Q3 2021 KORE Group Holdings Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the core wireless third quarter 2021 conference call.
Delivering today's prepared remarks are president and Chief Executive officer of them L Bell and Chief Financial Officer of Puneet pump Donnie.
Following their prepared remarks, the management team will open the call up for any questions.
Before we go further I would like to turn the call over to Victor did you ever Yeah, Coors Vice President of M&A as he reads the company's safe Harbor statement that provides important cautions regarding forward looking statements Vic. Please go ahead.
Thank you Alex.
On today's call, we will be referring to the press release filed this afternoon that details the company's third quarter 2021 results, which can be downloaded from the Investor Relations page at IR Dot core wireless dot com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call.
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.
[noise] disclaimers contained on this slide and in today's press release as well as in the Companys filings with Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward looking statements. The company does not undertake to publicly update or revise any forward looking statements. After.
This webcast.
The company also notes that on this call it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States or GAAP you can find a reconciliation of these metrics to the Companys reported GAAP results in the reconciliation tables provided in today's earning.
Release and presentation.
And now I'll turn the call over to Romo Val <unk>, the company's President and Chief Executive Officer Romo.
Thanks, Vic and good afternoon, everyone and thank you for joining us today for our very first earnings call as a public company my.
My name is you've not heard a couple of times as Romo Bell I've been here with core right out about four years and with me is puneet <unk>, our CFO, who has been here over three and a half years.
The objectives of our call today are to introduce our company to the public markets discuss our Q3 earnings and describe why we are so excited about the next 510 and yes, even 15 years.
For many of you that sounds like an awfully long time, but that is the beauty of our opportunity.
We are in the singular growth market of the internet of things for Iot.
Which is poised to grow spectacularly and hence provide our company with excellent tailwind as we hurtle towards becoming a truly connected planet.
In this first call therefore, I will take a little longer with my prepared remarks.
To introduce our company I will provide an overview of our services, which are powered by unparalleled technology and IP.
An overview of our markets and growth dynamics, our strategy and competitive positioning and bring it to life.
With a customer use case example.
Bonnie will cover our financial results after which I will cover the five year transformation plan, we have put in place and summarize our competitive moat and investment highlights.
Looking at our third quarter and as summarized here on page three for those of you. Following the webcast. We recorded strong total revenue of $67 9 million.
Of note, we were aided by the timing acceleration of a significant project with our largest customer.
Which was to start in Q4 and go through the first half of next year, but has been accelerated into being delivered mostly this year itself.
Our EBITDA results and strong connected health performance flow directly from this acceleration given that our largest customers in health care.
Importantly, and since the timing acceleration is merely from 2022 into 2021, we are happy to confirm that we are confident we will exceed our revenue projection for this two year period I E 2021, and 2022 combined.
While the acceleration of our customer's LTE transition project will make 2020 to look relatively flat with 2021, we expect to beat our combined revenue projections over this two year stack by a meaningful amount, which will further demonstrate our ability to execute our business and drive growth.
Of course, two lines of business as depicted on this page our Iot connectivity and Iot solutions first stop is Iot connectivity, the largest part of which is Iot connectivity as a service or what we refer to as cash we have been building our global value proposition in this.
Space for almost 20 years and it allows our customers to connect multiple device types using multiple types of networks in multiple countries and regions of the world.
This is why we like to call our independent world, leading Iot connectivity offering our multi multi multi service.
And right until the time. This leadership team arrived this was near 100% of our revenue.
Two our core business of Iot, Kaz, where we charged by subscription and data usage, we have added connectivity enablement services Rcs.
Where we can license our IP over multiple years to customers, who are looking to control their own communications networks.
Even as we have added she has revenue into our overall Iot connectivity services. We are proud to say that our newer Iot solutions business grew to approximately 26% of overall revenue in 2020 and is trending towards is it says there on the slide on the left towards 32%.
Our revenue in 2021.
The major categories of our Iot solutions business are depicted on the page as well from Iot device management to our newer Iot analytics services, including security Pro and our location based services.
These are built to customers on a subscription basis, just like our <unk> service.
Further we are hoping to accelerate the pace of our growth investments, including investments into pre configured solutions and private networks.
And then to the exciting market that we participate in la.
Largely in the three categories of connectivity applications and platforms and managed services. The Iot market is expanding from less than $400 billion in 2020.
To seven trillion in 2030 and.
And it is then expected to double again to approximately 15 trillion dollars by 2035, driven largely by the exciting use cases that five G will bring to Iot.
This market growth is best depicted by the growth in the number of Iot devices deployed which will grow from roughly $12 billion at the end of 2022, approximately 75 billion devices by 2030.
This growth is marked by a significant shift in the mix of short range to long range devices. It is the long range devices, where our Iot connectivity services fit while our Iot solution services actually apply across the entire spectrum of device and connectivity types.
This market growth seems very large the fact is that there are several trends that deterministic Lee underpin it.
Chief amongst these marked on the page our E Sim elpida.
El PWA going into massive Iot and of course five G.
But one could also look at the edge computing and AI, Iot, where artificial intelligence meets Iot as being the technology developments that can make this growth a reality.
This leaves us two key questions from the standpoint of understanding our market opportunity one what really is Iot and does it only apply to highly sophisticated or mission critical applications.
And two why was the last decade generally disappointing and why did we not reach the predicted 20 billion Iot devices by 2020.
Well the answers to these two key questions are on this next page first on the left side are depicted real Iot solutions that we support today.
You will note several our everyday items and they can be relatively simple sensors, but other use cases can be deceptively simple to look at.
But making them work is highly complex.
And that sort of leads to the right side of the page, which is a summary of the top seven challenges that have held Iot back the past decade.
I could spend a lot of time speaking to each of these starting with security as a foundational challenge at the bottom all the way around and then to the middle where we make the point of the fragmented ecosystem that our customers have to find a way to harness.
They have to put the Lego blocks together themselves and this is the root cause of the complexity in Iot.
In the interest of time I will just speak about this overall complexity.
I remember reading two key statistics back when we were crafting our growth strategy the.
The fact that it takes the average enterprise 18 to 24 months to launch an end to end Iot solution working with on average 18 partners to do so.
And secondly, the fact that almost two thirds of all Iot pilots and proof of concepts failed or stalled, especially in the early part of the last decade.
It is this complexity that we fundamentally target as our growth strategy now to provide a one stop shop for Iot to help our customers adopt Iot with ease.
So let's look at our growth strategy.
What we do for our customers is help them deploy manage and scale their iot applications, whatever those applications or whatever they use cases or if you prefer that term.
We help them deploy successfully instead of stalling at the pilot stage or failing to expand in multiple regions and multiple carriers because the costs are exorbitant and the number of partners required are unmanageable.
We help them manage their deployments with world class support and a series of managed services. They can outsource to us. So they can focus on their own growth and this in turn helps them scale confidently and securely.
So if that is what we do how we do it is through connectivity solutions and analytics.
Three simple words and yet they represent a lifetime's worth of opportunity as.
As we transform and grow our product catalog core will grow.
We have $1 billion in revenue squarely in our sites and we have confidence we can get there sooner than many might expect.
Now clearly there is a lot of detail underneath these simple words and I could peel the layers of the onion slowly describing our portfolio of services under each dimension, but it's in the interest of time I'm going to go straight to a bit of a detailed framework, we use with our customers.
We call. This our seven by seven framework and it represents the seven big deliverables required under each of the seven stages. It takes to launch an end to end Iot solution.
It doesn't matter the complexity of the solution it needs to go through each of these steps.
This picture instantly explain to you why Iot is so complex and why one enterprise might need to have 18 partners to launch one end solution and Thats an average in some cases like in the case of our largest customer you might need an order of magnitude more partners.
So as customers here about core and hear about our Iot and AR box approach, we believe they will engage with us earlier in the process not just when they need connectivity.
And we will work with them to ensure they understand everything they need to map what they have sorted on this chart versus what we can help them with and.
And of course, we transparently tell them, what we do ourselves, which is everything in green on the chart, including of course, our core business and step three of core productivity management plus device management data management.
What we do with partners, which is everything in blue on the chart.
And what we fully outsourced partners the items and rent cut.
Customers can ask us to sort of prime their solution or give us. Some portion of these 49 steps and our commitment to them is we will make it work and we will speed their time to market.
This takes us to the picture on slide 10 that best tells our pure play.
<unk> story, we are an enabler the end solution the part of the iceberg that's visible above the water line belongs to our customer.
That is the value proposition they sell to their end customers businesses or consumers and that is what they should be singularly focused on themselves. The.
The majority of the work that needs to be done represented by the 90% of the iceberg under the surface can be supported by us and this represents a lot of growth.
Further it represents stickiness and as our customers grow we grow with them and this makes US one of the best ways to play the growth of the connected world and the Iot market not a singular bet and anyone who use case or any one industry, but a diversified pure play enablement way to play Iot.
So the last part of the company overview I want to provide you before we go into our customer use case is our go to market approach.
Increasingly we go to market by industry. When we were just in Iot connectivity player we were inherently horizontal.
But holistically enable our customer solutions, we need to know their use case and speak their language. This is only possible with an industry orientation and so just this year, we launched our first two industry practices connected health and fleet management.
Even as we anticipate these industry is growing in the near term. We believe the next three verticals will grow even faster over the next few years as those segments adopt Iot solutions.
One of the key levers of our growth strategy is launching and growing these industry practices organically and inorganically.
Now to slide 12 for the use case, our number one customer the customer has an instantly recognizable large med tech enterprise and one of the use cases. They participate in is cardiac rhythm monitoring which is one of the early use cases in the exploding space of remote patient monitoring.
This is an incredible story of enabling Iot adoption Bottomline. This customer just sends us a po every quarter with the number of devices. They need for the following quarter and then we go to work.
The third party hardware manufacturer ships the devices to us we take care of the configure provision test label record pack ship and reverse logistics services that are needed.
And help our customer ship to approximately 57 countries and actually gather data from over 150 countries on their behalf.
And make sure that data gets to the appropriate data cloud and then to the cardiologist and caregiver portals and a highly secure manner.
The customer reached almost 1 million subscribers last year and will likely go over that number this year as they have been growing at roughly 20% each year.
And to give some sense of why they are our largest customer let's go one further slide.
And overlay on the seven by seven chart that you just saw.
All of the services that we perform for customer number one.
That then is the goal not that every customer will buy multiple services from us or even that there will be many that will by so many of our seven by southern services.
But getting more of our 3600 plus customers buying more of our services is a key growth opportunity that we refer to as our cross sell opportunity and this is another key reason we are bullish about our future.
With that I will now hand, the call over to <unk> to cover the financials in more detail I will then conclude with further commentary on our business and our Differentiators.
Thank you Rommel.
Good afternoon, everyone. This is puneet from 90 and I'm the CFO for wireless as Robert noted we are pleased to report a spa.
<unk> third quarter, which exceeded our internal projections.
Total revenue for the third quarter 2021 was $67 9 million growing 22, 8% compared to $55 $3 million a year ago.
For tier one and a half million dollars of our total revenue was from Iot connectivity, representing 61% of hardware revenue Iot connectivity.
Grew revenue four 9% compared to $39 $6 million a year ago, the remaining $26 $3 million of our total revenue.
Came from Iot solutions, which represented 39% of our total revenue Iot solutions grew 68, 2% compared to $15.7 million a year ago, Although as Robert mentioned, we were aided by the timing acceleration of a significant LTE transition with our largest customer.
Core revenue growth drivers, we track and externally report two key metrics total connections and BB in here.
Total connections represents all of Iot connectivity services connections, including both.
Yes, and CE connections, including the contribution of <unk>.
Our growth in <expletive> connections clearly drives the growth of Iot connectivity services, which were 61% of our total revenue. So this is an important metric. However, not each connection is the same and therefore Iot connectivity will not always CRO in.
In the same proportion of historic connections.
This is because the revenue generated per active connection can vary widely depending on the data plan better connection resolved.
On a one M. B plan the revenue can be 20 times lower or even less than 401 GB plan. So higher bandwidth connections are clearly more valuable in Q3, we ended the quarter at $13 6 million total connections up 23, 6% from.
From a year ago with a significantly higher growth than our Iot connectivity revenue growth in the same period, driven by several factors, including LTE transitions at.
Additionally, a few large customers have added a large number of non revenue generating persons in the same period. Some of these things are likely to convert to revenue than leading Sims in the future and help us future growth.
The other key metric we track is D. B any yet our dollar based net expansion rate, which tracks the combined effects of cross sell and upsell.
Through our existing set of customers, we calculate this metric by the way the revenue for a given time period from go forward customer and by the same revenue from customers.
Your prayer further details on this metric out available in our public filings.
For the 12 months ended September 30 of 2021, BBN, yet was 114% compared to 103%.
A year ago. We are pleased with this result, it indicates success and customer retention and growth. We do not however expect the growth of this ratio to be linear in fact, it will really there will be quarters, where it'll be affected by large customer cleanups. However, our goal is to maintain this ratio above 100%.
And continue to grow this metric over the long run.
As it happens this was a good quarter for DB and yet importantly, we are ahead of our publicly stated business plan 2021 September YTD as Rommel had mentioned, we expect to beat a combined 21 and 'twenty two revenue plan as well in Iot connectivity.
Our five year business plan had us growing at 14% in the medium to long run with total connections growing in the high teens and some erosion projected in the revenue per connection.
This is less than four 9% that you experienced this quarter compared to the same quarter a year ago in 2020, one and 'twenty two we expect and have previously communicated.
Iot connectivity revenue growth will be affected by the loss of one time churn customers.
And the shutdown of <unk> cellular networks at certain large carriers, notably AT&T T mobile sprint and Verizon.
We had already factored these one time got to end customers and technology transitions and our business plan.
And projected relatively muted Iot connectivity growth in 'twenty, one 'twenty two.
Some of our customers have been delayed and we use technology transitions because of the way shortages, which are now prevalent.
This has helped year to date 2021, Iot connectivity revenue, which is ahead of business plan. However, these networks are downbeat on Lockdown now and we do not anticipate any further delays in these technology transitions in 2022. Once these technology transitions are one and 2022, we expect to lap the other mediums.
Long term growth rate of 14% plus plus.
In Iot solutions.
We have a significant amount of cross sell and growth potential and in our business plan. We had expected to grow this area of 30% plus growth rates.
Continue to be optimistic, but we need to be cautious and interpreting the 68, 2% growth in the third quarter of 2021, a significant portion of this growth is derived from our largest customer which was in health care. This customer is transitioning a large number of <unk> devices to LTE and we are assisting in this journey by helping select emperor.
Writing the MPD devices.
Configuring investing these inner facilities and device management and program managing this effort.
Most of the additional revenue from this LTE transition was anticipated in 2022.
Our business plan, but now most of it is expecting in the third and fourth quarters of 2021 with some revenue getting into Q1, 2020 two.
This acceleration is good news for both us and the customer transition. However, we find it helpful.
Break the seven yard in order to look at the trend without it in terms of the largest customer.
Other noteworthy factor in our growth story as a semiconductor and therefore Iot device shortage travel into the market. The large majority of our revenue on Iot solutions is proportional to the number of Iot devices deployed configured installed. Therefore this shortage is most certainly affecting our short term growth in Iot solutions.
The gross margin percentage in the third quarter was 48% compared to 54% in the in the year ago quarter. This percentage decrease was largely a function of accelerated growth from Iot solutions revenue, which comes at a lower gross margin compared.
The connectivity that with you.
We also had a percentage gross margin decrease within Iot solutions, mostly because of the growth of our largest customer which had previously spoken about which has lower than average gross margins. Despite some important takes Iot connectivity gross margins were relatively stable in the third quarter.
Operating expenses in the third quarter increased to $38 4 million compared to $31 million.
In the in the year ago quarter. The key factors in this increase with higher sales commissions and bonuses, which will return to normal levels in 2022 the increases in salary and benefit items, New Bureau, constrained job market conditions and materially higher than expected public company costs.
Mainly as reported Opex is also affected by adverse foreign currency movements.
With certain countries, where we have global and regional shared services centers experiencing a currency appreciation.
For the third quarter 2021, we recorded a net loss of $4 5 million, an improvement compared to $5 $6 million a year ago.
Adjusted EBITDA in the third quarter was $15 9 million compared to $15 4 million.
This increase was primarily a function of increased order revenue increased gross margins, which I spoke about balanced by higher operating expenses, which I had already previously mentioned.
Now, let's turn to the balance sheet as of September 32021, we had $73 1 million of cash and restricted cash compared to $11 $9 million from the year ago quarter. The increase was primarily a function of net proceeds from the business combination and the previously announced backstop agreement.
Core grew $93 $4 million net of financing cost from the previously announced backstop agreement during.
During the business combination.
Subsequent to September 30 of 2021.
We drew an additional $25 million from the backstop agreement.
We expect to use this additional liquidity provided by the business combination to accelerate capability development, both organically and Inorganically.
The business used $9 4 million in cash flow from operations year to date September 2021.
Mostly due to the ramp up in accounts receivable inventories and prepaid expenses associated with the ramp up of revenue.
A lot of discussion in the same time period. The business also used $9 $8 million in cash flow from investing due to capital expenses required in maintaining and growing our business, notably our core on platform and the ECM product.
Year to date September 32021 cash flows from financing provided $81 $8 million of cash from the proceeds of the business combination and backstop financing balanced against the paydown of preferred equity and certain other items.
In summary.
We had a solid growth quarter I have clarified that there are some timing and acceleration issues that I have highlighted which is expected to make Q3, the largest quarter of 2021. Additionally, we should see accelerated effects of <unk> network shutdowns over the next 12 to 18 months.
By this we are confident that we will exceed the combined revenue guidance for 'twenty, one and 'twenty two.
Now I will turn it back to Robert for some additional comments wrong.
Thanks, Brett again, a very solid set of results and I will wrap up our prepared comments with just two more slides.
The first depicts our transformation and the crystal clarity with which we view our five year strategic plan.
We have a three phased plan in place and is 2021 comes to a close we are focused on closing out phase one.
Even as phase II has already kicked off earlier this year.
In phase one we focused on strengthening our core Iot connectivity business.
And launched our newer services, which we now report under Iot solutions.
By all measures. This has been a highly successful phase and we have leapfrogged the market with our technology and platform development.
Earlier, this year and as part of launching phase two we launched two industry practices connected health as we call it and fleet management.
That leaves three industry sectors to launch, which we will both organically and inorganically over the coming period.
The other priority in phase two is to take global leadership with ECM or EU ICC and we are well on our way with this key enabler of Iot growth.
The next phase will focus on five gene leadership and leading with analytics.
Finally, we had core have already built a distinct competitive mode.
Rather than read each bullet each differentiator to you I will leave this chart up while we take your questions.
And further we wanted to summarize our top investment highlights on this slide.
Starting with being the only pure play Iot company in the World.
<unk> one of the most exciting growth markets of all time to.
So having a world class strategy and the IP to give us a solid foundation for execution.
We have high recurring revenue and a large set of customers rounding out our platform for growth.
And as our near term headwinds dissipate with the <unk> network sunsets getting closer.
We believe our growth in the future will accelerate.
So we're focused on continuing to execute on our clear strategy with our ambitious goals in place and I'm confident that we are well positioned for future growth and value creation.
I want to take a moment to thank our entire global team of Io tiers, as we call them for their hard work and commitment to core and with that we'll take your questions Alex.
Thank you.
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Our first question comes from the line of Mike Latimore with Northland Capital markets. Please proceed with your question.
Alright, thanks, very much and congratulations on being public and a strong start with your first quarter here.
Thanks, Mike.
So.
Just a clarification on guidance you talked about being able to beat your original 2021 and 2022 guidance.
What is driving that confidence is it a vertical that ARPA or something else.
Yeah, I mean, it's I guess you could argue it's a little bit of all of that because really what it is.
What we hope we can continue at a solid business executing well and sort of a new pod mindset right the sort of the under promise over deliver sort of mindset right in and I think thats, what youre really seeing coming out in 2021, and 2022 and now of course, we have this.
Rather interesting year, where we went public really just in time for the fourth quarter.
But if you look at this two year period, together, which is the only sensible way to look at it given we're coming out until late this year.
We feel really good with first of all with the results we've already put out we've revised the guidance of course for this year as you saw and we think if you put those two years together the $2 19 in the 238 that we put out the $4 57, we're very comfortable we will be there given given momentum and all the things you said Mike.
Our pooser are stabilizing business volumes are good if it wasn't for the supply chain issues I'd be sitting here, saying I'd be significantly beating.
The two year period, but we have seen that slow us down here a little bit over these last few months.
Yes makes sense.
And then in the past you talked about.
Getting kind of past.
<unk> <unk> headwind in the legacy churn headwind in 2023.
What are your.
Potentially see some acceleration I guess.
Any more color on that dynamic and whether.
You might even see some of the sequential benefits, let's say that in the second half of 2022.
Okay.
Yeah look I think.
First of all I appreciate that you are.
Remember, our two kind of near term headwinds, we'll call them that look those are certainly you know we're working through them if anything they've been a little bit delayed right. So this supply chain phenomenon.
Is impacting us so as.
As our customers have a harder time getting a hold of their devices their transition to LTE to <unk>.
Has slowed right they don't they can't get the equipment to get there and so that slows.
If anything it slowed down our transition now as Tony pointed out the Sunset dates are set those don't look like they're going to move.
Any further and so in that sense, we will get those behind us largely by the end of next year.
With America Sunsets.
And then the other headwind that we've talked and of course that rate that would bring to an end the <unk> pressure right.
The one time churn issue as you recall, we're still we've put out a one time churn revenue number.
For this year and also for next year.
If anything we might edge upwards, a little bit on the number we put up next year, just again because people are transitioning as fast as we can so we will have that minor I'll say a headwind going into 2023.
But we should largely have the network stuff behind us. So that just leaves. This third phenomenon of is the supply chain going to open up.
And can we get at this sort of pent up demand, which we know is out there. We just we just haven't been able to while our customers aren't able to serve their customers with that demand and therefore, obviously, that's impacting us as well.
Got it Okay, and then just last I might've missed this or housekeeping question, but are you going to give gross margin on Iot connectivity and solutions separately.
We already do actually.
It should be not MD&A so.
In our MD&A.
On the face of a public offering.
P&L, we actually have products and services, but in the MD&A, we actually both.
Both revenue.
And cost of services.
Connect Iot connectivity and Iot solutions.
Alright perfect.
Great. Thanks, very much and best of luck.
Outstanding Thanks, so much Mike.
Right.
Our next question comes from the line of Lance Vitanza with Cowen. Please proceed with your question.
Hi, guys. Thanks for taking the questions.
Wanted to start with the customer case study.
You walked through thanks for doing that and just one question that comes to mind.
As the customer goes from $1 million I think you said 1 million installed devices growing 20%. So maybe there is $1 2 million.
Divestitures installed next year to what extent core participate in the revenue growth. There is it linear or they're great points I guess another way to ask the question is yes.
Who captures the operating leverage you or your customers in these types of arrangements.
Yes, no great question, Lance and look I mean for most customers I would say we benefit from operating leverage include.
Including of course, the cross customer operating leverage to the degree that these things are.
Yeah.
We get better and more automated at fulfilling this demand we're moving to a new warehouse up in our Rochester area, where we run our Iot solutions business, we're actually moving to a space Thats a two five times larger and have plans to even further streamline the efficiency there et cetera. So in general it's a good news story for us now with <unk>.
This particular customer.
Given how much extra volume they were giving us and given how many I'll say gross margin dollars were available we did agree.
Yes.
<unk>.
A reduction in our price with them right, which wouldn't be surprising to you.
And so that's that's some of what's affecting us as <unk> also said in our Iot solutions margins or if anything.
Under pressure because we have some customer concentration there with the largest customer and B, we gave up a bit but in general operating leverage is a good thing for core.
So right so.
The pipeline for that I guess, what I'll call a full suite business like like Youre dealing on that case study could you talk about how that pipeline has developed over the past few months.
Whether whether with new customers or whether it can just converting existing customers I mean, what what's the outlook look like and anything you could share with us there would be helpful.
Yeah, So look so.
A couple of things I mean, I think the team has done a nice job through last year of getting and I think we disclosed this in our in our documentation around coming public.
That's about 180 or so on an 82 I think was the specific number of our customers last year that brought multiple services from US right. So the typical as you well understand aligns with typical.
Customers, obviously, a connectivity customer right and then one would hope that over some period of time, we are cross selling them into other things, even as we're upselling them inside of Iot connectivity right.
So that number was up to 182 last year, we've increased that number obviously the year is not done yet this year.
I wouldn't say that.
Sort of jumping up and down with Joy in terms of how we're doing it is certainly an area that we need to continue to focus on which is improving our ability to bundle up and position our packages are services and to cross sell more effectively into our existing customer base interestingly new.
<unk> customers newer opportunities are a lot easier to have an expensive conversation, especially if they are relatively early in their deployments.
That's kind of an interesting phenomenon we're watching.
And I can go into that in more detail, if you'd like but I want to just take a pause and make sure im answering your question.
Yes.
Helpful I guess.
The other topic that I wanted to get to was with respect to the LTE transition, obviously debt that had a big impact in the numbers in the quarter, you've been talking about that basketball, but not a big surprise.
Could you discuss the how does what does that imply for connectivity volumes. The fact that you've now got.
Many more <unk> devices than you'd expected when you had sort of set out six months ago, what are the implications for the volumes would it be implications for pricing and the margin.
Going forward as a result of the acceleration I mean, I understand that the onetime revenue gets shifted forward, but is there any sort of impact on the business going forward from from having these devices already converted.
Yeah. So let me try and parse down that response for you. So first of all of course.
The large engagement that was supposed to actually officially we're supposed to kick off here in October.
In the fourth quarter. This year and then go for about the first half of next year, obviously, having that kind of execute largely this year right.
Data if you will pull forward to use your words some some some revenue.
Orders of magnitude.
We thought we'd get about $5 million off of this project this year and we're going to get something closer to 20 right. When it's all said and done and I can't tell you exactly what to do because I don't even know yet right. It depends on when during the holidays, we stopped shipping and they stop accepting and all this sort of stuff right, but so that's that's a material pull.
Pull forward and the fact that whereas a team sort of remaining committed to trying to still try and hit the number we put up despite that right shows you that we're certainly confident and want to try to get after that.
But now let's go to the other implications so.
It's sort of interesting isn't it when you when you have a <unk> <unk> sunset and your customer goes into LTE land the first.
Generation of that of course is <unk>.
It's really just a negative thing for people in the Iot connectivity business right, because Europe was going down.
Sometimes through those transition periods when a customer has to change out a device they might look to RFP. They might look to even change you are completely if you don't give them a really great price, but in general it's not a good thing right lease sunsets Thats why we cant wait for them to be done and get back to kind of our projected growth rate.
It's kind of neat, though as a much more diversified enablement, one stop shop company to have the ability to actually turn it turn the sunset transition type projects into a good thing right. So this revenue that we're talking about I mean, we can complain about a little bit of noise moving it from one quarter to another quarter, but it's really a good thing right. It's a great thing for our.
<unk> that we've been able to one stop shop them and give them to them. So in general I view. This as a high positive I view this as a sign of our strengthening strategic relationship with this customer etcetera and then the final part of this is yes, I mean sure look I mean, there is going to be.
<unk>.
Implications right so.
I'm sure you've already noticed.
That connectivity here in Q3 was a smidge off of Q2 sequentially. There's a couple of three different factors in it and those are the kinds of things that are happening when when you go to LTE right. So I think that's sort of how you unpack that line. So is that helpful.
It is and then maybe if I could squeeze one more question on the EBITDA side.
Nice performance it was a little bit more EBITDA than we were expecting but.
My question is I mean this to me it seems like the time that core what's to be investing for growth and I think you mentioned that that was your your view as well, but so presumably I mean, I guess the outlook for margins going forward.
B should be we shouldnt be expecting to see continued up.
Upward upside to the numbers from an EBITDA perspective, I guess, that's what I would say.
Yeah, No I think Thats, certainly very fair and.
We're obviously going to provide guidance when we come out with our fourth quarter results here in a few months. So we'll wait until all of the dust settles, but.
Like you said new public company wants to change. This is the brilliant news my board of directors wants to engage in a positive conversation about how to accelerate our top line growth right.
And so theres going to be a series of confirmations and plans put in place over the next few months as we finalize budgets and the like on how do we best get after that and obviously that will take up right. I mean that will take some some some of that profitability today that otherwise we had projected there is also a series of other things and put it as already pointed to those in his script right I mean, there is.
Just you know public company costs coming in much higher.
Higher than we thought they would and some FX stuff were working against US that he has already talked to and those aren't going to go away suddenly right and so for a combination of reasons, but the ones that I'm. Most excited about is the one you pointed too. So I. Appreciate you doing that which is how do we get this thing accelerated and going in the right direction.
Yeah.
Thanks for taking the questions.
Thanks, so much.
And our next question comes from the line of Matt Mcnulty.
Bank. Please proceed with your question.
Hey, Thanks for taking my question and congrats on your first quarter as a public company.
Maybe just to go back to the last question you talked a little bit about EBITDA margins, but I was wondering about understand some of the.
Puts and takes on gross margin because year to date gross margins are down about 300 bps as well. So I'm curious if we could just clarify the drivers between any supply chain constraints any sort of mix shifts between solutions and connectivity and then how to think about gross margins going forward and then one other clarification.
Maybe quickly you mentioned three <unk> would be the largest quarter between before to Jason Richey churn picks up I assume that's been referenced the absolute revenue, but I just want to see if I can get a clarification there. Thanks.
I'll start with the latter question I did refer to absolute revenue for this year it will be our largest.
Revenue for this year.
While the gross margins right. So the first thing is.
A big chunk off a chunk of our gross margin came in obviously the largest chunk of the gross margin pools comes from connectivity.
We don't see any pressure there.
As I had mentioned in my prepared remarks as well.
It is kind of where we expected it to be even mildly inevitable right.
I think where we are seeing pressure is in Iot solutions and then when you look at the gross margin pool as a whole as measured as a percentage.
It comes down here now because Iot solutions that would be good right. So.
Gross margin was 48, 5% compared to 53 point indeed, it was mostly because of Iot.
Iot solutions being materially higher and.
When you look at a lot of the existing Iot solutions coming from this LTE transition project.
This is also our largest customer.
It has even within Iot solutions, lower gross margin than the than the line average rate.
So that's what's really driving it and I'm glad you asked about the semiconductor shortages as well because that's also partially affecting it in a percentage basis. So you know we have had price increases in the device cost on that particular project.
And what and in some other cases.
<unk> dollar for dollar typically do customers, but when you get a dollar of extra revenue dollars extra cost to it pulls donia percentage right.
So it's all of those factors.
Great. Thank you and congrats again.
Thanks Raj.
Our next question comes from meta Marshall with Morgan Stanley. Please proceed with your question.
Okay, a couple of questions for me.
As you look at your pipeline are there certain verticals that you see.
Think are moving faster than expected versus verticals that are maybe taking a little bit more time and are there any kind of trend to follow from there and then maybe a second question.
You've kind of talked about.
Contract negotiations with customers just on pricing just trying to get a sense of when those contract negotiations normally happen is it.
And from a connectivity and Iot solutions customers that when they go from generation to generation is that on kind of an annual cadence just trying to figure out kind of when those negotiations take place or wanted to be mindful of.
Kind of gross margin impact so pricing impacts.
Yes, thanks, Matt good stuff, so look on the industries.
I guess, there's a couple of different ways that could address that question regimen.
But I'm going to take it on sort of.
On the area that I just want to make sure.
We've all understood as I showed the transformation.
And talked about phase two launching we've literally only launched two industries right and so in terms of having.
Individuals whether they were.
Here at the time, we launched them R&D, we've hired them in as.
As we've made those bets in those two industries.
The there's only really two industry. So so in other words I really don't have a staff of well trained and driven hunters and salespeople driving these other three industries for us right.
It wouldn't surprise you therefore to say Hey, you know.
The ones that are getting traction right now are the ones, we've launched and sure enough connected health is the big one.
Of the two that I would point to today.
That we're focused and we're also.
As we've as we're launching as we are investing in our pre configured solutions. These are still enablement solutions, we don't compete with our customers, but our.
Put together I'll say more pieces and parts together, so that they can be even easier to adopt and enable your Iot solution time to market I think by the way those pre configured solutions, we will have over the long run a positive impact on our margins right now, they're a drag because I'm investing well ahead of well ahead of getting revenue for these pre configured solutions, but.
Why did I bring that up in this context, because where we're coming to market now with the first couple of those.
One in the pure connectivity area would fail over and cellular as a primary and one actually in our connected health, We just announced at mobile World Congress in L. A.
Our <unk> solution connected health telemetry solution, which we're incredibly excited about and so I think for a little while we're just going to keep doubling down on connected health and take advantage of this explosion, we're seeing with an RPM company coming to market everyday the United States alone launches, a new remote patient monitoring company. So we're going to.
We're going to just keep going where the money is.
Yeah.
And I have not forgotten your second question, having I think it was about.
Just contract negotiation.
Yeah, So look.
<unk>.
Sure.
Classic core their classic Iot connectivity business core.
Tends to not really I mean, these contracts tend to not really be a very big dynamic part of what we do right because what tends to happen is a customer shows up and says hey, I want to get.
My business projections as I launched the solution or to get to whatever 100000, or some number of lines over some number of years and based on that in right. We agree a contract and the contract term.
As they progressed, if theyre doing materially better than that they may want to have a bit of a conversation with us about price points, even before their contract time period is up if by the way. The reverse is true in a minimum payment is starting to occur there may be a different kind of a you know what I'm, saying so it's so it has a lot more to do with.
The solution the momentum of that solution. The deployment is kind of how the commercials go and as you know once we get a device out there it's going to throw off revenue for five 710, sometimes longer number of years because.
It's really too expensive to go out and change that Sim right I think we've had that conversation and so look it's really.
It's really I guess, what I'm trying to say is it is.
It's a it's a volume driven conversation, which is usually a good thing for us anyway, because that means the customers having success I mean, I want to I want to have those conversations because it means they got more unicorns coming through the customer base right.
Got it okay. Congrats guys. Thanks.
And so that's great I appreciate that.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Walter Piecyk with like Chad. Please proceed with your question.
Thanks, Hey, Rommel can be can you just comment on I mean I know this is the biggest customer can I assume that stuff like this is will be a rare occurrence or should we expect some.
Level of Lumpiness as customers kind of move there or accelerate or slow down different deployments and also puneet can perhaps give what that growth rate would look like in that segment.
Can you just kind of pulled out this pull forward.
Curt on the revenue.
Okay. So yeah look I don't I mean, certainly something of this scale.
I don't know that it is going to repeat itself Walter I mean, I think you correctly gauged that one right I mean look I mean first of all the tons that are done in the next 12 to 15 months largely at least in North America ones and so.
The chances that that anything really really that large could come.
Our LOE.
I wouldn't hold my breath, but equally if they do come because of customer really needs to help to try to keep that transitions then come.
Come on over to the one stop shop, there because we would love to help.
So anyway. So that's sort of my answer there is I don't I don't think this kind of timing acceleration and a quote lumpiness as you call. It is a thing to stay at all but if you want to take the second one we've already broken out the top customer revenue for you right.
We can provide you some more information off the top core top customer revenue.
Walt.
$18 $9 million in three months.
Maybe about 11 ish from their transition project, which will help you calculate the number you're trying to calculate.
I would have thought some of that 11 would have happened anyway. So I'm just looking for the incremental to get to what the.
Growth would have otherwise been.
So this is mostly hitting in the FERC quarter theres going be some happening I know you said Q3 was peak, but youre going to see some acceleration or pull forward, helping the fourth quarter as well of 'twenty one.
Yeah Yeah.
Yes, we saw we saw we saw some of it already in Q2, and we and I think we've said that in our press release.
To your point there is a peak and there is a reducing number here in Q4, but there but we are Q4 is going to be helped with that yes with through this project is I mean, given the complexity of Iot solutions as you've described them. Obviously this should hopefully be a kind of a reference clients. If you can get if you get this should done quickly for them. So you got it on that.
On the on the revenue for 'twenty two.
When I remember that slide that you have where you show so much percentage of your revenue is already contracted.
So the flip side of that is like how long is the lead cycle to layer on new organic revenue opportunities in 'twenty two.
Is that I mean is that a heavy lift or is there still an opportunity to obviously you've got this revenue pulled into 'twenty one.
You've got all this other revenue already contracted for 'twenty two how quickly can you.
Contract additional revenue to deliver even further upside.
Yeah.
And look I mean.
Again like I said.
Earlier, our goal certainly is to and we as a team have been working on red.
Okay. So there's this big chunk.
Got brought forward what are we going to go do to.
Just sort of fill around that next year and where we are we are trying various we have various bets.
And that we're making for 'twenty two there some of which I think will pay off and will be helpful.
To answer your question, specifically, how easy is it how big a lift or heavier lift is it I mean, certainly connectivity tends to move slow right.
I mean, the fact is that we are in.
Our smaller customer that very very long tail of very small customers right. Several just kind of meander and try to get their value proposition to work and you know sort of fallout and fallout almost we don't even really think about them too much and others come in some of those will be successful, but it won't be next year right. I mean, the fact is that.
New business revenue in the in the year.
From either the cohort of customers that we're selling this year certainly from customers that were selling next year tends to be really slow unless theres, a large deployment and a transfer of lines or something that again doesn't happen very often so so the answer really Walter is that we have to look at the Iot solutions line to find these kinds of efforts right.
And your point was exactly correct. The reference case, taking the learnings from that sending that out and marketing campaigns to customers that are working through their transitions using the supply chain delays to our benefit if we can reach out and say hey, when you get those devices youre going to need help you may not have the capacity to do this in house you may not have the expertise to do this and as those are the kinds.
Of ideas that we're that we're thinking through but.
Our best bet.
Now I'll go through what we all want to do which is still hit next year's number. Despite the pull forward is as Iot solutions.
And then my last question I guess as you.
Now you have this extra cash ahead of time, which is nice and then you mentioned about pulling down another 25 post quarter.
When I look at that seven by seven chart on.
Page whatever it is nine.
What's the low hanging fruit for inorganic opportunities as you enter 2022 or what's at the top of your wish list as you kind of continue to look.
Fill in additional opportunities.
These are products and services. However, you want to describe it.
Yes, I think I think I think these fleshing out these industries.
Walter is my number one factor right now you can think about that a couple of different ways right. You could say hey go do a sizable acquisition put this cash to work with this currency you now have as a start to work in and go get yourself, an industrial or an asset type of practice because he is.
Acquired in there.
The other thing that I am quite intrigued about and I've sort of shown my cards on already on this call is doubling down in connected health right. I mean this thing is going places we have a real competitive moat. We are real differentiators I mean could there be a better place to make a bet.
Don't think so now look.
Right, we still have to be responsible we have to be accretive in all of those things will apply in the end, but I'm actually relatively pleased with the I'll call. It reinvigoration of our M&A program.
Funnel over the last few months.
And I think I think we will get a deal or two done next year, which we couldnt. Unfortunately this year just given everything that was going on so.
Largely again be industry focus how do you look could it be some tack or some five G pieces or somebody Iot pieces, maybe it's just not number one and I think you asked me what my number one way so.
Got it thank you.
Thank you Ray was too volatile on your other question on how much of a disposal group, we werent expecting anywhere near the $11 million, it's closer to about two ish.
Okay.
Great. Thanks.
As well.
Thank you currently this concludes our question and answer session I would now like to turn the call back over to Mr. Bell for closing remark.
Hey, Thank you Alex I do appreciate everyone, taking the time to listen into our very first earnings call. We hope everyone is staying safe and enjoying these four months, we look forward to.
Speaking with our investors and analysts again, when we report Q4 early next year.
Have a great evening, everyone happy holidays and see you soon in 2022, Thank you very much.
Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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