KORE Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Afternoon, everyone, and thank you for joining us today for our Q3 2023 earnings call. With me is Paul Holtz, Core's Chief Financial Officer. As always, I'll start with a brief overview of the key events and announcements for the Q3 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 and 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 $300,000,000 term loan with the issuance of a new $185,000,000 term loan and a strategic investment of $150,000,000 of 13% preferred stock.

Operator

The final closing of these transactions is expected to occur in the next week or 2. 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 Core. With these transactions, we have reduced our overall debt level and lowered our 1st lien leverage ratio from roughly 5 times to roughly 3 times our 2023 estimated adjusted EBITDA. We have extended the term loan maturity to 2028 matching the maturity of our $120,000,000 convertible note and added approximately $15,000,000 in cash to our balance sheet.

Operator

Importantly, we have also increased cash flow flexibility as the preferred stock dividend has a payment in kind or pick feature allowing the company the option to defer cash dividend payments. This payment optionality allows Core 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 3rd quarter.

Operator

Expanding our presence with distributed enterprise customers, Core announced that we would collaborate with a national U. S. Retailer to enable its digital transformation with 5 gs connectivity. This marks a turning point for the industry as 5 gs connectivity is driving a nationwide shift towards digital first retail. Core is well positioned to support retailers transitioning to 5 gs connectivity by providing critical 5 gs services and solutions complete with backup options, thereby enabling retailers to innovate in areas like inventory control, daily operations and consumer engagement.

Operator

In September, Core was honored to receive a 2023 IoT Evolution LPWAN Excellence Award from IoT Evolution World for Core LP Hub, which is Core's innovative LoRaWAN solution. Core LP Hub 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 Core's ability to bring new products to market and remain an IoT innovation leader, which in turn drives top line growth. Finally, building on Core'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 Core'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.

Operator

Over the next 3 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 positioned Core with an early presence in long term secular growth markets, enhancing Core's ability to capture market share. Now let's turn to our Q3 financial results and updated 2023 guidance on Slide 6. Our Q3 results came in at $68,600,000 of revenue increasing year over year from the Q3 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 core customers due to the 2 gs, 3 gs 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.

Operator

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 Q4 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. 3rd quarter 2023 adjusted EBITDA of $14,200,000 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 Q2 of this year.

Operator

The IoT Solutions order delays we experienced in the 3rd quarter have extended in the Q4 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 $300,000,000 to $310,000,000 As such, we are revising our 2023 revenue guidance to a range of $280,000,000 to $290,000,000 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 Q4 earnings call. Despite the reduced revenue outlook, We are maintaining our 2023 adjusted EBITDA guidance of $60,000,000 to $62,000,000 due to improved profitability on the acquired Twilio IoT Business and reduced operating expenses as we flexed to reflect current IoT Solutions revenue levels, both of which helped offset the reduced profitability from deferred revenue.

Operator

The restructuring activity we began in the 4th quarter is expected to result in approximately $10,000,000 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?

Speaker 1

Thank you, Rommel, and good evening, everyone. Turning to our results on Slide 7, 3rd quarter revenue increased 4% year over year to $68,600,000 compared to $66,100,000 in the Q3 of 2022. By segment, IoT Connectivity revenue of $55,200,000 which included our 1st 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, and IoT Connectivity revenue grew organically in the mid teens year over year.

Speaker 1

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 $13,400,000 As I mentioned on the previous earnings call, We saw some requests from our largest Connected Health customers to defer orders to the 3rd Q4, which increased the risk that these orders could slip further into 2024. This risk has materialized as seen in our lower than anticipated Q3 IoT Solutions revenue. We are forecasting to increase IoT solutions in the Q4, but with customers continuing to ask for deferrals to manage costs and year end inventories In the limited capacity due to 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 2 57 basis points year over year.

Speaker 1

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 percent 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 breakeven by the end of this year. IoT Solutions gross margin declined 174 basis points year over year to 26.9%.

Speaker 1

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 Q3 were $18,900,000 an increase of over $300,000 from the end of the Q2 of 2023 and approximately $3,600,000 from the end of the Q3 of 2022. Dollar based net expansion rate or DBNR for the 12 months ended September 30, 2023 was 96% compared to 100% in the prior year. As a reminder, DB NER 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 store sales growth rate. As a reminder, customers acquired from the BNP Simon acquisition in the Q1 of 2022 are included in the calculation.

Speaker 1

However, customers gain from the Twilio IoT acquisition are not included. The DBAR calculation continues to be negatively impacted by the significant revenue we received in 2022 from our largest customer's LTE transition project that began in June 2021 and ended in June 2022. During this period, revenue from our largest customer more than doubled. If we exclude total revenue from our largest customer because of this significant non recurring event, DB NER at the end of the quarter would have been 104% compared to 106% at the end of the Q3 of 2022. Operating expenses including depreciation and amortization in the 3rd quarter also including a $78,300,000 non cash goodwill impairment charge were $125,500,000 an increase of $82,900,000 compared to the same period last year.

Speaker 1

In addition to the non cash goodwill impairment charge, the increase is mainly attributed to the increase in headcount related costs, which includes a full quarter of these costs from the Twilio IoT Business. 3rd quarter interest expense, including amortization of deferred financing fees increased year over year to $10,600,000 versus $8,200,000 in Q3 2022 due to the increased borrowing costs on our existing senior secured term loan. Net loss in the 3rd quarter was $95,400,000 compared to $14,300,000 in the same period in the prior year. The year over year increase in net loss was primarily due to a non cash goodwill impairment charge of $78,300,000 due to the decline in the company's share price and also the increase in interest expense. Adjusted EBITDA in the 3rd quarter was $14,200,000 a decrease of approximately $1,000,000 or 6% compared to the same period last year.

Speaker 1

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 the Twilio IoT Business. Moving to cash flow, Cash provided by operations for the 9 months ended September 30, 2023 was approximately $4,500,000 compared to cash provided by operations of $20,500,000 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 Q3, cash excluding restricted cash with $19,800,000 compared to $34,700,000 as of December 31, 2022.

Speaker 1

Turning to our debt refinancing. As Rommel mentioned, we are excited to be working with 2 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 $300,000,000 term loan with a new $185,000,000 term loan, which will decrease our total leverage ratio at the end of the 3rd 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 6.50 basis points compared to the prior loan, which was at SOFR plus 5.50 basis points. The new term loan credit agreement allows for interest rate reductions of 25 basis points for each half turn reduction in our 1st lien leverage ratio up to a maximum reduction of 50 basis points.

Speaker 1

In conjunction with the new term loan, we issued $150,000,000 of 13% preferred stock with $11,800,000 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 $15,000,000 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 Romo, I would like to make a couple of comments on our updated 2023 annual guidance.

Speaker 1

We have revised our 2023 revenue guidance downward to $280,000,000 to 290,000,000 versus our previous guidance range of $300,000,000 to $310,000,000 to reflect order deferrals by some of our Connected Health customers in 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 loss orders and based on discussion Those order deferrals in 2020 will be deferred to 2024 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 $60,000,000 to 62,000,000 We are able to do this for a number of reasons.

Speaker 1

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 $2,000,000 in savings in Q4, but more importantly will benefit 2024 more significantly likely in the $10,000,000 range. Additional information on this plan will be given on our Q4 earnings call as part of our 2024 annual guidance. And with that, I'll pass it back to you, Rommel.

Speaker 1

Thanks, Paul.

Operator

As we finish 2020 To 2024, 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 2 gs, 3 gs 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.

Operator

Our sales pipeline now includes over 1700 opportunities with an estimated potential total contract value or PCV of approximately $740,000,000 In the Q3, we generated an incremental $27,000,000 of Closed One TCV, bringing the year to date total to $87,000,000 We continue to progress towards exceeding the $1,000,000 closed won TCV in 2022 and delivering a 5th consecutive year of TCV growth. As a reminder, the majority of sole TCV is recognized as revenue over 4 years and it is important to note that the close 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 3rd quarter, which contributed to the closed won TCV of $27,000,000 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 $4,400,000 TCV contract win with a remote patient monitoring customer. CORE will now become the sole provider of eSIM connectivity across the U.

Operator

S, UK and Europe for this customer who will also be transferring lines to Core from a competitor. We are very excited to win 100% wallet share with this customer because of its high growth prospects. Core'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 Q3, a national retail chain selected Core to provide full lifecycle managed services for a planned migration from 4 gs to 5 gs with a contract value of $6,200,000 Kare 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 Core to expand its services with existing customers.

Operator

A great example is the $2,500,000 TCV contract an existing rent to own store franchisor customer awarded Core to provide connectivity across multiple carriers. Core is also working on upgrading lines from 4 gs to 5 gs to expand its footprint further with this customer. Core continues to win internationally and in the Q3 a GPS tracking and fleet management software provider based in Australia selected Core as its connectivity provider utilizing Core OmniSIM for an initial contract TCV of $435,000 Although we chose these 4 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 Q3 in each of the 4 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 $100,000 TCV contract for Core to be their connectivity provider based on the capabilities of Core's OmniSIM, our eSIM offer. Core also won $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.

Operator

A leading provider of a proprietary decentralized platform and suite of supporting services used by life sciences organizations for remote capture of patient data who is 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. Core was selected for this $860,000 TCV contract due to Core's ability to provide a one stop shop for hardware, software, device management and connectivity on a global scale. And finally, an existing CorConnected Health International customer awarded Cor 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. Core's ability to support this breadth of use cases globally is foundational to the unique value we bring to our customers every day.

Operator

Our final slide, Slide 12, summarizes the key messages we have talked about today. We continued to add organic connections in the 3rd quarter and Core's total connections were approximately $18,900,000 as of September 30, 2023. Let me just take a moment to put this in perspective. At the end of 2017, Core had about 6,400,000 connections. That's about when I was joining the company.

Operator

So in less than 6 years, We have added approximately 12,500,000 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 2 gs, 3 gs 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 delevered, strengthened its balance sheet and increased cash flow flexibility. As I briefly mentioned earlier, the company initiated a restructuring in the 4th quarter that is expected to generate, as Paul also said, approximately $10,000,000 in operating expense savings next year.

Operator

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 Cor 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 core employees worldwide, our idle tiers 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 and A please.

Speaker 2

Our first question is coming from Michael Latimore from Northland Capital Markets. Your line is now live.

Speaker 3

Great. Thanks. Yes. Good afternoon. Well, congrats on the refinancing.

Speaker 3

I'm sure it's nice to get out to the plate and you can focus a little bit more on growing the business here.

Operator

Yes, absolutely. Thanks, Mike.

Speaker 3

Definitely. Good. So just wanted to think 2 things up. It seems like From a macro perspective, it's sort of the macro environment maybe Slowing some deployments a little bit, but doesn't seem to be slowing your kind of new business bookings here. Is that kind of it seems like a little bit of Two sides of a coin there, but what's your thought of that?

Speaker 3

Is the macro doesn't seem to be really slowing your business here?

Operator

Yes, really good observation actually. And I personally suspect the macroeconomic factors are impacting also TCV, but we're getting so much better at sales, at marketing, at the quality of leads that we're putting into our pipeline, the brand starting to become a little bit better known after you've been public for a couple of years. And so I personally think if the macroeconomic Factors weren't impacting us. My TCV might even have been more sort of excitingly growing this year and I do think we'll grow over the 102 from last year. But your point is still valid, right?

Operator

It's sort of a dichotomous view. Most of the pushbacks we're getting our from sort of larger mostly connected health type focused customers for different reasons. And volume growth years, people are very conscious of unused or 0 usage SIMs, right. They're turning those off proactively. They're optimizing their data spend and expenses more tightly than we've ever seen in certainly in the almost 6 years now that I've been here.

Operator

So there is some macroeconomic impact across the board. It just is much more visible in these IoT solutions large customers where obviously few of them start pushing back. We feel that given that but is it 8 of our top 10 customers are in Connected Health.

Speaker 3

Okay, okay. Yes. And then on the last call, you talked about maybe I think it was $10,000,000 of kind of solutions that could get pushed out. Looks like it's more like $20,000,000 now. Can you just elaborate a little bit on, are these the same customers or has that expanded to some other customers or is there more Connectivity change here, so Mark, probably would be great.

Speaker 1

Yes. No, it's a mix, but for the most part, it's The same customers like Raul 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 is 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.

Speaker 3

Holtz. Thanks a lot. Congrats on the refinancing.

Speaker 2

Thanks so much, Mike. Thank you. Thank you. Next question is Coming from Lance Vitanza from TD Cowen. Your line is now live.

Speaker 4

Hey guys, thanks for taking the questions. I just had to drop off and dial back in, so I apologize. I'm Guessing, it sounded like that Michael had asked about the delays in the business from Holtz. 3rd, Q4 into the first and perhaps second quarter. So I'll try not to repeat that.

Speaker 4

But maybe we'll just jump into the refinancing. Congratulations. I know you haven't closed it yet, but it's great that you feel confident in announcing it. I know you've been working on it for a while. How would you could you how would you describe the status?

Speaker 4

Is the funding fully committed on both sides, the preferred and the bank debt sides? And What if any hurdles remain? Are there any like if the Dow sells off tomorrow, do we have to worry about people pulling the What kind of what contingencies are still in place at this point? Thanks.

Operator

Yes. No, thanks, Hi, Lance. And yes, look, it's really, really exciting. I mean, from the time we started on the 1st lien side, on the debt side, 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.

Operator

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, 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.

Operator

I suspect it won't take about a few days for that to happen. There are no conditions anticipated. And just look 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. I don't know how much people know about them, but they've got about $12,000,000,000 in assets under management and well over half of that is in the telcosorthe Telecommunications Media space.

Operator

So they're very knowledgeable in this 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 2 of their members to our Board. I've gotten to know both of those members reasonably well here over the last few weeks 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.

Speaker 4

Yes. No, that's great. I'm very familiar with Searchlight in particular. And So, congratulations again. Maybe just to turn to if we could to the global sales pipeline on Slide 10.

Speaker 4

And my question there is, you've got the $740,000,000 of opportunities. It seems as though it's Spread out amongst a good number of opportunities. But I'm wondering if we think that just sort of Does the eightytwenty rule apply there? I mean, is it the case that you have, maybe it's not eightytwenty, but are is there a lot of concentration Within the size of those opportunities that still remain to potentially close? Or is it really Is it just a lot of more $2,000,000 to $4,000,000 contracts?

Speaker 4

And so that's I guess one question. And then the other question related to the funnel is, Would it be possible to talk a little bit about you have the arrows there from the qualification and evaluation stage sort of at the beginning of the process Holtz. All the way down to the beta site stage, which is pretty close to when you're actually going to win the business. How would you sort of describe where the bulk of the 7 Holtz. $40,000,000 sits, is it really evenly spread throughout those 4 categories or is it more at the beginning of the process, more at the end of the Holtz.

Speaker 4

At the end of the process, I'm just trying to get a sense for how we should think about what you're going to be able to announce closing on over the next, call it, 2 to 4 quarters? Thanks.

Operator

Yes. I know that's a fantastic question. And look, I actually sort of appreciate the question because It's starting to become such a big set of numbers, right, where it's 1700 opportunities and 3 quarters of a 1,000,000,000 Holtz, sort of potential estimated TCV that breaking it out a little bit, I think makes it more meaningful, more digestible and so on. The first thing I'll tell you is let's just talk size, right? Not that size is everything, Glass, right?

Operator

But size, I mean, it's kind of important for us because again, like 6 years ago when I arrived at the company, we had really relatively small deals, small customers in general. I mean, obviously, we were about a third of the size or so of what we are today anyway. But today, right, we have over 230 of these deals. So call it less than $1500,000,000 under $500,000 and the rest are over $500,000 right? About $100,000 between $500,000 and $1,000,000 another $100,000,000 between $1,000,000 $5,000,000 and then about $16,000,000 that are above $5,000,000 and below $10,000,000 and another $16,000,000 above $10,000,000 I I don't think I've ever seen 16 deals above $10,000,000 in the funnel.

Operator

I have a feeling that The first 4 years of my being in this company, we didn't have $16,000,000 total, right, that were above $10,000,000 You know what I'm saying? That's what's exciting about the kind of enterprise readiness, the maturity of our solutions, the kinds of conversations we're now having, the kinds of problems we're now solving. I mean IoT has disappointed because it started in this very regional, right. Let's start with a pilot here. Let's start with this there.

Operator

Now it's starting to go global. And when you start to go global, You start to talk big dollars and we're basically, we would argue the top player of helping our customers solve the global problem with our multi, multi, multi on the one hand with our eSIM offer on the other. Another couple of ways to slice and dice the funnel I find helpful, I hope you do. We have done remarkably well at staying pretty stable around the sort of sixty-forty mix of new customers versus existing customers. Remember, this funnel is new business.

Operator

So it's right, it's obviously if I have an existing piece of business and the sales guy goes and sort of We signed that business. We may treat that every bit as a deal with that kind of discipline, but it's existing revenue, right? So it's not really new. So We don't report out externally to you guys what I call existing, existing, right. But new business at existing customers and then of course, new customers by definition, no matter what you sell them, is new revenue.

Operator

And it's been consistently at sixty-forty new to existing. That's good to see because that tells you there's new customer dollars coming in. Another interesting thing, of course, is we've made no bones about the fact over the last year, actually almost 2 years now, We have been singularly more focused in the IoT Connectivity business, right? We like the managed services business. Holtz, not saying anything bad about my team there.

Operator

They're dedicated fantastic team. But we treat it as I think we should, which is When it helps differentiate us, when it gives a one stop shop service to a customer, when it helps us with a deal or a customer, we should absolutely use it. Otherwise, we're far more interested in putting our proactive efforts obviously into our 65% gross margin connectivity business. And that shows up in our funnel in space. More than 2 thirds of our funnel right now is IoT connectivity, okay.

Operator

And about a third is the managed services analytics stuff that goes into IoT managed services. And look, I could go on and on because as you know, I'm passionate about sales and deals and so forth. But, yes, that's kind of how the funnel has evolved.

Speaker 4

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 case makes sense or are you having to sort of fend off other would be providers or is it you're trying to Keep them from in sourcing or like how does has that changed at all recently?

Operator

Yes. Another Great question around the competitive dynamics. I'll tell you what's probably most striking about Holtz, 2023 to date, and I think we're still building momentum and there's more of this to come. But it's how pervasive eSIM, right, EUICC, not the form factor, but that one SIM updatable in the field, put it anywhere, right? It will figure out it will call home, it will figure out where it is.

Operator

You can download a profile to it or indeed a multi INSI based single SKU solution like SuperSoup, which is what Twilio brought to us, right. It has gotten to the point, Lance, where There is not a conversation we are having. There's obviously slight exaggeration in there, but the exceptions will prove my rules, right. The exceptions will prove the rule, which is every conversation with a customer has an eSIM component, even if they're not ready to buy today. We're still positioning eSIM, right?

Operator

And they're interested in learning about it and making sure that their next device generation can utilize it. It's such a massive simplifier of their supply chains and so forth. So you say, okay, so if the world is going to ship between 3,000,000,000 and $5,000,000,000 over the next 3 to 5 years. And if you were to pick 2, certainly of the top 3, I'm biased, I'll say 2 of the top 2, eSIM providers in the world. Where are they today?

Operator

They're all under the same roof, right, because Twilio SuperSim product and Core's Omnisim product are absolutely leading products. And so If every customer wants an eSIM, we've got that best product. We think we're pretty darn well positioned and the differentiation to your point is starting to become more clear. And what's even more exciting is the next gen of the best of breed of these, right, which Let's just say we'll launch in about a year from now. And if we get that product right, sort of look out world, right.

Operator

So that's one aspect of competitive dynamics, but it spawns off a couple of other points. By definition, we are global. There are certainly other competitors out there. We respect some of them. Some of them have done little roll ups kind of like Core did early in Core's era, but they're more regional or pan European in nature and that sort of thing.

Operator

But as the leading independent and as we are actually deepening and widening our competitive moat with our eSIM offer, with our platform and tech, I've actually never felt better and not to put too fine a point on it, but the one company that used to scare me a little bit is here now.

Speaker 3

All right,

Operator

Thank you.

Speaker 2

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

Speaker 5

Hey, everyone. You've got Jamie on for me. I appreciate you taking the question.

Operator

I guess first of all,

Speaker 5

how is Twilio IoT business performance 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?

Operator

Yes, so two questions there. Let me just let me take the Twilio IoT team integration question first or actually the status of the business even you asked. And I don't think it's any secret because we said this already on the last earnings call, but the year or so that passed between when we first So the management presentations and projections from the Twilio team and when they started to first hear internally from their management that they were not strategic to the future, has been detrimental, right? It was more than just a distraction to the team. Quite a bit of attrition happened on the sales force.

Operator

And there is no company that can act cavalier with its talent and maintain its momentum, right. And so The Twilio IoT unit that we took on was significantly smaller than what their projections were. And perhaps More concerningly than just pure size, the sort of momentum, the right growth, I mean, they were supposed to be accretive to our growth rates. They're actually dilutive right now to the core growth rates, right, in productivity. Now It doesn't panic us out at all because I think their teams sort of come into core and kind of unleashed a new life, right?

Operator

They're like, this is all about IoT. This is what we do as opposed to being that other small little unit part of a much larger corporation that was focused on other things. We've replenished the sales team. The momentum is significantly different already. It's not a switch you flip and suddenly growth rates are back to 20%, 30% and the like, but the pipeline you can see the early signs.

Operator

You can see customers renewing with core, the ease, I'll say, almost with which the customer transfers have been done to core. We haven't lost any significant customers to any concerns about, oh my God, we used to be Twilio now we're core. So I can confidently tell you that given that talent base, given their customer base, these guys will become accretive to our growth again At some point, Paul is not going to be able to tell what's Julio and what's not, right? And he shouldn't be able to because it's one team. But I think they will be Helpful and we'll get back there and I'm very confident in that.

Operator

On the talent retention side in general, again, very, very pleased. It's not something we take lightly. It's not something we sit back on our laurels and say integration is done, but we're pleased. And while we've taken some medicine here in the Q4 that Paul and I have talked about, We've largely left that team alone. In fact, one of the reasons to take the restructuring type actions was that we got all this talent in and we want to leave it largely intact because it's more relevant to the future of the next generation product and, and, and.

Operator

So generally speaking, very good. Before I move on to your second question, anything more on Twilio or did I get that?

Speaker 5

No, really appreciate the detail.

Operator

No worries. And then your second question was just our customers asking for lower price because of macro. First of all, customers are always asking for lower price, whether macro or not. But yes, you could argue that the intensity of Pricing conversation is up significantly. Our carrier partners sometimes don't quite understand why we keep coming back to them for more aggression.

Operator

Holtz and those M and O partners that don't get more aggressive won't get our SIMs or won't get the growth because that's just the reality of what it takes right now. But equally, look, it's good. It's a good thing to get disciplined and get focused on your asks of IoT Providers because what's happening right now is going to force the separation of the wheat from the shaft in terms of the providers, right? More people are asking questions about quality and eSIM than ever before. And yes, sure, price is a part of it, but it's sort of secondary to the main value proposition you're solving.

Speaker 1

And the only thing I would add to that when yes, when customers are coming to ask for price decreases a little bit 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 So we're seeing a lot more customers looking to consolidate because they know they can save costs?

Operator

That's awesome. Thank you.

Speaker 2

Thank you. Next question today is coming from Edward Lazarowitz, a Private Investor. Your line is now live.

Speaker 5

Hi, guys, and thank you for taking my question. Rommel, you continue to say that creating value for shareholders is Holtz. And Core is well positioned to achieve this goal. That's been going on for a number of quarters. Unfortunately, Core has lost over 95% of I'm glad you were able to refinance, although it appears to be very expensive, 10% dilution to shareholders, High interest rates and dividends on preferred equity.

Speaker 5

However, the real issue is management's ability to manage the business. Cost cutting is long overdue and I look forward to learning more about your reorganization plan in Q4. One of the things I don't really understand is why you do not have pricing leverage. You have great products, a great company, A growing market that spells out to me that you should have pricing leverage and you should be able to increase Your prices. I remember back, I think it was in the Q4 of 2022 when you were talking about increased cost Relative to the inability to get products to customers and other people were raising prices, Holtz.

Speaker 5

But you didn't want to do that to your customers, and I don't understand why, if you could explain that to me.

Operator

Okay. So I think after quite a few comments there, there was really only one question, and so I'll answer just that question. The question at the end was about a conversation in Q4 2022 about not increasing pricing on products. It was not that was not the question. The question that had been asked of me at the time was by 1 of our So I'll say sort of analyst who covers us was, hey, when hardware prices are up so much, right.

Operator

Are you just passing along those costs to your customers or are you further marking those up, right. So let's say a widget is dollars 100 it became $140 because of inflation, right? Are you just passing that through or not? Because the comment the question really came from a place where Paul and I talked about Gross margins were down because we were merely passing that through. And my response, which by the way I would consistently Bond and would always behave this way.

Operator

And this is why the fruits are there because we haven't lost any customers in this business in 3 plus years gouging the customer when it's, let's say on that $100 product I was getting whatever on the hardware alone, let's call it a 10% margin just for simplicity. If on 140, I would then also say I want 15% margin, right. That customer will never forget that set of actions, okay. And so being opportunistic in that moment is what I said we were not interested in doing. We certainly were passing along the costs.

Operator

Of course, we were. That's just real costs.

Speaker 3

Hopefully that helps.

Speaker 5

Yes. Your SG and 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, you have to at least address that issue. I have some other questions regarding your global sales pipeline.

Speaker 5

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?

Operator

Yes. 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 signed stage or a beta signed stage for many months because that's how long it takes for the customer to really get through a beta test.

Operator

So just sort of I would say Looking at a number in a phase is by no stretch of the imagination a direct the line to, hey, what will your TCV be in the next quarter? Now that said, I'm happy to answer the question, right? So there's After $740,000,000,000 obviously as one would expect, the vast majority of it is in the qualification and technical evaluation stage. It's about, call it $450,000,000 in that stage. It's closer to $200,000,000 in the proposal stage.

Operator

And then combined between what is signed and what is in beta, you're talking about another $80 odd 1,000,000 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 counted because we 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 data site stage. But anyway, so that's the breakout is call it $450,000,000 call it $200,000,000 call it $55,000,000 ish and $25,000,000

Speaker 1

All right. Thank you very much

Operator

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, Holtz.

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Earnings Conference Call
KORE Group Q3 2023
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