Q2 2022 KORE Group Holdings Inc Earnings Call
[music].
Greetings and welcome to the core wireless group second quarter 2022 earnings call at.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to our host Charley Brady Vice President Investor Relations. Thank you you may begin.
Thank you operator on today's call, we will be referring to the second quarter 2022 earnings presentation that will be helpful to follow along with as well as the press release filed this afternoon that details the company's second quarter 2022 results both of which can be found on the investor Relations page at IR Dot core wire.
<unk> Dot com.
Finally, a recording of the call will be available on the investors section of the company's website later today. Please.
Please note that this webcast includes forward looking statements statements about the company's beliefs and expectations containing words, such as May will could believe expect anticipate and similar expressions are forward looking statements that are based on assumptions and beliefs as of today the.
The company encourages you to review the Safe Harbor statements risk factors and other disclaimers contained on this slide and today's press release as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward looking statements.
The company is not undertake to publicly update or revise any forward looking statements. After this webcast.
The company also notes that it will be discussing non-GAAP financial information on this call.
Company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP.
Can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation.
I'll now turn the call over to Romo fail.
The company's president and Chief Executive Officer.
Thank you Charlie good afternoon, everyone and thank you for joining us today for our second quarter 2022 earnings call with me is Paul host course, Chief Financial Officer.
The first objective of today's call is to provide an overview of our financial results for the second quarter of 2022.
I'll start with a summary of our results and then Paul will take you through our performance in more detail.
Second we continue to help the market understand the significant long term growth opportunity that core is positioned to capture as the only public pure play Iot company.
Every call since we listed on the NYSE, we have leveraged our earnings calls to help educate the market and our business.
We started with a company overview last year and I, followed that initial call with overviews of our World class IP and technology moat, and then last quarter's deep dive topic with our connected health vertical.
This quarter, we will discuss Core's fleet segment, and the market trends driving our second largest industry practice. We will then hold a Q&A session to round out the call.
Let's move on to slide four to look at our Q2 results.
Second quarter revenue was $74 million.
Up 16% year over year.
Iot solutions revenue was $25 7 million up 47% year over year.
D be any or for the second quarter was 114% up from the second quarter of 2021.
As a reminder, we have consistently communicated since going public over three quarters ago that we expected a decline in quarterly revenue after the LTE transition project at our largest customer ended.
I am very proud that our team rallied to stave off said sequential decline another quarter with this strong Q2 performance.
But we fully expect a sequential decline in Q3, and 822 will be down from <unk> 122 organically has been embedded in our 2022 guidance since it was first provided.
Onset guidance, we are maintaining the communicated range. Despite an expected approximately $3 million revenue headwind from FX that was not previously embedded.
As a result, we continue to expect to beat our two year ago public revenue forecast for 2021, 2022 by more than $50 million.
With that I will present, a couple of slides to provide some business context on core and then we will move on to a deep dive of our fleet industry segment.
Slide five shows some Iot use cases on the left side of the page.
These solutions are not particularly complicated to understand conceptually, but they are very complicated to implement especially when the connected devices are in motion or are deployed across multiple technologies multiple devices and multiple connectivity protocols. The latter of which is a given in any deployment over a large geographic.
Area certainly across countries.
The key message is simple.
Iot is everywhere.
Anything connected is an Iot use case, and hence a potential customer scenario for us at quarter end.
And use cases do not have to be sophisticated to require our services. Although we certainly have that capability if needed.
Core is helping to bring a very large and rapidly growing set of use cases to life, which is driving our significant market opportunity.
But now on the right side of slide five let's take a look at the key complicating factors that have kept Iot for meeting its hype over the last decade.
Starting with cyber security is the foundational issue and working our way around the significant challenges of Iot solution deployment in the corporate world.
In particular, a lack of expertise and the ability to handle and leverage the massive amount of data coming off thousands and often tens of thousands of devices in many use cases.
Standard experience, even digital transformation experience is not enough to effectively deliver Iot.
Given the complexity stemming from the use of different types of devices and networks across different countries, the regulatory and compliance issues driving almost every industry and one of the most fragmented ecosystems in the tech World you have the issues that setup core strategy. This is what the core one stop shop is all about.
Simplifying these complexities and making it easy for our customers to deploy Iot solutions.
Slide six is a simplified view of our growth strategy.
What we do is help customers deploy manage and scale solutions.
Based on the experience of working with over 10000 use cases over the last 20 plus years, we can help our customers not just successfully deploy their solutions, but with our Iot managed services manage those deployments seamlessly, which in turn enables our customers to scale confidently and securely.
How we do this is with a combination of Iot connectivity solutions and analytics services, which is growing in scope and maturity with every year of our transformation.
With our global connectivity services, we can help enable almost any use case in any industry and as we have matured. Our Iot managed services, we have increasingly focused on going to market by industry, where we've become more of a trusted advisor with industry expertise.
We have organized our company to build and take to market. These world class IP, driven Iot services and slide seven illustrates the core organizational model at a contextual level.
We build our capabilities to support the major steps in the deployment of an Iot solution and while we are not at this point in time building a consulting organization to focus on the front end of a customer's Iot journey, we have been building the industry's leading Iot connectivity offering for over 20 years.
And in addition to our connectivity offerings, we have added a comprehensive suite of Iot managed services and plan to add to our early start with analytics capabilities, which will create even greater opportunities for growth.
The vast majority of our team is organized into these horizontal capability areas.
We have historically applied a regional go to market approach with our sales teams organized by the broad geographic regions Americas, Europe and Asia Pacific.
As we have expanded our portfolio of products and services, we are increasingly going to market and focused industry verticals, which allows us to get closer to our customers better understand their pain points and Iot requirements.
Last year, we launched connected health and fleet. The first two of our five target industry verticals.
Why these five verticals because these five industry sectors account for over 80% of Iot spend today.
And the successes, we have seen thus far, particularly with the BMP acquisition tell us our vertical go to market strategy is working.
This leads us to the overview of our fleet business.
It is a broad term that we use to describe objects that move people cargo or materials from one place to another such as autos buses trailers trucks and construction equipment.
One of the other transport methods, including rail and ships.
As our business stands today. It is vehicle centric and includes the telematics video analytics and usage based insurance segments.
All three of these segments are large and growing and we are seeing continued adoption of more Iot centric technology with multiple devices connected to the vehicle.
Mckinsey estimates the value pool for fleet management will grow to $750 billion by 2030.
A significant portion of this expected growth is due to video analytics, which is forecast to grow at a CAGR of 17%.
Over the next three years.
Similarly, the usage based insurance market surpassed $30 billion in 2020 and is projected to grow at a 20% CAGR through 2027.
This growth in usage based insurance is being driven by used cases targeting lower insurance premiums driver safety stolen vehicle recovery and government regulations.
Fleet management continues to lead the way in Iot market growth with around 15% of vehicles now having telematics pre installed and there are estimated to be about 100 million telematics units in operation around the world.
Technology adoption and the fleet management industry over the last several years has rapidly accelerated due to the speed and availability of networks complemented by the capability of Iot devices.
The industry was kickstarted by the adoption of GPS devices, and commercial vehicles, allowing for the birth of location based services applications. At this point the industry was primarily focused on information about the vehicle itself location status and vehicle health.
Next with the growth of low power networks and associated sensors, the industry move the focus to information about the cargo.
What is the vehicle carrying what is the status of that cargo how much of it is there how hot or cold is it when did it get loaded and where is it now.
Today organizations are acutely focused on safety, specifically around keeping drivers safe and reducing crashes.
This has led to our customers leveraging video telematics with a specific focus on driver behavior driver coaching and data collected by Iot devices to reduce fraud and false insurance claims.
All of this adds up to significant cost reductions and operational efficiencies.
The data that we can now collect associated with these three aspects of fleet can be combined to support many use cases and core through the management of connectivity hardware and SaaS solutions is at the intersection of this technology and these industry use cases.
Core's mission is to reduce the complexities of Iot to make Iot easy easier.
Easy to deploy easy to manage easy to scale and easy to buy.
Core make Iot easy, but providing bundled solutions that package just about everything in organization would need to deploy to address their fleet management use cases tracker.
Tracking solutions that combine hardware connectivity software and managed services advanced video analytics solutions that combine hardware connectivity AI and machine learning.
Cargo management solutions that track and provide environmental data for containers trailers and pallets, all the way down to a single item within a vast and often complex supply chain.
<unk> to our competition, who are mostly focused on a one size fits all approach core provides our customers with the option of integrating different products from multiple Oems, creating bundles that address specific industry needs without the fear of vendor lock in.
These bundled solutions and others that are shown here plus many that are not <unk>.
Leverage core's expertise to help fleet organizations tackle a variety of use cases.
And as Iot adoption accelerates, so too will demand for our bundled solutions for fleet.
To emphasize the importance of video analytics and the role it plays in driver safety. Let me give you a real life example of one of our customers leveraging our technology to help save the most valuable cargo in a truck driver.
Our fleet customer had an incident, where one of the drivers was kidnapped while driving in Mexico.
The technology that they had in his car alerted emergency services, leveraging artificial intelligence and in cabin video there.
This allowed law enforcement to track the driver and return him safely the same day.
So how does all of this translate into revenue for quarter.
Today, the fleet vertical accounts for approximately $50 million in annual revenues.
This revenue is a consistent and resilient recurring revenue stream driven primarily by a strong and broad base of customers.
In our go public five year forecast, we projected fleet revenue would grow to $75 million by 2025.
However, our internal stretch target is to achieve $150 million in revenue in the same timeframe.
We believe this is achievable by focusing on three areas.
First we're making ongoing investments in developing our partner ecosystem. In fact, we now integrate with over 400 partners that are unlocking data into our platform.
Second we have released over 130 features with multiple bundled solutions addressing the highest demand industry use cases, and our platform now supports as an example in the video analytics area. The top three Oems in the industry.
And third we are investing in Iot managed services addressing specific fleet needs around deployment and fulfillment, which is right in line with our vision to reduce the complexity of Iot.
In conclusion, I will say that we are very proud of the progress. Our fleet team has made and we believe the innovative approach outlined today will be a big contributor to <unk> growth.
With that I will now hand, the call over to Paul to cover the financials in more detail Paul.
Thanks, Rommel and good afternoon, everyone.
Moving to slide 12, we had another strong quarter of total revenue increased 16% to $70 4 million compared to $60 7 million in the second quarter of 2021.
As Ron one Romo mentioned earlier since going public in Q3 2021, we have consistently communicated that revenue in the second half of 2022 would be lower than the revenue in the first half the decline in revenue is attributable to the completion of the LTE transition project with our largest customer and the various carrier network sunsets in the United States.
<unk> by the end of 2022.
Despite the expected headwinds just mentioned and the new estimated $2 5 million to $3 million FX headwind that emerged in Q2 2022, we are maintaining our previously disclosed revenue and adjusted EBITDA guidance.
Turning to our service lines Iot connectivity continue to be resilient throughout Q2, despite the revenue pressures from FX LTE pricing transitioned and U S carrier Sunset.
These headwinds along with the new revenue from the BNP acquisition resulted in a 3% year over year increase in Iot connectivity revenue to $44 7 million.
Iot solutions revenue year over year increased 47% to $25 $7 million. The growth was primarily driven by new customers acquired as a result of the BNP acquisition, partially offset by FX and the expected decline from our largest customer due to the conclusion of their LTE transition project at the beginning of the second quarter.
Please note that even with the continued new revenue from BNP customers in Q3, and Q4 of this year, we do expect Iot solutions quarterly revenue to decline in both quarters on a year over year comparison basis decline is attributable to the significant LTE transition volumes with our largest customer in Q3 and Q.
Four of the prior year.
Total gross margin was 52%, which was flat year over year Iot connectivity gross margin increased six percentage points year over year to 65% driven.
Driven by the leverage from lower carrier costs on higher revenue and volume.
As expected however, we experienced a decline in Iot solutions gross margin year over year, which was down six percentage points to 28%.
The decline was primarily due to the increased mix of hardware revenue during the current quarter.
Total connections at the end of the second quarter were $15 2 million, an increase of $2 million or 15% compared to the second quarter of 2021.
Roller based net expansion rate or <unk> for the 12 months ended June 32022 was 114% compared to 113% in the prior year as.
As expected <unk> was also down when compared to the prior quarter and is likely to decline over the next couple of quarters as the LTE transition revenue from our largest customer declines over the trailing 12 month period in the calculation.
We do however continue to expect EMEA to be above 100% for the rest of 2022.
Operating expenses in the second quarter were $43 2 million, increasing seven 8 million or <unk>, 22% compared to the same period last year.
Increased salary and benefit costs higher stock based compensation higher travel expenses operating expenses related to the BMT acquisition and public company costs, including insurance and professional service fees all drove the increase in operating expenses year over year.
Note that approximately 45% of the increase in operating expenses year over year came from noncash items like amortization and stock based compensation.
Net loss in the second quarter was $11 1 million compared to $6 9 million in the same period in the prior year.
Adjusted EBIT in the second quarter was $15 9 million, an increase of $1 2 million or 8% to the same period last year.
Our adjusted EBITDA margin in the current quarter was 22, 6% compared to 24, 1% in the same period in the prior year.
Moving to cash flow core generated $14 7 million from operations in the three months ended June 32022.
This compared to a use of cash of $2 million in the same period in the prior year.
Q2, 2022 was a strong quarter from cash flow from operations due to increased collections from our largest customer related to billings from their LTE transition project positive cash flows from the <unk> acquisition and lower requirements for prepaid inventory.
Cash and cash equivalents at the end of the second quarter were $40 8 million compared to 86 million as of December 31, 2021. This change was primarily related to the financing of the BMP and Simon acquisition and with that I'll pass it back to Europe .
Thanks, Paul as you heard we had another strong quarter core continues to grow our connected devices count and win new opportunities.
Our current sales pipeline includes over 1500 opportunities and we expect our pipeline to continue to grow.
Today, you heard us talk about our fleet vertical where we have opportunities for high bandwidth applications for video monitoring and telematics, which carry very healthy our push and also low bandwidth applications, which add hundreds of thousands of systems.
These opportunities are not limited to fleet as Iot adoption increases and we build out our other targeted verticals of industrial assets and communication services providers, our opportunity set increases exponentially.
When core went public less than a year ago, we committed to generating $457 million of revenue in 2021 and 2022 combined.
We expect to exceed that figure by over $50 million and continue to deliver on our commitment to all of our stakeholders.
And we have achieved this despite a continuing pandemic disruptions in our customers' supply chains significant forced churn from the <unk> and <unk> sunsets in the U S, which finally comes to an end this year.
A rising cost environment, and now FX headwinds and uncertainty around the economy and broader geopolitical events.
All of which demonstrate the quality and resilience of our business model.
As you can see on our final slide core has transformed from simply providing connectivity to offering a broad array of products and services that help deliver Iot end solutions.
No one competitor can offer the breadth of products and services core is bringing to market today.
And we are continuing to build out and expand our capabilities as we execute on our clear transformation plan.
We will continue to invest in our IP and take leadership in <unk> and Iot just as we have done over the last few years in Egypt for example.
In closing core has just delivered the best quarter in the company's history, and we continue to exceed expectations I am confident that as we move past the second half headwinds of <unk> <unk> Sunset and a tough comparison from our largest customers LTE transition project. The stage is set for core to continue delivering.
On our strategic growth plan.
I want to thank our global Io tiers, as we call them for their hard work dedication and commitment to core with that let's start the Q&A.
Thank you.
Ladies and gentlemen at this time, we will conduct a question and answer session.
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Our first question comes from Lance Vitanza with Cowen. Please go ahead with your question.
Okay.
Hi, guys.
We're not hearing loss.
So it sounds like you cut off a little bit.
All right, we're going to go onto the next question.
Go ahead Mr <unk>.
Alright can you hear me alright.
Yes, Capex better yes.
Yes, great. So.
The revenue beat on the two year stack could you break that down for us in terms of contributing factors I mean, how much of that is volume versus price.
Execution, obviously M&A played a role.
And then I have a couple of follow ups if it holds out.
Yes so.
I think I think we sort of expected mid to high <unk> from our acquisition.
Which was obviously done during the first quarter lines.
And look I mean, they may even do better than that certainly given the red Hot start they've had with US is as they have taken advantage of some of the low hanging fruit in sort of demand that the rest of the core was able to generate incentive their direction, but also some pull forward from some of their large customers some really significant orders so.
<unk> from them to be higher than that and then the rest of it is largely execution right now organic execution right now.
A little bit harder I think to start to break it down on volume versus <unk> I think it's a little bit of both the the number of connections.
In the face of obviously these handsets this year has held up pretty well.
But.
Were more acutely aware of.
Some of the supply chain issues that we felt that a little bit last year, but we are feeling a more this year certainly through the six month Mark.
I guess, if I had to wait in one direction landside weight and a little bit more in the <unk> stability we've seen.
But good execution by the <unk>, yes, yes.
Lance the only thing I would add is when we modeled the sunsets, we thought they would churn off on.
<unk> basis throughout the months, but we are seeing a lot of those.
Whether it was AT&T are now and we expect now for T mobile.
Lot of the customers are just waiting right to the very end.
Whereas we modeled more conservatively that overtime.
So we're getting a little okay great.
Okay.
Let me turn to the fleet opportunity that you've talked about the first one yes. It is.
The $100 million I think you said $100 million telematics units around the world.
I'll repeat what when is that now are the future and then more importantly.
How well does the geographic distribution of those $100 million.
Does that lineup for core are you well positioned to go after all of that or should we be thinking about a smaller subset that really is the tanker bulker Yale.
Yes, so certainly those 100 million telematics units are out there today and in fact, almost 15% of them are our pre configured retro theyre rolling off assembly lines with the connectivity.
Embedded not just relying on after aftermarket type solutions.
Look I mean outside of some of the very large Asia markets, China, India et cetera, I would say these are mostly accessible markets to us right. I mean, certainly in North America, certainly in Europe , Australia getting better in Latin America.
So yes.
I wouldn't stretch it and say, it's all of it is accessible.
But.
Given our tiny market share today significant significant opportunity.
And then and then whether it's slide nine or 10 or 11, those three slides I thought very interesting, but could you point us to where you see the bigger versus smaller contributors to this $75 million to $150 million of incremental revenue, whether you want to do that by by the verticals are probably the.
By the anchor accounts et cetera. Thanks.
Yes look I think we are.
I mean I talked about the first three for a reason those are certainly the ones that we believe will be the three stronger horsemen. If you will from our solution bundles and if I had to pick one out of those three I would say that the very innovative work we're doing in the video telematics area, which is red Hot.
We believe that has a lot of potential and it's a very differentiated strategy, we're not coming out there like <unk>.
Some of these other players with.
One camera one size fits all here's what you get and its proprietary closed environment technology made by them kind of sort of solution, where we're bringing.
In the top three already are integrated and others will be integrated over time.
So a myriad of choices of cameras based on different use cases that our customers can deploy so I'd say the last three on page 10, Lance are my top three and certainly my personal favorite is video in the middle of those three.
Yes.
That's really helpful guys, Thanks, and I apologize for the bad connection I'm going to get back in queue. Thank you.
No worries thanks.
Thank you and just a reminder to ask a question at this time press Star one on your telephone keypad to remove your question from the queue Press Star two.
Our next question comes from Walter <unk> with <unk>. Please state your question.
Thanks can you start with just the M&A environment, given kind of what's going on in the market as you've seen.
Any.
More greater willingness.
Some companies to sell out to you guys or is it the opposite where.
Somebody wants to hold on.
Until things stabilize until rates are maybe lower or stabilized in order to get a higher take up price.
Yeah, I think it's I think there's a little bit more of the latter.
And.
You combine that with.
Yes.
What some would say is our head scratching the hard to explain.
We're getting ourselves so it's not like there is.
Currency I could use the terms of our public stock.
Yes, it's a tough environment.
I mean, you generate free cash flow is just the willingness to lever up further to make smaller tuck in acquisitions not part of the part of your contemplation.
Yes look I mean.
Certainly tuck ins remain an important part of what we're contemplating and it's going to be something we're going to look at doing.
You're putting our free cash flow to work on for sure right.
The lever up parts harder to contemplate world.
I've spoken to many public company investors now who even at Forex start to get nervous certainly at <unk> start to get nervous and if you were to add our convertible.
At $120 million type facility there, we're at a smidge over six X right. So.
We don't want to.
Likely go in that direction and kind of make that would make ourselves on investable just loading up on leverage I think one has to be cautious as we as we go through that.
So if you go to the original presentation.
For this for the for the spec obviously, you've significantly at least from what I can tell unless im model screwed up outperform in 'twenty two.
You have this kind of second half drop off which you've talked about before despite kind of beating in the first and second quarter. It doesn't.
We still.
Yes, the incremental thing is FX.
Not enabling you to kind of push that guidance up further again higher than what the original plan was if we just go out to 'twenty, three though and.
And you think about the kind of the incremental things that space that you face over the next couple of quarters.
Are you feeling about the 2023 growth either in the context of the original presentation or some of the headwinds that are going to bring.
Deliver the second half, which is lower than the first half performance that you've had.
To get to the guidance.
Yes look I understand the spirit of the question and then I have a number in my head I think it was $2 76 or something but let me Paul is going to pull it up here in a minute then we'll figure out what we said in the model.
Hey, good morning, So next page 31 of the April yes.
Chuck.
Yes perfect.
So the so.
I would tell you that we're very confident against that right.
And again I'm, not taking full credit for that organically because.
The one inorganic thing with it but yes, we're certainly very confident against that now.
The way the trajectory will so so let's just talk through the factors that are driving <unk> down from H, one and yes FX is in our friend right now, which otherwise we might have been tempted to.
With that.
Bringing the guidance up a smidge so okay.
It's largely in Iot solutions.
Story in terms of reduction in <unk> just because.
There's this massive sort of upfront.
I don't like the term pull forward myself, but the onetime sort of large engagement. The LTE transition project, which is such a unique thing for us its not like we have many of these running through US right. It's just this one thing and that's why we have spent time trying to explain it to the market, but that going away puts a dent on the second half and actually.
As the customer correctly, so was conservative and asking for very high amounts of volume over the last three or four quarters.
A good chunk of the business as usual part not just the one time transition part that's in our opinion has been pulled forward a little bit and so that's obviously going to then affect our <unk>, but it will come back next year right.
And then and then the question is even if you sorry to interrupt you.
But even if you strip out that $11 million I mean, the growth rate, obviously, the implied growth rate certainly very robust.
So if you can maintain that type of growth rate or even if it moderates into 2023, just the organic growth rate pulling out that 11.
It would seem like when we look at 2023.
Your overall organic growth rates should still.
Pretty good and certainly an acceleration.
Over what's happening in 2022 as far as I can tell.
Yeah, So look again.
It's clouded by this one time thing right. So Q1, and now Q2 are going to be these really high comp quarters. When we get to Q1 and Q2 next year and somebody will tell gosh why are you not growing but to your point those that are now asking them to understand the numbers understand that one time transition will see that there is progress in there.
On the connectivity side I would just say we're actually.
Excited right because.
We started the year with close to $1 million <unk>, we're going to end the year with close to zero or if they do hanging along it will be for a few weeks next year kind of thing.
But largely largely.
The holes that we had to fill every year before we could grow will go away now we still have some next year that that millions in terms of revenue at an average bulk of our pool that was $1 million in January right and so.
That's not really $12 million over the year right because it's obviously a number that's going down so call it $810 million, let's say $8 million to $10 million holding until next year and then we're off to the races. Because now I've got no holes going all our noncore customers are out all our <unk> are out <unk> showing stabilization so.
We're far more bullish about Iot connectivity growth going forward than we have been these last three or four years.
And yes to your point AD solution solutions will baseline out in the fourth quarter and then start to grow back up again and I think we continue to outperform what we said we would in our five year model.
Got it and then just one last one just on the Iot solutions, where I look at that type of.
Again growth rate, what's to me again, yes, the first half of the year is tough comps, but if you are putting up as you continue this type of growth rate and it's still it's still going on.
<unk>.
I would think that it would still have to grow.
Just in Iot solutions can you talk about.
Like some of the Iot solution customers that are out there I mean, I looked at iridium like Iridium business. It seems to be doing extremely well can you talk about some of the new business that youre signing up there to give us some sense on kind of where that growth is going to come from or where that revenue is going to come from in 2023 as you add more recurring revenue.
Sure.
Yes. So there is early signs of.
<unk>.
Success.
Certainly in our two key verticals that again as you know we launched early last year.
We're now sort of <unk>.
18 months of maturity into building out these pre configured solutions our bundled solutions.
And so there is.
There is dozens of customer opportunities in the funnel now.
We obviously would feel more confident once we see real dollars starting to flow again.
These pre configured solutions and so forth, but we remain.
Confident excited about about.
Both the revenue opportunity, but also the gross margin uplift opportunity from getting more pre configured solutions out there in connected health and fleet specifically, but then also some of our cross industry solutions like Sail-over leveraging fixed wireless access that sort of thing. So that's where the solutions growth was going to come from for the next few years really cold.
Got it. Thank you appreciate it.
Thank you. Thank you.
Our next question comes from Mike Latimore with Northland Capital. Please go ahead.
Hey, Mike.
Yes, it does.
It would be helpful.
Yes, okay.
So could you tell me how much did the fleet vertical contribute as a percentage of revenue is it like all looked in Brooklyn based off revenue.
Yes, so I think that we said, we said it's about $50 million right. So.
On a base of whatever end of our guidance you want to take our midpoint of our guidance you want to take its obviously not 20% rate.
So, it's a little bit less than that call. It 70, initiate A&H, depending on where the year ends up.
Alright.
What do you give some color on if the inflation in the system or the higher gas prices.
Have any impact on the fleet vertical.
It's interesting.
The.
I guess the knee jerk reaction is Oh, my God, there's higher gas prices. So trucks are going to stop rolling or something but it's obviously not.
Obviously, not really going to happen right products and goods to left to flow in through this to get into our supermarkets.
On and on and on so in an interesting kind of way, we have actually seen an uptick in our fuel optimization fuel management kinds of solution areas.
Those those lead customers that have not yet implemented those solutions or are much more seriously kicking the tires at least if not spending dollars are launching rfps in those areas I would.
Largely say I mean look given the recession proves a big word and you don't want to use those words lightly but.
We've proven that we're pretty darn good at.
Enabling solutions that help both the profit side of our customer and the revenue side of a customer and in some cases, it's both because these are solution providers, who are reliant on our connectivity and our solutions to be in business themselves right. So, it's a pretty sort of mission critical and sort of.
<unk> resilient business model.
Got it and lastly, you spoke about the revenue being a little lower in the second quarter.
Do you also give some color on the gross margins would be.
<unk> margins to be stable or increased a bit in the second half.
Yeah, Paul I'll take that one so as you look at we had a really good.
Quarter for gross margins on connectivity around the 65% Mark we we don't expect much change from there hopefully we can continue to optimize and even make it better.
So we will say those will stay pretty stable.
On the Iot solutions side again, each quarter is different depending on the amount of hardware in there, but we do expect those to also go go up so we hit the bottom in Q4 with a bunch of hardware there, but we've seen two quarters now in a row that it's inched up a couple points.
We expect that to continue into Q3 Q4.
Alright, great. Thank you.
Thanks Alethia.
Okay.
Our next question comes from meta Marshall with Morgan Stanley . Please go ahead.
Great. Thanks.
Maybe you can help us on.
The total number of connections.
Period end connections clearly set.
That pretty meaningfully year over year step down quarter on quarter I know some of that is from kind of a sunsetting of the <unk> networks, maybe you could just kind of help us determine what the headwind from that was it.
Overall connections.
And then maybe second question is how does that kind of the size of the MP businesses are doing quite well has there been any chance for cross sell yet.
Or just kind of when do you expect that there could be kind of more more cross sell across customers. Thanks.
Thanks, Hamid maybe Paul should take the I'll take connections connections connections ones.
You are right when youre looking at year over year to $2 million increase.
That's our typical growth, we we expected Q1 to be more of the down quarter win At&t's Sunset was originally supposed to happen and it got pushed a couple of quarters or so so we saw more of that happen in Q2. So we said at the end of Q4, we had about a $1 million.
Devices left on <unk> that we would lose or would transfer to LTE throughout this year, we saw more of that happen in Q2. So we're we're ending Q2 at about half a million dollars. So there's about half a million left for the rest of the year, but.
That.
It was more rounding we were pretty much flat quarter over quarter, we had growth, but it was offset by the additional ATM.
AT&T devices that went away.
Does it get to the question made up before we go to the other one yeah.
Thank you.
Excellent so yes look.
As I was saying there was some I hate to call it low hanging fruit because that makes it sound easy or something but I think our team we had customers that needed that kind of low touch BMP solution. So we've been able to funnel I mean part of their outperformance, obviously as being part of core I guess is what I will say.
But also they have done just fantastic work and so we certainly are continuing to look very closely.
As the integration continues to go well at customers that we can move from our core kind of Rochester operation that is a more complex and built for larger volume built for high regulatory environments like connected health and move the lighter touch things to Westbury and the.
Operation there.
And certainly bullish that the.
The low touch solutions will continue to help our cross sell efforts in general.
Great. Thanks, so much thanks.
Thanks Peter.
Yeah.
Our next question comes from Scott Searle with Roth Capital. Please state your question.
Afternoon, Thanks for taking the questions I got on the call late so I apologize if some of this is redundant but to just follow up on the legacy subscriber question. It sounds like there's still about a $5 million left.
Will that go to zero by the end of the year is that still kind of hanging around for a little bit longer than expected just kind of given the end of lifecycle here and Paul.
From a normalized Opex standpoint, it look look a little higher this quarter I know there were some one time charges and that if we net out and adjust for that is that the normalized number going forward or is there still some more adjustments that we should expect in the third quarter.
Alright, So I'll go first and the first thing I'll say is I thought you loved US best I can't believe you were on some other call or something in late for hours Scott, but my.
My apologies, Rob I'll make it up.
So.
Yes, so so.
I think largely the answer is yes.
5 million <unk> to your question.
Largely it goes to zero now again as there are a couple of weeks of delay or something if the sunset. It takes a little bit longer than just one day.
There may scribble, some some amount into January but but the way we're looking at it is.
It's gone at the end of the year and as I was saying just a little while ago.
The only sort of headwind left going into next year is what these million assumes represented in terms of revenue this year right and once we're done with that and then we're sort of after the races and again, if arb, who continues to do what it's doing in supply chain opens up supply chains actually been more <unk>.
Appointing on the volume front for us this year than we thought it would be six months ago.
Customers get back to deploying we get back to anywhere near 20% volume growth and a stable <unk> environment.
Certainly in 2024, you'll see very exciting growth and hopefully we will start proving it.
Last year itself.
Another thing I'd add to that Scott Ramos, Alright, well, we model it to go to zero, but again, we're working these guys trying to win them back and hopefully can convert them and make them stay and like almost said some of them may trickle on into Q1 again, depending if there is any delays in T mobile or <unk> or Verizon sunset at the end of the year.
But right now we've modeled it that they would.
To zero by the end of the year, Robert just to follow up on the supply chain issue.
Did you talk about a number in terms of what was left on the opportunity you Couldnt ship this quarter and in terms of the immediate demand pipeline that just targeting cellular modules, what's that number look like.
So that's not.
Certainly I Havent addressed that let me, let me maybe try a slightly different tack right. So.
One of the strengths of our business.
The stickiness of our customers of course to our platform and the fact that existing customers on average certainly the larger customers that matter have been growing on average about 20% a year. These last few years coming into this year, we felt the downdraft on that set of demand signals into us.
We signaled I forget exactly what it was I think it was after the fourth on the fourth quarter call. When we were giving guidance, we signaled that we were thinking.
Volume growth will be more like half of what we've normally seen and we said hey, roughly half of that is the millions in terms of being kind of force churned out.
And the other half of that impact of the supply chain I would just say that rather than seeing that at all.
10% type expected half of normal 20% volume growth, we may even come a few percentage points short of that obviously, we're going to try the sales teams hammering away and we're going to try to ship more and activate more and so forth, but if our customers cannot get their devices because their orders are getting delayed six months 12 months, we've heard horror stories in certain.
Certain parts of the module and device supply chain.
They don't need our systems, and we don't get our devices going right. So that's what we're seeing.
Sorry, Scott sorry, Scott can you repeat your.
And the last question.
I was on the Opex front, Paul just in terms of is if we if we adjust out the one time charges for the acquisition and otherwise is that the normalized number you guys still tightening things up a little bit more on that front.
So this quarter it depends which adjustment you are talking about like we would have adjusted out onetime stuff related to the acquisition in the prior quarter, but this quarter. The <unk> expenses are the regular ongoing expenses and they had higher than usual because of the revenue they brought in this quarter.
Part of their Opex is the channel Commission side of things. So obviously the higher revenue they sell the more commissions.
So that that will fluctuate depending on how well or how much revenue they sell in that particular quarter, but.
Other than that the from a onetime perspective in Opex, there wasn't anything more significant other than ongoing increase cost.
From head Count travel has picked up now the COVID-19 is kind of behind us.
Traveling more.
And stuff like that so got you.
And if I could on the <unk> front and kind of back of the napkin kind of math and it looks like the <unk> have stabilized over the past couple of quarters here part of that is legacy rolling out.
But you also have some some larger opportunities with more video content more traffic that's attached to that so is this the bottom should we be expecting arpus now start to slowly move in the other direction Rumble or is it a little early to make that call.
Your lips to God's ears baby.
Look at.
I sure hope so right.
I'm a great believer in the notion that tech costs always had in one direction, which is down Moore's law, and this and that but and so.
I am not sitting here pretending that on a per megabyte basis costs aren't going to go down right that it is to your point the higher bandwidth consumption. The right. The more use of video in and this is all largely pre <unk> alright, as <unk> actually matures for Iot over the next couple of years.
The bandwidth usage is only going to go in one direction. So.
Look I will just continue to say for now or too early to make any predictions, but we feel good about our predictions on stabilization so far coming through in the next four six quarters will be very interesting and we continue to see many high bandwidth opportunities like that.
It's a big change from 12 months ago or 18 months ago.
The number of opportunities we are seeing in that area.
Got you and lastly, if I could from a high level and maybe on that last point, Paul is like the opportunity pipeline.
Is there a way to quantify it if you talked about any numbers in terms of the number of connections that are in there and then I guess kind of putting that together with the backdrop of the supply chain on the margin. It seems like things are improving while there are still horror stories out there.
Are we getting to an environment.
Where do you think in 2020, we're starting to get back to I'll call. It a quote unquote normalized 20%.
Connection growth is that is that what we should be thinking about at some point in 2023, and how big is the pipeline. Thanks guys.
Yes, so on the opportunities front.
Scott I, just I think we need a couple of more.
Maybe even a couple of more years, certainly a few more quarters of maturity.
On.
Selling these more pre configured solutions bundled solutions types of engagements to customers in this industry go to market kind of model that really only five six quarters old for us.
Before theres meaningful numbers that can throw out there on PCV that have meaningful then year over year types of comparisons right. It's too early otherwise I feel like it's just it will throw off data points of noise that isn't isn't worth it. So so we really are resisting to put out.
PCB kinds of metrics, maybe it will start next year will.
Certainly it's on our mind, we understand you guys would like to see more in the way of momentum and so forth and we should we should work towards providing that transparency and we will.
But yeah, we feel really good about the number of opportunities and in general the <unk> of those opportunities being on an uptick is what I will say in general.
On supply chain I wish I was as optimistic about 2023 being back to normal.
I'm not seeing it.
But again the way, we think and the way we behave in the way react when we're out with customers is it sort of doesn't it sort of doesn't matter. It we aspire to being a company that can grow 15% to 20% volume every year and that's the company, we want to be and we're going to get started.
The attitude I want my team to add as breakthrough walls and find a way to get it done for your customers.
Great. Thanks, so much.
Okay.
Our next question comes from Matt Nicole <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the question maybe take a step back more of a macro question and maybe beyond the question around fleet that was brought up before but more broadly what's the latest you're hearing from your customers just in terms of their approach to a seemingly slowing macro backdrop any sort of changes you're seeing in terms of tone or pulled.
Back.
In their plans and then I have one follow up.
Yeah, Hey, Matt Thanks for the question really again.
Not hearing a lot of sort of knee jerking or changes in.
In planned projects and approaches that doesn't mean, there isn't one or two here and there with the company that might have some some specific circumstances surrounding them.
That of course, there's always going to be that but the fact that there are so few of those exception proves the rule that most seem to be wanting to proceed in.
In some cases, where it's cost efficiency drivers with Iot there is actually an acceleration.
That one feels and so the larger constraint seems to be supply chain.
And so we remain relatively sort of business as usual in that sense relatively bullish on our own in terms of how we're thinking about our investments et cetera, we're not really massively changing now look if something next 234 quarters or something macro China, Taiwan, who knows what will have a different conversation.
But today, we're not really feeling significant changes from the macro.
Got it got it and then the follow up more maybe for Paul.
In your adjusted EBITDA Calix. So I know you guys typically we'll adjust the transformation expenses and acquisition and integration related restructuring costs as well I'm, just wondering acquisition and M&A, maybe aside because those are tied to specific deals but transformation expense typically has been 7% to 9 million in the last two years and you're already at about $4 million year to date.
Any color in terms of what inning you are in terms of these initiatives how long we could anticipate these costs occurring.
Over the next couple of quarters. Thanks.
Yes, yes, so I would say we are getting into the later innings of this ballgame. So.
We do expect these to start to level out or even start to decline and then into next year would be the likely last year, you'll you'll see these I don't want to say, which quarter that will be it could be trailing till the end of the year, but for the most part you can expect 2023, we'd like to be done in this model.
Okay, great. Thank you.
Thanks Pat.
Thank you there are no further questions at this time I'll hand, the floor back to Rommel ball for closing remarks.
Alright. Thank you very much we appreciate your interest in our in our Investor call Our earnings call here, we will.
Back to you on the next one thank you very much bye bye. Thank you. Thank.
Thank you. This concludes today's call all parties may disconnect have a great day.