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Edited Transcript of KLR.A earnings conference call or presentation 16-Feb-21 1:00pm GMT

·41 min read

Q4 2020 Kaleyra Inc Earnings Call Feb 16, 2021 (Thomson StreetEvents) -- Edited Transcript of Kaleyra Inc earnings conference call or presentation Tuesday, February 16, 2021 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dario Calogero Kaleyra, Inc. - CEO, President & Director * Giacomo Dall’Aglio Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer ================================================================================ Conference Call Participants ================================================================================ * Allen Robert Klee Maxim Group, LLC - MD & Senior Equity Research Analyst * George Frederick Sutton Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst * Jeff Feinberg * Jeffrey M. K. Bernstein Cowen Inc. - VP * Lance William Vitanza Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst * Michael James Latimore Northland Capital Markets, Research Division - MD & Senior Research Analyst * Patrick D. Walravens JMP Securities LLC - MD, Director of Technology Research & Senior Research Analyst * Thomas Anthony Maloney Needham & Company, LLC, Research Division - MD & Director of Equity Research * Timothy Kelly Horan Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Marc P. Griffin ICR, LLC - SVP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Kaleyra, Inc. Fourth Quarter and Full Year 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Marc Griffin, Investor Relations for Kaleyra, Inc. Thank you. You may begin. -------------------------------------------------------------------------------- Marc P. Griffin, ICR, LLC - SVP [2] -------------------------------------------------------------------------------- Thank you. Good morning, and welcome to Kaleyra's Fourth Quarter and Full Year 2020 Conference Call. Kaleyra released unaudited results for its fourth quarter and full year ended December 31, 2020, earlier this morning. The press release as well as a replay of today's call can be found on the Investors section of the company's website at investors.kaleyra.com. Joining us for today's call from management is the Founder and Chief Executive Officer, Dario Calogero; and the company's Chief Financial Officer, Giacomo Dall’Aglio. Management is doing this call from different locations today, so please bear with us as we transition between speakers and address your questions. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's annual report on Form 10-K for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Kaleyra cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law. Throughout today's press release and our call today, we will refer to adjusted EBITDA. This metric is not determined in accordance with generally accepted accounting principles and therefore is susceptible to a variety -- varying calculations. A definition, calculation and reconciliation to the financial statements of adjusted EBITDA can be found in the tables included in our press release. We believe this non-GAAP measure of Kaleyra's financial results provides useful information regarding certain financial and business trends and results of operations. With that, let me turn the call over to Dario. Please go ahead. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Marc, and thank you to everyone joining us on the call today. As you are all aware, the effects of the global pandemic continues to unfold and why we believe we are most likely through the worst of it. The residual effects on the global economy are still present. We continued to see a modest recovery in Italy, while our other largest market, India, reported solid growth. And the United States of America led the way with growth, which was over 100% from last year. Digital transformation is driving change at organizations around the world, and the pandemic has only accelerated those plans. Now our interactions with enterprise customers, their own customers are demanding enhanced digital relationships through a variety of new channels, like video, chatbot and interactive voice response, or IVR. We are well equipped to handle this additional demand and our full range of CPaaS tools will allow to capitalize on these opportunities and provide solutions to any communication platform challenges our customers might face during these times. In addition, the scale and scope of our trusted CPaaS platform and our reputation as a global provider of communication tools is resonating with large multinational corporations, and we are starting to see traction outside of our core markets. By leveraging our positioning as the most trusted CPaaS provider for banking and financial services in Europe and India, we are now making significant inroad in the United States, where we see strong demand for our industry-leading API protocols. This strategy is now starting to pay off, as our United States business saw 100% increase in 2020 and believe we have a number of greenfield opportunities with additional Fortune 500 companies in the region. Now moving on to some financial highlights. We reported record quarterly revenues in Q4 with $44.3 million, beating the high end of our guidance of $42.5 million. Most importantly, Q4 revenues was up 16% from Q3 and 24% from the same period last year, demonstrating continued momentum in the recovery. For the full year 2020, revenue increased 14% from full year 2019 to $147.4 million. The main drivers in the quarter was our e-commerce customers in India and the continued renting of a large U.S.-based enterprise customers. Other enterprise customers added to the momentum with an increasing number of digital payments and transactions, which grow messages up 16% sequentially and 18% on a year-over-year basis. On the voice side, calls were up 27% from Q3 and 100% year-over-year. For the full year, we delivered nearly 26 billion billable SMS messages and 4 billion voice calls on behalf of Kaleyra's customers. Now I would like to touch on some of our key initiatives in the quarter. Early last year, we launched k-lab as a center of excellence dedicated to supporting Kaleyra in developing new solutions to enhance the customer experience for financial services companies in the U.S. market. Our goal was to leverage our expertise in solution development, digital innovation and go-to-market strategies for the financial sector to build more impactful mobile customer experience solution for both new and existing clients. We are very excited to see that this initiative beginning to bear fruits. And we announced the signing of our first k-lab agreement in the fourth quarter. The first agreement involved the deployment of a proprietary application to person solution for Mastercard banking customers in Latin America and the Caribbean. The second agreement is with one of the top 5 U.S. banks helping them to design digital onboarding processes and systems. We are thrilled with the current pipeline for this new initiative and believe our bespoke solution for the financial services sector will quickly build sustainable momentum. We also announced the strategic partnership with WebEngage, India's leading marketing automation and customer data platform for business-to-consumer businesses. WebEngage will use Kaleyra's platform in a state-of-the-art communication channel infrastructure to engage customers and provide an omnichannel brand experience to consumers across the globe. Enhanced customer engagement is becoming increasingly crucial to the time. And Kaleyra's addition to the WebEngage service will empower brands to foster a personal connection with their consumers. In October 2020, the breadth our platform and our global reach was highlighted when Kaleyra was listed as a representative vendor in Gartner's all-encompassing market guide for communication platform as a service. By their estimation, by 2023, 90% of global enterprises will leverage API-enabled CPaaS offering as a strategic IT skill set to enhance their digital competitiveness, up from only 20% in 2020. Our wide range of developer tools help customers get the most of our expansive platform, particularly our visual builder, which is crucial for workers without coding skills to access the full range of the CPaaS tool set. Finally, Kaleyra won gold in the 2021 Juniper Research Future Digital Award for Telco Innovation in the category of Best RCS Provider, highlighting the strength of our platform. Kaleyra has dedicated the best amount of time and expertise to the advancement of RCS, and we couldn't be more honored to be recognized on a global level for our efforts. In summary, we believe that Kaleyra is well positioned to execute on our initiatives with our broad portfolio of products, global reach and unbelievable worldwide team. We continue to build traction globally with solid growth in India and the United States, which we see as key markets going forward for Kaleyra. Let me now throw the call over to Kaleyra's Chief Financial Officer, Giacomo Dall’Aglio, who will review our financials in more detail. Giacomo, please go ahead. -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Thanks, Dario. For the fourth quarter ended December 31, 2020, we reported total revenue of $44.3 million, beating the guidance disclosed in the previous quarter. Q4 revenue was up 16% from Q3, which demonstrated the continued strength of the recovery and was also up 24% year-over-year, highlighting a return to pre-COVID growth levels. For the full year 2020, revenue increased 14% to $147.4 million. The main drivers in the quarter was our e-commerce customers in India and the continued ramping of a large U.S.-based enterprise customer. Our geographical mix shift continues to move away from Italy with India growing 39% year-over-year to 27% of our revenue and the U.S. growing over 100% to 16% of revenues. In the quarter, we processed 7.1 billion messages, up 8% from the prior year and up 13% on sequential basis. We connected 1.4 billion voice calls in the quarter, up 100% year-over-year and 27% from Q3. For the full year, we delivered nearly 26 billion billable messages and 4 billion voice calls on behalf of Kaleyra's customers. Gross margin was 18% in the fourth quarter of 2020, down approximately 2 points from Q3 20% and down approximately 5 points from 23% we reported in the fourth quarter of 2019. Decline in volume in the first half of the year caused by COVID created a negative residual effect on margin in the fourth quarter. Q3 gross margin increased following the effect of the renegotiation of agreement in premium services. We compared the first half of 2020, the main drivers of gross margin expansion were reopening of economies, which led to an increase in higher-margin premium service and voice calls. Operating expenses were $12.5 million in Q4 2020 compared with $9.8 million in Q4 2019. These operating expenses include $4 million in stock-based compensation, $1.4 million of transaction and one-off cost and $1.5 million pertaining to the public company compliance, which we did not have in Q4 2019. Excluding this cost, operating expenses would have increased by $2.4 million compared with adjusted operating expenses of $3.1 million in the fourth quarter 2019, mainly driven by significant increase in human capital. Loss from operation was $4.7 million for the fourth quarter of 2020 and includes $4 million of stock-based compensation, $1.4 million of transactional and one-off cost and $1.5 million of public company cost, as I just mentioned. This compared with loss from operating of $1.8 million in the fourth quarter of 2019. Net loss was $4.5 million or $0.15 per share for the fourth quarter of 2020, a 15% improvement when compared to Q3 net loss of $5.3 million. The quarter's net loss can be compared to the net loss of $3.6 million or $0.25 per share for the fourth quarter of 2019. Adjusted EBITDA comparable with the previous year was $3.1 million in the fourth quarter of 2020 and include approximately $1.5 million of costs incurred as a public company that were not recognized in the fourth quarter of 2019. Without adjusting for those costs, adjusted EBITDA would have been $1.6 million and compared to $5.6 million on the fourth quarter of 2019. The decline in adjusted EBITDA is attributed to the increase in the headcount mainly in the engineering talent that has been hired to execute on emerging growth opportunities to develop and deliver new products and services. For the full year 2020, gross margin were 17%, down approximately 3.75 points from 2019. Net loss was $26.8 million or $1.09 per share compared to the net loss of $5.5 million or $0.48 in 2019. Adjusted EBITDA comparable with the previous year was $7.5 million compared to $11.1 million and includes approximately $4.3 million, of course, incurred as a public company that we were not recognized in 2019. Without adjusting for those costs, adjusted EBITDA would have been $3.2 million and compared to $11.1 million in 2019. Cash used in operating activities was $11.5 million in the year 2020, mainly due to working capital changes compared with the cash provided of $6.4 million in the prior year. Cash and cash equivalents were $33 million as of December 31, 2020. This cash position is after paying mainly through restricted cash of $20.9 million. The remaining obligation under the forward share purchase agreement and compared with $37 million cash, cash equivalent and restricted cash of December 31, 2019. Now I'd like to expand our focus regarding our financial outlook. We are issuing annual revenue guidance in the range of $183 million to $185 million, up approximately 25% in the midpoint of the range. For Q1, total revenue is expected to be in the range of $40.5 million to $41.5 million, up approximately 22% in the midpoint of the range. Thank you for taking the time to join us on our call today. And with that, we would happy to receive your questions now. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Tim Horan with Oppenheimer & Company. -------------------------------------------------------------------------------- Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2] -------------------------------------------------------------------------------- A few, if I might. Could you talk a little bit about non-SMS revenue, voice, video, chatbot -- sorry, IVR, these other products, roughly what percentage of revenue are they now? Maybe what the growth rate is? And how do the margins kind of compare to more legacy SMS services? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Tim. This is Dario answering. Well, the exact percentage of the non-SMS revenues, it's a figure that I could ask Giacomo to provide. We have seen an expansion in that product line, so it should be about 10% in 2020 on a full year basis. With an increasing voice, especially in India, where voice is taking -- getting momentum. Also WhatsApp business is going pretty well, video is still at the very, very early stage. So let me say, very promising going forward, but not really providing significant revenues in 2020. And in general, we pursue the expansion of new channels because all of them come with a higher gross margin. On voice, it's over 45%, for example. Giacomo, do you have the figure of the overall non-SMS revenues that we have at hand? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Yes, it is a little less, 10% of the overall revenues. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- On a full year basis. Yes, it's increasing over time, quarter-by-quarter. -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [6] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [7] -------------------------------------------------------------------------------- And -- yes, what's that growing -- roughly that growth rate versus SMS in revenue? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [8] -------------------------------------------------------------------------------- So for voice, the growth is 27% on Q3 and 100% year-over-year. And voice is the most significant piece of this kind of revenue. -------------------------------------------------------------------------------- Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [9] -------------------------------------------------------------------------------- Great. And in the quarter, what percentage of revenue do you think was cyclical due to the holiday season and e-commerce? And I know your mix is very different. I'm not sure if India has the same type of cyclicality as the United States for the fourth quarter. But yes, do you have a rough idea what percentage was more out of trend in the quarter? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- If I got the question right, the increase of the fourth quarter is the highest seasonality quarter in general in the U.S., in Italy and also in India, due to multiple reasons, but the most relevant one is because it's an holiday season where in India you have Diwali and in Italy and in the U.S., you have Christmas, which is the period where people is making a lot of gift and presents. And this is leading to more traffic in terms of platform. In terms of seasonality, in general, Q4 is the highest volume quarter in the year and Q1 is a little less than Q4. That's the typical pattern that we observed over the last few years. Said that, 2020 has been a little bit different from the other years because of the pandemic and because the very substantial increase of digital transaction, e-commerce on delivery, electronic payments and a relatively lower volume of card present transaction in Italy, for instance, at the retail shops because people have been more using online channel to reduce the exposure to the pandemic. -------------------------------------------------------------------------------- Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [11] -------------------------------------------------------------------------------- And then lastly, any update on Campaign Registry? Is it being kind of implemented at this point? And when do you think it will be fully implemented? And maybe a rough idea of what -- how large of a contract or how meaningful can this be? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [12] -------------------------------------------------------------------------------- Well, we start seeing the volume of Campaign service provider registering. If you want to check on campaignregistry.com, which is our website, we published the names of the carriers and the names of the campaign service provider, which has been onboarded. This is a moving target, which is changing on a daily basis. The major operators are expected to enter into the commercial phase of the service as of March 1, 2021, next month. And after having observed what's going to be the volume of the registration and the campaign and the traffic, let me say, in second quarter, then we will be in the position to make a best guess about what does it worth in terms of revenues and volume, but sounds to be very, very promising, frankly speaking. And also this is an high growth and an high gross margin segment. So this will be very, very, let me say, it will provide an expansion to the gross margin of Kaleyra as a whole. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from the line of Mike Latimore with Northland Capital Markets. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [14] -------------------------------------------------------------------------------- Congratulations on the strong rebound to the year there. I guess, Giacomo, on the -- your comments about gross margin, how volumes in the first half of the year affected fourth quarter gross margin? Just -- can you just elaborate on that a little bit? And then how do you think about that dynamic playing out in 2021? And what kind of visibility do you have to gross margin in 2021 here? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [15] -------------------------------------------------------------------------------- Yes. So let me say, there are some agreements that are on a cumulative basis on the year related to the cost of messaging. And with some targets and because the Q2 decline on revenues and volumes, we are not able to reach some targets. So this taken effect -- a residual effect, as I said, on Q4. So Q4 is not so high as we expected in a normal situation compared to the other quarter. But starting from Jan, we see a recovery, and we can project for the next year a recovery in the gross margin, let me say, as we were before the pandemic. In 2019, the gross margin was 20%, and we can project something like that for this year. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [16] -------------------------------------------------------------------------------- Let me add -- hi, Mike, this is Dario. Let me add only Q1 comment on this. Most of the contract with the mobile network operators have a kind of a volume discount scheme, which is progressive. So due to the lower-than-expected volume in Q2, we basically didn't reach the threshold in Q4 that we were expecting normally because we had this slowdown in Q2. So that's the mechanism basically. So the anomaly is still Q2. -------------------------------------------------------------------------------- Thomas Anthony Maloney, Needham & Company, LLC, Research Division - MD & Director of Equity Research [17] -------------------------------------------------------------------------------- Yes. Okay. Got it. Great. And then Dario, you talked about the pipeline for k-lab looking pretty solid. Can you elaborate on that a little bit more? What are the use cases? And also, does the pipeline involve sort of greenfield opportunities? Or are you looking at replacement? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- No. I believe that it's more a greenfield opportunity rather than a replacement. In the U.S. domestic market, the banks have been using messaging only for KYC, strong customer authentication and some, let me say, marketing and engagement. We don't see very sophisticated use cases like we have seen answering (inaudible). And in Latin America, where we are working closely with [Mexico] now with the issuers, the use cases are very much related to the prepaid plastic card because the Latin American and Caribbean market, it's significantly higher than the U.S. in terms of prepaid because of the credit scoring of the typical Latin American citizen is lower. And on those specific plastic cards, use cases are typically like transaction denial because you run out of credit. So we notify the cardholder to top-up the card ahead to the typical monthly transaction for subscriptions like Netflix or Amazon Prime, these kind of things. Also, dispute management seems to be very promising. And the way we handle this as co-creator, we sit alongside with -- we sit with them -- the issuers to analyze their data and to decide where they should focus on the design of new services to improve the overall performances, more card holders, more transactions per card holder, less transaction denial and less dispute. That's the whole idea. And this is very interesting and very promising in the future. It's a process. So it takes some time to get into volume. But once it's full fledge and full throttle, it becomes very relevant. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question comes from the line of Lance Vitanza with Cowen and Company. -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [20] -------------------------------------------------------------------------------- Congratulations on the strong quarter. I wanted to start, I just have a couple of housekeeping questions first. The 7.1 billion messages in Q4, that was up 13%. Was that up 13% from the fourth quarter of '19 or the third quarter of '20? I assume it was the fourth quarter of '19. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [21] -------------------------------------------------------------------------------- Giacomo? -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [22] -------------------------------------------------------------------------------- In the press release, you said there was a 13% increase from the previous period. I want -- just want to make sure that I know what period that is. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [23] -------------------------------------------------------------------------------- It's sequential, I believe. -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [24] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [25] -------------------------------------------------------------------------------- So 13% -- so it's over Q3 of 2020. And then -- okay, so then likewise, the 1.4 billion voice calls that was -- that doubled from 3Q to 4Q? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [26] -------------------------------------------------------------------------------- The doubling of the call is year-over-year. -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [27] -------------------------------------------------------------------------------- That's year-over-year. Okay. Got you. But the 13% is sequential, okay. Do you have the number -- can I get the number of billable messages that you did in the fourth quarter of 2019? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [28] -------------------------------------------------------------------------------- I will -- so... -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [29] -------------------------------------------------------------------------------- We can follow-up offline if you don't have it handy. -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [30] -------------------------------------------------------------------------------- Yes, yes, I can send to you the figures. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [31] -------------------------------------------------------------------------------- Yes, Giacomo, go ahead in the look for the figure specific, and Lance, let's go forward. -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [32] -------------------------------------------------------------------------------- Sure. So more to the point, I mean, just to confirm what I think you said a minute ago is the voice calls are not only growing much more quickly than SMS, but are also significantly more profitable. It sounded like you said, if I heard you correctly, that the voice margins are 45%. Did I get that right? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [33] -------------------------------------------------------------------------------- Yes, that's right. It's 45% plus, frankly speaking. -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [34] -------------------------------------------------------------------------------- yes, correct. -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [35] -------------------------------------------------------------------------------- So longer term, whenever -- when the business is at scale, what kind of gross margin do you anticipate? Or do you think is feasible? I mean -- and I guess, when -- I mean, how many years do you think before we kind of get to that scale? I'm just trying to sort of think more about the longer-term opportunity as opposed to the next quarter? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [36] -------------------------------------------------------------------------------- Lance, let me give you the drivers and not let -- allow me not to give you an exact figure. So the drivers for the expansion of the gross margin are multiple. On messaging, it's also a volume business. The higher the volume, the better the gross margin. And that's like a baseline because we are still [are a] growth company where volumes are increasing year-over-year. The second very significant element is the geographical mix on messaging because the U.S. market is much more profitable rather than any other rest of the world market. In Europe, typically, on messaging, you have about 20%, 24%, depending on the segmentation of the customer base. Same thing in Asia Pacific. Same thing, even maybe lower in Latin America. In the U.S., you easily can have more than 30%, 35% in gross margin. The other driver is the mix of the customer. If you have a very large account like we do have because like top 30 customer make about 70% of our revenues, then you typically have a lower gross margin compared to players which have -- which work on the long tail of the small medium enterprises because if a customer is sourcing, say, 350 million messages in a year is getting a better unit price rather than a customer, which is sourcing 3.5 million messages a year. So going forward, we expect to widen all of these 4 variables. But the last one also, which I didn't mention, but we said before, it's the product mix. Not all the products comes with such a high cost of goods sold like SMS. So voice, for instance, is much more profitable. And all the IP services, in general, the access to the network is (inaudible) the bandwidth is not variable. For messaging, you pay the termination fee, which is the variable cost. So my expectation and my aim as the manager for this operation is to work on both the 5 leverages that I have to widen the gross margin. Is this answering to your question? -------------------------------------------------------------------------------- Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Capital Structure Analyst [37] -------------------------------------------------------------------------------- Great. Yes, that's very helpful. And if I could just in one other question. I guess I wanted to just try to understand, you have these big revenue numbers and big volume numbers. So -- but what does that imply about your customer count? And I want to kind of think about that in both the U.S. and then everywhere else, sort of -- so to speak. So in the U.S., revenues up 100%. Did you add -- basically, did you have any customers year ago? Or is this all new customers? Or should some of that we thought of as being more organic? And then likewise, if we think about revenues away from the U.S., revenues were up 16% year-on-year, just doing the math. So my question here, when you think about away from the U.S. and Italy and India, et cetera, did you add any customers? Or is that 16% growth, is that almost entirely driven by just the same customer transaction volume growth? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [38] -------------------------------------------------------------------------------- Well, indeed, we are adding new customers for multiple reasons, but the most relevant one being the launch of Kaleyra Cloud, which is aimed at medium and small enterprises, and we are winning tens of customers on that specific platform. They still are not very relevant in terms of revenues because there is a ramp-up of the volume that brings up the revenues quarter-by-quarter, but the number of customers is increasing. Same thing is happening in the U.S., that to us, it's an emerging market. But if you want to understand how come that we increased and expanded so much the revenues, this is more coming from larger volume made by existing customers rather than new revenues from new customers, especially because we focus on large accounts. And large accounts, typically have a cycle to ramp up the volume and ramp up the revenues, which span over more than a quarter. Giacomo, how many -- how much of the fourth quarter revenues are coming from customers existing on our platform for more than 1 year? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [39] -------------------------------------------------------------------------------- About 80%. And let me say also the first -- the bigger customers that we announced last February, the social media (inaudible) has a lot of traction in the growth of the U.S. customers. And Lance, to answer your first question, the messaging in Q3 2020 was 6.3 billion; in Q4, is 7.1 billion messages. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question comes from the line of George Sutton with Craig-Hallum Capital Group. -------------------------------------------------------------------------------- George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [41] -------------------------------------------------------------------------------- Guys, I wonder if you could focus on the trusted platform message. As you move into the U.S., you discussed the pipeline of Fortune 500 companies and an expanded pipeline. Can you just give us a sense of that trusted platform message and give us a little bit more depth in terms of what you were seeing in terms of U.S. response? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [42] -------------------------------------------------------------------------------- Yes, indeed. But most of the expansion that we are having on the U.S. large account is coming from our innovation lab initiative, k-lab, which is typically engaging with large financial institutions. So let me say, at the moment, Kaleyra is focusing on that segment in the U.S. And so basically, this is where we see no significant traction on one end and the most significant increase in terms of volume. Again, George, as you perfectly understand large accounts, they do not rank in the number of 100s. They rank in the number of 10s of potential institution that we are going after. -------------------------------------------------------------------------------- George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [43] -------------------------------------------------------------------------------- I understand. So that continues to be the focus. Relative to the Mastercard relationship in the Caribbean, my belief is they've been bringing you into some very attractive issuer accounts. Can you just give us a sense of the opportunity in Latin America with Mastercard? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [44] -------------------------------------------------------------------------------- Yes, of course. But first thing, let me say that the partnership with Mastercard is global. It's worldwide. We are now focusing on Latin America because Latin America, it's a very important market for Mastercard and it's also a market where they require to announce the relationship between the issuer and the cardholders, and they want to use mobile to do this. So at the moment, we are interacting with -- mostly with issuers in Latin America, in Brazil, in particular. The potential is huge because if you think that Mastercard have more than 1,000 issuers in Latin America and Caribbean, we are now focusing on the top guys because, again, you go in ABC in this kind of processes. Now you focus on the largest one because that's where the most significant opportunities are. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from the line of Allen Klee with Maxim Group. -------------------------------------------------------------------------------- Allen Robert Klee, Maxim Group, LLC - MD & Senior Equity Research Analyst [46] -------------------------------------------------------------------------------- Impressive coming up with 24% revenue growth in the environment we're living in. So I had 2 questions. The first one is for WebEngage. Could you just go into it explaining how it works a little bit more and what the opportunity is? And second, for Campaign Registry, can you give us an opportunity -- I'm sorry, an update on how that's progressing? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [47] -------------------------------------------------------------------------------- Thank you, Allen. Well, on WebEngage, read the press release, specific press release that we have issued when we have made the agreement. WebEngage is the largest Indian provider for engagement and customer data platform, and we strongly believe as other industry players that customer data platform would be very significant in the CPaaS play. So we have been very proactive in managing this partnership with WebEngage because basically they use the knowledge that they can get from the customer data platform to help their customers to better interact with the consumer. And basically, we are the mobile leg for them to do that. Before Kaleyra, they were doing this using the typical web channels like e-mail marketing and things. Now we do it using messaging and other mobile channels. So it's very, very promising, and it's also a great learning opportunity for Kaleyra because India is one of the most advanced market in this perspective for 2 reasons. One reason is demographics, which is like very young people. The average age of population is way below 30. And the other thing is that technology -- digital companies are very well advanced in India because India is one of the sweet spot in the world for technology -- information technology and software development. On Campaign Registry, very quickly, I already touched this thing with Tim Horan a little earlier. The Campaign Registry is progressing nicely. The mobile network operator are mandating the registration of the campaign starting from March 1. One of them is also sanctioning the ones that do not register at the campaign would be sanctioned in terms of differential pricing on the traffic. And many, many campaign service providers have already signed. Some of them have already given also indication and run workshop with customers to understand what the process is. This is a new process. We're just doing a campaign. It's a new process. So it has to be brought to the attention and the knowledge of the marketeers so that they understand the process, and they do whatever it takes to make sure that their campaign will be registered. And this, over time, will definitely reduce the span on the mobile telephony network, and this is also in the interest of all of us because we receive an awful lot of undesired traffic on our (inaudible) -------------------------------------------------------------------------------- Allen Robert Klee, Maxim Group, LLC - MD & Senior Equity Research Analyst [48] -------------------------------------------------------------------------------- Could I just have one follow-up. How do you -- do you think that at some point in 2021 that this can be material meaningful contributor to your revenues and profits overall? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [49] -------------------------------------------------------------------------------- Yes, indeed, indeed, I think. Again, maybe you missed this, Allen, I already mentioned. We will -- we are launching. We are launching and the mobile network operators are launching commercially the service as of March 1. We want to see the numbers to have historical data because this is a new service. So it's kind of a greenfield market. For the second quarter, once we will have a better understanding of the dynamics and the takeoff of the volume and the revenues, then we can give, let me say, a forecast for the full fiscal year. We expect Campaign Registry to provide material increase in the top line and in the gross margin in the second half. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Our next question comes from the line of Patrick Walravens with JMP Securities. -------------------------------------------------------------------------------- Patrick D. Walravens, JMP Securities LLC - MD, Director of Technology Research & Senior Research Analyst [51] -------------------------------------------------------------------------------- Congratulations to you guys. Giacomo, maybe this is for you first. So if I look at your slide deck, you guys say that you think your market opportunity is growing almost 30%, right? And the revenue guidance is 25%. So I'm sure part of that is COVID, but can you just parse for that why we wouldn't be growing at least as fast, if not faster than the market? -------------------------------------------------------------------------------- Giacomo Dall’Aglio, Kaleyra, Inc. - CFO, Executive VP & Principal Accounting Officer [52] -------------------------------------------------------------------------------- So -- yes, sure. We are exposed, in particular, in markets like Italy and India. So 30% of the market growth is worldwide, and in particular, it's related also to United States. Where the market we are exposed are a little less growing because there are some partial lockdown and the economy are not fully recovered yet. So -- and we are very conservative to our projection. And so for the first half of the year, we project not grow like the market, but we can see in the second half, I think, to return to the normal growth as Kaleyra did in the 4 years from '16 to '19 was 33%, so organic. So I think we -- as soon as we are out of COVID, we can return there. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [53] -------------------------------------------------------------------------------- And also, Pat, this is Dario. I want to add one thing. Being a marketing question at the end, I think I want to get my 2 sense. When you look at the market size, you look at the market of the CPaaS growing 28%, 29%. But basically, the real market, it's the blend of the CPaaS market and the application to person messaging market, which is, by far, the largest part of the pie because when it's going up 61 billion in 2019, up to 78 billion, if I remember well, in 2023 or 2022, I can provide that exactly. So basically, if you consider the blend of the 2 markets, the growth rate of the overall market, which is also including application to person messaging is lower than 25%. -------------------------------------------------------------------------------- Patrick D. Walravens, JMP Securities LLC - MD, Director of Technology Research & Senior Research Analyst [54] -------------------------------------------------------------------------------- Okay. Okay. And then, Dario, the one for you is if you look at sort of all your R&D priorities, what's sort of the most important thing for you that you want your software to be able to do in the future that it can't do today? So that's the sort of most important piece of functionality that you would like to add? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [55] -------------------------------------------------------------------------------- Well, the strategy is to remain the most trusted omnichannel CPaaS in the world. So we'll keep on investing heavily in having high quality, highly resilient network on one hand on the incumbent existing channels and also adding new channels going forward. For instance, we've been investing significantly on WebRTC. We've been investing significantly on voice, on instant messaging and chatbot, flow builder. So let me say, the investments will be and are, indeed, significant for Kaleyra in keeping the pace with the evolution of the technology and the omnichannel paradigm, which we believe is the most important thing because at the end of the day, the consumer and the brand, they want to interact on the service. They don't really care about the channel. So the channel is a means. It's not an aim. The aim is doing e-commerce, buying goods, accessing health care, accessing services and doing in the most convenient way across multiple channels. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Our next question comes from the line of Jeff Feinberg with Feinberg Investments. -------------------------------------------------------------------------------- Jeff Feinberg, [57] -------------------------------------------------------------------------------- In addition to the strong organic growth opportunities which you've outlined here, I'm just curious if there are acquisition opportunities in the marketplace, if that's something you think could be achieved on an accretive basis prospectively? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [58] -------------------------------------------------------------------------------- Thank you, Jeff, for your question. This is a very good question. Yes, we indeed are extremely active enforcing accretive, let me say, acquisitions. We already have told to the investor community that Kaleyra is a consolidator in this space. We'll keep on consolidating the space. And we are very much working on this. Giacomo and I and the corporate development team is working on this. I, unfortunately, can't tell you anything more than that. But definitely, the acquisition shall be relevant, let me say, in an industrial perspective, adding more footprint and adding more revenues and will be definitely relevant financially because we have an history of accretive acquisitions, and we will keep on doing -- pursuing accretive acquisition. -------------------------------------------------------------------------------- Jeff Feinberg, [59] -------------------------------------------------------------------------------- Okay. And it sounds like you're optimistic that there's opportunities that fit that accretive benchmark? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [60] -------------------------------------------------------------------------------- I am optimistic, Jeff. I am an entrepreneur. If I were not, it wouldn't be an entrepreneur. -------------------------------------------------------------------------------- Jeff Feinberg, [61] -------------------------------------------------------------------------------- Okay. But you also have done a good job being conservative. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [62] -------------------------------------------------------------------------------- Thank you. Thank you. Yes, in general, one thing, let me comment on this final comment, please. In general, due to the very high level of uncertainty in the market due to the pandemic, we all perceive and live in this climate of uncertainty. In general, we are conservative because it's much more difficult nowadays in February 2021 to make an estimate at least for the next 6 months. So basically, our approach to the guidance and to the forecast is to be very conservative at least until we won't see the light for the vaccine campaign. Now the U.S. say that the vaccine will be completed by May. But maybe in other geographies, the process is lagging a little bit behind. So just to give you an example, in Italy, we think that we will complete the vaccine for the elders over 80 by end of April. So we'll see. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Our next question comes from the line of Jeff Bernstein with Cowen and Company (sic) [Cowen Inc.] -------------------------------------------------------------------------------- Jeffrey M. K. Bernstein, Cowen Inc. - VP [64] -------------------------------------------------------------------------------- Cisco is acquiring IMImobile, which looked like a pretty similar kind of comp to you guys. I don't think you had much overlap geographically there, focus in the U.K. But just talk a little bit about your thoughts about Cisco getting into this market and what it means? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [65] -------------------------------------------------------------------------------- Thank you. Thank you for your question. Yes, this is a very interesting acquisition because, in general, I think in the industry, nobody did expect Cisco getting into the CPaaS play and get involved into the space because IMImobile is a good one. It's a very well reputed player, focusing pretty much on the U.K. You're right, we do not have any geographical overlap. We know each other and we respect each other. I know personally the Chief Executive Officer. It's a very well reputed company with a significant track record in financial services in the U.K. where, unfortunately, we do not compete, and they do not compete in Italy. So let me say, in Italy, Ubiquity at that point in time, that then changed its Kaleyra in 2018 was very similar in terms of position into IMImobile. That's why we know each other. But this is a very emerging market yet. So competition is very local. You don't really compete. I couldn't go in London and knock at the door of Barclays saying, "Hey, I'm a messaging provider doing banking." So this is it. -------------------------------------------------------------------------------- Jeffrey M. K. Bernstein, Cowen Inc. - VP [66] -------------------------------------------------------------------------------- That's great. And then you guys won a nice award from Juniper Research on RCS. And that seems to be burgeoning around the world with more and more carriers and phone providers setting that up, that capability. What are your thoughts about RCS? Is this a sort of evolutionary? I know there are guys with visions of creating WeChat in various countries. But just talk about RCS and your presence there and your thoughts about it? -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [67] -------------------------------------------------------------------------------- RCS is the natural evolution of SMS. It's standard brought forward by the GSMA, the standardization body in the GSM space, and it's Rich Media interaction on SMS, which is definitely, let me say, brought along because of the competition from the Eastern messaging platforms. But RCS has 2 major assets. One thing the interoperability, which no one of the other platform has, including WeChat, WhatsApp or Messenger or any other. And the second one is the endorsement made by Google. Because Google a couple of years ago and those at RCS as the standard for Android phones. And Android is, by far, the largest operating system in mobile handset and smartphones in the world. So I believe that RCS will be very, very relevant going forward. It takes time to get the consensus of multiple operators, which are in a way competitors in the market, but I believe it get through -- it will get through. And we handled the positioning on this very carefully, building up a partnership with Google and working closely together with the operators worldwide. And this is going at different velocities in different markets. So in the U.S., it has been a little bit difficult recently. In India, it's progressing very well. Italy is a little bit behind. So it depends on the market. But we think that strategically is going to be relevant. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes the question-and-answer session. I'll turn the floor back to Mr. Calogero for any final comments. -------------------------------------------------------------------------------- Dario Calogero, Kaleyra, Inc. - CEO, President & Director [69] -------------------------------------------------------------------------------- Thank you very much. I think this call has been very, very interesting. I'm glad that you have the time to spend with us. And I'm very optimistic about the future. And the resilience of this company has shown to be incredible in the very, very stormy weather we have been living for over the last year. Thank you again for joining us today for the call and for the question and answer. Thank you, ladies and gentlemen. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.