KORE Group Holdings, Inc. Q3 FY2023 Earnings Call

Hello and welcome to the KORE Group Holdings’ Third Quarter 2023 earnings call and webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Charley Brady, Vice President of Investor Relations. Please proceed, Charley.

Thank you, operator. On today's call we'll be referring to the third 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 third quarter 2023 results, both of which can be found on our 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 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, the company’s President and Chief Executive Officer.

Thank you, Charley. Good afternoon everyone and thank you for joining us today for our third quarter 2023 earnings call. With me is Paul Holtz, KORE's Chief Financial Officer. As always, I'll start with a brief overview of the key events and announcements for the third quarter, and I will be followed by Paul who will discuss our financial results. We will then look at our sales results and finish as always with a Q&A session. First and by far the most important of our key announcements today, I am very pleased to announce that we have signed agreements to refinance our approximately $300 million term loan with the issuance of a new $185 million term loan and a strategic investment of $150 million of 13% preferred stock. The final closing of these transactions is expected to occur in the next week or two. Slide 4 provides an overview of the transactions which Paul will detail later in the call. But make no mistake about it, this refinancing is a very important milestone for KORE. With these transactions, we have reduced our overall debt level and lowered our first lien leverage ratio from roughly 5x to roughly 3x our 2023 estimated adjusted EBITDA. We have extended the term loan maturity to 2028 matching the maturity of our $120 million convertible note and added approximately $15 million in cash to our balance sheet. Importantly, we have also increased cash flow flexibility as the preferred stock dividend has a payment-in-kind or PIK feature allowing the company the option to defer cash dividend payments. This payment optionality allows KORE to increase our free cash flow as we accelerate revenue and EBITDA growth over the next few years and further delever our balance sheet. We believe this near-term debt overhang has been the single overriding concern of public company investors and we are happy to remove this obstacle to shareholder value creation. We can now direct all of our attention to driving organic top line and adjusted EBITDA growth. Turning to Slide 5, we present some additional key announcements from the third quarter. Expanding our presence with distributed enterprise customers, KORE announced that we would collaborate with a national US retailer to enable its digital transformation with 5G connectivity. This marks a turning point for the industry as 5G connectivity is driving a nationwide shift towards digital-first retail. KORE is well positioned to support retailers transitioning to 5G connectivity by providing critical 5G services and solutions complete with backup options thereby enabling retailers to innovate in areas like inventory control, daily operations, and consumer engagement. In September, KORE was honored to receive a 2023 IoT Evolution LPWAN Excellence Award from IoT Evolution World for KORE LPHub, which is KORE's innovative LoRaWAN solution. KORE LPHub is a SaaS-based Service Delivery Platform or SDP which deploys, manages, and connects LoRaWAN devices over a cost-effective Low Power Wide Area or LPWA network ensuring device longevity and supporting expansion into the massive IoT market segment. This award is a testament to KORE's ability to bring new products to market and remain an IoT innovation leader which in turn drives top line growth. Finally, building on KORE's IoT for Good initiative, we announced an alliance with GrandPad to support their mission of helping seniors age in place with IoT. Powered by KORE's robust IoT connectivity solutions, GrandPad provides an easy-to-use communication device that allows seniors to connect to vital caregivers and family members by making video calls, sending voice messages, and viewing media. Over the next three decades, the number of adults over 60 years of age who will require long-term care is expected to more than triple. Partnerships such as this position KORE with an early presence in long-term secular growth markets enhancing KORE's ability to capture market share. Now let's turn to our third quarter financial results and updated 2023 guidance on Slide 6. Our third quarter results came in at $68.6 million of revenue, increasing year-over-year from the third quarter of 2022 by approximately 4%, driven by strong growth in our high-margin IoT connectivity business which increased 27% year-over-year and in the high single digits organically. Excluding the forced churn of non-KORE customers due to the 2G, 3G sunsets, IoT connectivity grew in the mid-teens organically showing clearly how IoT connectivity can be a strong top-line growth business at high gross margins. This growth in IoT connectivity was partially offset by the expected decline in IoT solutions due to the customer order deferrals we discussed on our last quarterly earnings call. Despite experiencing additional delays in IoT solutions orders from a few customers, we expect to generate year-over-year quarterly revenue growth again in the fourth quarter of 2023. Gross margin increased 257 basis points year-over-year to 54.8%, a new quarterly record and benefited from continuing carrier cost optimization and a lower mix of IoT solutions revenue. Third quarter 2023 adjusted EBITDA of $14.2 million declined approximately 6% year-over-year due to increased operating expenses including SOX compliance. Adjusted EBITDA margin declined approximately 220 basis points to 20.6% from 22.8% but did experience a slight improvement from the second quarter of this year. The IoT solutions order delays we experienced in the third quarter have extended into the fourth quarter pushing additional revenue into 2024. To be clear, this is not lost revenue but is primarily a function of certain IoT solutions customers managing year-end inventory levels and delays in remote patient monitoring deployments and clinical drug trials that use IoT devices. We fully expect to recognize these orders in 2024 and continue to serve these customers as they grow back to normal business volumes. Given all of this, our full year 2023 revenue is expected to be lower than our previously guided range of $300 million to $310 million. As such, we are revising our 2023 revenue guidance to a range of $280 million to $290 million. On a positive note, this does give us a slight tailwind for 2024 revenue and we will provide more guidance for next year on our fourth quarter earnings call. Despite the reduced revenue outlook, we are maintaining our 2023 adjusted EBITDA guidance of $60 million to $62 million due to improved profitability on the acquired Twilio IoT business and reduced operating expenses as we flex to reflect current IoT solutions revenue levels, both of which helped offset the reduced profitability from deferred revenue. The restructuring activity we began in the fourth quarter is expected to result in approximately $10 million in cost savings in 2024, reducing potential margin impacts from ongoing macroeconomic events. And with that, I will now hand the call over to Paul to cover the financials in more detail. Paul?

Thank you, Romil, and good evening everyone. Turning to our results on Slide 7, third quarter revenue increased 4% year-over-year to $68.6 million compared to $66.1 million in the third quarter of 2022. By segment, IoT Connectivity revenue of $55.2 million, which included our first full quarter of revenue from the Twilio IoT acquisition, increased 27% year-over-year. Organically IoT Connectivity grew in the high single digits year-over-year. If we exclude the revenue from the non-core customers that were forced to churn at the end of 2022 due to the network sunsets in the United States, then IoT Connectivity revenue grew organically in the mid-teens year-over-year. This growth is despite some delays in deployments or plan upgrades at some customers that we were expecting in 2023 but have now been pushed to early 2024. IoT Solutions revenue declined 41% year-over-year to $13.4 million. As I mentioned on the previous earnings call, we saw some requests from our largest Connected Health customers to defer orders to the third and fourth quarter, which increased the risk that these orders could slip further into 2024. This risk has materialized as seen in our lower than anticipated third quarter IoT Solutions revenue. We are forecasting an increase in IoT Solutions in the fourth quarter, but with customers continuing to ask for deferrals to manage costs and year-end inventories and the limited capacity to the various holidays within the quarter, we are being more conservative on how much revenue we will recognize before the end of the fiscal year in IoT Solutions. Total gross margin in Q3 2023 was 54.8%, an increase of 257 basis points year-over-year. The increase in gross margin year-over-year is mainly due to the mix of IoT Connectivity revenue in the current quarter, which was 80% of overall revenue this quarter. IoT Connectivity gross margin of 61.7% was down approximately 300 basis points year-over-year. This decline was expected due to the inclusion of the lower margin revenue from the Twilio IoT acquisition. However, Twilio IoT margins have continued to be higher than we originally forecasted, which will result in the Twilio business being break-even by the end of this year. IoT Solutions gross margin declined 174 basis points year-over-year to 26.9%. As typical, the change in IoT Solutions gross margin was due to the hardware and services mix in the quarter. Total connections at the end of the third quarter were 18.9 million, an increase of over 300,000 from the end of the second quarter of 2023 and approximately 3.6 million from the end of the third quarter of 2022. The dollar-based net expansion rate or DBNER for the 12 months ended September 30, 2023 was 96% compared to 100% 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 a same store sales growth rate. The DBNER calculation continues to be negatively impacted by the significant revenue received in 2022 from our largest customer’s LTE transition project that began in June 2021 and ended in June 2022. If we exclude total revenue from our largest customer because of this significant non-recurring event, DBNER at the end of the quarter would have been 104% compared to 106% at the end of the third quarter of 2022. Operating expenses including depreciation and amortization in the third quarter, also including a $78.3 million non-cash goodwill impairment charge, were $125.5 million, an increase of $82.9 million compared to the same period last year. In addition to the non-cash goodwill impairment charge, the increase is mainly attributed to the increase in headcount related costs which include a full quarter of these costs from the Twilio IoT business. Third quarter interest expense including amortization of deferred financing fees increased year-over-year to $10.6 million versus $8.2 million in Q3 2022 due to the increased borrowing costs on our existing senior secured term loan. Net loss in the third quarter was $95.4 million compared to $14.3 million in the same period in the prior year. The year-over-year increase in that loss was primarily due to the non-cash goodwill impairment charge of $78.3 million due to the decline in the company's share price and also the increase in interest expense. Adjusted EBITDA in the third quarter was $14.2 million, a decrease of approximately $1 million or 6% compared to the same period last year. Our adjusted EBITDA margin in the current quarter was 20.6%, down approximately 220 basis points compared to the same period in the prior year. The year-over-year decline in adjusted EBITDA and adjusted EBITDA margin were impacted by increased costs for headcount, including the additional headcount associated with Twilio IoT business. Moving to cash flow, cash provided by operations for the nine months ended September 30, 2023 was approximately $4.5 million compared to cash provided by operations of $20.5 million for the same period in the prior year. The change year-over-year included increased collections in the prior year from the LTE transition project from our largest customer versus the current year which had additional outflows of cash from interest and the operating activities from the Twilio IoT acquisition. At the end of the third quarter, cash excluding restricted cash was $19.8 million compared to $34.7 million as of December 31, 2022. Turning to our debt refinancing, as Romil mentioned, we are excited to be working with two new strategic partners with deep experience in the telecom space that will help strengthen our balance sheet and give the company more flexibility to invest in growth opportunities going forward. We are replacing our previous $300 million term loan with a new $185 million term loan, which will decrease our total leverage ratio at the end of the third quarter from 7.3 turns to 5.3 turns of last 12-month adjusted EBITDA. The new term loan carries an interest rate of SOFR plus 650 basis points compared to the prior loan which was at SOFR plus 550 basis points. The new term loan credit agreement allows for interest rate reductions of 25 basis points for each half-term reduction in our first lien leverage ratio up to a maximum reduction of 50 basis points. In conjunction with the new term loan, we issued $150 million of 13% preferred stock with 11.8 million 10-year penny warrants. Importantly, the preferred stock dividend has a PIK feature which allows for greater cash flexibility. After the transaction expenses, we expect to add approximately $15 million of cash to our balance sheet. I know I'm not just speaking for myself but the entire company is thrilled to have this debt refinancing overhang behind us. And before passing it back to Romil, I would like to make a couple of comments on our updated 2023 annual guidance. We have revised our 2023 revenue guidance downward to $280 million to $290 million versus our previous guidance range of $300 million to $310 million to reflect order deferrals by some of our Connected Health customers in our IoT Solutions business. As mentioned earlier, these risks have materialized, are larger than we originally estimated and will push revenue into 2024. To be clear, most of these are not order cancellations or lost orders and based on discussions, those order deferrals will be deferred to 2024 and are expected to be recognized in early 2024. At this point, we don't expect to see the recognition of these deferred orders to significantly cannibalize the orders we are forecasting to receive for the rest of 2024. Despite the reduction in our revenue guidance, we are maintaining our 2023 adjusted EBITDA guidance of $60 million to $62 million. We are able to do this for a number of reasons. Firstly, the majority of the reduction of revenue in 2023 is coming from the lower margin IoT Solution revenue. Secondly, we will have less variable compensation due to the lower revenue number. And lastly, we are reallocating costs based on our current priorities which will result in approximately $2 million in savings in Q4 but more importantly will benefit 2024 more significantly likely in the $10 million range. Additional information on this plan will be given on our Q4 earnings call as part of our 2024 annual guidance.

Thanks, Paul. As we finish 2023, we do so with lower leverage, a strong balance sheet, and greatly improved cash flow. Further, we are confident that with the transitory effects of the 2G, 3G sunsets and LTE transition project at our largest customer now behind us, we will deliver on our top line growth promise. In fact, we are on track to achieve double-digit revenue growth in 2024 as evidenced by our increasing global sales pipeline. Slide 10 represents a snapshot of our global sales pipeline as of September 30, 2023. Our sales pipeline now includes over 1,700 opportunities with an estimated potential Total Contract Value, or TCV, of approximately $740 million. In the third quarter, we generated an incremental $27 million or closed one TCV, bringing the year-to-date total to $87 million. We continue to progress towards exceeding the $1 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. Slide 11 showcases a few examples of our wins in the third quarter, which contributed to the closed one TCV of $27 million. These recent contract wins highlight the success of our growth strategy and demonstrate the expansion of new use cases for our products. We continue to win a greater share of our customers' wallets, as evidenced by a $4.4 million TCV contract win with a remote patient monitoring customer. KORE will now become the sole provider of eSIM connectivity across the US, UK, and Europe for this customer, who will also be transferring lines to KORE from a competitor. We are very excited to win 100% wallet share with this customer because of its high-growth prospects. KORE's ability to act as a one-stop shop to provide a full suite of IoT deployment services for customers continues to be a competitive advantage. In the third quarter, a national retail chain selected KORE to provide full lifecycle managed services for a planned migration from 4G to 5G with a contract value of $6.2 million. KORE will provide connectivity, installation services, and ongoing management of the customers' devices. Expanding on existing customer relationships built on excellent delivery of our initial scope allows KORE to expand its services with existing customers. A great example is the $2.5 million TCV contract received from an existing rent-to-own store franchisor customer awarded to KORE to provide connectivity across multiple carriers. KORE is also working on upgrading lines from 4G to 5G to expand its footprint further with this customer. KORE continues to win internationally. And in the third quarter, a GPS tracking and fleet management software provider based in Australia selected KORE as its connectivity provider utilizing KORE OmniSIM for an initial contract TCV of $435,000. Although we chose these four wins to highlight in the press release and slide deck, this is by no means a complete list as we had several other important wins in the third quarter in each of the four thematic areas represented on this slide. Despite its parent company utilizing an MNO for connectivity, a provider of smart outlets, switches, thermostats, door locks, and sensors awarded a several hundred thousand dollar TCV contract for KORE to be their connectivity provider based on the capabilities of KORE's OmniSIM or eSIM offer. KORE also won a $185,000 TCV contract from a tracking and computer printing technology manufacturer to support a global deployment in partnership with a hardware provider by supplying OmniSIM for in-store and warehouse inventory management. A leading provider of a proprietary decentralized platform and suite of supporting services used by life sciences organizations for remote capture of patient data was looking for a one-stop technology enablement partner to help them reduce hardware lead times and the use of multiple hardware and connectivity vendors globally. KORE was selected for this $860,000 TCV contract due to KORE's ability to provide a one-stop shop for hardware, software, device management, and connectivity on a global scale. And finally, an existing KORE Connected Health international customer awarded KORE additional contracts with a combined TCV of $236,000 to provide connectivity to multiple global clinical trials. These wins span a broad array of end markets and use cases from commercial building, smart sensors and switches to warehouse inventory management and logistics to global clinical trials and remote patient monitoring in hundreds of countries worldwide. KORE's ability to support this breadth of use cases globally is foundational to the unique value we bring to our customers every day. Our final slide, Slide 12, summarizes the key messages we have talked about today. We continue to add organic connections in the third quarter and KORE's total connections were approximately $18.9 million as of September 30, 2023. Let me just take a moment to put this in perspective. At the end of 2017, KORE had about 6.4 million connections. That's about when I was joining the company. So in less than six years, we have added approximately 12.5 million connections, almost tripling our IoT connectivity volumes, which represents, by the way, recurring revenue and a compound annual growth rate of approximately 21%. And this was net of the connections that churned due to the shutdown of the 2G and 3G networks. Our global sales pipeline has never been more robust and today our funnel represents larger opportunities at significantly higher bandwidth and hence higher ARPU. On top of this momentum, the company has now deleveraged, strengthened its balance sheet, and increased cash flow flexibility. As I briefly mentioned earlier, the company initiated a restructuring in the fourth quarter that is expected to generate, as Paul also said, approximately $10 million in operating expense savings next year. This action serves to focus on our top priorities and reduce the risk to our profitability in light of ongoing macroeconomic factors potentially impacting future top line growth. All of this is to say that KORE is in a better position today from both a financial and growth perspective than at any time since the company came public. Creating shareholder value remains a top priority and against the backdrop of what we have discussed today, we believe we are in a great position to deliver against this priority. In closing, thank you to all KORE employees worldwide, our IoTers, for continuing to work together with a growth mindset to serve and support each other and our customers every day. With that, let's start the Q&A, please.

Thank you. Our first question is coming from Michael Latimore from Northern Capital Markets. Your line is now live.

Well, thanks. Yeah, good afternoon. Well, congrats on the refinancing. I'm sure it's nice to have it off the plate and you can focus a little bit more on growing the business there?

Yeah, absolutely. Thanks, Mike.

It seems that the macro environment may be causing some delays in deployments, but it doesn't appear to be affecting your new business bookings. What are your thoughts on this? It seems like there are two sides to this situation, but the macro factors don't seem to be hindering your business.

That's a great observation. I believe the macroeconomic factors are also affecting TCV, but we are significantly improving in sales, marketing, and the quality of leads in our pipeline. Our brand is becoming better known now that we’ve been public for a couple of years. Personally, I think that without the impact of macroeconomic factors, my TCV might have shown even more exciting growth this year. I do expect our growth to surpass the $102 million from last year. However, your point is valid. Most of the pushbacks are coming from larger customers, primarily those focused on Connected Health, for various reasons. Additionally, there is a macroeconomic impact felt across the board, which we are also experiencing in Connectivity. This year has seen lower organic volume growth in Connectivity, as customers are more aware of unused or zero usage SIMs. They are actively turning those off and managing their data spending and expenses more tightly than I’ve observed in nearly six years. Thus, the macroeconomic impact is clear, especially among our large IoT Solutions customers, where any pushback from a few of them is felt, particularly since eight of our top ten customers are in Connected Health.

Okay, okay. Yeah. And then on the last call, you talked about maybe I think it was $10 million of kind of solutions that could get pushed out, looks like it's more like $20 million now. Can you just elaborate a little bit on, are these the same customers or is that expanded to some other customers? Or is there more connectivity change here somewhere? Or are we good?

Yeah, no, it's a mix. But for the most part, it's the same customers, like Romil mentioned, the larger Connected Health customers that are continuing to push out, whether that's because the clinical trial that they thought was going to start won't start till the new year, because there's not enough nurses available out there to actually do them. So it is some of the same customers. On the connectivity side, it's a lot less. But we are seeing some that will delay deployments into next year, or they were going to do some plan upgrades or firmware updates, which would give us some more overage revenues. They're pushing that out into 2024 to obviously manage results for 2023.

Okay, great. Thanks a lot. Congrats on the refinancing.

Thanks so much, Mike.

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

Thank you for taking my questions. I had to disconnect briefly, so I apologize for that. I believe Michael inquired about the delays in our business from the third and fourth quarters into the first and possibly second quarters. I’ll avoid repeating him, and instead, let’s move on to the refinancing. Congratulations on that! While I know it hasn't closed yet, it's encouraging to hear your confidence in announcing it. You've been working on this for a while. Could you describe the current status? Is the funding completely committed from both the preferred and bank debt sides? Are there any remaining hurdles? For instance, if the Dow drops tomorrow, should we be concerned about anyone withdrawing their commitment? What contingencies are still in place at this point? Thank you.

Yeah, now, thanks, Lance. And yeah, it's really, really exciting. And I mean, from the time we started on the first lien side on the debt side, when we started that process, Whitehorse Capital has just been sort of an outstanding forward-leaning kind of, I'll say management and company-friendly kind of partner, and certainly put together the most compelling of what were several alternative first lien offers. And obviously, they're sort of speaking for the whole thing themselves. We did have a more clubby sort of syndicate alternative as well. So the first thing I'll tell you is what was very sort of good to see was that in what is likely one of the tougher refinancing markets, the company, I think stood out in the process and had multiple sort of partners. But they are fully committed and frankly could have funded by yesterday or today, when we signed. The really the only reason to delay, and by the way, we're delighted that we are the first investment, I believe, in Searchlight Capital's new fund. And just between the timing of them closing that fund and cash becoming available, and so forth, we've said, okay, let's just separate out the sort of definitive agreements, the signing from the closing. I suspect it won't take but a few days for that to happen. There are no conditions anticipated. And just a couple of words on Searchlight, if I could. Again, just a fabulous sort of forward leading stance they've had since we first met them. Don't know how much people know about them, but they've got about $12 billion in assets under management, and well over half of that is in the telco, so the telecommunications media space. So they're very knowledgeable in the space. Their vote of confidence means that much more than sort of generic money, if you will, right? Because this is very strategic, very savvy money in the telco space. And we're looking forward to welcoming two of their members to our Board. I've got to know both of those members reasonably well here over the last few weeks and months. And we couldn't be more excited about how much difference I think they're going to make to a growth mindset around here.

I'm familiar with Searchlight, so congratulations once again. I wanted to ask about the global sales pipeline on Slide 10. You mentioned having $740 million in opportunities, which seems to be distributed among a good number of prospects. I’m curious if the 80/20 rule applies here. Is there a significant concentration among the larger opportunities that are yet to close, or are we primarily looking at numerous smaller contracts ranging from $2 million to $4 million? Additionally, could you provide some insights into where the majority of the $740 million lies? Is it evenly distributed across the qualification and evaluation stages all the way to the beta site stage, or is it more heavily weighted at either the beginning or the end of the process? I’d like to gauge what we can expect you to announce closing over the next couple of quarters. Thank you.

That's a great question, and I appreciate it because the numbers are becoming significant, with 1,700 opportunities and an estimated TCV of around three-quarters of a billion dollars. Breaking it down a bit makes it easier to understand. First, let's discuss size, which is somewhat important for us. When I joined the company six years ago, our deals were relatively small, and we were about a third of our current size. Today, we have over 230 deals, with under 1,500 of those being below $0.5 million and the rest above that threshold. Approximately 100 are between $0.5 million and $1 million, another 100 between $1 million and $5 million, about 16 are between $5 million and $10 million, and another 16 are above $10 million. It's notable that I have rarely seen this many deals over $10 million in our funnel. In my early years here, we likely didn't have that many combined. What excites me is our enterprise readiness, the maturity of our solutions, and the types of conversations we are having, along with the problems we are solving. IoT has faced some challenges, starting regionally with small pilots, but it's now expanding globally, leading to larger financial discussions. We believe we are a leading player in assisting our customers with global issues using our multi-faceted solutions alongside our eSIM offerings. Additionally, we have maintained a stable 60/40 mix of new versus existing customers in our funnel, which is encouraging as it indicates that new customer revenue is coming in. Over the past year, we've been increasingly focused on the IoT Connectivity business while still valuing our Managed Services team. When Managed Services helps us win customers or differentiate our offerings, we will utilize it, but our primary focus has been on our 65% gross margin Connectivity business, which is strongly represented in our funnel. More than two-thirds of our funnel consists of IoT Connectivity, with about a third related to Managed Services and Analytics. I'm passionate about sales and deals, and that's how the funnel has developed.

No, that's really great color. I appreciate that. If I could just ask one more question, this one on the competitive landscape, if you've seen any changes there since we last checked in? Is there, when you're going in and competing for this business, is it really just sort of trying to convince them that the use cases make sense? Or are you having to sort of fend off other would-be providers? Or like, how does that changed at all recently?

Certainly, the competitive dynamics have been quite striking so far in 2023, and I believe we are still gaining momentum with more to come. One notable aspect is the pervasiveness of eUICC technology, which allows for SIM updates in the field and flexibility in deployment. This capability enables devices to call home, identify their location, and download the necessary profiles, including multi-IMSI solutions like Super SIM, which Twilio offers. It’s reached a point where every customer conversation includes an eSIM component, even if they are not ready to purchase yet; we are emphasizing eSIM and exploring its potential for their next generation of devices. This technology simplifies supply chains significantly. Considering that the market is expected to ship between $3 billion and $5 billion worth of eSIMs over the next few years, the leading eSIM providers, including Twilio's Super SIM and KORE's OmniSIM, are all under one roof. If demand for eSIMs is rising, we have the top products to meet that need, which puts us in an excellent position. The differentiation in our offerings is becoming clearer, and there’s even more excitement around our next generation of products set to launch in about a year. We operate on a global scale and while there are other competitors, many are smaller or more regionally focused. As the leading independent company, we are strengthening our competitive edge with our eSIM offerings, platform, and technology. I have never felt more confident in our position, even as we keep an eye on a once-daunting competitor that is now in the mix.

All right, great. Thanks, guys. Appreciate the discussion.

Thanks, Lance.

Thank you. Next question is coming from Jamie Reynolds from Morgan Stanley. Your line is now live.

Hey, everyone, you've got Jamie on for Meta. I appreciate you taking the question. I guess, first, how is Twilio IoT business performing to expectations? And have you guys been able to retain the engineering resources? And then I guess, just as a more broad follow-up, are you seeing any customers renegotiate pricing given the macro conditions?

Absolutely, I’ll address your questions. First, regarding the Twilio IoT team integration and the overall status of the business. It's no secret that we've mentioned this in our previous earnings call, but there's been a significant impact over the past year since we first reviewed the management presentations and projections from the Twilio team, followed by their internal discussions suggesting they were considered ‘not strategic to the future.’ This situation has proven detrimental, leading to more than just distractions; we've seen considerable turnover within the sales force. No organization can overlook its talent without facing consequences. Consequently, the Twilio IoT unit we've acquired is notably smaller than initially estimated, and more concerning is that instead of contributing positively to our growth rates, it has actually diluted them down to our current levels in Connectivity. However, we are not alarmed. The Twilio team is now part of KORE, breathing new life into our operations with a strong focus on IoT rather than being a minor segment of a broader initiative. We have replenished the sales team, and we are already noticing a significant change in momentum. While it's not a simple process to instantly return growth rates to previous highs, there are encouraging signs. We see early indicators of renewed customer relationships with KORE, and the transition for customers has gone smoothly. We haven't lost any key accounts due to concerns about the transition from Twilio to KORE. Given the capabilities of our combined talent and customer base, I am confident that they will positively contribute to our growth again, to the point where distinguishing between what's Twilio and what's KORE will be irrelevant. They will be an asset to us, and I have strong confidence in that outcome.

No, really appreciate the detail.

No worries. As for your second question, customers are always asking for lower prices, regardless of the macro situation. However, the intensity of pricing discussions has increased significantly. Our carrier partners sometimes don't fully grasp why we keep pushing them for more competitiveness. Those M&O partners that don't adopt a more aggressive stance will miss out on our SIMs and consequently on growth, as that's the current reality. At the same time, it's beneficial to enforce discipline and clearly define your expectations of IoT providers. What's happening now will differentiate the strong providers from the weaker ones, as more customers are inquiring about quality and eSIM than ever before. Sure, price plays a role, but it is secondary to the primary value proposition that needs to be addressed.

And the only thing I would add to that when, yes, when customers are coming to ask for price decrease a little more, but as part of that, we're seeing more and more of customers where we don't have 100% of their wallet share, they're coming to us to say, well, if I move all of my share to you guys, what price can I get? And obviously, the more volume that they bring to us, we'll give them that because we're going to double our revenue with them or our base with them. So we're seeing a lot more customers looking to consolidate because they know they can save costs.

That's all.

Thank you. Next question is coming from Avril Lasaro, a private investor. Your line is now live.

Hi, everyone, and thank you for taking my question. Romil, you have consistently mentioned that creating value for shareholders is a main focus, and KORE appears to be in a good position to achieve this aim. This has been the case for several quarters. However, KORE has lost over 95% of its value in just over two years. I appreciate that you managed to refinance, although it seems quite costly, resulting in 10% dilution for shareholders, along with high interest rates and dividends on preferred equity. The main concern, though, is management's ability to run the business effectively. Cost-cutting measures are long overdue, and I am eager to hear more about your reorganization plan in Q4. One point I find confusing is your lack of pricing leverage. You have excellent products, a strong company, and a growing market, which suggests that you should have some pricing power and the ability to raise prices. I recall that in the fourth quarter of 2022, you discussed rising costs related to distribution challenges, while others were increasing their prices, but you chose not to do so for your customers. I would appreciate it if you could clarify this for me.

I believe after several comments, there was only one question remaining, so I'll address that. The inquiry at the end was regarding a discussion in the fourth quarter of 2022 about not raising prices on products. That wasn't actually the question asked. An analyst had posed the question about whether, with hardware prices rising significantly, we were simply passing those costs onto our customers or marking them up further. For instance, if a product costing $100 increased to $140 due to inflation, were we passing that cost on or not? The question arose from the discussion Paul and I had about gross margins declining because we were just passing through costs. My consistent response has been that we are not interested in exploiting the situation; we have maintained our customer base for over three years because of this approach. For example, if a product's price increased from $100 to $140, and we were initially aiming for a 10% margin on the original cost, I wouldn't shift to seeking a 15% margin on the new price. That would leave a lasting negative impression on the customer. Thus, while we were certainly passing along the actual increased costs, we are mindful of our pricing approach. I hope this clarifies things.

Yeah, but your SG&A costs are increasing. We're in an environment where your margins are decreasing overall at the bottom line. And you can't just not increase prices and you have to at least address that issue. I have some other questions regarding your global sales pipeline. One of the other callers asked a question about how the opportunity revenue is distributed amongst the various stages. And I don't believe I heard the answer to that. My specific question is what percent of the overall pipeline is qualification and technical evaluation stage?

Yeah. Okay. So one of the reasons I didn't go there when Lance asked the question was because at any moment in time, this is a snapshot. There are deals that go through these things with velocity because they're relatively quick decision timeframes. There's other things that will sit in a contract time stage or a beta site stage for many months, because that's how long it takes for the customer to really get through a beta test. So just sort of, I would say, looking at a number in a phase is by no stretch of the imagination, a direct line to, hey, what will your TCV be in the next quarter? And that said, I'm happy to answer the question. So there's, of 740 million odd dollars, obviously, as one would expect, the vast majority of it is in the qualification and technical evaluation stage. It's about, I call it $450 million in that stage. It's closer to $200 million in the proposal stage. And then combined between what is signed and what is in beta, you're talking about another 80 odd million dollars of stuff that customers have literally said, yes, you're our guy or our supplier. And then we're going to do beta tests and so forth before we start to count it because we've found, we've learned from experience that sometimes the time between a contract signing and production revenue growing can be very long. And that's why we introduced that new beta site stage. But anyway, so that's the breakout is, call it $450 million, call it $200 million, call it 55-ish and $25-ish. All right, thank you very much for the questions. I think that pretty much takes us to the end of our call. I want to thank everyone for taking the time to listen to our earnings call, and we look forward to updating you with our fourth quarter results in March. Thanks very much.

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