million to $62 million, implying an adjusted EBITDA margin of approximately 20%. With that, I will now hand the call over to Paul to cover the financials in more detail. Paul?

Thanks Romil, and good afternoon everyone. For those who are following KORE, you are already aware that we filed a Form 12b-25 with the SEC on Friday, March 17th with respect to our Form 10-K for fiscal year 2022. As indicated in the Form 12b-25 during the process of preparing our fiscal year 2022 financial statements, we discovered misstatements related to various items, but mainly involving current and deferred income tax liabilities or benefits in the various foreign jurisdictions that we operate in. The tax misstatements relate to prior periods, including periods prior to KORE becoming a public company. Management, the audit committee, and our external auditors have all concluded that the misstatements are not material and will result in a revision of prior period financial statements in the 2022 Form 10-K, which we intend to file on March 31st. These revisions will also include correcting all prior years' immaterial unadjusted audit differences. Now on our results. For slide nine, fourth quarter revenue declined 3% year-over-year to $62.4 million compared to $64.4 million in the fourth quarter of 2021. As previously communicated, the fourth quarter of 2021 included revenue attributed to the LTE transition project at our largest customer, which concluded in Q2, 2022. Revenue growth was also impacted by various carrier 2G/3G sunsets in the United States, which were essentially completed by the end of 2022. By segment, IoT connectivity revenue of $43.7 million increased 1% year-over-year. Growth from new and existing customers excluding non-KORE customers was approximately 7% year-over-year. Offsetting this growth was a decline in the non-KORE customer revenue cohort and the negative impact of lower pricing to existing customers related to the shift of 2G/3G devices to LTE. All of these combined to reduce revenue growth by approximately 6% year-over-year. IoT solutions revenue declined 11% year-over-year to $18.7 million. The decline was driven by the difficult year-over-year comparison as the fourth quarter of 2021 included significant revenue related to the LTE transition project at our largest customer. To put this in perspective, in the fourth quarter of 2021, the LTE transition project revenue accounted for about one-third of total IoT solutions revenue. Excluding the LTE transition project revenue, IoT solutions revenue would have increased 30% year-over-year. Total gross margin was 54.1%, an increase of approximately 600 basis points year-over-year. IoT connectivity gross margin increased 500 basis points year-over-year to 65.1%, driven by the continued optimization of our carrier costs as volumes and data usage increased. IoT solutions gross margin increased 510 basis points year-over-year to 28.7%, mainly driven by the absence of lower-margin LTE transition revenues from our largest customer in the current quarter. Total connections at the end of the fourth quarter were 15 million, an increase of over 400,000 compared to the end of the fourth quarter of 2021. This is net of the 2G/3G sunsets in the United States of approximately 1.2 million SIMs that were forced to churn throughout the year, including the loss of approximately 150,000 2G/3G connected devices on the last day of the year. Dollar-based net expansion rate or DBNER for the 12 months ended December 31st, 2022 was 92% compared to 122% in the prior year. As a reminder, DBNER measures the growth from existing customers in the trailing 12 months compared to the same customer cohort in the year-ago period, much like same-source sales growth rate. As expected, DBNER was down sequentially from the third quarter and year-over-year, as the trailing 12-month measurement continues to be impacted by the LTE transition revenue from our largest customer, which peaked in the third quarter of 2021 and was completed early in the second quarter of 2022. Excluding total revenue from our largest customer, DBNER at the end of the quarter would have been 103% compared to 115% at the end of the fourth quarter of 2021. Operating expenses, including depreciation and amortization in the fourth quarter were $97 million, an increase of $59.1 million or 156% compared to the same period last year. This includes a non-cash goodwill impairment charge of $56.9 million, which is a GAAP-required impairment. It is entirely due to the sustained decline in our share price and market capitalization, which is a triggering event under ASC 350. Excluding the goodwill impairment charge, operating expenses increased approximately $2.2 million or 5.8%. Increases included salary and benefit costs, contractor costs, higher travel expenses, professional services, channel commissions, and incremental operating expenses associated with the BMP-Simon acquisition that didn't exist in Q4, 2021. These increases were offset by lower D&O insurance and marketing costs. Fourth quarter interest expense, including amortization of deferred financing fees, increased year-over-year to $9.2 million due to increased borrowing costs on our senior secured term loan. We expect interest expense will be approximately $9.5 million to $10 million per quarter in 2023. Net loss in the fourth quarter was $68.8 million compared to $12.2 million in the same period in the prior year. The net loss includes a non-cash goodwill impairment charge that I mentioned earlier. Adjusted EBITDA in the fourth quarter was $15.7 million, an increase of $2.6 million or approximately 20% compared to the same period last year. Our adjusted EBITDA margin in the current quarter was 25.1%, up 480 basis points compared to the same period in the prior year. Moving to cash flow, cash used in operations for the three months ending December 31st, 2022 was approximately $5 million. This compared to a similar amount of cash used in operations for the same period in the prior year. At the end of the fourth quarter, cash and cash equivalents were $35 million compared to $86.3 million as of December 31st, 2021. This change was primarily related to the financing of the BMP-Simon acquisition in Q1, 2022. Cash and cash equivalents were lower than expected at the end of Q4, 2022 as we saw slower collections in December this year as customers pushed out payments until January. $6 million in collections from various customers were received on January 2nd that were due and expected to be collected in December. Turning to our full-year 2022 results, total revenue of $268.4 million increased 8% from 2021, IoT connectivity revenue increased 4% to $175.9 million and IoT solutions revenue increased 16.5% to $92.5 million. Full-year gross margin of 51.9% was up 80 basis points from 2021. This was driven by a 330-point basis increase in IoT connectivity margin to 64.2%, partially offset by an 180 basis point decline in IoT solutions margin to 28.5%. Adjusted EBITDA for the year was $62.8 million, resulting in an adjusted EBITDA margin of 23.4%. This compares to $60.9 million and 24.5% in 2021. Note that prior year audit adjustments reduced fiscal year 2022's adjusted EBITDA by approximately $300,000. This amount was moved to 2021. Without these adjustments, we would have been in our previously communicated adjusted EBITDA 2022 guidance range of $63 million to $64 million. Full-year 2022 net loss was $105.4 million, which includes the fourth-quarter goodwill impairment charge, increasing by $80.6 million compared to the full-year 2021 net loss of $24.8 million. Excluding the goodwill impairment charge of $56.9 million, the full-year 2022 net loss increases $23.7 million to $48.5 million. Attributing to this increase in net loss year-over-year were increases in the following: interest expense; depreciation and amortization related to the BMP acquisition; stock-based compensation; change in the fair value of our warrant liability; and operating costs associated with being a public company. And with that, I'll pass it back to Romil.

Thanks Paul. Last quarter, we began providing additional insight into our global sales pipeline, which you see on slide 11. As of December 31st, 2022, our pipeline has grown to include approximately 1,400 opportunities with a potential total contract value, or TCV, in excess of $430 million. In the fourth quarter, we added $30 million to our closed-one TCV, thereby ending the year at $102 million, exceeding our goal for the year, even while increasing the size of our overall funnel. While we expect to recognize the majority of sold TCV as revenue over four years, it is important to note that the closed TCV figure is aggregated across all of our business lines, which have different durations of revenue recognition. IoT connectivity revenue tends to have a slower ramp and can go out beyond the four years we use for TCV calculations. While IoT managed services include both one-time revenue projects that are generally recognized in one to two years, and recurring revenue usually recognized over three years. The important summary point is that our closed-one TCV continues to show solid growth in how we are adding new business and is additive to our 80%-plus annual recurring revenue. Given this, we feel confident in our revenue growth forecast for 2023. Slide 12 showcases a few examples of our wins in the fourth quarter that contributed to the increase in our closed-one TCV. Our strategy of building preconfigured solutions is starting to prove out. In the fourth quarter, we signed two pilot agreements to begin integration and testing of our connected health telemetry solution, or CHTS, with a clinical research organization and a large remote patient monitoring services provider. CHTS simplifies remote data capture for healthcare and life sciences applications, speeds time to market, and we believe will drive the adoption of large-scale remote patient monitoring initiatives. Additionally, we added approximately $1 million in TCV from an existing fleet customer that is now leveraging our video telematics preconfigured solution to manage their fleet. Our eSIM offering KORE OmniSIM is starting to be a differentiator for KORE and is gaining traction in the market as demonstrated by a win at a leading global provider of cold chain tracking and another win in support of a customer's SD-WAN offering. OmniSIM's multi-carrier downloadable profiles were a key driver of these wins. Slide 13 illustrates the KORE roadmap as the company has evolved from a narrow focus on IoT connectivity to a comprehensive approach that includes technology-driven IoT services and solutions that help customers navigate the many complexities of IoT deployment. Over the coming years in this decade of IoT, we see significant opportunities in analytics, which is a small part of our business today, as well as massive IoT edge computing and becoming an IoT connectivity hyperscaler. Today, connected health and fleet comprised approximately 60% of KORE's total revenue. Over time, we expect to expand our presence in other targeted industry verticals where we can apply our deep knowledge of IoT connectivity solutions and analytics. This will in turn, expand and increase our total addressable market and drive further growth. As you have all heard, we had another solid quarter and finish to our year. We exceeded our $457 million go-public 2021 and 2022 two-year stack revenue forecast by $60 million. We have expanded our market reach by collaborating with other leading companies in IoT such as Google Cloud Platform and AWS and introduced best-in-class products such as our eSIM solutions, which we call KORE OmniSIM Rush for global high bandwidth usage needs, and OmniSIM Reach, which can connect customers across 500 networks in 215 countries. With over 80% recurring revenue, the majority of which is tied to mission-critical applications, KORE is largely recession resistant and has a strong presence in rapidly growing end markets such as connected health, our largest industry vertical. Given this backdrop and the increase in TCV, which I previously discussed, we are confident in the revenue and adjusted EBITDA guidance we are providing today. I want to thank all of our employees across the globe, the KORE IoTers, as we call them, for their continued hard work, dedication, and commitment to KORE and to our customers. And welcome again to the Twilio IoT team. We cannot wait for you to join the KORE family. With that, let's start the Q&A.

Thank you. And ladies and gentlemen, at this time we will conduct our question-and-answer session. Thank you. And our first question comes from Michael Latimore with Northland Capital. Please state your question.

Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on the sales cycle? Are you seeing the longer sales cycle or smaller, given the macro concerns?

Yeah. Sure, Aditya. We haven't seen anything really materially different in our sales cycles. Deals that are more complex or larger enterprise type deals that just naturally take longer because those entities have longer, more formalized processes, et cetera. Those kinds of reasons are really still the predominant reason why a sales cycle is longer rather than shorter. What we have seen a little bit in terms of our customers and potential customers responding, if you will, to the macroeconomic environment to which you are undoubtedly sort of referring, is a little bit of a shift from top line growth or revenue enablement type opportunities to more automation, more cost optimization, and efficiency-oriented opportunities or processes enabled by IoT. But that's the beauty of our business is we are obviously highly applicable both to top line and to bottom line, very cross-industry in nature, high recurring revenue in nature. And so, we feel really pretty good about being resistant to any kind of recessionary pressures that may come.

All right. And some color on the supply chain as well. Is the supply chain loosening? How could that help the gross margin and revenue growth this year?

I'm sorry, ask the second part of the question. You said there's the supply chain loosening and then what?

Yeah. Yeah. How could that help the gross margin and revenue growth this year?

Yeah. So, there are some signs of the supply chain loosening, but it's definitely a sector-by-sector, device-type-by-device-type story. We are not out of the woods yet in terms of our customers' ability to procure devices at the volume that we'd certainly like to see. And obviously, when they're not able to get their devices, they're not placing orders with us for deployment. But we continue to be hopeful that by the end of this year we will see ongoing improvement that we have seen over the last few months. We need another, I think, 12 to 18 months to really dig out of the hole that we've been in and hopefully then see our volume growth return. In terms of, is the supply chain really impacting gross margins and so on? I mean, yeah, look, in some cases where we are, I'll say merely passing along price increases or a little bit more than price increases. Our gross margins may be declining a slight bit. And again, the supply chain has to open up and some of these inflationary price points have to get back and get stable. And maybe there's some improvement there. But again, none of this is particularly significant to us, right? I mean, our gross margins on the IoT connectivity side are driven entirely by how well we can optimize, how well we can run our algorithms to optimize our spend even as our customers spend more with us using more bandwidth. It's those kinds of factors that have much more significant impact on our gross margin rather than the supply chain per se.

All right. Fine. Thank you.

Thank you.

Hey, good afternoon. Thanks for taking my questions. Very exciting news on Twilio. I'd like to, I guess, dive right in on that front if I could. In terms of the guidance, looking at where the Street was before versus what you're guiding to now in terms of that $300 million to $310 million, is that delta entirely due to the Twilio contribution closing on June 1st? Just trying to get my hands around it because it implies $25 million or so on an annualized basis, $40 million with slightly negative EBITDA, I think relative to where the Street was before. Is that correct? Or can you calibrate us in terms of what else is going on within KORE's core business? Are there some other elements that are starting to ramp up a little bit faster than expected? And also are there some other metrics to talk about in terms of gross margins, employees, customers, installed devices, et cetera within the Twilio base to kind of start to frame the opportunity going forward?

Yeah. Thanks Scott. Look, we're certainly very excited about the potential acquisition, right? Because while the agreement is, of course, definitive, the close is ahead. I mean, it's just such a great fit with our core business, right? Our IoT connectivity business. It fits right in there. It accelerates the journey we're on. It adds some complementary capabilities. We certainly think there's a best-in-market type eSIM offering when you put the Twilio Super SIM together with KORE OmniSIM. Anyway, all these aspects that the people, world-class, I think this is going to be a very meaningful acquisition in terms of strengthening our core business. But at the same time, we sort of have to recognize two things, right? One, it is not going to be material to our overall numbers, right? And so, there are no disclosure requirements. Two, and perhaps more importantly, we have to be respectful of Twilio. Twilio's a public company. They do not disclose these numbers. Today, we are not going to disclose them. Certainly not until we close and most likely not even after that. So, apologies. But I'm not going to confirm or deny those numbers you came out with there, Scott.

Okay, fair enough. But if I could, Romil, I want to follow up on the opportunity there. Besides the technological advantages, they have a very valuable community of developers and customers. Is that what makes this opportunity exciting? Is there a way to discuss how to monetize that within Twilio? Also, does Twilio get a Board seat? Are they planning to hold the stock? Any additional information you could provide on that would be appreciated. I have one more follow-up as well.

Thank you for your questions, and I appreciate the interest. First, I want to emphasize that we believe our digital front end is the strongest capability for IoT market consumption. To break down our technology and services, there are three main components. The first is our extensive backend integrations, with 45 mobile network operator partnerships and satellite capabilities, where we are the global leader. The second component is our connectivity management platform. Our IoT platform, ConnectivityPro, has significantly outpaced the competition. Moving forward, we will focus on enhancing our digital front end and developing our own developer ecosystem and console. Acquiring Twilio is pivotal, as they bring not only a valuable patent portfolio and intellectual property but also immense experience that will accelerate our development. Their strong developer community aligns well with our goals. Assuming the deal closes on June 1, the first six to seven months will prioritize ensuring a smooth experience for Twilio's customers and showcasing our expanded capabilities. Additionally, we aim to improve profitability, which we expect will positively impact 2024. A major focus for 2024 will be cross-selling, particularly our Super SIM and IoT managed services to Twilio's existing customer base. We anticipate that by the end of 2024, we will have merged the best of Twilio's Super SIM with KORE OmniSIM, which we might call Super OmniSIM for now. We believe this product will lead to significant revenue synergies into 2025 and beyond, transforming our outlook to exciting growth. I hope that answers your question, and I apologize if I overlooked part of it due to my enthusiasm.

No, no, no, that's fine. And lastly, if I could, and I'll get back into the queue, but just want to clarify comments about sequential progression of revenues as we go into the first quarter. I thought you said we should see sequential increases, but wanted to clarify, is that just on the connectivity and services front, is that an aggregate for KORE proper, the entire entity? And particularly around ARPU? We've been going through the transition of sunsetting for 2G and 3G connections, now that we're past that and you're starting to add higher value video and CRO opportunities, did we finally start to see the ARPU starting to move back in the other direction? Thanks.

Yeah. No, really good questions. Yeah. Look, we were relatively confidently stating without providing guidance on the last call that, even net of the $24 million hole, right, the $12 sort of headwind from our largest customers' LTE transition project going away, and then the 2G/3G revenue of about $12 million in 2022, that was obviously not going to be replicated in 2023. But despite that, we thought we could put up growth numbers organically, kind of in the mid to highest single digits. And you undoubtedly used some percentage in there, Scott, and then sort of subtracted that from 310 to 320 to get to your number, which again, I'm not saying is off the mark. But what I will say is that absolutely organically we still believe we're doing that, and we'll show that in Q1 when we come out here in a few weeks and continue to believe that sort of the worst is behind us. In terms of the ARPUs, look, we are just delighted that they are stabilizing, right? And frankly, we're quite happy if they stay stable because any ongoing decline per megabyte is made up for by the use of higher and higher bandwidth in most customer use cases, right? So, that's a good outcome for us, right? From a 20% price decline type place over many of the last four or five years. Could there be upside on the ARPU? Sure. I mean, there could be, right? But it will probably take us well into kind of real 5G, right? And a lot of high bandwidth usage before that will truly happen. And I wouldn't hazard to put a timeline on that per se. I continue to believe it's possible. And certainly hopeful, but couldn't tell you exactly when.

Thank you.

Thank you.

Thanks Scott.

Hey, thanks for taking the questions, and congrats on the Twilio transaction. Look, Romil, I think you mentioned that when you were putting together the guidance for 2023, did you say earlier on the call that that was before you layered in the Twilio component, that you were sort of looking at mid to high single-digit organic normalized growth rates, obviously normalized meaning despite the fact that you had the pair of $12 million revenue headwinds for 2023. Did I hear that right?

Yeah. No, that's correct. Despite the 12 of our largest customer's LTE transition project and the $12 million from our 2G/3G, we thought we could sort of fill that hole and more, and I actually went a step further on the last call, Lance, and I said, when we don't have that $24 million hole in 2024, right, we could likely near double that organic growth rate without massively improving our sales performance, right? The same top-line dollars that we're putting on the company in the year when I'm not subtracting 24, if it was 5, 6, 7, 8, whatever percent it was this year should be able to get you 10, 12, 14 the next year, right? So that was kind of what we talked about on the Q3 call.

Yes. This suggests that the normalized growth rates have remained quite strong even through the fourth quarter. My question is, what are your thoughts on the overall trend in the pace of IoT deployment? More specifically, do the normalized growth rates you are experiencing indicate that you are gaining market share, or are they primarily reflecting the broader market conditions and deployment pace?

Our goal is to reach the rule of 40, which means aiming for 20% top-line growth. If we can exceed that, we certainly will try. We've been eager to invest in growth and enhance our sales capabilities, something that was challenging as a private company with significant debt. The Twilio acquisition can be seen as the Board's strong support for achieving 20% EBITDA quickly. Furthermore, I believe it's an excellent investment because hiring 30, 40, or 50 salespeople, while hoping that half are a good cultural fit and can be found, is a long path. With the acquisition, we gain a proven team of sales and pre-sales professionals who already have good customers. We are committed to achieving that 20% growth. When we do reach 20% top-line growth, it will involve increasing our market share, improving our win rates, and likely growing faster than the market. While the market might surprise us and reach 20% growth across our total addressable market services, currently, those markets are growing at half that rate or less, depending on the specific services involved. We expect to capture more of our fair share over time.

Great. Thanks very much for taking the questions. Congrats. Bye.

Thank you, Lance.

Hey, guys. Thank you for taking the question. Congrats on the deal announcement. Just two, if I could. One on the 2023 revenue guide, maybe I'll ask the question a little bit differently, and I'm not going to ask about Twilio's contribution. But any color you can provide in terms of what you're expecting for the CaaS and IoT solutions businesses, maybe within that $300 million to $310 million outlook. And then maybe secondarily also if I can ask about free cash flow, just given the bump up in interest expense. I'm just wondering if there's any expectation for any meaningful cash flow generation next year. Thanks.

Yeah. I'll set Paul up on a question, he should really answer, certainly on the IoT connectivity, IoT solutions breakout and projections within the $300 million to $310 million type guidance. On the cash flow front, look, I mean, the nature of our senior debt is such as you're aware, floating over what used to be LIBOR, I guess, once we go address it and at minimum amend and extend it, if not reduce it in the process, it'll be SOFR plus or whatever. But the fact is that that's expensive debt right now. And so between that and our convertible equity, which is at a much more reasonable interest rate, we're spending in the neighborhood of $40 million just servicing debt in 2023. It is just a ridiculous number. And when you then add in a little bit of extra expense on the audit revisions here on the extra CapEx and sort of cash spent that will get once we close the Twilio IoT unit. Yeah. It's certainly not going to be a good free cash flow year, right, is what I'll say. And then I'll turn it over to Paul to add color.

We expect an increase in revenue from IoT connectivity, projecting low to mid-single-digit growth in that area. On the solution side, we're aiming to fill a $12 million gap, so we're anticipating a similar growth range there as well. Overall, the outlook for both line items appears consistent. As Romil mentioned regarding cash flow, we're estimating around $35 million by the end of this year. However, I foresee a decline next year due to integration costs related to the Twilio deal, assuming we close by June 1st, along with the slight EBITDA dilution from this acquisition. Additionally, we will face audit costs in Q1 and public costs that will be fully recognized in 2023, unlike in 2022 when they gradually increased throughout the year. Consequently, we expect negative cash flow next year of approximately $2 million to $4 million.

If I could just follow up, also safe to assume, I know the margin guide is about 20% for the year, but safe to assume 2H could be a little bit lower as you get some dampening effects from the Twilio revenues coming in at least early on.

Yeah. So, the margins from the Twilio side are less than ours, obviously. And that's where we see a lot of our opportunity to gain here. But yeah, on the connectivity side, because all the revenue will be in the connectivity revenue, you will see from a percentage basis a little bit of dilution from the Twilio margins in the second half.

I would argue that, especially considering the current macro environment, it's prudent to adopt a somewhat conservative approach when discussing our guidance. Additionally, we've been making investments in our organic business, particularly in the second half of the year, after ensuring that we are not seeing any significant downturns due to the recession and other macro factors. We aren't observing any signs of weakness and are feeling positive about that. We will protect our ability to make those investments independently if the deal doesn't go through. Conversely, if the deal does close, we may need to evaluate whether all those investments are necessary. We feel very confident about achieving a 20% EBITDA margin, and while there might be some impact in the second half, it may not be as significant as you think.

That's great. That's great. Appreciate the color. Congrats again. Thank you.

Thank you.

Thank you. And we have time for one more question, and that question comes from Meta Marshall with Morgan Stanley. Please state your question.

Great. Thanks. I have two questions. Could you provide more background on how this deal came about and how long the discussions have been ongoing? Did they reach out to you? Any details you can share would be helpful. Also, now that Ericsson has sold their IoT platform to Aeris, do you have any updates on the status of that partnership? Thanks.

Okay. Good stuff, Meta. Let me see. I'm not sure exactly how much I am able to say/should say about the process with Twilio. It's been a cycle. It's been a longish cycle. They have been careful in how they've made this selection. Any more words on that should likely come from them, to be honest, as opposed to from me, in terms of what they might be willing to share in terms of the number of parties that were involved in the process and the ups and downs and so forth that go on. We are just delighted that at the end of it all, they chose to pick us, right? I mean, their bet was us. This was the place they said is the best place for their talent, for their customers, and for the go-forward kind of journey of IoT, which obviously continues to be an important market for them; it's just not where they are strategically focused for the future, right? So, in that sense, it's sort of a marriage made in heaven. We're just delighted that it's worked out the way it's worked out. What was the second part? Was the Ericsson question. Again, an excellent question. We were really bullish about that partnership. I at least haven't seen a closing announcement yet of the deal. And as you might imagine, between the gun-jumping rules and everything else, there's not exactly a lot of conversation going on with either side right now about their plans and so forth. So, I suspect post-close we'll start to get more insight into their plans. Let me say this. Let me show my hand a little bit in the sense that we're definitely more cautious, right, about the situation. I mean, we were deliriously happy to take IoT accelerators inbound traffic, if you will, from their international customers on their international MNOs, right? When it was part of Ericsson. When it's part of arguably a competitor or sort of wannabe competitor, we're going to be cautious. We have lots of opportunities in how we develop our indirect sales channel. With between the AWSs and the Google Clouds, are we going to put more of our effort on some of those as opposed to an Ericsson, it all depends on what we hear and what their proposition comes back with. And we're certainly going to be looking hard at what, if anything, may change. Now, last thing I'll say on this, slightly long-winded answer, Meta, is that, as I said, when the Ericsson partnership was announced, right, every deal had to be one at a time and there was going to be minimal revenue in 2023. And in fact, in the guidance we provided there is $0 in there, I can say that confidently. So, there's no risk to the numbers because of what may end up on that partnership front.

Great. Thanks so much.

Awesome. Thank you.

Thank you. And I'll hand the floor back to management for closing remarks.

Yeah. No, thank you so much. And operator, and thank you everyone for taking the time to listen to our earnings call. We look forward to updating with our first quarter results in what feels like just a few short weeks. So, speak to you all soon. Have a good evening.

Thank you. And that concludes today's conference. All parties you may disconnect. Have a great evening.