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Edited Transcript of TEUM earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Pareteum Corp Earnings Call

NEW YORK Sep 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Pareteum Corp earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine Braelow

Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment

* Denis McCarthy

Pareteum Corporation - COO

* Edward O'Donnell

Pareteum Corporation - CFO

* Michael Bloom

Pareteum Corporation - IR Officer

* Robert H. Turner

Pareteum Corporation - Founder, Executive Chairman & CEO

* Robert Mumby

Pareteum Corporation - Chief Revenue Officer

* Victor Bozzo

Pareteum Corporation - Co-Founder & Chief Commercial Officer

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Conference Call Participants

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* Allen Robert Klee

Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst

* Bruce Goldfarb;Lake Street Capital Markets;Director of Institutional Sales

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Timothy Kelly Horan

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Pareteum Corporation Second Quarter 2019 Financial Results Call. Today's conference is being recorded. At this time, I would like turn the conference over to Michael Bloom, Investor Relations. Please go ahead.

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Michael Bloom, Pareteum Corporation - IR Officer [2]

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Thank you, and good afternoon, everyone. Thank you for joining us for Pareteum Corporation's Second Quarter Ended June 30, 2019 Earning Results, Analyst and Investor Conference Call. With us today are Hal Turner, Pareteum's Founder, Chairman and Chief Executive Officer; Denis McCarthy, Chief Operating Officer; Ted O'Donnell, Chief Financial Officer; Vic Bozzo, Co-Founder and Chief Commercial Officer; Rob Mumby, Chief Sales Officer; and Christine Braelow, Vice President, Global Enterprise.

Earlier today, Pareteum released financial results for the quarter ended June 30, 2019. If you have not received Pareteum's earnings release, please visit Pareteum's Investor page at www.pareteum.com. Following management's discussion, there will be a Q&A session.

During the course of this conference call, the company will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. The company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the company's future financial results. It also includes any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding anticipated new relationships or agreements, any statements regarding expectations for the success of the Company's products in the U.S. and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any of the foregoing.

These forward-looking statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described today. Some of these risks are described in the section of today's press release titled Forward-Looking Statement and in the public periodic reports the Company files with the Security (sic) [Securities] and Exchange Commission. Investors or potential investors should read these risks. Pareteum assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

With that, I'd like to turn the call over to Pareteum's Founder, Chairman and Chief Executive Officer, Mr. Hal Turner. Hal?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [3]

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Mike, thank you very much. And I'd also like to thank those listening in from across the world who've taken their time to hear our quarterly end of -- update and our vision for Pareteum. Simply stated, we have had a superb quarter in Q2. This was achieved by executing our ambitious growth strategies. We've materially exceeded consensus analyst expectations by some distance in many cases, and we've achieved very important milestones.

We crossed the $1 billion revenue under contract backlog threshold. In Q2, we have delivered standalone revenues of $34.1 million, which have exceeded our full year 2018 revenues of only $32.4 million. This was accomplished in just 6 short months and yet in our perspective, we're really just beginning.

In these early days for Pareteum, we've already changed Global Communications. Our results are driven by Experience Cloud, this is our core platform, and it is globally connected by our Smart Network. This is after all an age of digital transformation. Experience Cloud gives both form and function to digital transformation. We do this by importantly shifting control of communications and software into the hands of our customers, affordably and dependably. And most importantly, we've shifted control of communications and software into the hands of the engineering and development teams of our customers. They are the users of our enabling software platform and capabilities for things like services innovation, creation of connected applications and all of this that have full command and control capability in the deployments to their applications.

Our transformative solutions create new brands, new use cases and are pretty empowered by our software and super APIs. They're used daily by the thousands of engineering and development teams of our customers. By our mission, connecting every person and everything, we are transforming the communications of the world with software and the ease of which our customers and developers use it.

However, we haven't declared any victory laps yet, we still have much hard work and heavy lifting to do in fully achieving all of our aims and all of our aspirations. Our teammates get up each day with a clear focus on customers, their needs and continuously improving everything. We expect to continue doing that, which has worked so well for us.

The largest and most material milestones achieved during Q2 and for the 6 months ended June 30, 2019, are this: Pareteum has produced EBITDA of $3.4 million for Q2 and also EBITDA of $900,000 for the 6 months ended June 30. We achieved these material profitability indicators a full quarter prior to previous analyst expectations because of our disciplined execution and results focus.

I've already noted that our revenue for the quarter was $34.1 million. This is up $28.1 million from the prior year's quarter. This is a sequential quarter-over-quarter increase of 48% and is a Q2 year-over-year increase of 468% and as noted, Pareteum's Q2 revenue performance of $34.1 million exceeds our full year 2018 revenue results of $32.9 million. That's significant to us.

We delivered adjusted EBITDA of $6.1 million, up from just under $1.3 million a year ago. That's a 369% increase, materially exceeding our previous guidance. Already mentioned, we delivered actual EBITDA of $3.41 million and that's a significant 466% increase from a year ago. Based upon these exceptional results for the first half of 2019, the excitement and commitments we are seeing from global customers and the visibility that's inherent to our business model and expected results, we are raising our full year guidance, which I will communicate to you momentarily. These strong financial results reflect the core capabilities of Pareteum Experience Cloud and the communications services, which is our smart network. These are intersecting with strong customer demand, all of which are expected to continue accelerating Pareteum's expansion. This is how we provide great experiences to our approximate 1,100 customers worldwide.

Q2 also resulted in two additional major milestones for the company. The first was our inclusion in the Russell 2000 and 3000 indices, inclusion in the Russell indices reflects the progress that Pareteum has made and raises our profile among the institutional investment community. The second was the commercial launch of Pareteum Experience Cloud, we previewed this at our Pareteum Power Analyst Day held at NASDAQ on May 28. Our experience cloud represents the successful integration of recent acquisitions into the Pareteum family under one unified brand and platform.

The Pareteum Experience Cloud provides a powerful mix of mobility, customer engagement, analytics and intelligence services to customers through a SaaS-based recurring revenue model. The richness and flexibility of this platform and its API and software-based services support significant cross-sell and up-sell opportunities through our customer base. This combination gives us strong visibility in our business and a clear path to achieving significant revenue growth and long-term earnings power.

We now occupy a unique position in the market, offering a single unified software platform that provides limitless scale and control over value-added communications services. This is accomplished through our APIs and leveraging our owned, which is now one of the world's largest unified global networks. Customers are choosing the Pareteum Experience Cloud precisely because it represents the integrated service layer that has been missing in the marketplace.

With their brands, and by this, I mean the Pareteum customers, delivering a totally fully integrated solution managed and controlled by our customers to provide services and experiences to their direct customers and users. Control has demonstrably shifted to our customers, this is digital transformation at its best, Smart Cities, one of our fastest-growing segments, illustrates this point well. A Smart City for us is a fabric of connected devices built to serve discreet applications, our experience cloud brings these applications together and enables each of these unique services to be managed by one Pareteum delivered platform and control application. This single control application management enables smart city administrators to simplify their operations, while creating new value revenue streams. For example, we have a planned community in Florida, in the U.S. that has added control management and connectivity through experience cloud to every street light. The street light itself ensures the lights are on and functioning efficiently while providing Wi-Fi connectivity, which provides dynamic connectivity for the screens for advertising and events postings and also monitors water levels on streets.

Another example, in Brazil following the deployment of our experience cloud and smart network, our customer is using these enablement capabilities in managing IoT devices for smart water meters, street parking systems, waste collection and many more apps are planned for this particular deployment.

We have clearly helped this municipality improve their services, reduce their cost and we've contributed beneficially to their ongoing environmental management initiatives. This is a clear win for our customers [in the eyes of citizens. It is a win for the community and a growth win for Pareteum. This is Pareteum Power doing good things. In an Asian Smart City, our Experience Cloud was deployed with Smart Network providing citizens with Wi-Fi and connectivity services. This implementation is based on a community advertising model in enabling citizens to maintain their connectivity through the train and the bus systems and infrastructure. These are very compelling solutions and enable us to propel businesses forward, assisting customers in their strategic and operational target attainment, this is why at Pareteum Power Analyst Day, our customers such as the City of Kiev in the Ukraine, Deutsche Telecom, Vodafone, ACN, McKinsey and others agreed to share their specific insights into their successful deployments of our experience cloud and smart network.

Initial reception of Pareteum Experience Cloud has been extremely positive, and we are encouraged by the accelerating momentum and increasing rates of customer adoption. Pareteum's customers and their participation and support in evangelizing Pareteum's vision is a testament to the power of our platform and our excellent working relationship with our global customers. All of our teammates work diligently daily to make each customer's journey with Pareteum a happy and successful one and to do good things always. We believe this strong reception further validates our strategy of powering the future of cloud communications on a single unified platform and shifting control to the customers. Continuing now with the strength of our customer relationships, I'm pleased to share with you some of the things that are driving visibility and demonstrable growth through our sales efforts. Here's some of our key Q2 success wins. The largest Internet search and advertising company in the world will use our experience cloud and smart network Wi-Fi for its MVNO brand, enabling expanded coverage and secure connections for its subscribers. A US global fintech company will use Pareteum Experience Cloud and smart network for global connectivity serving as the Wi-Fi backbone for their solution and their sister company, which is an MVNO will use experience cloud's smart network to launch service in the US; a leading European CRM and loyalty company will deploy experience cloud to create more meaningful customer experiences at retail locations. In this instance, it's using IoT connectivity and location presence alerts, so the company will assist its customers in providing personalized offers and discounts to shoppers upon entry into their stores.

Throughout Asia, M1, a very significant Tier 1 mobile network operator, will deploy experience cloud to enable its partner brands to launch mobility services targeting consumer IoT and enterprise markets. M1 is initially focusing on Singapore before extending to other Asia Pacific markets. Moving on, as discussed in our last earnings call, we acquired Devicescape in the second quarter. Devicescape brings a highly attractive IP portfolio including 33 granted patents, strong complementary software solutions and a high-caliber set of executives and product leadership. From an operational standpoint, our integration plans are well ahead of schedule. Additionally, Devicescape's former CEO, Dave Fraser now serves as Pareteum's Chief Product Officer. Dave and his team including John Gordon, our Chief Architect, offer excellent executive and product leadership for our experience cloud platform and portfolio.

Now I'm going to shift to and discuss several operational metrics that are important drivers in our business. We've discussed our 36-month contractual revenue backlog, which is simply the value of new sales orders intake and the revenue under contract or simply called backlog and we -- as we've discussed this so which it is as a non-GAAP indicative number. We began using this metric in 2016 to provide a view of the magnitude, sales growth and its conversion to billable revenues. This has been especially important as we transform the company and needed a barometer that looked beyond the methodical building up of monthly recurring revenue. I'm pleased to inform you that at the end of Q2, the 36-month revenue under contract backlog stood at over $1.270 billion. This milestone demonstrates the strong demand we have referenced from our customers. It's also a very strong leap forward from our Q1 number when we ended the quarter at $938 million.

Putting this quarterly backlog increase into vivid perspective, our sales executives executed on average one new sales contract per business day for the whole quarter. We're very proud of our teammates and their sales performance. This metric has also been a very useful way to help stakeholders understand the magnitude of our opportunity and the commitments that we've secured from customers, particularly as we started to transform the company in 2016.

However, new sales order 36-month backlog metric will now be replaced as an external metric. It has served its purpose and now provides us significant internal transparency into new sales orders and their conversion into billable revenues. We can now see clearly the strength in our revenues and their expected growth, therefore it is our reported quarterly results and the annual guidance provided, which are the strongest indicators of our expected growth and continued financial successes in the coming periods. We will, therefore, formerly retire backlog as a key performance indicator and no longer report it after Q3 of this year.

Now we will focus on providing operational metrics as leading indicators of our business performance. These metrics demonstrate how we manage the business day by day and provide a more direct indication of our performance. These may include our net dollar expansion rate, total connections, quarterly adds to connections, total customers and churn. We may from time to time include other metrics when they may be meaningful to the quarter and our business. Our Q2 net dollar expansion rate was 151% year-over-year. This is reflecting our laser-like focus on upselling and cross-selling services with our existing customer base. Our total connections, which is our term for connected subscribers and devices and their usage, increased to 13.03 million devices at the end of Q2. This is a net addition of over 1 million connected devices in the quarter and up from 2.7 million in the second quarter of 2018. This is a year-over-year increase of 380% on connections. Our customer churn is pleasingly low, it's less than 2.5% annually and that's across all service segments and all sources of revenue in the business. Our low churn paired with our high net dollar expansion rate highlights the value of the services we provide to our customers and it demonstrates our ability to scale the business.

In summary, we are very delighted with Pareteum's performance. The executive management and leadership team are very optimistic about now, about our future, we're bullish about ongoing results based upon our customers and our sales.

Now I will yield to Denis McCarthy for his review of our financial performance and then we'll come back in a few moments to discuss the guidance followed by Q&A. Denis, if you will, please.

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Denis McCarthy, Pareteum Corporation - COO [4]

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Thank you, Hal. And thank you, everyone, for joining the call today. As Hal mentioned, we're very pleased to report that we have exceeded revenue for the second quarter of $34.1 million along with gross margins of 55%. However, the largest milestone achieved during both the quarter and for the 6 months ended June 30, 2019, is that Pareteum produced EBITDA of $3.4 million and $0.9 million respectively as of those dates. This is a result of our consummate execution and it has been completed a full quarter prior to previous analyst expectations. Additionally, for the 3 months ended June 30, we have income from operations of $0.2 million and $0.03 of non-GAAP earnings per common share. We have achieved organic growth of 48% over the prior quarter from the combined Pareteum and Artilium businesses. The Artilium acquisition was not only accretive, but as we intended it accelerated our organic growth as well.

These revenues and gross margins drove an adjusted EBITDA of $6.1 million or 18% of total revenue. Adjustments to EBITDA includes stock-based compensation of $2 million and acquisition and restructuring cost of approximately of $0.4 million. Much of that is related to the closing of the iPass acquisition. A majority of these adjustments are non-recurring in nature. G&A as a percentage of our revenue was 26% versus 37% for 2018. We continue to see our general and administrative expenses growing at a rate much lower than our revenue and we expect this trend to continue over the next several reporting periods. We generated non-GAAP earnings of $3.9 million or $0.03 per share over the second quarter, a reflection of our strength of our core business as well as stability of our business and sales team's ability to generate new opportunities and our service delivery team's ability to continue to get those customers installed and in service. We were EBITDA positive for the quarter and we continue to have a relatively strong balance sheet with the additional capability to draw funds from our credit facilities., appropriately leveraged and we do not feel that we need to add to the balance sheet for business as usual activities.

Our need to access capital and our credit facilities will be based on the acceleration of our organic growth and/or to pursue inorganic growth opportunities. As stated previously, connections are a leading indicator for our growth. As of today and as Hal mentioned, we now stand at approximately 13 million connections and just under 1,100 customers. As a point of comparison, only 21 months ago we had single-digit customers and less than 3 million connections.

Our balance sheet and accounts receivable reflect this revenue growth and we will continue to grow that revenue for the quarters to come. As discussed previously, we closed the acquisition of iPass on February 12, making this second quarter the first full quarter inclusive of iPass. During 2019, iPass has added 15 new customers, 3 of which have reached over $1 million of annual revenue run rate on the Pareteum platform as of June 30, and we are seeing an increased need for the augmenting of the legacy products alongside the Pareteum Experience platform, which has been newly introduced into this customer base.

Pareteum has exceeded consensus and analyst expectations in several areas, our revenue of $34.1 million exceeds analyst expectations of $26.5 million. The consensus estimate for non-GAAP EPS was breakeven. We achieved EPS of $0.03 per share for the quarter over achieving those estimates. The consensus analyst view was that Pareteum would be EBITDA positive sometime in the second half of 2019.

The Company outperformed those expectations and has achieved positive EBITDA results for the 3 and 6 months ended June 30, 2019, of $3.4 million and $0.9 million respectively. Additionally, adjusted EBITDA of $6.1 million exceeded consensus estimates of $4.1 million by over $2 million. Our key performance indicator of connections, which is our term for subscribers, devices and their network usage indicated over 13 million for the end of the second quarter, which includes the impact of the iPass acquisition. During the first quarter of 2019, we engaged RSM to bolster our internal audit function and improve our internal control processes. They will partner with us, and Squar Milner are guiding us as we enter the next chapter of our development and expected substantial growth.

To conclude, we are pleased with our strong financial results for the second quarter. These results provide us with a strong financial foundation to support the long-term vision of the company.

With that, I'll yield back to Hal to conclude the call.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [5]

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Denis, thank you very much. Based upon our exceptional results, including exceeding the analyst consensus estimates for our performance in Q2 and the strong momentum we're seeing in the market, we are raising our full year guidance. Our updated guidance for 2019 is as follows.

Full year 2019 revenues are now expected between $120 million to $130 million. This implies an organic growth rate from 270% to 301% year-on-year. We are expecting continued strong growth in revenues, EBITDA, operating cash flows net of onetime restructuring and acquisition cost, non-GAAP net income and non-GAAP earnings per share. Adjusted EBITDA and operating cash flow, again net of onetime restructuring and acquisition cost, are expected to continue their strong growth throughout 2019, not accounting for any additional strategic activity. The robust revenue and EBITDA growth will be a major additional validation of the Pareteum strategy for institutional investors.

In summary, we are extremely pleased with our results for Q2, which show strong fundamentals exceeding all expectations. As we segue into the Q&A, I wanted to share a brief perspective with you.

Recently, a shareholder said to me, Pareteum may be a show-me company. And as I also observe others in the marketplace, some folks have bet against our company with untruthful and misleading propagation of things that could create fear, uncertainty and doubt. We see the chips stacked in our favor at Pareteum. Our results, our teammates and the integrity we apply to the trust we have with every person will continue to speak for themselves. This is the overarching show-me. In thinking about that a little bit more, we observed Pareteum's strong growth is driven by our consistent execution over every area of the business and continuing to do the right things for all of our stakeholders. We are, we have been and we expect to remain very bullishly strong about Pareteum. Our company is doing very well, and our forward growth indicators are positive.

In specifically reflecting, here's a partial rendition of what we have shown. We've had a, I think, a stunning and staggering growth as we've transformed Pareteum in just 33 short months, Q4 '16 to Q2 of '19, with our intensive business plan execution. The growth is factually evident when reviewing that 2016 revenues were $12 million, 2017 revenues were $13.5 million, 2018 revenues were $32.4 million, 2019 revenues on current guidance are in the range of $130 million. That's 984% growth or 222% compounded growth annually.

This sort of growth does not just happen. Our results are produced by daily hard work from all of our teammates with their disciplined professional execution across the whole business. Customers on a global basis are responding extremely well to our Experience Cloud and our Smart Network. This is a best-in-class platform, say our customers. They tell us they're tired of dealing with inflexible incumbents. They tell us we are selecting Pareteum because Pareteum delivers better connected, better managed and more secure services. They tell us we have shifted control to them, our customers. And most importantly for Pareteum, we're doing good things while increasing revenue and profitability.

This is just the beginning for Pareteum, very early days for us. We're uniquely positioned to power the future of communications. We're doing it now, we've actually built it, it's called the Experience Cloud and the Smart Network. We intend to continue this growth and the fulfillment of our mission connecting every person in everything.

Now with that, I'll yield to our operator for Q&A with Denis, Ted, Vic, Rob and Christine, and you're going to hear a lot from Vic, Rob and Christine, on this call. Please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Tim Horan with Oppenheimer.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Two questions if I may. Denis, the new search company using you for WiFi offload, is that -- I am assuming that's a brand new contract, and I'm assuming they must have been trialing the connected technology for a while, and they are pretty happy with the hand-offs and the quality, but maybe you can give us some more color around that and maybe how large of a contract can that be and can they use you for international roaming our other products and services. And then, Ted, can you just comment on the accounts receivable? It seemed to grow again pretty substantially. What caused that and what the trend might look like for the rest of the year?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [3]

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Denis, your turn.

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Denis McCarthy, Pareteum Corporation - COO [4]

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Yes. Sure. Tim, quickly, I would say that the company has done work with us before, we do expect that it can grow quite substantially, but I'd yield to Christine to give us -- give you a little more color on that customer that has come out of her enterprise sales team.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [5]

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Christine?

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [6]

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Thanks, Denis. Yes, sir. Happy to do so. So the initial review and where we're focusing is currently with the Wi-Fi smart network and this is terrestrial and it is available on a global basis and, so as Denis had indicated, has a tremendous growth possibility as we look at what else we can bring from the experience cloud for the enterprise. They also are an enterprise customer that is using our service and has for a number of years with our own employee base. So we have a long and rich history with this enterprise.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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And just to be clear on that, on that search company. I think they also might have an MVNO brand. So have you won the ability to offload the MVNO also?

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [8]

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Correct. Yes. So we're offloading Wi-Fi with the MVNO as well as have a relationship with their own employee base. So it is both.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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And the MVNO offload that's brand new and was that in the quarter at all or is that kind of …

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [10]

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Correct.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [11]

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Yes.

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [12]

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Yes, that's in the quarter and it is brand new.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [13]

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Okay. Tim, shall we move to the AR question or is that enough on that? Do you have…

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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Well, I guess just the last one, did you win that contract based on the quality of the hand-offs. I mean how long do they trial that for on the connected technology to do the handoff from LTE to Wi-Fi?

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [15]

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Sure. So yes, it was definitely won on quality, so they were looking for improved quality of experience for their user base and the trial was over about 3 months plus/minus time frame.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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Congratulations. Yes. And then Ted on the accounts receivable, any color would be great.

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Edward O'Donnell, Pareteum Corporation - CFO [17]

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We look to the AR to increase a little bit, then probably plateau and then start to come down with collections in the third and fourth quarters of this year and then continue that process of coming down in Q1 of 2020. So we're very vigilantly going ahead looking at this, and -- but we go ahead and feel very comfortable that the sales that we're going ahead and generating, will go ahead and lead to strong collection going into the second half of this year and the first quarter next year.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [18]

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Denis, would you…

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [19]

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Yes, sorry, Tim.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [20]

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Denis, would you want to share the comment that our auditor made with us on this as we asked about this and where we are in levels I thought it was quite hallucinating.

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Denis McCarthy, Pareteum Corporation - COO [21]

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Yes. I think it was effectively how that the -- with the rapid revenue growth over the last 9 months, growing from $6 million to $34 million, they were comfortable with where the overall receivables had grown to and really reflects the health and growth of the company and comparable to companies that they have in the space and that they are continuing to look at our internal processes, which they feel are strong and reflects what Ed had mentioned that we will see that plateau late third quarter, and then continue to come down over the fourth quarter this year and first quarter next year.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [22]

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Right. And just lastly, bad debt expenses have been relatively stable or has that increased or declined?

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Edward O'Donnell, Pareteum Corporation - CFO [23]

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We did go ahead and increased a little bit in this last quarter and we're just going ahead and following normal GAAP procedures on that depending upon the timing of certain collections we were going to go ahead and continue to look out in the future, but it was relatively flat, we were basically in the same range in the first and second quarter, we went from $1.3 million for allowance debt to up like $1.4 million in this current quarter that we're in now.

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Operator [24]

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Next, we hear from George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [25]

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So one of the challenges obviously with winning all the business you are is you need to implement it and I know that's one of the reasons the DSOs have gone up. So can you talk about what you're doing to ramp-up the team on the implementation side and are you doing anything yet with any key partners?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [26]

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Denis, you want to address that since the service deployment and product fall to you and then I'd like Vic to comment on it from the account management and the customer advocacy standpoint.

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Denis McCarthy, Pareteum Corporation - COO [27]

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Yes, sure, Hal. And thanks for the question, George. We have brought in a very senior person on the operations side, Conor Carroll, who has delved [in over the last 2.5 to 3 months and accelerated our deployment along with, as Hal mentioned, Dave Fraser and John, Gordon, who joined us from Devicescape bringing to bear technology improvements that did improve our time to market with the software cloud platform, particularly as we enter into new markets in Latin America and Asia. So we've seen accelerated growth in our ability to deploy. We still do have that as a major challenge ahead of us over the next, I would say, 6 to 9 months as we keep pace with the rapid sales and what Vic will coin [, I'll let him speak to it a bit, but we are now receiving a lot more inbound calls on demand for our platform as we continue to see the growth in the marketplace.

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Victor Bozzo, Pareteum Corporation - Co-Founder & Chief Commercial Officer [28]

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So in addition to the service delivery buildout, we are investing heavily in what we call customer advocacy function and that's both in account management for cross-sell, upsell but it's also working hand-in-hand with sales from the moment the prospect is identified through service delivery, which is coming into the equation as the contract is being negotiated.

And so generally our customer advocacy, we envision to be growing as large as our sales force. So most of our new investment in the sales side and the commercial side is really in customer advocacy account management and candidly with close to 1,100 accounts, we have a strong opportunity to farm cross-sell and up-sell in our customer base.

In particular, we see the merging of several of our services from messaging to Wi-Fi to all being brought together through the experience cloud and we see that's unleashing already new up-sell and cross-sell opportunities. But the key is our customer advocacy team is growing, and it is growing globally and it's focused on helping from the minute the sales process begins through the service delivery, and then forward into the future.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [29]

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Hal, I thought your example of the Florida Smart City was very tangible, very clear in terms of what you will be doing to help enhance that, can you talk about the addressable market overall for smart cities?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [30]

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Yes, I can. And when we look at our total addressable market over the course of about 3 years of $270 billion out of a total market of $463 billion, if you take the IoT portion down into that, it is approximately #200 billion. If you start weaving that down to where we are, the segments that we're in, we think that clearly we can address at least the $25 billion range in the next 2 years, so we only have to capture a fraction to really have a huge upside.

I will tell you that we're working more demonstrably on this to better understand how our control platform will work with partners, who have discrete applications with the water meter reading as an example, which could change the profile of the opportunity. So what I've just given you has to do with the way we look at the smart cities. But as we look at it with the individual applications, it actually may grow is my view. I'd like to turn to Vic on that, and is [Cynthia] on the call Vic?

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Victor Bozzo, Pareteum Corporation - Co-Founder & Chief Commercial Officer [31]

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Yes, [Cynthia] is on the call. And just to echo what Hal said, if you recall, as we described it, we described it as a fabric of discrete connections and opportunities. And so what Hal is describing is that there is an overall market, but within each of that -- of those segments and if you take that street lamp, there are multiple applications within that lamp. It's been -- within that light post and it's being run in many cases by different not just discrete applications, but discrete groups who sell those products. So we see the opportunity to really give one single control mechanism to that. And so I think that the accessible market grows, but it's pretty large as it is, as Hal mentioned.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [32]

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And [Cynthia], any comments on the market size that might better reflect the things that Vic and I've said.

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Unidentified Company Representative, [33]

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No. I don't think I have anything to add.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [34]

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One other quick one, if I could sneak it in. And I know backlog is going to go away as a public indicator, but it was a significant increase quarter-over-quarter, and I'm just curious, if you could give us a sense of, within that, how many are significant deals in size relative to smaller opportunities that you sign?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [35]

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Yes, we can, and I'm going to turn to Rob Mumby for that since he drives the vast majority of it. Remember that we have 3 segments: communications service providers, enterprises and IoT. So Rob can give you a flavor of how that was spread out. Rob?

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Robert Mumby, Pareteum Corporation - Chief Revenue Officer [36]

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Yes, sure. Well, in general, I would just say that we have -- we tend to have one large deal a month and then we have several medium and even some smaller ones. So from a risk standpoint, we're very diversified. We're not counting on just one large customer signing, but by all means, we want large customers. And so it's a mix of both, and we're interested in enabling mobile disruption with all sizes of the businesses because you look at it at some point, WhatsApp was a small shop in a garage. And so you never know where the next game changer is coming from. Is that helpful?

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [37]

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That's perfect. Congratulations.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [38]

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George, I just want to add one thing to what Rob just said. If you take this down to what I mentioned that we are on average selling about a transaction a day for the whole quarter, that means somewhere in the 22 to 27 sales, discrete sales, a lot of these do fall into the $3 million to $5 million range. But we consider that very, very good because that's really what Rob is talking about in terms of the kinds of customers that are going to have significant growth potential and really the real upside.

On our website, we talk about a company in New York called Wing, and it's a great example of a small company that's got a potential to be really big really quick. So we're looking for those kinds of transactions.

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Operator [39]

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Next, we hear from Mike Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [40]

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I guess on the sequential growth in the second quarter, can you just give a little more color there? Maybe which regions were particularly strong, or was it broad-based? And then are there a couple big customers really ramping here? Or is it kind of more diverse? Just a little more color on the sequential growth would be great.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [41]

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Okay. Denis, you want to dig into that from the financial standpoint?

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Denis McCarthy, Pareteum Corporation - COO [42]

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Yes. Sure, Hal. We do continue to see, Mike, strength in Europe and particularly in the United Kingdom. But to dig into some specifics. It is very broad-based in that growth. They implemented roughly 23 new customers in the second quarter. And of those customers, we also saw growth from the existing base I referenced in my prepared notes, the 3 customers from the legacy iPass sales team that have grown up to over a $1 million revenue run rate and our first very significant contract in Africa deployed during the quarter. So I would say that Asia and Africa are prepared -- are poised for significant growth. Europe still maintained strong. And out of the iPass space, we are -- with the cross-sell of the new enterprise experience platform, we're seeing strength in the U.S. as well, but pretty broad-based growth.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [43]

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Then on the AR growth, how much of that is sort of service implementation fees versus subscription versus something else? Just a little color on that would be great.

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Edward O'Donnell, Pareteum Corporation - CFO [44]

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When we go ahead and look at the implementation, most of that work is in our past. The vast majority of it is for folks that are going ahead and ramping up services with us or going ahead and adding on new services with this as well.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [45]

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And then just to be clear on the -- you talked about that sort of plateauing in 3Q and then declining in 4Q. Is that -- should we think of AR then going up a little bit in the third quarter and then down a little bit in the fourth quarter? Is that what you imply there?

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Edward O'Donnell, Pareteum Corporation - CFO [46]

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Actually, it would be like a gradual ramp up and then probably coming back right into the same levels that we're in right now. As we start to go ahead and see, a good amount of collections coming in the -- comes at the end of this upcoming -- this quarter that we're in right now in the third quarter, then it's ramping up in the fourth quarter as well as and into the first quarter of next year.

So especially, as we go ahead and see a few more active deployments that are starting to ramp for us.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [47]

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And then just last on the sale of the experience cloud into the iPass base. Can you -- I know it's still early, but like what should we think about in terms of sort of an average sales cycle there? I know you haven't really kind of gone through too many episodes -- what's kind of a good ballpark on that really?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [48]

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Christine, can you take that, please?

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Christine Braelow, Pareteum Corporation - VP of Global Sales - Enterprise Sales Segment [49]

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Sure, happy to. So remember where we're really getting the most traction are with multinational. So decision-making time frame in a large organization takes a little bit of time. So at this point, the way that we're seeing it track is anywhere from 6 months and likely up to a year and I think on the short term -- so we are in a discussion right now where I think in the next two months or so will actually run a POC and then see a decision towards the end of Q4.

So that's about the time frame that we're seeing. It's very exciting and it's exciting conversation to have. We're bringing a lot more value, as Hal had pointed out, there's a single point of contact and there is a tremendous level of interest from the enterprise side. So as those conversations mature and we start to see wins, I expect those sales cycles to tighten up a little bit because we will have some proof. But overall, it's just a very exciting conversation that we're having and we're seeing good reception.

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Operator [50]

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(Operator Instructions) We'll now hear from Bruce Goldfarb with Lake Street Capital Markets.

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Bruce Goldfarb;Lake Street Capital Markets;Director of Institutional Sales, [51]

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Just a couple of questions. Most in terms of revenue under contract, a lot of the revenue or most of the revenue under contract is with your largest customers. Do you see that changing over the next 18 to 24 months/?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [52]

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Yes. Bruce, actually as we look at this pretty closely, the large customers really are going to represent much less than 20% of the total revenue that is under contract, and I believe. Denis, if I'm not mistaken, our largest customer now is under 20%, is that correct?

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Denis McCarthy, Pareteum Corporation - COO [53]

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Absolutely, Hal, and continue to turn in that direction while growing as an overall cost. We see 10% to 15% growth in our largest customer and a drop from the 19% range to likely the 12% range in 2020. And as Hal alluded to earlier, these $2 million and $3 million contracts, which has become the norm of the closing in the last, let's call it, 60 days, as those get implemented, they continue to become a larger part of our base and I think it speaks to the 1,100 customers now. That has a great diversification in our customer bids.

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Bruce Goldfarb;Lake Street Capital Markets;Director of Institutional Sales, [54]

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And then just one last question, it sounded like you guys are seeing some real strength in Europe, but just given the macro weakness, are you seeing any deal push out in Europe or any kind of delays?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [55]

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Vic, can you address that? I can tell you, I don't see any, but you might be a little closer to one or two of the deals.

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Victor Bozzo, Pareteum Corporation - Co-Founder & Chief Commercial Officer [56]

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Yes. I haven't seen really that affect our deal structure. I will say that we have quite a bit of disruptive new entrants coming into our funnel as well and so that could clearly be a -- it could clearly be an indicator that, that disruption is part of what's going on in Europe right now. But we're not seeing any slowdown in the deal flow based on the macroeconomics. In fact, it feels like there is more opportunity because there is increasing competitive landscape, which seems to work in our favor.

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Operator [57]

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Our final question of the day will come from Allen Klee with the Maxim Group.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [58]

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Yes. Short and sweet. Can you tell us what your -- how much your total debt was at the end of the quarter?

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [59]

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I have to turn to Denis for that, but it's -- I'll let Denis give you the exact number.

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Denis McCarthy, Pareteum Corporation - COO [60]

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$25 million on the balance sheet as of June 30.

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Robert H. Turner, Pareteum Corporation - Founder, Executive Chairman & CEO [61]

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Thanks, Alan. Well, with that, we'll conclude the call, I want to thank everyone for joining. And we look forward to seeing you in due course. And thank you all very much. Denis, Vic, Christine, Rob, Ted, Mike, thank you all so much. Bye-bye now.

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Operator [62]

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This does conclude today's conference call. Thank you for your participation, you may now disconnect.