Q3 2022 KORE Group Holdings Inc Earnings Call

A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce your host Charley Brady Vice President of Investor Relations. Thank you Charlie you may begin.

Thank you operator on today's call, we'll be referring to the third 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 third quarter 2022 results both of which can be found on the investor Relations page at IR Dot for wireless.

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 and are based on assumptions and beliefs as of today.

The company encourages you to review the Safe Harbor statements risk factors and other disclaimers contained on this slide and today's press release as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward looking.

<unk>.

The company does 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.

The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP you.

You can find a reconciliation of these metrics to the Companys reported GAAP results in the reconciliation tables provided in today's earnings release and presentation.

I'll now turn the call over to Roma ball, the company's President and Chief Executive Officer.

Thank you Charlie and good afternoon, everyone and thank you for joining us today for our third quarter 2022 earnings call with me is Paul hopes of course, Chief Financial Officer.

Today, we will provide an overview of our financial results for the third quarter of 2022.

I will start with a brief highlight of key events from the quarter followed by a summary of our results. Paul will then take you through our financial performance in more detail and we will finish with a Q&A session to answer your questions.

In our third quarter, we once again delivered strong financial and operational results and further advanced our strategy through new initiatives in September we announced a strategic alliance whereby portable join ericsson's Iot accelerator platform, which already has over 35 other M N O partners.

Most all of which are located in Europe and Asia.

Via these channel partners core will have the opportunity to provide over 8500 enterprise customers primarily headquartered in those 35 plus countries with seamless connectivity when they want to deploy Iot assets in the U S.

So this alliance has the potential to bring to core of thousands of customers who are managing millions of connected devices.

These are customers core would otherwise not have easy access to given that they are headquartered all over the world. However.

They will still need to be one customer by customer and these wins will likely ramp slowly.

That said this alliance is another milestone in the evolution of core and I am excited by the prospect of partnering with a global leader in Ericsson and enhancing our growth engine for years to come.

In the third quarter, we also announced the launch of the poor connected hub of telemetry device peripheral that streamlines the integration of connected medical devices and sensors into course connected health solutions.

And finally in July we were honored to be named a 2022 competitive strategy leader for the global Iot industry by Frost and Sullivan.

At core we never stopped innovating to simplify the complexities of Iot deployment for our customers.

Let's move on to slide five to look at Q3.

We again delivered strong results our third quarter revenue results were at the upper end of our internal estimates.

This has prompted us to increase our 2022 revenue guidance. Despite the adverse impact from foreign exchange rates, having almost doubled from our second quarter projection to an estimated $5 million for all of 2022.

Since going public last year, we have consistently proven our ability to execute our strategy.

As expected third quarter revenue of $66 $6 million declined one 8% year over year due to a difficult comparison as the year ago quarter included significant revenue from the LTE transition project at our largest customer.

I am happy to report that gross margin increased 500 basis points. Despite this revenue decline as we continue to focus on improving our margin profile.

We continue to expect our fourth quarter to decline sequentially from third quarter due to the usual seasonality of Iot solutions, where the fourth quarter is typically the lowest revenue quarter of the year.

I will now take a minute to address some of the factors impacting our near term revenue growth as.

As we have discussed previously strengths in course underlying revenue growth has been masked by transitory onetime factors.

To put this in perspective, if you cut away all the headwinds created by the <unk> sunsets, the LTE transition project at our largest customer and the foreign exchange headwinds. This year of course 2022 revenue growth rate percentage is in the low twenties, obviously, the BNP Simon acquisition.

<unk> has been a big help with this growth.

But even putting that deal aside we have delivered organic growth. This year net of the transitory factors I just mentioned.

More importantly, and while we are not providing formal guidance today. We are excited about the future. Because these one time effects are coming to and it would.

The approximately $12 million in <unk> revenue headwind next year being the last major impact.

And despite this headwind we expect revenue growth in 2023 to be in the mid to high single digits percentage range, including our belief that we will find replacement revenue at our largest customer to make up for the LTE transition project revenue. We received in the first half of this year.

In 2024, we believe we can double that organic growth rate given the absence of headwinds and we continue to target a 20% growth rate by 2025.

Given our strong performance through the first nine months of 2022, we are increasing our revenue guidance to a range of $265 million to $267 million compared to our prior guidance of $2 60 to $2 65.

And as mentioned this is despite the estimated 5 million dollar headwind from foreign exchange rates, which have increased since the end of the second quarter.

As a reminder, this was not previously embedded in our initial 2022 guidance that we provided in March.

Our EBITDA guidance range of 63 to 64 million is unchanged to account for some increases in operating expenses that Paul will talk about in more detail.

As a result, we anticipate exceeding our two year ago public revenue forecast for 2021, 2022 by $56 million to $58 million.

With that I will now hand, the call over to Paul to cover the financials in more detail.

Thank you Ramon and good afternoon, everyone.

For slide six as expected third quarter revenue declined one 8% year over year to $66 6 million compared to $67 9 million in the third quarter 2021.

For almost a year now we have consistently communicated that revenue in the second half of 2022 would be lower than the revenue in the first half of the year.

Declining revenue has been and will continue to be attributable to the completion of the LTE transition project with our largest customer which concluded in Q2 2022 and the various carrier network sunsets in the United States, which will be completed by the end of this year.

But segment Iot connectivity revenue up $43 4 million increased four 4% year over year, including an estimated two 5% headwind from unfavorable foreign exchange rates.

Both from new and existing customers, excluding noncore customers was in the high single digits and BNP added approximately 6% to Iot connectivity right.

Offsetting this growth was the foreign exchange impact already mentioned.

Klein and noncore customer revenue and the negative impact of lower pricing to existing customers related to the shift of <unk> devices to LTE.

All of these combined to reduce revenue growth by approximately 8% year over year.

Iot solutions revenue declined 11, 7% year over year to $23 3 million decline was.

Driven by the difficult year over year comparison as the third quarter of 2021 included significant revenue related to LTE transition project at our largest customer.

Put this in perspective in the third quarter of 2021, LTE LTE transition project revenue accounted for almost half the total of Iot solutions revenue and with the peak quarter for the revenue related to this project.

Excluding the LTE transition project revenue Iot solutions revenue have increased over 60% year over year, primarily due to the BNP Simon acquisition.

We continue to expect the fourth quarter of 2020 to Iot solutions and total company revenue will be down year over year and sequentially from third quarter, primarily due to the impact of the LTE transition project with our largest customer in the prior year.

Additionally, the fourth quarter is seasonally Iot solutions, and BNP Simons well, what's your revenue quarter of the year.

Total gross margin was 53% and increased approximately 500 basis points year over year from the third quarter of 2021.

Iot connectivity gross margin increased 400 basis points year over year to 65% driven.

Driven by increased optimization of our carrier costs associated with higher revenue and volumes.

Iot solution margins increased 200 basis points year over year to 30% driven by our continued focus on improvement in our Iot solutions margin profile.

In the absence of lower margin LTE transition revenues from our largest customer in the current quarter.

Total connections at the end of the third quarter were $15 3 million, an increase of $1 7 million or 12, 5% compared to the end of the third quarter of 2021.

Dollar based net expansion rate or E. B any yard for the 12 months ended September 32022 was 100 per cent compared to a 114% in the prior year.

As a reminder, D. B any are measured as the growth from existing customers in the trailing 12 months compared to the same customer cohort in the year ago period, much like same store sales growth rate.

As expected.

<unk> was down sequentially from the second quarter and year over year is it trailing 12 month measurement continues to be impacted by the LTE transition revenue from our largest customer which peaked in the third quarter of 2021 and was completed early in the second quarter of 2022.

Excluding total revenue from our largest customer E b any or at the end of the quarter would have been 106% compared to 110% at the end of the third quarter of 2021.

Looking ahead to the end of Q4, we now expect DB in the air with our largest customer included to be in the low 90% range or around 100% excluding this customer.

Note that foreign exchange had a 1% to 2% negative effect on QB on D. V are for the third quarter and similarly will in the fourth quarter.

Operating expenses, including depreciation and amortization in the third quarter were $42 6 million, an increase of $4 1 million or 11% compared to the same period last year.

Increased salary and benefit costs really recruiting cost to hire new employees.

Travel expenses operating expenses related to the BMP acquisition, which included $1 1 million and depreciation and amortization and go public company costs, including insurance and professional service fees all drove the increase in operating expenses year over year.

Third quarter interest expense increased year over year to $8 2 million due to an increase in borrowing costs on our senior secured term loan we.

We expect interest expense will continue to increase to approximately 10 million next quarter as interest rates are expected to continue to rise.

Net loss in the third quarter was $13 million compared to $4 5 million in the same period in the prior year.

Yeah.

Adjusted EBITDA in the third quarter was $15 6 million a decline of zero point $3 million or approximately 2% compared to the same period last year.

Adjusted EBITDA margin in the current quarter was 23, 4%, which was flat compared to the same period in prior year.

Moving to cash flows or had another strong cash flow quarter generating $9 8 million from operations in the three months ending September 32022.

This compares to cash from operations of $4 9 million for the same period in the prior year.

The strong Q3 2022 cash flow generation was driven by the positive cash flows from the business, including from our largest customer and their LTE transition project revenue from Q1 and Q2 of this year.

There was also a lower requirement for prepaid inventory during the quarter.

Cash and cash equivalents at the end of the third quarter were $43 3 million compared to $86 3 million as of December 31, 2020.

This change was primarily due to the financing of the BNP Diamond acquisition.

I will wrap up by repeating that despite the estimated 5 million foreign exchange headwind for all of 2022.

Wasn't in our previous revenue guidance of 260 to 265 million, we're increasing our 2022 revenue guidance to a range of 265 to 267.

Our adjusted EBITDA guidance of 63 to 64 million remains unchanged, reflecting continued pressure on head count related costs from a tight labor market and the use of more expensive contractors. These gaps.

And with that I'll pass it back to normal.

Thanks, Paul as you have all now heard we had another solid quarter when core went public a little over a year ago, we committed to generating 2021, and 2022 combined revenue of $457 million.

As it stands today, we believe we will exceed this projection by approximately $57 million at the midpoint of our increased 2022 revenue guidance and.

And we are doing this in the face of disruptions in our customer supply chains significant forced churn from the <unk> and <unk> sunsets in the U S, which will be complete by the end of this year, a rising cost environment and foreign exchange rate headwinds, which have continued to increase.

Suffice it to say, we have great confidence in the quality and resilience of our business model.

We enjoy a business model that is largely recession resistant due to the 80% plus recurring revenue, we enjoy and the fact that a majority of connected devices that core provides connectivity and other services for our embedded and mission critical Iot solutions in general our customers cannot do.

What they do without our service.

Slide nine shows you the transformation path that core has taken to move beyond being solely in Iot connectivity provider to a company that offers a broad array of technology driven services to help deliver end to end Iot solutions and the most exciting growth industry for the coming decade, the internet of things.

A much more connected planet with roughly 75 to 80 billion connected devices and sensors by 2030 is driving the digital revolution in almost every company and home.

Over the first four years of our transformation our focus has been on strengthening our core business of Iot Kaz or connectivity as a service and launching new capabilities to target attractive market Adjacencies at.

At core we believe that effective expansion strategy is start with a customer in view.

My thought fully studying the market and our customers' problems, we identify how we can help make their iot adoption journeys easier.

Second we do not believe in straying too far from the core the.

The very credibility of our company and its offers depends upon our customers' believing we are capable of delivering certain iot capabilities better than they can themselves and orchestrating the ecosystem of Iot better than they can.

This is why we start with the chart. Many of you have seen before or seven by seven framework of the major steps it takes to design and deploy an Iot solution.

We have identified how we can become a one stop shop for our customers and further we have identified the high growth use cases in key industries to focus our initial capability expansion and hence our target addressable market or Tam expansion efforts.

And our Iot Cat business, we have invested in world class technology and have built the leading global independent connectivity offering.

With core omni Sem, our ECM offer we can connect customers in over 190 countries better yet our customers can utilize the omni same offer via Apis from a micro services architecture directly into their own systems.

Well, they can log into our connectivity pro portal and take advantage of our multi multi multi offer for global Iot connectivity one screen one APN one bill one number for global customer support effectively simplifying the most significant of complexities that have been holding back Iot.

Because as you all know without connectivity there is no internet of things connectivity has to work that as the devices have to be connected and data has to flow.

Next we built out our managed services capabilities with which we have had early success. We have focused these capabilities in certain industries. Our core <unk> business was strong in telematics in fleet and we were attracted to the connected health market. Since I really believe there will be soaring demand across health care and life science.

As for Iot technology to help with the growing remote everything trends aging in place global clinical trials et cetera.

In keeping with this focus early last year 2021, we launched a determined to go to market motion in these two industries with focused practices and global industry leaders.

The next step even as we embrace the challenge of cross selling these new capabilities into our existing customers is to invest into what we call pre configured solutions, where we address frequently occurring problems. For example in connected health now our largest industry vertical our connected health telemetry solution or C. H T S.

Significantly reduces the complexity of getting a gateway or hub device to pair with blood pressure monitors and weight scales and other sensors in homes and clinics, where remote care is increasingly a prerequisite.

In the life Sciences Arena, where clinical trials are still largely manually run see HTS allows real time data capture rather than waiting weeks or months to collect data to be analyzed.

Core is hence very well positioned to benefit from growing trends in health care and life Sciences, such as the increase in decentralized clinical trials, which are projected to account for 70% of all clinical trials by 2025, and the expansion of remote medical device monitoring and remote treatment of chronic disease.

Uses such as diabetes hypertension and cardiovascular disease.

In our second largest vertical fleet discussed in some depth on our last earnings call. We have several pre configured solutions.

These pre configured solutions are able to track and monitor the vehicle, including location speed and fuel consumption.

Driver metrics, such as performance and adherence to regulations and safety and cargo variables like temperature humidity and vibration all into a single interface utilizing the core one Iot platform and core connectivity pro.

In vehicle video telematics is a growing area and is expected to be $1 $3 billion market by 2024.

Core already has several in vehicle video solutions for on road and off road applications.

Aside from the overall growth dynamics in this area video solutions carry significantly higher Rps for connectivity as do so many use cases that are using more bandwidth as Iot matures.

Underpinning all of course product and technology capability is the strength of course talent pool. We are fortunate to have leaders with decades of experience in developing deploying and managing Iot solutions.

They not only identify current customer needs, but anticipate what will be needed in the future.

Combining this bench strength with our global connectivity reach innovative products Iot managed services and core sole focus on Iot will we believe allow us to continue to win market share in a large and growing market and drive growth for years to come.

As 2022 comes to an end we are increasingly focused on the deliverables in the 2026 column.

Including leadership in <unk>, and edge analytics massive Iot and as it makes sense and expansion of industry practices to take advantage of our world class capabilities and mold them into solutions for new high growth use cases, thereby continuing to increase our Tam.

And we will continue to add to our capabilities to maintain our leadership position in this emerging decade of Iot.

Core continues to grow our connected devices year over year and win new opportunities.

Starting this quarter, we are sharing with you some metrics from our global sales pipeline, which is presented on slide 10.

To provide better visibility around the magnitude of growth opportunities with which we are actively engaged.

As of September 30th our global sales pipeline includes over 1300 opportunities with an estimated potential total contract value or <unk> of just over $400 million.

We define T C V a little differently for Iot connectivity for Iot solutions as you can imagine, but we are conservative in the metric and.

And limit TCP value such that this revenue can be projected to burn and bill over the next three to four years.

So what does this mean.

This is a snapshot of all of the opportunities we have identified as of September 30th across the various funnel stages.

Not all of these opportunities will convert the closed one opportunities, which you see in the bottom section of the funnel.

Closed one opportunities are those that have finished field testing and moved into production with our service.

Year to date through the end of third quarter. Our closed one business had an estimated <unk> of $72 million from new customers or new revenue expansion at existing customers. This $72 million of incremental revenue, we expect to recognize over the next four years and we expect this figure to increase by the.

The end of 2022.

Now it is important to understand that revenue from our new contract does not grow linearly.

There is generally a slow ramp of revenue, especially in Iot connectivity, which then continues to build over the contract period.

Also remind you that our connectivity and recurring revenue generally runs longer than for four years and could increase overtime.

And these factors are not captured in our <unk> estimate finally, our strong recurring revenue base, our run rate business as we call. It continues to represent a major part of our revenue each year with new T. C V driven business being a relatively small contributor.

In closing core delivered another solid quarter and we continue to do what we said we would do.

And I would reiterate that as we move past the headwinds of <unk> sunsets, and large onetime or transitory revenue effects, we expect to grow from the trough fourth quarter. This year with the goal of mid to high single digit organic growth in 2023, doubling this organic growth rate in 2024.

Or which then position us by 2025 to be a 20% top line growth story with an EBITDA margin in excess of 20% I want to thank every one of our employees across the globe, our Io tiers as we call them for their hard work dedication and commitment to core.

That let's start the Q&A.

You may now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line isn't the question Q1 moment. Please while we poll for questions. Our first question is coming from Scott Searle from Roth Capital. Your line is now.

Alive.

Good afternoon, thanks for taking the questions maybe just to dive in quickly in terms of the organic growth in the most recent quarter I know you throw out a bunch of different numbers and there are a lot of moving parts in there.

But I was wondering if you could clarify for us what legacy connections were at the end of September it sounds like there'll be completely out of the picture by the end of this year. If there was any supply chain impact in terms of your inability to ship because of modules or other device availability and then kind of what that organic growth rate did look like on a normalized basis, maybe in constant currency.

In the third quarter.

Yeah.

On the services front my apologies, yes, yes.

So yeah on the connectivity side of things and when you look at it.

First off we will talk about first the supply.

Supply chain and Royal can chime in if he has anything but we're not seeing any difference compared to last quarter to this quarter again, some customers here and there we'll have.

Some issues getting their devices and so forth, but nothing significant or major that will that we would call out.

From the connection standpoint, we're estimating between 300 and 400000 still left at the end of the quarter, which is mainly to <unk> customers and Verizon CDMA customers.

This cohort of customers declined year over year about a $1 million. When you compare Q3 of last year to Q3 of this year and then going into Q4, you'll have that same kind of decline.

But outside of that the other parts of the organic growth or so forth, we had about $3 million from existing customers or new customers growth and then that was offset by the FX of $1. One that we talked about the $1 billion that we lost in noncore customers and then about $1 million or so from the LTE pricing.

<unk> year over here and then on top of that with the BNP, 6%.

Paul if I could just quickly follow up on the on the <unk> front. It looks like <unk> might have been down a little bit sequentially not a huge number but is that mostly the forex impact yeah. Yes, yes. It is the $1.1 million you add that back in when we were pretty much flat ish.

And then if I could as a follow up going forward looking at the T. C V funnel I'm wondering if you could provide some more color on and by the way. We appreciate that that level of detail, but in the 72 million I'm kind of wondering what the win rate has been there and looking at that $407 million funnel whats the composition and.

Or how should we think about our foods are these going to be upwardly skewed. Our booth is it skewed towards any particular end markets and I'm wondering how ericsson in the Iot accelerator program fits into the I know its very early stages. So I'm, assuming there's probably not a lot in there, but just wanted to clarify that if that's going to represent some further upside. Thanks.

Yeah, Let me I'm.

Sorry, I hit off the the TCP and funnel and look we took our time, putting this out here out there for sort of public markets, because I really wanted to get a year or so under our belt of AR.

Of a much more disciplined and conservative metric on total contract value than we had in the past.

This beta site stage that you guys are seeing there on slide 10 of your I think that's why it is still up on the presentation screen.

It's actually a brand new stage that we only implemented this year because we've found a lot of wins werent turning into revenue because customers were off doing beta kinds of things and so now we don't really call. It a closed one deal.

Until we get production orders flowing in and revenue flowing.

Before you know before this year, we used to have.

The contract sign stage was basically closed one right.

So we've taken pains to be.

More disciplined more conservative.

As I said, a little bit you know just and in my prepared remarks.

We cut off connectivity sort of roughly 40 months, we cut off even programmatic solutions deals that may be much longer than that at 36 months, meaning careers. Because three years is a lifetime right and you don't really want to count bookings beyond that in artificially inflated.

So so what's the key message here that I guess I have two or three key messages got.

The first is you know this same snapshot third quarter last year.

Was 1200 ish opportunities and $2 88 odd T C V right.

So.

If something is working I mean, I can give you statistics out the wazoo in terms of MQ hours and SQL. So I don't think that would help much but net net at the end of the day.

Now even if we don't increase our sales force dramatically we stay at the current levels.

And deal with sort of 200, 1300 1400 opportunities at a time, which is about what you can deal with or without a capacity what I'd like to see of course is that continued trajectory up from like I say close to $300 million in PCB potential right potential estimated PCB last year to four one.

Hundred this year I'd like to see that get the 500 I'd like to see that get to $1 billion because that would mean, we're doing the right things, where we're targeting the larger customers. The larger Iot deployments. So that's sort of one angle to look at the.

The other angle to look at.

It's really this should give us a lot of confidence about our numbers I mean, this basically points to the resilience of our business model right because.

No.

Recurring revenue right out about 85%.

This business.

You could take whatever number you are going to take this year. We just increased guidance. If you took the midpoint range to 66, you can multiply that by 85% 85, right you've got a number right callout to $25 million to $26 million right.

We consistently see at least a 10% kind of growth on existing number on top of that alright. So this existing customer base based on prior T. C V deals run rate growth our customers growing we should we should put that on the top line right of this of this T. C V. The 72 million that you have.

Seeing and by the way, we should multiply that by four and divide by three right. I mean, just to get the full year number that'll be closer to 100 million Bucks.

And so you know about 15% of that roughly half of that burns in the year that you get at because a lot of the solution stuff is front end loaded a lot of the kind of do the stuff is backend loaded, but roughly 15% of that we always see burns of next year right. So you can add that number in and then you got next year's D. C V and if I do know better than this year's hundred.

Right I'll get 50% of that burning next year and that's that's how you'll see a very very clear walk to.

Our significant revenue growth number and then you said.

Okay.

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Now rejoining the speakers.

Sure.

Hello can you hear US now, yes, we can and you're still on with Scott Searle from Roth capital sorry about.

You're.

You stuck around you just said.

Boy I'm always tells me Scott that I, just talked to myself a lot that I was actually doing it even broader than that.

So I think I lost you somewhere around where I was trying to talk about why we should feel good about the TCE because it provides this clear.

Line of sight to to sort of grow right and.

Really if you if you take sort of our 85% recurring revenue number right is really high quality recurring revenue business. We have right. Whatever your number ends up being I was I was just going off of $2 66 at the middle of the new guidance range. That's roughly 226 right. There on just recurring revenue.

Even in this environment of I'll say.

Sort of.

Supply chain constraints and potentially other macro factors.

We're confident we'll get a growth on existing number in the 10% range or more you know we in normal times, you used to get significantly more than that almost to ex that.

For several years and so you.

You put it you put another 10% on that number up there.

From this T. C V number. This is 72 through three quarters right. If I just prorated that for the fourth quarter that'd be like 96 called out 100.

About half of that Burns in the first year about 15% to 20% in the in the second year. So you should get 15% to 20% of that next year. If we did no better than 100 million in PCB next year, right, which again, we'd like to think we'll keep getting better but if you didn't know better about half of that will burn again next year and so you actually add those numbers up and you get to a signal.

And growth.

Clear growth number. So then you say well why are you only guiding to mid to high single digits well because we've got you know this last year. These last two sort of headwinds right. The $12 million of revenue we got from <unk>. This year that won't show up again next year.

And then you know our number one customer was which the big LTE one time project that finished in Q2.

<unk> was right at about $12 million as well. So you still have to subtract that 'twenty four 'twenty five from all of those growth numbers that I talked about next year and that's why we're being sort of conservative in saying mid to high single digits. Now you take that same equation and take that forward into 2024 and again, if I do know that it was just the.

101 in D C V.

The beauty is there's none of that 24 $25 million, one time, a whole happening right or that hole that we're digging in 2024 and so the entire sort of you know.

$100 million or so of topline growth.

Comes it comes home to roost in 'twenty, four and Thats, what gives us confidence when we say we think we can double.

The growth rate from 23 to 24, so anyway. So that's kind of how we should look at T. C V. If thats helpful.

That's very helpful I'll get back in the queue. Thanks.

Okay.

Thank you. Your next question today is coming from Matt <unk> from Deutsche Bank. Your line is now live.

Hey, guys. Thank you for taking the questions just two if I could first on EBITDA margin. So we've seen that stayed relatively stable at about 23% a couple of last couple of quarters.

Despite some of the lift you've seen in gross margins and I'm just wondering relative to the.

Revenue outlook, you've given her initial revenue outlook for 'twenty three how are you thinking about the path for margins into next year as you see some organic revenue pick up.

And then maybe somewhat related to that on leverage I'm. Just wondering maybe for Paul is the dynamic of rising rates and your mix of floating rate that changed the way you're thinking about target leverage for the business. Thanks.

Yeah. So I'll take the first one so the leverage we had originally talked about a four to four and a half over the next 12 months to 24 months and obviously with.

Interest rates going up and interest expense hitting in probably 10 million next quarter.

We will definitely we're going to continue to work towards that but it would be probably more closer to the four and a half.

Range, then for again, depending on what interest rates do over the next couple of years and again a lot of that will be based on just the EBIT growth.

Of the company over into 'twenty three 'twenty four.

On the on the margin side of things, we do we do expect our gross margins to stay kind of where they are right now from a connectivity perspective, 65% Iot solutions will hopefully continue to grow into next year. So we're at 30 and continue to go up a little bit from there. So we.

We are getting more gross margin dollars, but from a.

Opex perspective, because of what we talked about the increase in cost. So those will continue obviously into next year and we're going to invest more on the sales side of things on the business.

So we're thinking 2020, low 20% range on the EBITDA margin, but again.

And again some of that is some of that is strategic choices right.

We've talked about in at least where my head is.

It is building a kind of a rule of 40 business with a 20% adjusted EBITDA margin and 20% topline growth right now if we're happy with single digits growth or low double digit growth you know, we don't need to invest as much in 'twenty three 'twenty four but so I think those those decisions we will.

But if if we.

Choose to reduce EBITDA margins from the 23, 24% range this year it'll be because we.

We are comfortable.

Getting down to 20%, but making sure that by 2025.

Target of 20% growth was.

Is achievable.

That's great. Thank you both.

Okay.

Next question today is coming from meta Marshall from Morgan Stanley . Your line is now live.

Great. Thanks.

And then kind of the core existing business really doesn't see as much impact from macro, but just whether you're seeing any macro.

Impact to just kind of the new business pipeline.

And then maybe a second.

You just kind of touched on it in areas that you wanted to invest and then clearly there's a lot of opportunity ahead for this business.

You are so you mean like managing to kind of trying to optimize cash flow you do have.

And inflationary impacts to Opex. So just are there areas, where you're like what are the key areas, where you're not able to invest today that you would like to thanks.

Yeah. Thanks, Matt.

Yeah look I mean, I think you know.

In any given year, one obviously tries to manage too right the budgets and the expectations and all that sort of stopped right and so yeah. So we've invested as sort of as much as we could we were curtailed by the by frankly by the.

Yeah, just just incremental costs both of being a public company. Some of the investments you have to make into.

Finance accounting and to make sure you know things are moving well with.

With our Sox program that sort of thing hopefully that sort of where it needs to be now and we can get back to sort of investing in sales as Paul just said.

So so I think that'll sort itself rectify over the next year in terms of the macro and its impact, especially on new opportunities.

I was actually reasonably certain made up that you would ask me how many of those wins and how much of that D. C. V was from new customers, but I'll I'll go ahead and answer the question in any way look at.

It turns out that there's actually quite a lot of opportunities in that number that you're at 840 odd opportunities, which tells you again, but there's a long tail of very small teasing the type of opportunities that we win.

But interestingly right we have.

A little over 200, new customers in fact, 240, new customers our new App.

New opportunities one out of the 840 that are new customers right and they won't be massive revenue certainly next year, but it just right. It's it it's I think another forward indicator of growth in the future I would I.

I would say that our new customer logo acquisition is actually up this year.

Third the prior years and there's almost every statistic along the way from marketing qualified leads down.

So that's you know that sort of answers at one level. The question about is the macro affecting you, but if you really step back from all of this.

One of the reasons, we were already a fleet telematics company and so we weren't going to really change that that was my largest industries on Iraq.

But one of the big reasons, we focused on connected household.

You know probably the strongest supporter of health.

Industry focus at core.

Is because we're picking resilient and high growth type use cases in areas in industries, where we.

We were fairly certain that we're just right.

I'll argue unless somebody shows would be something.

Oh, it will become 30%, 40% of the GDP and just keep going right and so so you know so we've picked areas of focus use cases of focus that will stay resilient you can't you can't really switch on and off your pacemaker monitoring or your diabetes continuous glucose monitoring device because the economy.

It's down.

There will certainly be some impact.

Sticking our heads in the ground in saying there won't be a recession I will tell you our uniquely you that.

My personal view today anyway of the recession is more skewed towards Morgan Stanley 's music. Your view that you guys published today actually that it'll be a shallow if at all a recession at least in North America I'm not this isn't going to be the seventies again, right I think innovation the innovation agenda in the United States, especially is alive and well.

That innovation all comes with technology, and Tech enablement, and Iot enablement, and that's where we play right and I will tell you that for every enterprise customer.

That is maybe looking at something that theyre doing as a.

Discretionary spend item that that they may want to slow down I've got three conversations going on with senior people at these at these customers saying.

We've got to implement better automation better productivity enhancement tools, Iot tools or motorized manufacturing tools labor is going to continue to be hard to find and these enterprises have to get better at deploying technology to help and.

I think people sometimes underway.

The opportunity for Iot to help drive efficiencies and automation and productivity. So we're relatively sort of.

Confident in.

And hitting the things were saying, where you know we can do you know mid to high single digits next year try to double that the following year et cetera.

And of course, if the macro changes dramatically it will have a different conversation, but we're saying everything we're saying in a measured way based on what we're seeing.

Great. Thank you thank.

Thank you. Thank you.

The next question is coming from Walter Pritchard from my Chair Nobody got life.

Thanks.

From all the <unk> gave you.

You made some commentary I guess about the PCB.

From a year ago, I think you said something like $2 80 to 1200 opportunities what was.

The total closed one a year ago.

The total closed one a year ago was actually slightly larger than the total closed this year, but it's just not apples to apples comparison, if you heard what I said about the.

Entire new stage, we created at the beta site stage right that that completely changes the picture because.

What we were seeing in the business over the first couple of three years of our sales force discipline was.

The expected burn or revenue recognition against T. C V was not showing up.

And so we've tightened that definition up at the front end of this year. So it's not a good comparison I don't know what you mean by about the expected burn of GCB, what does that even mean.

So revenue recognition against D. C. D. C V is a total contract value number that burns over a period of time.

Okay. So what does that mean that the larger number from last year included what you are now considering in beta site stage.

That is core or is it just a larger number of period.

Last year's number was really the contract signed stage was closed one.

Is how you should think about it.

Right. So a larger last year than this year. So why is that.

Right.

So let me try again.

So if I counted by contract signed stage, which used to be the close days last year.

Right, if I kind of at that stage the beta side stays in my close one say this era of them bigger.

It's just not an apples to apples comparison on the closed one right. So you are saying the last year's number what youre, what youre climbing as larger was including what in this chart is showing in our beta site stage, which is in the $407 million and the contracts on stage.

Okay. So what is the apples to apples that on the on the closed ones. If you eliminated that from last year's number.

It's impossible, it's impossible to tell I mean.

When a contract that time by a customer we would say that's DCP and.

And we just call it closed.

Right Okay.

Earlier also you mentioned something about.

After talking about how.

The guidance was increased for revenue, but it wasn't inquiry for EBITDA because of.

Labor cost et cetera, et cetera, but then you said our customers connect our customers cannot do what they do.

Without or without or services.

So I think if that's the case when I look at other companies in connectivity with recurring revenue type of businesses they've increased price.

If your customers. If this is such an important central service to your customers.

When you enter 2023 have you considered perhaps.

Perhaps increasing price so that when you have upside in revenue you also get upside in profitability.

Yeah, it's definitely something we're.

Considering I will tell you that.

You know.

I'm not a big fan of these actions that have been taken by certain of our I'll say peer group loosely because they tend to be relatively short lived increases in nature of the temporary poke your customer in the eye in nature.

And human beings and companies have very long memories.

So we if we go there we will go there very cautiously and where it makes sense and we will go there in certain areas, where we can defensibly take the customer a story of increased labor costs or increased.

Hardware costs et cetera, which we of course do today pass that along right. It's not that we're just eating the the differences in those costs. So it's certainly an area that we will look at the numbers suggest that though because your revenue goes up by $2 million on the guidance right and your EBITDA doesn't then effectively you are eating those incremental costs now.

No no we're not because.

Look at the reasons for our Opex increase it's got far more to do with.

What it's cost us to retain our employees, what it's costing us to attract employees.

Who are leaving the company, it's got far more to do with that and certain other items, which if you'd like to talk in detail and in a lot more detail, but it is not because eating the extra.

Procurement cost if you will or a hardware cost of a device that would pass them onto our customer well.

The extra 2 million increased guidance. The majority of that is coming from Iot solutions, which is at that lower margin of the 30 or whatever percent yes.

It's getting zero.

Incremental zero margin right, if revenue goes up and EBITDA doesn't incremental margin is zero debt.

No so that lower that's literally zero, that's just math.

No.

Increase the $2 million increased 30% that would be 600000.

That 600000.

So margin is offset by an increase of 300000 in opex or whatever that is.

And we're still within the range I am not going to increase guidance for $300000.

Okay.

And just last question I guess, you mentioned in the trough.

Quarter, and Q4 are you referring to the.

The growth rate.

That you believe that the trajectory of the business, that's closed and obviously new business.

The year over year organic growth rates.

Should improve each quarter.

Throughout 2023, and obviously getting to your mid to high single digit guidance for the year.

Well I mean, if you.

The the literal quote of drawing from the trough of the fourth quarter is merely saying that obviously first of all just looking at looking at year to date first nine months of our revenue versus the guidance. You know that Q4 is going to be down. So that's the first point is that is the trough quarter, we'd expect that to.

The the low quarter.

The last few quarters and certainly the next few quarters and that we will grow from here right. So Q1 will grow sequentially.

I'm just wondering are you talking of a trough in terms of absolute number meaning the number obviously is going to be down.

Relative to the or the growth rate now.

The absolute number is all we're talking about yet.

Okay.

Because theoretically you could have the number could be up empirically in Q1 and that doesn't reflect that obviously could reflect organically lower growth in Q1 and Q4 right.

Because your comment right there youre right about that and you.

Uh huh.

It is absolute number of Q4 in absolute numbers going forward from there I'm not making any proclamations around Q1 'twenty three.

Being up even potentially on Q1 'twenty to remember Q1, 'twenty two we still had our number one customers large LTE trying different projects right. So yeah and it had been.

Q3, do you still live.

Yeah.

So and then just my I guess my final like 10000 foot question, which as you know earlier. Thank you in response to.

Someone's question I forget who it was.

Talking about the balance of investing and you can do lower growth higher growth.

With the stock where it is what do you think investors want to see in terms of that balance.

Is it something that you need to.

Address or does it just like look.

This is what I believe our strategy should be and when the numbers show up and we see this EBITDA grow then.

I guess as I say build it they will come or have you actually.

Had some interaction with investors understand maybe they want more profit and cutting cost even at the expense of potentially giving up some revenue.

So so first of all I listen all the time and try to listen well I ask almost every investor I ever talk to.

I don't know if that would talk to sort of you know what.

What do you guys think the the.

In 2020 answer has always met has always been met with sort of Universal Hey, if you're confident you can get there you should try to go get there right I mean, I remember as a private equity company.

With very very high I mean, 10, five turns of debt effectively.

We sort of have to have very high margins. So we were closer to 30% of adjusted EBITDA margins you have to drive for that cash flow to pay that debt load et cetera et cetera.

So the growth rates were what they were right and so we think thats the right direction to go now.

That there's there's there's a debate to be had yet.

Just to be set yet and all of that sort of stuff. So stopping short of saying, absolutely that's where we're going that's all.

Got it thank you.

Thank you.

Thank you. Your next question is coming from Lance Vitanza from Cowen Your line is not a lot.

Thanks, guys.

I wanted to see if we could talk a little bit more about the Ericsson Alliance clearly good news from the standpoint of new customer growth, but could you explain a little bit more mechanically how this works and specifically what's in it for Ericsson do they are you paying them like a percentage of revenues, they're making introductions I suppose and did they get a bounty or percent of revenue.

<unk>.

Maybe we could just start there.

Yeah.

Hey, last and that's good that's a good question and actually had a pretty good way to think about.

About sort of you know what sort of Ericsson gets.

I mean in general it isn't just about the revenue quote unquote.

Get from Us and think of it as a Rev share of some form.

It's it's really for them also.

Yeah important to their overall right in to the overall growth of the other channel partners and to their enterprise customers I mean.

Let's get down to the fundamental mechanics so.

Yeah, Ericsson's Iot acceleration platform is that the connectivity management platform, which carriers Domino's will lease for three year five year type contract terms.

To run their Iot businesses right. So you got a carrier in Singapore or are you going to carrier somewhere in eastern Europe .

There are 35, plus carriers are predominantly actually mostly all in the sort of Europe , and Asia, which is actually one of the things that attracts us to them and to their ecosystem.

So a local enterprise in Singapore or named the country of your choice or a solution provider was launching a new solution and whatever in vehicle video telematics and fleet management.

And are you now.

Uses that local carrier for that local sort of startup business I'd say what are the initial deployment of their solution. If it's a larger enterprise.

Not wants to start to spread globally.

The problem again, the problem that we saw a chord with our with or without a multi multi multi offer and connectivity as well.

Boy you have to go to another country and get another carrier and use their carriers platform and then the third country in our fourth convinced pretty soon you have.

Many platforms again of course all of that so one answer for that customer in Singapore is to say Oh This core company exists and.

Unfortunately, my brand doesn't quite.

It isn't quite that strong globally, where where where these 8500 enterprise customers that are on the 35, plus <unk> platforms that use Iot accelerator is the Iot are calling core right.

So for them. The ideal answer actually is can I use my Ericsson Iot or sort of thoughts on that I have and just you guys do something in the back and then connect me into these countries I need to be in and that then was what Ericsson Thats right Ericson brings and there are other carrier partners from these other countries, where you wanted to deploy.

So this the Singapore customer can now deploy so now let's talk about the United States right.

That Singapore customer wants to deploy in the United States most of the World wants most enterprise companies in the world want to be part of this market right.

They literally had no choice today, they had no Iot accelerator platform implementation in the United States for them to be able to use that connection to bring their I'll call. It inbound traffic to the U S.

And deployed here.

So.

That's why you know Ericsson reached for us they know our multi multi offer then all we work with all three of the major carriers here.

You know they know that we can.

Simplify a lot of the complexities for deployment and add even further value to these customers and so that's that's the makings of the deal My labs I got to tell you I mean, it in the five to 10 years, a decade of Iot as I often call. It this will be I think a very important play in a very.

Exciting indirect channel for growth for us right.

In the next 12 months 18 months.

And it won't be a meaningful amount of revenue right. Because these customers have to come individually they may come to Ericsson.

Well a little bit on the hopefully we'll wind up in a handful in the first half of next year, we'll learn a lot through that hopefully I wouldnt rates will keep going up from there and it'll get to build a head of momentum, but I mean, I Gotta CFO sitting next to me not counting lots of lots of lots of millions of revenues.

For next year anyway.

I understood and I appreciate the incremental color. Thanks, Robert Congrats on the quarter. Thanks, Matt Thanks, Matt.

Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.

Okay, Thanks, very much and apologies again.

No idea what happened to our line there Ah I appreciate you guys hanging onto that and taking the time in general to listen to our earnings call. We look forward to updating you on our fourth quarter and year end results in March 2023.

Thank you very much bye bye.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.