KORE Group Holdings, Inc. (KORE) Earnings Call Transcript & Summary

Hello, and welcome to the KORE Group Holdings Third Quarter 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Charley Brady, Vice President, Investor Relations. Please go ahead, Charley.

Thank you, operator. On today's call, we'll be referring to the third quarter 2023 earnings presentation that will be helpful to follow along with as well as the press release filed this afternoon that details the company's third quarter 2023 results, both of which can be found on our Investor Relations page at ir.korewireless.com. Finally, a recording of the call will be available on the Investors section of the company's website later today. Please note that this webcast includes forward-looking statements, statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions are forward-looking statements and are based on assumptions and beliefs as of today. The company encourages you to review the safe harbor statements, risk factors and other disclaimers contained on this slide and today's press release as well as in the company's filings with the Securities and Exchange Commission, which identifies specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this webcast. The company also notes that it will be discussing non-GAAP financial information on this call. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. I'll now turn the call over to Romil Bahl, the company's President and Chief Executive Officer.

Thank you, Charley. Good afternoon, everyone, and thank you for joining us today for our Third Quarter 2023 Earnings Call. With me is Paul Holtz, KORE's Chief Financial Officer. As always, I'll start with a brief overview of the key events and announcements for the third quarter, and I will be followed by Paul, who will discuss our financial results. We will then look at our sales results and finish, as always, with a Q&A session. First, and by far the most important of our key announcements today, I am very pleased to announce that we have signed agreements to refinance our approximately $300 million term loan with the issuance of a new $185 million term loan and a strategic investment of $150 million of 13% preferred stock. The final closing of these transactions is expected to occur in the next week or 2. Slide 4 provides an overview of the transactions, which Paul will detail later in the call. But make no mistake about it, this refinancing is a very important milestone for KORE. With these transactions, we have reduced our overall debt level and lowered our first lien leverage ratio from roughly 5x to roughly 3x our 2023 estimated adjusted EBITDA. We have extended the term loan maturity to 2028, matching the maturity of our $120 million convertible note and added approximately $15 million in cash to our balance sheet. Importantly, we have also increased cash flow flexibility as the preferred stock dividend has a payment in kind, or PIK, feature, allowing the company the option to defer cash dividend payments. This payment optionality allows KORE to increase our free cash flow as we accelerate revenue and EBITDA growth over the next few years and further delever our balance sheet. We believe this near-term debt overhang has been the single overriding concern of public company investors, and we are happy to remove this obstacle to shareholder value creation. We can now direct all of our attention to driving organic, top-line, and adjusted EBITDA growth. Turning to Slide 5, we present some additional key announcements from the third quarter. Expanding our presence with distributed enterprise customers, KORE announced that we would collaborate with a national U.S. retailer to enable its digital transformation with 5G connectivity. This marks a turning point for the industry as 5G connectivity is driving a nationwide shift towards digital-first retail. KORE is well-positioned to support retailers transitioning to 5G connectivity by providing critical 5G services and solutions, complete with backup options, thereby enabling retailers to innovate in areas like inventory control, daily operations, and consumer engagement. In September, KORE was honored to receive a 2023 IoT Evolution LPWAN Excellence Award from IoT Evolution World for KORE LPHub, which is KORE's innovative LoRaWAN solution. KORE LPHub is a SaaS-based Service Delivery Platform, or SDP, which deploys, manages and connects LoRaWAN devices over a cost-effective, low-power, wide area, or LPWA, network, ensuring device longevity and supporting expansion into the massive IoT market segment. This award is a testament to KORE's ability to bring new products to market and remain an IoT innovation leader, which in turn drives top-line growth. Finally, building on KORE's IoT for Good initiative, we announced an alliance with GrandPad to support their mission of helping seniors age in place with IoT. Powered by KORE's robust IoT connectivity solutions, GrandPad provides an easy-to-use communication device that allows seniors to connect to vital caregivers and family members by making video calls, sending voice messages and viewing media. Over the next 3 decades, the number of adults over 60 years of age who will require long-term care is expected to more than triple. Partnerships such as this position KORE with an early presence in long-term, secular growth markets, enhancing KORE's ability to capture market share. Now let's turn to our third quarter financial results and updated 2023 guidance on Slide 6. Our third quarter results came in at $68.6 million of revenue, increasing year-over-year from the third quarter of 2022 by approximately 4%, driven by strong growth in our high-margin IoT connectivity business, which increased 27% year-over-year, and in the high-single-digits organically. Excluding the forced churn of noncore customers due to the 2G, 3G sunsets, IoT connectivity grew in the mid-teens organically, showing clearly how IoT connectivity can be a strong, top-line growth business at high gross margins. This growth in IoT connectivity was partially offset by the expected decline in IoT Solutions due to the customer order deferrals we discussed on our last quarterly earnings call. Despite experiencing additional delays in IoT Solutions orders from a few customers, we expect to generate year-over-year quarterly revenue growth again in the fourth quarter of 2023. Gross margin increased 257 basis points year-over-year to 54.8%, a new quarterly record, and benefited from continuing carrier cost optimization and a lower mix of IoT Solutions revenue. Third quarter 2023 adjusted EBITDA of $14.2 million, declined approximately 6% year-over-year due to increased operating expenses, including SOX compliance. Adjusted EBITDA margin declined approximately 220 basis points to 20.6% from 22.8%, but did experience a slight improvement from the second quarter of this year. The IoT Solutions order delays we experienced in the third quarter have extended in the fourth quarter, pushing additional revenue into 2024. To be clear, this is not lost revenue, but is primarily a function of certain IoT Solutions customers managing year-end inventory levels and delays in remote patient monitoring deployments and clinical drug trials that use IoT devices. We fully expect to recognize these orders in 2024 and continue to serve these customers as they grow back to normal business volumes. Given all of this, our full year 2023 revenue is expected to be lower than our previously guided range of $300 million to $310 million. As such, we are revising our 2023 revenue guidance to a range of $280 million to $290 million. On a positive note, this does give us a slight tailwind for 2024 revenue, and we will provide more guidance for next year on our fourth quarter earnings call. Despite the reduced revenue outlook, we are maintaining our 2023 adjusted EBITDA guidance of $60 million to $62 million due to improved profitability on the acquired Twilio IoT business and reduced operating expenses as we flexed to reflect current IoT Solutions revenue levels, both of which helped offset the reduced profitability from deferred revenue. The restructuring activity we began in the fourth quarter is expected to result in approximately $10 million in cost savings in 2024, reducing potential margin impacts from ongoing macroeconomic events. And with that, I will now hand the call over to Paul to cover the financials in more detail. Paul?

Thank you, Romil, and good evening, everyone. Turning to our results on Slide 7, third quarter revenue increased 4% year-over-year to $68.6 million compared to $66.1 million in the third quarter of 2022. By segment, IoT Connectivity revenue of $55.2 million, which included our first full quarter of revenue from the Twilio IoT acquisition, increased 27% year-over-year. Organically, IoT Connectivity grew in the high single-digits year-over-year. If we exclude the revenue from the noncore customers that were forced to churn at the end of 2022 due to the network sunsets in the United States, then IoT Connectivity revenue grew organically in the mid-teens year-over-year. This growth is despite some delays in deployments or planned upgrades at some customers that we were expecting in 2023, but have now been pushed to early 2024. IoT Solutions revenue declined 41% year-over-year to $13.4 million. As I mentioned on the previous earnings call, we saw some requests from our largest Connected Health customers to defer orders to the third and fourth quarter, which increased the risk that these orders could split further into 2024. This risk has materialized as seen in our lower-than-anticipated third quarter IoT solutions revenue. We are forecasting to increase IoT Solutions in the fourth quarter, but with customers continuing to ask for deferrals to manage costs and year-end inventories, and the limited capacity to the various holidays within the quarter, we are being more conservative on how much revenue we will recognize before the end of the fiscal year in IoT Solutions. Total gross margin in Q3 2023 was 54.8%, an increase of 257 basis points year-over-year. The increase in gross margin year-over-year is mainly due to the mix of IoT Connectivity revenue in the current quarter, which was 80% of overall revenue this quarter. IoT Connectivity gross margin of 61.7% was down approximately 300 basis points year-over-year. This decline was expected due to the inclusion of the lower margin revenue from the Twilio IoT acquisition. However, Twilio IoT margins have continued to be higher than we originally forecasted, which will result in the Twilio business being break-even by the end of this year. IoT Solutions gross margin declined 174 basis points year-over-year to 26.9%. As typical, the change in IoT Solutions gross margin was due to the hardware and services mix in the quarter. Total connections at the end of the third quarter were 18.9 million, an increase of over 300,000 from the end of the second quarter of 2023, and approximately 3.6 million from the end of the third quarter of 2022. Dollar-based net expansion rate, or DBNER, for the 12 months ended September 30, 2023, was 96% compared to 100% in the prior year. As a reminder, DBNER measures the growth from existing customers in the trailing 12 months compared to the same customer cohort in the year-ago period, much like same-store sales growth rate. As a reminder, customers acquired from the BMP/Simon acquisition in the first quarter of 2022 are included in the calculation. However, customers gained from the Twilio IoT acquisition are not included. The DBNER calculation continues to be negatively impacted by the significant revenue received in 2022 from our largest customer's LTE transition project that began in June 2021 and ended in June 2022. During this period, revenue from our largest customer more than doubled. If we exclude total revenue from our largest customer because of this significant non-recurring event, DBNER at the end of the quarter would have been 104% compared to 106% at the end of the third quarter of 2022. Operating expenses, including depreciation and amortization in the third quarter, also including a $78.3 million non-cash goodwill impairment charge, were $125.5 million, an increase of $82.9 million compared to the same period last year. In addition to the non-cash goodwill impairment charge, the increase is mainly attributed to the increase in headcount-related costs, which includes a full quarter of these costs from the Twilio IoT business. Third quarter interest expense, including amortization of deferred financing fees, increased year-over-year to $10.6 million versus $8.2 million in Q3 2022, due to the increased borrowing costs on our existing senior secured term loan. Net loss in the third quarter was $95.4 million compared to $14.3 million in the same period in the prior year. The year-over-year increase in net loss was primarily due to the non-cash goodwill impairment charge of $78.3 million due to the decline in the company's share price and also the increase in interest expense. Adjusted EBITDA in the third quarter was $14.2 million, a decrease of approximately $1 million or 6% compared to the same period last year. Our adjusted EBITDA margin in the current quarter was 20.6%, down approximately 220 basis points compared to the same period in the prior year. The year-over-year decline in adjusted EBITDA and adjusted EBITDA margin were impacted by increased costs for head count, including the additional head count associated with Twilio IoT business. Moving to cash flow, cash provided by operations for the 9 months ended September 30, 2023 was approximately $4.5 million compared to cash provided by operations of $20.5 million for the same period in the prior year. The change year-over-year included increased collections in the prior year from the LTE transition project from our largest customer versus the current year, which had additional outflows of cash from interest and the operating activities from the Twilio IoT acquisition. At the end of the third quarter, cash excluding restricted cash was $19.8 million compared to $34.7 million as of December 31, 2022. Turning to our debt refinancing, as Romil mentioned, we are excited to be working with 2 new strategic partners with deep experience in the telecom space that will help strengthen our balance sheet and give the company more flexibility to invest in growth opportunities going forward. We are replacing our previous $300 million term loan with a new $185 million term loan, which will decrease our total leverage ratio at the end of the third quarter from 7.3 turns to 5.3 turns of last 12-month adjusted EBITDA. The new term loan carries an interest rate of SOFR plus 650 basis points compared to the prior loan, which was at SOFR plus 550 basis points. The new term loan credit agreement allows for interest rate reductions of 25 basis points for each half-turn reduction in our first-lien leverage ratio up to a maximum reduction of 50 basis points. In conjunction with the new term loan, we issued $150 million of 13% preferred stock with 11.8 million 10-year penny warrants. Importantly, the preferred stock dividend has a PIK feature, which allows for greater cash flexibility. After the transaction expenses, we expect to add approximately $15 million of cash to our balance sheet. I know I'm not just speaking for myself, but the entire company is thrilled to have this debt refinancing overhang behind us. And before passing it back to Romil, I would like to make a couple of comments on our updated 2023 annual guidance. We have revised our 2023 revenue guidance downward to $280 million to $290 million versus our previous guidance range of $300 million to $310 million to reflect order deferrals by some of our Connected Health customers in our IoT Solutions business. As mentioned earlier, these risks have materialized, are larger than we originally estimated, and will push revenue into 2024. To be clear, most of these are not order cancellations or lost orders, and based on discussion, those order deferrals will be deferred to 2024 are expected to be recognized in early 2024. At this point, we don't expect to see the recognition of these deferred orders to significantly cannibalize the orders we are forecasting to receive for the rest of 2024. Despite the reduction in our revenue guidance, we are maintaining our 2023 adjusted EBITDA guidance of $60 million to $62 million. We are able to do this for a number of reasons. Firstly, the majority of the reduction of revenue in 2023 is coming from the lower-margin IoT Solutions revenue. Secondly, we will have less variable compensation due to the lower revenue number. And lastly, we are reallocating costs based on our current priorities, which will result in approximately $2 million in savings in Q4 but, more importantly, will benefit 2024 more significantly, likely in the $10 million range. Additional information on this plan will be given on our Q4 earnings call as part of our 2024 annual guidance. And with that, I'll pass it back to you, Romil.

Thanks, Paul. As we finish [ 2020 ] to 2024, we do so with lower leverage, a strong balance sheet and greatly improved cash flow. Further, we are confident that with the transitory effects of the 2G/3G sunsets and LTE transition project at our largest customer now behind us, we will deliver on our top-line growth promise. In fact, we are on track to achieve double-digit revenue growth in 2024, as evidenced by our increasing global sales pipeline. Slide 10 presents a snapshot of our global sales pipeline as of September 30, 2023. Our sales pipeline now includes over 1,700 opportunities with an estimated potential total contract value, or TCV, of approximately $740 million. In the third quarter, we generated an incremental $27 million of closed won TCV, bringing the year-to-date total to $87 million. We continue to progress towards exceeding the [indiscernible] closed won TCV in 2022 and delivering a fifth consecutive year of TCV growth. As a reminder, the majority of sold TCV is recognized as revenue over 4 years, and it is important to note that the closed TCV figure is aggregated across all of our business lines, which have different durations of revenue recognition. Slide 11 showcases a few examples of our wins in the third quarter, which contributed to the closed won TCV of $27 million. These recent contract wins highlight the success of our growth strategy and demonstrate the expansion of new use cases for our products. We continue to win a greater share of our customers' wallets, as evidenced by a $4.4 million TCV contract win with a remote patient monitoring customer. KORE will now become the sole provider of eSIM connectivity across the U.S., U.K., and Europe for this customer, who will also be transferring lines to KORE from a competitor. We are very excited to win the 100% wallet share with this customer because of its high growth prospects. KORE's ability to act as a one-stop shop to provide a full suite of IoT deployment services for customers continues to be a competitive advantage. In the third quarter, a national retail chain selected KORE to provide full lifecycle managed services for a planned migration from 4G to 5G with a contract value of $6.2 million. KORE will provide connectivity, installation services and ongoing management of the customer's devices. Expanding on existing customer relationships built on excellent delivery of our initial scope allows KORE to expand its services with existing customers. A great example is the $2.5 million TCV contract an existing rent-to-own store franchisor customer awarded KORE to provide connectivity across multiple carriers. KORE is also working on upgrading lines from 4G to 5G to expand its footprint further with this customer. KORE continues to win internationally, and in the third quarter, a GPS tracking and fleet management software provider based in Australia selected KORE as its connectivity provider, utilizing KORE OmniSIM for an initial contract TCV of $435,000. Although we chose these 4 wins to highlight in the press release and slide deck, this is by no means a complete list, as we have several other important wins in the third quarter in each of the 4 thematic areas represented on this slide. Despite its parent company utilizing an MNO for connectivity, a provider of smart outlets, switches, thermostats, door locks and sensors, awarded a several-hundred-thousand-dollar TCV contract for KORE to be their connectivity provider based on the capabilities of KORE's OmniSIM or eSIM offer. KORE also won a $185,000 TCV contract from a tracking and computer printing technology manufacturer to support a global deployment in partnership with a hardware provider by supplying OmniSIM for in-store and warehouse inventory management. A leading provider of a proprietary decentralized platform and suite of supporting services used by life sciences organizations for remote capture of patient data was looking for a one-stop technology enablement partner to help them reduce hardware lead times and the use of multiple hardware and connectivity vendors globally. KORE was selected for this $860,000 TCV contract due to KORE's ability to provide a one-stop shop for hardware, software, device management, and connectivity on a global scale. And finally, an existing KORE Connected Health international customer awarded KORE additional contracts with a combined TCV of $236,000 to provide connectivity to multiple global clinical trials. These wins span a broad array of end markets and use cases from commercial building, smart sensors and switches, to warehouse inventory management and logistics, to global clinical trials and remote patient monitoring in hundreds of countries worldwide. KORE's ability to support this breadth of use cases globally is foundational to the unique value we bring to our customers every day. Our final slide, Slide 12, summarizes the key messages we have talked about today. We continued to add organic connections in the third quarter, and KORE's total connections were approximately 18.9 million as of September 30, 2023. Let me just take a moment to put this in perspective. At the end of 2017, KORE had about 6.4 million connections. That's about when I was joining the company. So in less than 6 years, we have added approximately 12.5 million connections, almost tripling our IoT connectivity volumes, which represents, by the way, recurring revenue and a compound annual growth rate of approximately 21%. And this was net of the connections that churned due to the shutdown of the 2G, 3G networks. Our global sales pipeline has never been more robust, and today our funnel represents larger opportunities at significantly higher bandwidth enhanced higher ARPU. On top of this momentum, the company has now delevered, strengthened its balance sheet and increased cash flow flexibility. As I briefly mentioned earlier, the company initiated a restructuring in the fourth quarter that is expected to generate, as Paul also said, approximately $10 million in operating expense savings next year. This action serves to focus on our top priorities and reduce the risk to our profitability in light of ongoing macroeconomic factors potentially impacting future top line growth. All of this is to say that KORE is in a better position today from both a financial and growth perspective than at any time since the company came public. Creating shareholder value remains a top priority, and against the backdrop of what we have discussed today, we believe we are in a great position to deliver against this priority. In closing, thank you to all KORE employees worldwide, our IoTers, for continuing to work together with a growth mindset to serve and support each other and our customers every day. With that, let's start the Q&A, please.

[Operator Instructions] Our first question is coming from Michael Latimore from Northland Capital Markets.

Well, congrats on the refinancing. I'm sure it's nice to get it off the plate and you can focus a little bit more on growing the business here.

Yes, absolutely.

Definitely. Good. So, just wanted to sync 2 things up. It seems like, from a macro perspective, sort of the macro environment may be slowing some deployments a little bit, but doesn't seem to be slowing your kind of new business bookings here. Is that kind of -- it seems like a little bit of two sides of a coin there. But what's your thought on that? Is the macro doesn't seem to be really slowing your business here?

Yes, really good observation, actually. And I personally suspect the macroeconomic factors are impacting also TCV, but we're getting so much better at sales, at marketing, at the quality of leads that we're putting into our pipeline, the brand starting to become a little bit better known after you've been public for a couple of years. And so, I personally think if the macroeconomic factors weren't impacting us, my TCV might even have been more sort of excitingly growing this year, and I do think we'll grow over the 102 from last year. But your point is still valid, right? It's sort of a dichotomous view. Most of the pushbacks we're getting are from sort of larger mostly Connected Health-type focused customers for different reasons. And then there's just a macroeconomic impact across the board, which is cross-industry. And actually we're feeling that in connectivity as well. Our connectivity volume, this is one of our lower organic volume growth years. People are very conscious of unused or 0-usage SIMs, right? They're turning those off proactively. They're optimizing their data spend and expenses more tightly than we've ever seen in certainly in the almost 6 years now that I've been here. So there is some macroeconomic impact across the board. It just is much more visible in these IoT Solutions, large customers, where obviously a few of them start pushing back. We feel that given that, what is it, 8 of our top 10 customers are in Connected Health.

Okay. Got it. And then, on the last call, you talked about maybe -- I think it was $10 million kind of solutions that could get pushed out. Looks like it's more like $20 million now. Can you just elaborate a little bit on, are these the same customers? Or has that expanded to some other customers? Or is there more connectivity change here? Some more color would be great.

Yes. No, it's a mix. But for the most part, it's the same customers, like Romil mentioned, the larger Connected Health customers that are continuing to push out, whether that's because the clinical trial that they thought was going to start won't start until the new year because there's not enough nurses available out there to actually do them. So it is some of the same customers. On the connectivity side, it's a lot less, but we are seeing some that will delay deployments into next year. Or if they were going to do some plan upgrades or firmware updates, which would give us some more overage revenues, they're pushing that out into 2024 to, obviously, manage results for '23.

Great. Congrats on the refinancing.

Next question is coming from Lance Vitanza from TD Cowen.

I just had to drop off and dial back in, so I apologize. I'm guessing it sounded like that Michael had asked about the delays in the business from third, fourth quarter into the first and perhaps second quarter. So, I'll try not to repeat that, but maybe we'll just jump into the refinancing. Congratulations. I know you haven't closed it yet, but it's great that you feel confident in announcing it. I know you've been working on it for a while. How would you describe the status? Is the funding fully committed on both sides, the preferred and the bank debt sides? What, if any, hurdles remain? Are there any, like if the Dow sells off tomorrow, do we have to worry about people pulling the commitment? What kind of -- what contingencies are still in place at this point?

Yes, Lance. Yes, look, it's really, really exciting. I mean, from the time we started on the first-lien side, on the debt side, when we started that process, Whitehorse Capital has just been sort of an outstanding, forward-leaning kind of, I'll say, management and company-friendly kind of partner, and certainly put together the most compelling of what were several alternative first-lien offers. And obviously, they're sort of speaking for the whole thing themselves. We did have a more clubby sort of syndicate alternative as well. So, the first thing I'll tell you is, what was very, sort of good to see was that in what is likely one of the tougher refinancing markets. The company, I think, stood out in the process and had multiple sort of partners. But they are fully committed and frankly, could have funded by yesterday or today when we signed. Really the only reason to delay -- and by the way, we're delighted that we are the first investment, I believe, in Searchlight Capital's new fund. And just between the timing of them closing that fund and cash becoming available and so forth, we've said, okay, let's just separate out the sort of definitive agreements, the signing from the closing. I suspect it won't take but a few days for that to happen. There are no conditions anticipated. And just look, just a couple of words on Searchlight if I could. Again, just a fabulous sort of forward-leaning stance they've had since we first met them. Don't know how much people know about them, but they've got about $12 billion in assets under management, and well over half of that is in the telco sort of telecommunications media space. So they're very knowledgeable in this space. Their vote of confidence means that much more than sort of generic money, if you will, right? Because this is very strategic, very savvy money in the telco space. And we're looking forward to welcoming 2 of their members to our Board. I've gotten to know both of those members reasonably well here over the last few weeks and months. And we couldn't be more excited about how much difference I think they're going to make to a growth mindset around here.