KORE Group Holdings, Inc. Q2 FY2023 Earnings Call

Thanks for joining us for KORE Group Holdings' second quarter earnings conference call. Currently, all participants are in a listen-only mode. A question-and-answer session will take place after the formal presentation. Please note that this conference is being recorded. I am now pleased to introduce your host, Charley Brady, Vice President of Investor Relations. Thank you, and you may begin.

Thank you, operator. On today's call, we'll be referring to the second quarter 2023 earnings presentation that will be helpful to follow along with, as well as the press release filed this afternoon that details the company's second quarter 2023 results, both of which can be found on our Investor Relations page at ir.korewireless.com. Finally, our 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 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 identifies 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 we'll 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, Kore's President and Chief Executive Officer.

Thank you, Charley. Good afternoon, everyone, and thank you for joining us today for our second quarter 2023 earnings call. With me is Paul Holtz, Kore's Chief Financial Officer. Before we get started, a warm welcome to our newest IoT team members, many of whom joined Kore with the acquisition of Twilio's IoT business. Now let's get to the meat of our earnings call. As always, I'll start with a brief overview of the key events and announcements from the second quarter, and I will be followed by Paul, who will discuss our financial results. Slide four presents some key announcements from the second quarter. On June 1, we closed the acquisition of Twilio's IoT business, marking a key milestone in accelerating our journey to being the world's first IoT hyper-scaler. This acquisition, apart from providing us a world-class IoT connectivity product in Super SIM, expands Kore's one-stop shop position by adding build to our deploy, manage and scale value proposition. Needless to say, we remain excited about the additional growth opportunities created by the combination of Kore and the Twilio IoT business. In May, we announced the launch of our preconfigured managed solution to offer retailers, restaurants and other multisite companies high-bandwidth 5G cellular connectivity through fixed wireless access or FWA. Kore's FWA solution will allow customers to access high-speed Internet that has traditionally been available only through wireline applications. Retailers, restaurants and other consumer-facing companies are increasingly seeing the benefits of 5G solutions to support point-of-sale devices, digital ordering and integrating with third-party delivery services across multiple locations. This FWA solution positions Kore to attack a growing high-bandwidth use case and further expand our addressable market. As I'm sure you are all aware, ESG and sustainability have become important topics for companies and investors. With IoT increasingly playing a role in supporting ESG initiatives, we are seeing more opportunities where Kore can play a part, aligning with our purpose statement, IoT for good. Along these lines, in the second quarter, Kore announced its participation and support of two sustainability initiatives. We will provide scalable global IoT connectivity to a biodiversity sensor project conducted by AgTech company, Syngenta. Syngenta's biodiversity project is digitally connecting farmlands across the globe to provide farmers with analytics to aid them in adapting to climate change and improving biodiversity to protect crops. Last year, Syngenta connected over 200 hectares of land and has a goal to connect 1 billion hectares over the next three years. To further support sustainability and waste reduction, Kore has launched an initiative to reduce the amount of plastic used in SIM card bodies by 50%. In addition to cutting SIM card plastic waste by half, this initiative will lower SIM card shipping costs by 50% and reduce Kore's carbon footprint related to SIM cards by 16%. Now let's turn to our second quarter financial results and 2023 guidance on slide five. Our second quarter results continued the momentum established in the first quarter with Q2 revenue of $69.5 million, increasing sequentially from the first quarter by approximately 5%. On a year-over-year basis, revenue declined slightly by 2%, primarily due to a difficult comparison to the second quarter of '22, which had revenue from 2G, 3G customers and the LTE transition project at our largest customer. Absent the 2G, 3G and LTE transition project revenue in 2022, second quarter 2023 revenue increased over 2% year-over-year. Our 2023 second quarter was the last quarterly year-over-year comparison impacted by the LTE transition project revenue, and the true organic growth of the company will be more evident going forward. While we have experienced some delays in IoT solutions revenue at a few customers, we continue to expect sequential quarterly revenue growth for the remainder of 2023 and year-over-year growth beginning in the third quarter. Gross margin increased 180 basis points year-over-year to 54.4% and benefited from continuing carrier cost optimization and a lower mix of hardware revenue. Second quarter 2023 adjusted EBITDA of $14.2 million increased approximately 7% sequentially from the first quarter, and adjusted EBITDA margin improved 30 basis points to 20.5% from 20.2%. Compared to the second quarter of 2022, adjusted EBITDA declined approximately 15%. We are reiterating our 2023 revenue and adjusted EBITDA guidance. We expect revenue to grow in the low to mid-teens, resulting in revenue in a range of $300 million to $310 million. This guidance includes absorbing the $24 million in year-over-year headwinds from the 2G and 3G sunsets in the U.S. and the LTE transition project at our largest customer, somewhat offset by the partial year contribution of the Twilio IoT business acquisition. Our reiterated guidance assumes that much of the IoT solutions revenue pushback that we started to see in the second quarter and will see in the third quarter will be made up in Q4. We remain confident in our adjusted EBITDA guidance range of $60 million to $62 million and margin of approximately 20% as margins in the Twilio IoT business are improving slightly faster than we initially projected, which should offset any potential impact from the revenue delays I mentioned. With that, I will now hand the call over to Paul to cover the financials in more detail.

Thanks, Romil, and good afternoon, everyone. Turning to our results on slide six, second quarter revenue decreased by 2% year-over-year to $69.5 million, down from $70.9 million in the second quarter of 2022, but it rose by 5% sequentially from the first quarter of 2023. In terms of segments, IoT connectivity revenue was $48.3 million, including one month of revenue from the Twilio IoT acquisition, which was an 8% year-over-year increase. The second quarter of 2023 was the first time in many years that IoT connectivity revenue was unaffected by the 2G and 3G sunsets in the U.S. We expect IoT connectivity revenue to grow both year-over-year and sequentially for the remainder of 2023. However, IoT solutions revenue fell by 19% year-over-year to $21.3 million due to tough comparisons from last year's LTE transition project revenue at our largest customer. This project wrapped up in the second quarter of 2022, so future comparisons will not be impacted by it. The total gross margin for Q2 2023 was 54.4%, which represents an increase of 180 basis points year-over-year, marking the highest gross margin since our public offering in Q3 2021. The IoT connectivity gross margin was 65.2%, slightly lower than the previous year. For the last four quarters, IoT connectivity gross margins have stabilized around 65%, but we anticipate an overall decline in the second half of 2023 due to the lower-margin revenue from the Twilio IoT acquisition. The positive aspect is that margins from the Twilio IoT business are expected to improve slightly faster than we had anticipated for the rest of 2023. IoT solutions gross margins decreased by about 90 basis points year-over-year, primarily due to the mix of hardware and services. By the end of the second quarter, total connections were 18.5 million, including roughly 2.9 million connections from the Twilio IoT acquisition. Excluding these connections, Kore’s organic connections saw an increase of 400,000 in the second quarter of 2022. The dollar-based net expansion rate for the 12 months ending June 30, 2023, was 99%, down from 114% the previous year. This metric reflects growth from existing customers over the trailing 12 months compared to the same customer group in the previous year, similar to same-store sales growth. As noted in our last quarterly call, the customers from the BNP Simon acquisition are now included in the metrics, while the new customers from the Twilio IoT acquisition have not been factored in. The year-over-year impact on DBNER continues to be influenced by the LTE transition project revenue from our largest customer, which began in June 2021 and concluded in June 2022. During that time, revenue from our largest customer more than doubled from this singular project. If we exclude total revenue from this customer due to the significant non-recurring events, DBNER at the end of the quarter would have been 115%, compared to 109% at the end of Q2 2022. Operating expenses, including depreciation and amortization, were $47.4 million in the second quarter, up $4.2 million or 10% from the previous year. This increase is attributed to higher headcount costs, the inclusion of the Twilio IoT business, stock-based compensation, and higher depreciation and amortization expenses compared to Q2 2022, following the BNP acquisition last year. Second quarter interest expenses, including amortization of deferred financing fees, rose year-over-year to $10.4 million from $7.3 million in Q2 2022 due to increased borrowing costs under our senior secured term loan. In the second quarter, we reported a net loss of $19.5 million, compared to $10.8 million in the same quarter last year. The increase in net loss year-over-year was mainly due to higher operating expenses, which included the Twilio IoT headcount, increased depreciation and amortization, elevated interest expenses, and a reduction in income tax benefits compared to the previous year’s quarter. Adjusted EBITDA for the second quarter was $14.2 million, a decline of $2.6 million, or roughly 15%, from the same period last year. Our adjusted EBITDA margin was 20.5%, which is down 320 basis points compared to the previous year. Nonetheless, we experienced a 7% sequential improvement in adjusted EBITDA and a 30 basis point improvement in adjusted EBITDA margin compared to the first quarter of this year. The decline in adjusted EBITDA and adjusted EBITDA margin year-over-year was affected by rising headcount costs associated with investing in the company’s growth, additional costs for Twilio's IoT headcount, and expenses related to enhancing public company processes and systems, such as SOX compliance. Regarding cash flow, cash used in operations for the three months ending June 30, 2023, was approximately $0.7 million, down from $14.7 million in cash provided by operations for the same period last year. This shift was predominantly due to unusually high collections from our largest customer in Q2 2022 associated with their LTE transition projects. In contrast, Q2 2023 saw incremental cash outflows related to the Twilio IoT acquisition and headcount costs incurred during the quarter. These additional cash outflows from the Twilio acquisition were not counterbalanced by any revenue collections as we won’t start receiving revenue until Q3 2023. At the end of the second quarter, we had cash, excluding restricted cash, amounting to $22.9 million, down from $34.7 million as of December 31, 2022. This change was largely due to cash flows from the Twilio IoT acquisition, annual bonus payments, and increases in interest and income tax expenses. Before I hand it back to Romil, I want to make a few remarks regarding our 2023 annual guidance, which we are maintaining for both revenue and adjusted EBITDA. We experienced a robust first half of the year without any adverse effects from the 2G and 3G sunset in the U.S., saw positive organic growth in IoT connectivity, and completed the Twilio IoT acquisition. For the second half of the year, we expect IoT connectivity revenue to keep its positive trend, and we will have a complete six months of revenue contribution from the Twilio IoT business. However, we are somewhat cautious about IoT solutions revenue as some customers have indicated they are deferring orders to the fourth quarter, which increases the likelihood that these orders could further shift into 2024. Currently, we anticipate Q4 will be the largest quarter for IoT solutions, whereas it has typically been our lowest quarter. We are much more confident in our adjusted EBITDA outlook due to the strong momentum in IoT connectivity and the quicker improvement of Twilio IoT margins. Additionally, we have accounted for incremental sales headcount in our guidance for the second half of 2023, which we could postpone if necessary. With that, I'll pass it back to Romil.

Thanks, Paul. As you've heard, and to reiterate, with the second quarter complete, the difficult year-over-year revenue growth comparison from the LTE transition project at our largest customer is now behind us. As a result, we expect to generate year-over-year growth beginning in the third quarter, and further, we are on track to achieve double-digit revenue growth in 2024 as evidenced by our increasing global sales pipeline. Slide eight presents a snapshot of our global sales pipeline as of June 30, 2023. Our sales pipeline now includes almost 1,500 opportunities with an estimated potential total contract value, or TCV, of approximately $660 million. In the second quarter, we generated an incremental $32 million of closed one TCV, bringing the year-to-date total to $60 million. We continue to progress towards exceeding the $102 million closed one TCV in 2022 and delivering a fifth consecutive year of TCV growth. As a reminder, the majority of sold TCV is recognized as revenue over four years, and 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. For instance, 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. Slide nine showcases a few examples of our wins in the second quarter that contributed to the closed one TCV of $32 million. These recent contract wins highlight the success of our growth strategy and demonstrate the expansion of new use cases for our products. Kore has continued to have success in increasing its wallet share at existing customers. In the second quarter, we secured three contracts with TCVs of over $9 million, $6 million, and $1.5 million from customers in the fleet, asset tracking, and healthcare markets, respectively. These customers are seeking to improve operational efficiency and effectiveness by consolidating IoT connectivity to a single platform and single partner in Kore. We continue to see customers taking advantage of Kore's full range of capabilities and product offerings to support their growth. For example, Kore recently won a $500,000 TCV engagement to support IoT managed services for a usage-based insurance company seeking to upgrade and improve their logistics. As an example of effective land and expand execution, Kore followed on a recent win at a major restaurant chain with another engagement whereby Kore will provide fixed wireless access services to 650 of the customer's locations and will upgrade these locations to 5G technology. This contract has a TCV of $850,000. We also continue to win customers outside the U.S. In Q2, Kore won contracts from a leader in fleet AI video telematics headquartered in the U.K. and a leading medical equipment and remote patient monitoring provider based in France to support their entries into the U.S. market. These contracts have a combined TCV of approximately $1.5 million. On to the final slide, slide 10, as I said at the beginning of this call, we started the year with good momentum, which continued through the second quarter. We organically grew connections by 0.5 million SIMs. We added $32 million in TCV and delivered sequential quarterly growth. As we move into the second half of the year, we expect revenue to continue to increase sequentially each quarter and importantly, generate year-over-year growth beginning in the third quarter. As covered on our funnel chart, our global sales pipeline is approaching 1,500 opportunities with a potential new business TCV of approximately $660 million, which provides a solid backdrop for growth over the coming years. This sales pipeline, coupled with our approximately 80% recurring revenue, gives us confidence that we can achieve our medium-term goal of generating top-line revenue growth of at least 20% with an EBITDA margin of 20% or better, thus becoming a Rule of 40 company. As always, creating value for our shareholders remains a top priority, and we believe we are well positioned to do that. In closing, I wish to thank all of our global employees, the Kore team who are working hard every day to drive growth and serve our customers. With that, let's start with Q&A.

We will now be conducting a question-and-answer session. Our first question comes from Michael Latimore with Northland Capital Markets.

Hi, great. Thanks very much. The TCV funnel is very large and grew nicely. Does that include the Twilio business? Or is that organic?

That's actually organic, Mike. We really only kind of, I'll say, owned the Twilio IoT business for a month in Q2, as you know, and so far, we're just going off even revenue recognition and so forth, so provided by the Twilio back office and so forth. So we haven't quite had a chance to consolidate everything. But hopefully, when we're speaking to you in mid-November about Q3, we'll have that done.

And what sort of use cases or applications are most pronounced in that funnel?

We are observing a steady increase in high bandwidth use cases, particularly in fleet management. Since the start of the year, we have seen significant growth in this area, with around 60% of the $32 million we secured in Q2 related to fleet. There is a strong demand for video telematics and higher bandwidth solutions as companies explore more AI applications at the edge. Additionally, we recently announced a follow-up win with a large restaurant chain, which indicates a positive trend in fixed wireless access (FWA). This also contributes to a quicker accumulation of revenue, leading to growth in our total contract value funnel.

Yes. Great, and obviously, you're expecting good year-over-year growth in the second half. In the third quarter, do you think you will get back to year-over-year organic growth, kind of, ex-Twilio?

Yes, we certainly believe that to be the case despite what both Paul and I talked about around the pushbacks we're seeing from IoT managed services, and net solutions that customers. But depending on where all that falls out, we're still fairly confident in this organic growth there, yes.

Great. Thanks a lot.

Thank you. Our next questions come from the line of Scott Searle with ROTH MKM. Please proceed with your questions.

Hey, good afternoon. Thanks for taking my question. Maybe to follow up quickly on Mike's question. In terms of returning to organic growth in the third quarter, I'm not sure I heard a Twilio contribution number in the second quarter. I'm wondering if you could calibrate us on that front? Remind us how many employees also are coming on board as part of the transaction?

Yes, so Scott, we haven't disclosed any of all of that. It's so small and sort of generally kind of not material. but we did disclose this time because we could, because we got account from them of their connection at the end of June, and of course, we had our own connections count. So you could see kind of a $2.9 million number there. Their ARPUs are right around ours. So I guess you could get a general idea of size from there, but it's just not something we've disclosed per se.

And then, Scott on the people we have to disclose, it's just a little bit over 50 people electing over. That will be in the Q2.

Right. Okay, great, and Romil, maybe to go back to the FWA opportunity. I'm wondering if you could dig into that a little bit more in detail. I'd like to understand if you guys are just doing the device management of it, or are you doing the full managed service capability for that fixed wireless access? And I was wondering if you could also frame the opportunity there as well. I imagine it comes with much higher ARPUs. So I'd love to kind of get my hands around that and what's your broad-based expectations for that type of an end market or use case would be as we get into '24, '25?

Yes, that's a great question, Scott. The first thing I want to mention is that it has been about four years since we started focusing on the general use case in this area. Initially, the emphasis was on backup solutions, primarily for failover situations; when there was a power or Wi-Fi outage, cellular backup was the alternative. However, in the past few years, since we launched our first solution, we have made significant advancements in bandwidth and technology. Now, many people consider cellular as the primary option. We find ourselves in a position where we should be installing fixed lines and fiber when cellular can provide comparable speeds. The solution we referenced in the press release and highlighted in this call is designed for easy use by customers and does include hardware and connectivity. It is a fully managed solution, exemplifying the "as a service" model, and it specifically supports 5G, allowing businesses to sever ties with traditional landlines just as we are moving away from landline phones at home. We are also partnering with strong hardware providers to support this initiative.

Okay. Great. And lastly, if I could, looking out to 2024, it sounds like ending this year, there are some big opportunities that look like they're going to catalyze in the fourth quarter around some device deployments and product sales. It sounds like it's setting you up for a nice return to organic growth ex-Twilio going into the 2024 time period. So we're back to a 15%-plus kind of organic growth on IoT connectivity in '24? Or is it still a little bit early to be making that call? Thanks.

Yes, Scott, in response to the earlier question, we have returned to organic growth year-over-year in Q3. While the Twilio contribution is smaller than we anticipated a year and a half ago, it will still have an impact. Additionally, some of the discrepancies between Q3 and Q4, as mentioned by Paul, are due to customers who typically place purchase orders around May and June for Q3, but have informed us of delays of 90 to 120 days. If those orders come through, it effectively shifts revenue from Q3 to Q4. Regardless, we expect to see organic growth in Q3, and Q4 should exhibit very strong growth, and we hope this trend continues. Regarding next year, while I won't commit to a specific 15% growth in connectivity, we are optimistic. The 8% growth from Q2 to Q1 in connectivity is encouraging. We believe that achieving higher growth rates of 8% to 10% is possible, and we aspire to reach 15% and 20%. However, this depends on the economy stabilizing, resolving supply chain issues, and seeing increases in average revenue per user, all of which we anticipate will occur. While we believe we can achieve this, I won’t promise it for 2024.

Great. Thank you, nice to see a return to growth.

Yes, thank you.

Thank you. Our next questions come from the line of Meta Marshall with Morgan Stanley. Please proceed with your questions.

Great, thanks. My first question is about Twilio. I'm curious about how it feels different now that you've had the chance to experience it firsthand and understand the organization. Were you also able to retain some of the key engineering talent that you find most promising?

Thank you, Meta. First, I want to emphasize that the strategic rationale for the deal remains strong, particularly regarding the engineering talent you've highlighted. Much of the Kore network team is based in Germany, and I had a productive visit with them. I'm eager to see, as early as this quarter, a unified next-generation product roadmap and an accelerated plan to enhance our digital front end. They are exceptional at digital IoT business models, and we anticipate that their contributions will help us build more efficiently, taking advantage of the cost savings discussed during the acquisition. All strategic rationale points still hold true. The cultural fit is also promising. In Germany, the U.K., and here in the U.S., our meetings with them have been very positive. In fact, the integration is progressing better and quicker than expected, including on the gross margin front. We are confident about reaching breakeven this year, potentially by the fourth quarter, which aligns with our commitment to being accretive next year. However, one challenge we've encountered is that the revenue from this smaller entity is behind initial expectations, and their growth rate is slower than anticipated. This has been partly due to 12 to 18 months of distractions for the team, as rumors about their strategic importance within Twilio led many to seek other job opportunities, resulting in attrition, particularly in their sales force. Despite coming in smaller than expected, we are committed to meeting this challenge head-on. Our new Chief Revenue Officer is actively collaborating with the Twilio leadership to rebuild the momentum we believe is attainable and that can positively contribute to our growth.

Great, thanks. And maybe just a follow-up question. If you could just kind of remind us of how much of the solutions business is kind of what you would deem more recurring versus project base?

Yes, it is roughly 60-40. Again, it will vary each quarter, but that 60% has been pretty consistent on customers who either order annually, so one PO or order on a quarterly basis. But yes, it’s 60-40.

Sort of, programmatically recurring, as we call it, yes.

Got it, okay, perfect, thanks so much guys.

Thank you, Meta. Operator?

Yes, I’m here. I apologize, Mike. Computer froze. Thank you. Our next line comes from the line of Matt Niknam with Deutsche Bank. Please proceed with your questions.

Thank you for taking my question. First, regarding adjusted EBITDA, you've generated just under $28 million year-to-date and are reaffirming the guidance for 60% to 62% for the year. Initially, it was expected that the Twilio deal would be somewhat dilutive upfront, but you seem to express more optimism about profitability prospects. Can you help us understand how you plan to bridge the gap in the second half of the year to meet the adjusted EBITDA target? Additionally, concerning the IoT Solutions business, can you quantify the impact from the delayed orders and clarify whether Q3 is still expected to be challenging with those deferred orders anticipated in Q4? Thank you.

I'll address the profitability question. So far this year, we've achieved approximately 27% profitability, with about 13% in the first quarter and 14.2% in the second quarter. It's important to note that the first half of the year tends to have higher costs, especially in Q1 due to additional expenses from the audit and other factors. Typically, we expect EBITDA to increase as the year progresses. Initially, we anticipated Twilio to contribute positively from the start, but they were at a loss in June. However, we see signs of improvement, and as Romil indicated, by Q4, we could see them break even and potentially turn positive in 2024. The pathway to reaching the 60% to 62% profitability range is closely tied to our revenue growth, especially from the connectivity sector, which has higher margins. We expect Q4 to be our strongest quarter, helping us achieve that target. Additionally, we've factored in some extra headcount for growth, and we will keep monitoring that in light of any pushbacks in solutions. This serves as a bit of a buffer if necessary. I apologize if I overlooked anything.

Then there was a question about the confidence surrounding the push, specifically regarding the amount of pushback and how much should be expected in Q4.

Yes, so we saw about $1 million starting in Q2 at the end mainly in June here at the end, so for the back half of the year, the number between Q3 and Q4, we estimate between $5 million and $10 million, so again, depending on timing, where that is, we do expect most of that to be in the back end in Q4.

Right, so to be clear between $5 million and $10 million we’ll move, we hope only from Q3 to Q4.

So we're assuming that in June, there was about $1 million. You're expecting this accumulation in the third quarter to carry over into the fourth quarter. Does that bring you to the $50 million?

Yes. Correct. That's right.

Thank you. I'm showing no further questions at this time. I would like to turn the floor back over to Romil Bahl for closing comments.

Thank you very much for your attention here today on our second quarter call. We certainly appreciate you taking the time to listen in and to ask your questions. We look forward to updating you in mid-November with our third quarter results. Good-bye.

Thanks.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your evening.