KORE - NYSE

Greetings and welcome to the KORE Group Holdings Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It’s now my pleasure to introduce your host Charley Brady, Vice President, Investor Relations. Thank you, Charley. You may begin.

Thank you, Operator. On today’s call, we’ll be referring to the third quarter 2022 earnings presentation that will be helpful to follow along with as well as the press release filed this afternoon that details the Company’s third quarter 2022 results, both of which can be found on the Investor Relations page at ir.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 that are based on assumptions and beliefs as of today. The company encourages you to review the Safe Harbor statements, risk factors and other disclaimers contained on this slide and today’s press release, as well as in the company’s filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking 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 the 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 2022 earnings call. With me is Paul Holtz, KORE’s Chief Financial Officer. Today we will provide an overview of our financial results for the third quarter of 2022. I will start with a brief highlight of key events in the quarter followed by a summary of our results. Paul will then take you through our financial performance in more detail and we will finish with a Q&A session to answer your questions. In our third quarter, we once again delivered strong financial and operational results and further advanced our strategy through new initiatives. In September, we announced a strategic alliance whereby KORE will join Ericsson’s IoT Accelerator platform, which already has over 35 other MNO partners, most all of which are located in Europe and Asia. Via these channel partners, KORE will have the opportunity to provide over 8,500 enterprise customers primarily headquartered in those 35-plus countries with seamless Connectivity when they want to deploy IoT assets in the U.S. So this alliance has the potential to bring to KORE thousands of customers who are managing millions of connected devices. These are customers KORE would otherwise not have easy access to given that they are headquartered all over the world. However, they will still need to be one customer-by-customer and these wins will likely ramp slowly. That said, this alliance is another milestone in the evolution of KORE, and I am excited by the prospect of partnering with a global leader in Ericsson and enhancing our growth engine for years to come. In the third quarter, we also announced the launch of the KORE Connected Hub, a telemetry device peripheral that’s streamlines the integration of connected medical devices and sensors into KORE’s Connected Health solutions. And finally, in July we were honored to be named a 2022 competitive strategy leader for the global IoT industry by Frost & Sullivan. At KORE we never stop innovating to simplify the complexities of IoT deployment for our customers. Let’s move on to Slide 5 to look at Q3. We again delivered strong results. Our third quarter revenue results were at the upper end of our internal estimates. This has prompted us to increase our 2022 revenue guidance despite the adverse impact from foreign exchange rates having almost doubled from our second quarter projection to an estimated $5 million for all of 2022. Since going public last year, we have consistently proven our ability to execute our strategy. As expected, third quarter revenue of $66.6 million declined 1.8% year-over-year due to a difficult comparison as the year ago quarter included significant revenue from the LTE transition project at our largest customer. However, I am happy to report that gross margin increased 500 basis points despite this revenue decline, as we continue to focus on improving our margin profile. We continue to expect our fourth quarter to decline sequentially from third quarter due to the usual seasonality of IoT Solutions where the fourth quarter is typically the lowest revenue quarter of the year. I will now take a minute to address some of the factors impacting our near-term revenue growth. As we have discussed previously, strength in KORE’s underlying revenue growth has been masked by transitory one-time factors. To put this in perspective, if you cut away all the headwinds created by the 2G, 3G sunsets, the LTE transition project at our largest customer and the foreign exchange headwinds this year, KORE’s 2022 revenue growth rate percentage is in the low-20s. Obviously the BMP-Simon acquisition has been a big help with this growth. But even putting that deal aside, we have delivered organic growth this year net of the transitory factors I just mentioned. More importantly, and while we are not providing formal guidance today, we are excited about the future because these one-time effects are coming to an end. With the approximately $12 million in 2G, 3G revenue headwind next year being the last major impact. And despite this headwind, we expect revenue growth in 2023 to be in the mid-to-high single-digits percentage range, including our belief that we will find replacement revenue at our largest customer to make up for the LTE transition project revenue we received in the first half of this year. In 2024, we believe we can double that organic growth rate given the absence of headwinds and we continue to target a 20% growth rate by 2025. Given our strong performance through the first nine months of 2022, we are increasing our revenue guidance to a range of $265 million to $267 million compared to our prior guidance to $260 million to $265 million. And as mentioned, this is despite the estimated $5 million headwind from foreign exchange rates, which have increased since the end of the second quarter. As a reminder, this was not previously embedded in our initial 2022 guidance that we provided in March. Our EBITDA guidance range of $63 million to $64 million is unchanged to account for some increases in operating expenses that Paul will talk about in more detail. As a result, we anticipate exceeding our two-year go public revenue forecast for 2021, 2022 by $56 million to $58 million. With that, I will now hand the call over to Paul to cover the financials in more detail.

Thank you, Romil, and good afternoon everyone. First Slide 6, as expected, third quarter revenue declined 1.8% year-over-year to $66.6 million compared to $67.9 million in the third quarter of 2021. For almost a year now, we have consistently communicated that revenue in the second half of 2022 would be lower than the revenue in the first half of the year. The decline in revenue has been and will continue to be attributable to the completion of the LTE transition project with our largest customer, which concluded in Q2 2022 and the various carrier network sunsets in the United States, which will be completed by the end of this year. By segment IoT Connectivity revenue of $43.4 million, increased 4.4% year-over-year, including an estimated 2.5% headwind from unfavorable foreign exchange rates. Growth from new and existing customers, excluding non-KORE customers within the high single digits and BMP added approximately 6% to IoT Connectivity revenue. Offsetting this growth was the foreign exchange impact already mentioned a decline in non-KORE customer revenue and the negative impact of lower pricing to existing customers related to the shift of 2G, 3G devices to LTE. All of these combined to reduce revenue growth by approximately 8% year-over-year. IoT Solutions revenue declined a 11.7% year-over-year to $23.3 million. Decline was driven by the difficult year-over-year comparison as the third quarter of 2021 included significant revenue related to the LTE transition project at our largest customer. To put this in perspective, in the third quarter of 2021, the LTE transition project revenue accounted for almost half the total of IoT Solutions revenue and with the P [ph] quarter for the revenue related to this project. Excluding the LTE transition project revenue, IoT Solutions revenue have increased over 60% year-over-year, primarily due to the BMP-Simon acquisition. We continue to expect fourth quarter 2022 IoT Solutions in total company revenue will be down year-over-year and sequentially from third quarter, primarily due to the impact of the LTE transition project with our largest customer in the prior year. Additionally, the fourth quarter is seasonally IoT Solutions and BMP-Simon’s lowest revenue quarter of the year. Total gross margin was 53% and increased approximately 500 basis points year-over-year from the third quarter of 2021. IoT Connectivity, gross margin increased 400 basis points year-over-year to 65% driven by increased optimization of our carrier costs associated with higher revenue and volumes. IoT Solution margins increased 200 basis points year-over-year to 30% driven by our continued focus and improvement in our IoT Solutions margin profile and the absence of lower margin LTE transition revenues from our largest customer in the current quarter. Total connections at the end of the third quarter were $15.3 million an increase of $1.7 million or 12.5% compared to the end of the third quarter of 2021. Dollar Based Net Expansion Rate or DBNER for the 12 months ended September 30, 2022 was a 100% compared to 114% 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 expected DBNER was down sequentially from the second quarter and year-over-year as a trailing 12-month measurement continues to be impacted by the LTE transition revenue from our largest customer, which peaked in the third quarter of 2021 and was completed early in the second quarter of 2022. Excluding total revenue from our largest customer, DBNER at the end of the quarter would’ve been 106% compared to 110% at the end of the third quarter of 2021. Looking ahead to the end of Q4, we now expect DBNER with our largest customer included to be in the low 90% range or around a 100% excluding this customer. Also note that foreign exchange had a 1% to 2% negative effect on DBNER for the third quarter and similarly will in the fourth quarter. Operating expenses included depreciation and amortization in the third quarter were $42.6 million, an increase of $4.1 million or 11% compared to the same period last year. Increased salary and benefit costs, recruiting costs to hire new employees, higher travel expenses, operating expenses related to the BMP acquisition, which included $1.1 million in depreciation and amortization and go public company costs including insurance and professional service fees all drove the increase in operating expenses year-over-year. Third quarter interest expense increased year-over-year to $8.2 million due to an increase in borrowing costs on our senior secured term loan. We expect interest expense will continue to increase to approximately $10 million next quarter as interest rates are expected to continue to rise. Net loss in third quarter was $13 million compared to $4.5 million in the same period in the prior year. Adjusted EBITDA in the third quarter was $15.6 million, a decline of $0.3 million or approximately 2% compared to the same period last year. Our adjusted EBITDA margin in the current quarter was 23.4%, which was flat compared to the same period in the prior year. Moving to cash flows. KORE had another strong cash flow quarter generating $9.8 million from operations in the three months ending September 30, 2022. This compared to cash from operations of $4.9 million for the same period in the prior year. The strong Q3 2022 cash flow generation was driven by the positive cash flows from the business, including from our largest customer and their LTE transition project revenue from Q1 and Q2 of this year. There was also a lower requirement for prepaid inventory during the quarter. Cash and cash equivalents at the end of the third quarter were $43.3 million compared to $86.3 million as of December 31, 2021. This change was primarily to the financing of the BMP-Simon acquisition. I will wrap up by repeating that despite the estimated $5 million foreign exchange headwind for all 2022 that wasn’t in our previous revenue guidance of $260 million to $265 million, we’re an increasing our 2022 revenue guidance to a range of $265 million to $267 million. Our adjusted EBITDA guidance of $63 million to $64 million remains unchanged reflecting continued pressure on headcount related costs from a tight labor market and the use of more expensive contractors to fill these gaps. And with that, I’ll pass it back to Romil.

Thanks, Paul. As you have all now heard, we had another solid quarter. When KORE went public a little over a year ago, we committed to generating 2021 and 2022 combined revenue of $457 million. As it stands today, we believe we will exceed this projection by approximately $57 million at the midpoint of our increased 2022 revenue guidance. And we are doing this in the face of disruptions in our customers supply chains, significant forced churn from the 2G and 3G sunsets in the U.S., which will be complete by the end of this year, a rising cost environment and foreign exchange rate headwinds, which have continued to increase. Suffice it to say, we have great confidence in the quality and resilience of our business model. We enjoy a business model that is largely recession resistant due to the 80% plus recurring revenue we enjoy and the fact that a majority of connected devices that KORE provides connectivity and other services for our embedded in mission critical IoT Solutions. In general, our customers cannot do what they do without our service. Slide 9 shows you the transformation path that KORE has taken to move beyond being solely an IoT Connectivity provider to a company that offers a broad array of technology-driven services to help deliver end-to-end IoT Solutions in the most exciting growth industry for the coming decade, the Internet of Things. A much more connected planet with roughly 75 billion to 80 billion connected devices and sensors by 2030 is driving a digital revolution in almost every company and home. Over the first four years of our transformation, our focus has been on strengthening our KORE business of IoT CaaS or Connectivity-as-a-Service and launching new capabilities to target attractive market adjacencies. At KORE, we believe that effective expansion strategies start with a customer in view. By thoughtfully studying the market and our customer’s problems, we identify how we can help make their IoT adoption journeys easier. Second, we do not believe in straying too far from the KORE. The very credibility of a company and its offers depends upon our customers believing we are capable of delivering certain IoT capabilities better than they can themselves and orchestrating the ecosystem of IoT better than they can. This is why we start with the chart many of you have seen before, our 7x7 framework of the major steps it takes to design and deploy an IoT solution. We have identified how we can become a one-stop shop for our customers and further we have identified the high growth use cases in key industries to focus our initial capability expansion and hence our target addressable market or TAM expansion efforts. In our IoT CaaS business, we have invested in world-class technology and have built the leading global independent connectivity offering. With KORE OmniSIM, our eSIM offer, we can connect customers in over 190 countries. Better yet, our customers can utilize the OmniSIM offer via APIs from our micro-services architecture directly into their own systems, or they can log into our ConnectivityPro portal and take advantage of our multi, multi, multi offer for global IoT Connectivity. One screen, one APN, one bill, one number for global customer support, effectively simplifying the most significant of complexities that have been holding back IoT. Because as you all know, without connectivity there is no Internet of Things. Connectivity has to work that is the devices have to be connected and data has to flow. Next, we built out our managed services capabilities with which we have had early success. We have focused these capabilities in certain industries. Our KORE CaaS business was strong in telematics and fleet and we were attracted to the Connected Health market since I really believe there will be soaring demand across healthcare and life sciences for IoT technology to help with the growing remote, everything trends, aging in place, global clinical trials, et cetera. In keeping with this focus early last year, 2021, we launched a determined go-to-market motion in these two industries with focused practices and global industry leaders. The next step, even as we embraced the challenge of cross-selling these new capabilities into our existing customers, is to invest into what we call preconfigured solutions, where we address frequently occurring problems. For example, in Connected Health, now our largest industry vertical, our Connected Health Telemetry Solution or CHTS significantly reduces the complexity of getting a gateway or hub device to pair with blood pressure monitors and weight scales and other sensors in homes and clinics where remote care is increasingly a prerequisite. In the life sciences arena where clinical trials are still largely manually run CHTS allows real time data capture rather than waiting weeks or months to collect data to be analyzed. KORE is hence very well positioned to benefit from growing trends in healthcare and life sciences, such as the increase in decentralized clinical trials, which are projected to account for 70% of all clinical trials by 2025 and the expansion of remote medical device monitoring and remote treatment of chronic diseases such as diabetes, hypertension, and cardiovascular disease. In our second largest vertical fleet discussed in some depths on our last earnings call, we have several preconfigured solutions. These preconfigured solutions are able to track and monitor the vehicle, including location, speed and fuel consumption, driver metrics such as performance and adherence to regulations and safety, and cargo variables like temperature, humidity, and vibration, all into a single interface utilizing the KORE One IoT platform and KORE ConnectivityPro. In-vehicle video telematics is a growing area and is expected to be $1.3 billion market by 2024. KORE already has several in-vehicle video solutions for on-road and off-road applications. Aside from the overall growth dynamics in this area, video solutions carry significantly higher ARPUs for connectivity as do so many use cases that are using more bandwidth as IoT matures. Underpinning all of course product and technology capability is the strength of course talent pool. We are fortunate to have leaders with decades of experience in developing, deploying, and managing IoT Solutions. They not only identify current customer needs, but anticipate what will be needed in the future. Combining this bench strength with our global connectivity reach, innovative products, IoT managed services and KORE sole focus on IoT will we believe allow us to continue to win market share in a large and growing market and drive growth for years to come. As 2022 comes to an end, we are increasingly focused on the deliverables in the 2026 column, including leadership in 5G and edge analytics, massive IoT and as it makes sense, an expansion of industry practices to take advantage of our world-class capabilities and mold them into solutions for new high growth use cases thereby continuing to increase our TAM. And we will continue to add to our capabilities to maintain our leadership position in this emerging decade of IoT. KORE continues to grow our connected devices year-over-year and win new opportunities. Starting this quarter, we are sharing with you some metrics from our global sales pipeline, which is presented on Slide 10 to provide better visibility around the magnitude of growth opportunities with which we are actively engaged. As of September 30, our global sales pipeline includes over 1,300 opportunities with an estimated potential total contract value or TCV of just over $400 million. We define TCV a little differently for IoT Connectivity than for IoT Solutions as you can imagine, but we are conservative in the metric and limit TCV value such that this revenue can be projected to burn and bill over the next three years to four years. So what does this mean? This is a snapshot of all of the opportunities we have identified as of September 30 across the various funnel stages. Not all of these opportunities will convert to closed won [ph] opportunities, which you see in the bottom section of the funnel. Closed won opportunities are those that have finished field testing and moved into production with our service. Year-to-date, through the end of third quarter, our closed won business had an estimated TCV of $72 million from new customers or new revenue expansion at existing customers. This $72 million is incremental revenue we expect to recognize over the next four years and we expect this figure to increase by the end of 2022. Now, it is important to understand that revenue from a new contract does not grow linearly. There is generally a slow ramp of revenue, especially in IoT Connectivity, which then continues to build over the contract period. I would also remind you that our Connectivity recurring revenue generally runs longer than for four years and can increase over time and these factors are not captured in our TCV estimate. Finally, our strong recurring revenue base or run rate business, as we call it, continues to represent a major part of our revenue each year with new TCV driven business being a relatively small contributor. In closing KORE delivered another solid quarter and we continue to do what we said we would do. And I will reiterate that as we move past the headwinds of 2G, 3G sunsets and large one-time or transitory revenue effects, we expect to grow from the trough fourth quarter this year with the goal of mid-to-high single-digit organic growth in 2023, doubling this organic growth rate in 2024, which then position us by 2025 to be a 20% top-line growth story with an EBITDA margin in excess of 20%. I want to thank every one of our employees across the globe, our IoT-ers as we call them for their hard work, dedication and commitment to KORE. With that, let’s start the Q&A.

Hey, good afternoon. Thanks for taking the questions. Maybe just to dive in quickly, in terms of the organic growth in the most recent quarter, I know you threw out a bunch of different numbers and there are a lot of moving parts in there. But I was wondering if you could clarify for us what legacy connections were at the end of September. It sounds like they’ll be completely out of the picture by the end of the year. If there was any supply chain impact in terms of your inability to ship because of modules or other device availability and then kind of what that organic growth rate did look like on a normalized basis, maybe in constant currency in the third quarter – on the services front. My apologies.

Yes. Yes. So yes, on the Connectivity side of things, when you look at it, first off we’ll talk about first supply chain and Romil can chime in if he has anything. But we’re not seeing any difference compared to last quarter to this quarter; again, some customers here and there will have some issues getting their devices and so forth, but nothing significant or major that we would call out. From the connection standpoint, we’re estimated between 300,000 and 400,000 still left at the end of the quarter, which is mainly 2G, T-Mobile 2G customers and Verizon CDMA customers. This cohort of customers declined year-over-year about a $1 million when you compare Q3 of last year to Q3 of this year. And then going into Q4 you’ll have that same kind of decline. But outside of that, the other parts of the organic growth or so forth, we had about $3 million from existing customers or new customer’s growth. And then that was offset by the FX of $1.1 that we talked about, the $1 million we lost in non-KORE customers and then about $1 million or so from the LTE pricing change year-over-year. And then on top of that was the BMP 6%.

Hey Paul, if I could just quickly follow up on the ARPU front, it looks like ARPU has might have been down a little bit sequentially, not a huge number, but is that mostly the Forex impact?

Yes. Yes, it is, the $1.1 million. You add that back and we’re pretty much flattish.

And then if I could as a follow up going forward looking at the TCV funnel, I’m wondering if you could provide some more color in, and by the way, we appreciate that level of detail, but in the $72 million, I’m kind of wondering what the win rate has been there? And looking at that $407 million funnel, what’s the composition in terms of how should we think about ARPUs? Are these going to be upwardly skewed ARPUs? Is it skewed towards any particular end markets? And I’m wondering, how Ericsson and the IoT Accelerator program fits into the, I know it’s very early stages, so I’m assuming there’s probably not a lot in there. But just want to clarify that if that’s going to represent some further upside? Thanks.

Yes, let me sort of hit off the TCV funnel. And look, we took our time putting this out here – out there for sort of public markets, because I really wanted to get a year or so under our belt of a much more disciplined and conservative metric on total contract value than we had in the past. This beta site stage that you guys are seeing there on Slide 10, if you’re – I think that slide is still up on the presentation screen is actually a brand new stage that we only implemented this year, because we found a lot of winds weren’t turning into revenue because customers were off doing beta kinds of things. And so now we don’t really call it a closed won deal until we get production orders flowing and revenue flowing. Before, before this year we used to have the contract sign stage was basically closed won, right? So, we’ve taken pay-ins to be more disciplined, more conservative, as I said a little bit just in my prepared remarks, we cut off connectivity at sort of roughly 40 months. We cut off even programmatic solutions deals that may be much longer than that at 36 months, meaning three years, because three years is a lifetime, right? And you don’t really want to count bookings beyond that and artificially inflated. So what’s the key message here that I guess, I have two or three key messages, Scott, the first is, this same snapshot, third quarter last year was 1200-ish opportunities and 288 odd TCV, right? So, something is working. I mean, that I could give you statistics out the [indiscernible] in terms of MQLs and SQLs. I don’t think that would help much, but net-net at the end of the day, even if we don’t increase our sales force dramatically, we stay at the current levels and deal with sort of 1,200, 1,300, 1,400 opportunities at a time, which is about what you can deal with our capacity. What I’d like to see, of course, is that continued trajectory up from, like I say, close to $300 million in TCV potential, right? Potential estimated TCV last year to $400 million this year. I’d like to see that get to $500 million; I’d like to see that get to a $1 billion, because that would mean we’re doing the right things. We’re targeting the larger customers, the larger IoT deployments. So that’s sort of one angle to look at. The other angle to look at is really this should give us a lot of confidence about our numbers. I mean this basically points to the resilience of our business model, right? Because recurring revenue, right, at about 85% this business. So, you could take whatever number you’re going to take this year, we just increased guidance. If you took the midpoint range $266 million [ph], you can multiply that by 85% 0.85, right? You get a number, right? Call that $225 million, $226 million, right? We consistently see at least a 10% kind of growth on existing number on top of that, right? So this existing customer base, based on prior TCV deals run rate growth, our customers growing, we should put that on the top-line right, of this TCV, this $72 million that you’re seeing, and by the way, we should multiply that by four and divide by three, right? I mean, just to get the full year number that’ll be closer to a $100 million. And so you know about 15% of that, roughly half of that burns in the year that you get it. Because a lot of the solution stuff is front end loaded. A lot of the connectivity stuff is backend loaded, but roughly 15% of that we always see burns the next year, right? So, you can add that number in. And then you got next year’s TCV and if I do no better than this year’s $100 million, right? I’ll get 50% of that burning next year. And that’s how you see a very, very clear walk to a significant revenue growth number. And then you say [Technical Difficulty]

Please stand by, will you appear to be – speakers, do you hear me? Scott, do you hear me?

Yes, I hear you. But I can’t hear anyone else.

I believe we lost the speaker lines, speakers do you hear me? [Operator Instructions] Now we’re joining the speakers.

Hello, can you hear us now?

Yes, we can. And you’re still on with Scott Searle from Roth Capital, Sorry about you’re now reconnected.

You stuck around. You’re just Scott. Hey, listen, my board always tells me, Scott, that I just talked to myself a lot today. I was actually doing it even broader than that. So, I think I lost you somewhere around where I was starting to talk about why we should feel good about the TCV because it provided this clear, sort of line of site to sort of growth, right? And really if you take sort of our 85% recurring revenue number, right? There’s really high quality recurring revenue business we have, right? Whatever your number ends up being I was, I was just going off of $266 million at the middle of the new guidance range, that’s roughly $226 million right there on just recurring revenue. Even in this environment of I’ll say sort of, supply chain constraints and potentially other macro factors, we’re confident we’ll get a growth on existing number in the 10% range or more. We, in normal times, we used to get significantly more than that, almost 2x that for several years. And so, you put another 10% on that number up there, from this TCV number. This is 72 through three quarters, right? If I just prorated that for the fourth quarter, that’d be like 96 call that a 100 about half of that burns in the first year, about 15% to 20% in the second year. So you should get 15% to 20% of that next year. If we did no better than a $100 million in TCV next year, right, which again, one would like to – think will keep getting better, but if we did no better, about half of that’ll burn again next year. And so you actually add those numbers up and you get to a significant growth, clear growth number. So then you say, well why are you only guiding to mid-to-high single digits? Well, because we’ve got, this last year, these last two sort of headwinds, right? The $12 million of revenue we got from 2G, 3G this year, that won’t show up again next year. And then, our number one customer was which, the big LTE one time project that finished in Q2 was right at about $12 million as well, right? So you sort have to subtract that $24 million, $25 million from all those growth numbers, I talked about next year. And that’s why we’re being sort of, conservative and saying mid-to-high single digits. Now, you take that same equation and take that forward into 2024. And again, if I do know better, just a $100 million TCV, the beauty is there’s none of that $24 million, $25 million one-time whole happening, right or that, that whole that we’re digging in 2024. And so the entire sort of a $100 million or so of top line growth, comes home to roost in 2024. And that’s what gives us confidence when we say we think we can double the growth rate from 2023 to 2024. So anyways, that’s kind of how we should look at TCV. If that’s helpful.

Yes. Very helpful, I’ll get back in the queue. Thanks.

Thank you. Next question today is coming from Matt Niknam from Deutsche Bank. Your line is live.

Hey guys, thank you for taking the questions. Just, if I could first on EBITDA margin. So, we’ve seen that stay relatively stable at about 23%, a couple – last couple quarters despite some of the list you’ve seen in gross margins. And I’m just wondering relative to the revenue outlook you’ve given or initial revenue outlook for 2023, how are you thinking about the path for margins into next year as you see some organic revenue pickup? And then maybe somewhat related to that on leverage, I’m just wondering maybe for Paul, has the dynamic of rising rates in your mix of floating rate that change the way you’re thinking about target leverage for the business? Thanks.

Yes, so I’ll take the first one. So for leverage, we had originally talked about a 4 to 4.5 [ph] over the next 12 months to 24 months. And obviously with interest rates going up in interest expense hitting and probably $10 million next quarter we will definitely, we’re going to continue to work towards that, but it’ll be probably more closer to the 4.5 range than 4 again, depending on what interest rates do over the next couple years. And again, a lot of that will be based on just the EBITDA growth of the company over into 2023 to 2024. On the margin and side of things, we do expect our gross margins to stay kind of where they are right now from a Connectivity perspective 65%, IoT Solutions will hopefully continue to grow into next year. So, we’re at 30% and continue to go up a little bit from there. So, we are getting more gross margin dollars, but from a OpEx perspective, because of what we talked about, these increase in costs, those will continue obviously into next year and we’re going to invest more onto the sales side of things on the business. So, we’re thinking the – low 20% range on the EBITDA margin, but again, that’s just a estimate right now.

Well, and again, some of that is strategic choices, right? I mean, we’ve talked about, and at least where my head’s at is building a kind of rule of 40 business with a, 20% adjusted EBITDA margin and 20% top-line growth, right? Now, if we’re happy with single digits growth or low double digits growth, we don’t need to invest as much in 2023 and 2024, but, right. So, I think those decisions we will make. But if we choose to reduce EBITDA margins from the 23%, 24% range this year, it’ll be because we are comfortable getting down to 20% and but making sure that by 2025 that target of 20% growth is achievable.

That’s great. Thank you both.

Thank.

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

Great, thanks. Understanding kind of the KORE existing business really doesn’t see as much impact from macro, but just whether you’re seeing any macro impact to just kind of the new business pipeline. And then maybe second, you just kind of touched on it in areas that you wanted to invest in, and clearly there’s a lot of opportunity ahead for this business, but just you are seemingly managing to kind of trying to optimize cash flow. You do have inflationary impacts to OpEx. So just are there areas where you are like, what are the key areas where you’re not able to invest today that you would like to? Thanks.

Yes, Thanks. Meta. Yes, look I mean, I think, in any given year, one obviously tries to manage to right the budgets and the expectations and all that sort of stuff, right? And so, we’ve invested as sort of as much as we could. We were curtailed by frankly, by the just incremental costs, both of being a public company, some of the investments we’ve had to make into finance accounting to make sure, things are moving well with our SOX program, that sort of thing. Hopefully that’s sort of, where it needs to be now and we can get back to sort of investing in sales as Paul just said. So, I think that’ll sort of self rectify over the next year, look in terms of the macro and its impact, especially on new opportunities. I was actually reasonably certain Meta that you would ask me how many of those wins and how much of that TCV was from new customers. But I’ll go ahead and answer the question anyway. Look, it turns out that there’s actually quite a lot of opportunities in that number. There’s actually 840 odd opportunities, which tells you again, that there’s a long tail of very small TCV type opportunities that we win. But interestingly, right, we have a little over 200 new customers, in fact 240 new customers, new opportunities, one out of 840 that are new customers, right? And they won’t be massive revenue certainly next year, but it just, right, it’s, I think another forward indicator of growth in the future. I would say that our new customer logo acquisition is actually up this year compared to prior years, as is almost every statistic along the way from marketing qualified leads down. So that sort of answers at one level. The question about is the macro affecting you? But if you already step back from all of this, I mean, one of the reasons, we were already afflict in telematics company, and so we weren’t going to really change that. That was my largest industry when I arrived. But one of the big reasons we focused on Connected Health, so much of the reasons I’m, probably the strongest supporter of health, as an industry focus at KORE is because we’re picking resilient and high growth type use cases and areas and industries where we were fairly certain they were just, I mean, I’ll argue that unless somebody shows me something different, health will pick up 30% and then 40% of this GDP and just keep going, right? And so we’ve picked areas of focus use cases of focus that will stay resilient. You can’t really switch on and off your pacemaker monitoring or your diabetes, continuous glucose monitoring device because the economy is down. There will certainly be some impact. We’re not sticking our heads in the ground and saying there won’t be a recession. I will tell you uniquely you that, my personal view today anyway of the recession is more skewed towards Morgan Stanley’s view, your view that you guys published today actually, that it’ll be a shallow, if at all a recession, at least in North America, I’m not, this isn’t going to be the 70s again, right? I think innovation; the innovation agenda in the United States especially is alive and well. That innovation all comes with technology and tech enablement and IoT enablement, and that’s where we play, right? And I will tell you that for every enterprise customer that is maybe looking at something that, as that they’re doing as a discretionary spend item that, that they may want to slow down. I’ve got three conversations going on with senior people at these customers saying, we’ve got to implement better automation, better productivity enhancement tools, IoT tools, remote asset manufacturing tools. Labor’s going to continue to be hard to find. And these enterprises have to get better at deploying technology to help. And I think people sometimes underrate the opportunity for IoT to help drive efficiencies and automation and productivity. So, we’re relatively sort of confident in hitting the things we’re saying we’re, we can do, mid-to-high single digits next year, try to double that the following year, et cetera. And I mean, of course, if the macro changes dramatically, we’ll have a different conversation, but we’re saying everything we’re saying in a measured way based on what we’re seeing.

Great. Thank you.

Thank you.

Thank you.

Thank you. Next question is coming from Walter Piecyk from Lightshed. Your line is now live.

Thanks. Romil, you gave, you made some commentaries, I guess about the TCV from a year ago. I think you said something like 282, 1,200 opportunities. What was the total close one a year ago?

The total close one a year ago was actually slightly larger than the total close this year, but it’s just not apples-to-apples comparison. I mean, if you heard, what I said about the entire new stage we’ve created of the beta site stage, right that completely changes the picture because what we were seeing in the business over the first couple of three years of our sales force discipline was, the expected burn or revenue recognition against TCV was not showing up. And so we tightened that definition up at the front end of this year. So it’s not a good comparison.

I don’t know what you mean by that. The expected burn of TCV, what does that even mean?

The revenue recognition against TCV. TCV is a total contract value number that burns over a period of time.

Okay. So was, does that mean that the larger number from last year included what you’re now considering in beta site stage?

That is correct.

Or was it just a larger number period?

It was beta site. Last year’s number was really the contract sign stage was closed won is how you should think about it.

Right. So it was larger last year than this year. So why is that?

Okay, so let me try again, Walter. If I counted my contract signed stage, which used to be the closed stage last year, right? If I counted that stage, the beta side stage and my closed won stage this year, I’m bigger. It’s just not an apples-to-apples comparison on the closed won number.

Right. So you’re saying the last year’s number, which you’re claiming is larger, was including what in this chart is showing in the beta site stage, which is in the $407 million?

And the contract fund stage.

Okay. So what is the apples-to-apples then on the closed won, if you eliminated that from last year’s number?

It’s impossible. It’s impossible to tell. I mean, last year when a contract got signed by a customer, we would say that’s TCV, and we’d just call it closed won.

Right. Okay. Earlier also, you mentioned something about after talking about how the guidance was increased for revenue, but wasn’t increased for EBITDA because of labor costs, et cetera et cetera. But then you said, our customers connect, our customers cannot do what they do without our services. So, I think if that’s the case, when I look at other companies in connectivity with recurring revenue type of businesses, they’ve increased price. So if your customers, if this is such an important essential service to your customers, when you enter 2023, have you considered perhaps increasing price, so that when you have upside in revenue, you also get upside in profitability?

Yes, it’s definitely something we’re considering. I will tell you that, I’m not a big fan of these actions that have been taken by certain of our, I’ll say peer group loosely. Because they tend to be relatively short lived increases in nature. They tend to be poke your customer in the eye in nature and human beings and companies have very long memories. So we, if we go there, we’ll go there very cautiously and where it makes sense, and we will go there in certain areas where we can defensively take to the customer a story of increased labor costs or increased hardware costs, et cetera, which we of course do today, we pass that along, right? It’s not that we’re just eating the differences in those costs. So it’s certainly an area that we will look at.

But the number suggests that though, because if your revenue goes up by $2 million on the guidance, right, and your EBITDA doesn’t, then effectively you are eating those incremental costs. No?

No, we’re not. Because as look at the reasons for our OpEx increase, it’s got far more to do with what it’s cost us to retain our employees, what it’s costing us to attract employees who are leaving the company. It’s got far more to do with that and certain other items, which if you’d like Paul can detail in a lot more detail. But it is not because eating the extra procurement cost, if you will, or hardware cost of a device that we’re passing on to a customer.

Well, and think of the extra $2 million in increased guidance the majority of that is coming from IoT solutions, which is at that lower margin of the 30% or whatever. So it’s getting…

I mean, lower that’s zero, that’s incremental zero margin, right? If revenue goes up and EBITDA doesn’t, incremental margin is zero, then.

No, so…

I mean, it’s not lower, that’s literally zero. That’s just math.

No. If it’s increased the $2 million increase on 30%, that’d be $600,000. If that $600,000 margin is offset by an increase of $300,000 in OpEx or whatever, that’s still, and we’re still within the range, I’m not going to increase guidance for $300,000.

Okay. And just last question, I guess you mentioned the trough quarter in Q4. Are you referring to the growth rate, meaning that, that you’re, that you believe that the trajectory of the business is closed and obviously new business that the year-over-year organic growth rates should improve each quarter throughout 2023 and obviously getting to your mid-to-high single-digit guidance of the year?

Well, I mean, if you the literal quote of growing from the trough of the fourth quarter is merely saying that obviously, first of all, just looking at year-to-date, first nine months of our revenue versus the guidance, that Q4 is going to be down. So the first point is that is the trough quarter. We expect that to be the low quarter of – the last few quarters and certainly the next few quarters. And that we will grow from here, right? So Q1 will grow sequentially over.

So, but no, I understand. I’m just wondering, are you talking trough in terms of absolute number, meaning the number obviously is going to be down or relative to the – or the growth rate?

Absolute number is all we’re talking about. Yes.

Okay. So because theoretically you could have, the number could be up empirically in Q1 and that doesn’t reflect, that obviously could reflect organically lower growth in Q1 and Q4, right? Because your cost is $69 million?

You’re right about that. And it is absolute number Q4 and absolute numbers going forward from there. I’m not making any proclamations around Q1 2023 being upped even potentially on Q1 2022. Remember Q1 2022 still had our number one customer is large LTE transition project, right? So, yes and it had do 3G still. Yes.

So, and then just my – I guess my final like 10,000 foot question, which is, earlier I think you, in response to someone’s question, I forget who it was, talking about the balance of investing and you could do lower growth, high growth, I mean, with the stock where it is, what do you think investors want to see in terms of that balance? And is it something that you need to address? Or does it, you’re just like look, this is what I believe our strategy should be, and when the numbers show up and we see this EBITDA grow, then I guess as they say, build it and they will come or have you actually, had some interaction with investors to understand maybe they want more profit and cutting costs, even at the expense of potentially giving up some revenue?

So first of all, I listen all the time and try to listen well, I ask almost every investor I ever talk to, every analyst I ever talk to sort of, where – what do you guys think the 2020 answer has always met, has always been met with sort of universal, hey, if you are confident, you can get there, you should try to go get there, right? I mean, remember as a private equity company with very, very high, I mean 10.5 turns of debt effectively, we sort of had to have very high margins, so we were closer to 30% adjusted EBITDA margins, you had to drive for that cash flow to pay that debt load, et cetera, et cetera. So the, so growth rates were what they were, right? And so we think that’s the right direction to go now. Yes, there’s a debate to be had yet and there’s a budget to be set yet and all of that sort of stuff. So, I’m stopping short of saying absolutely, that’s where we’re going. That’s all.

Got it. Thank you.

Thank you.

Thank you. Next question is coming from Lance Vitanza from Cowen. Your line is now live.

Thanks guys. I wanted to see if we could talk a little bit more about the Ericsson alliance. Clearly good news from the standpoint of new customer growth, but could you explain a little bit more mechanically how this works and specifically what’s in it for Ericsson? Do they are – are you paying them like a percentage of revenues they’re making introductions, I suppose, and did they get a bounty or a percent of revenues? And maybe we could just start there.

Yes, hey Lance that’s a good question. And actually a pretty good way to think about sort of, what sort of Ericsson gets I mean, in general, it isn’t just about the revenue, “They’ll get from us to think of it as a rev share of some form”. It’s really for them also, important to their overall growth, right? And to the overall growth of their other channel partners and to their enterprise customers. I mean, let’s get down to the fundamental mechanics. So Ericsson’s IoT Accelerator platform is a connectivity management platform, right, which carriers, MNOs will lease for three-year, five-year type contract terms to run their IoT businesses on, right? So you got a carrier in Singapore, you got a carrier somewhere in Eastern Europe. There are 35 plus carriers are predominantly, actually mostly all in sort of Europe and Asia, which is actually one of the things that attracts us to them and to their ecosystem. So a local enterprise in Singapore or, name the country of your choice or a solution provider who’s launching a new solution in whatever in vehicle video telematics in food management, and uses that local carrier for that local sort of startup business, let’s say or the initial deployment of their solution, if it’s a larger enterprise now wants to start to spread it globally. The problem again, the problem that we solve KORE with our multi, multi, multi offering connectivity is, boy you’d have to go to another country and get another carrier and use their carriers platform and then a third country and a fourth convenes pretty soon you have, many platforms. Again, KORE solves that. So one answer for that customer in Singapore is to say, Oh, this KORE company exists, unfortunately my brand doesn’t quite, isn’t quite that strong globally, where these 8,500 enterprise customers that are on the 35 plus MNO platforms that use IoT Accelerator as the IoT are calling KORE, right? So for them, the ideal answer actually is, can I just use my Ericsson IoT Accelerator platform that I have and just you guys do something in the backend and connect me into these countries I need to be in? And that then is what Ericsson does, right? Ericsson brings in their other carrier partners from these other countries where you want to deploy. And so this Singapore customer can now deploy. So now let’s talk about the United States, right? That Singapore customer wants to deploy the United States. Most of the world wants, most enterprise companies in the world want to be part of this market, right? They literally had no choice today. They had no IoT Accelerator platform implementation in the United States for them to be able to use that connection to bring their, I’ll call it inbound traffic to the U.S. and deploy it here. So that, that’s why, Ericsson reached for us. They know our multi, multi offer. They know we work with all three of the major carriers here. They know that we can, simplify a lot of the complexities for deployment and add even further value to these customers. And so that’s the makings of the deal. Now that I got to tell you, I mean, in the five years to 10 years, the decade of IoT, as I often call it, this will be I think a very important play and a very exciting indirect channel for growth for us, right? In the next 12 months and 18 months. It won’t be a meaningful amount of revenue, right? Because these customers have to come individually. They may come to Ericsson, we’ll bid on them. Hopefully we’ll win a handful in the first half of next year. We’ll learn a lot through that. Hopefully our win rates will keep going up from there and it’ll get to build ahead of momentum. But I mean, yes, I got a CFO sitting next to me not counting, lots of millions of revenues for next year anyway.

Understood and appreciate the incremental color. Thanks Romil. Congrats on the quarter.

Thanks, Lance.

Thanks, Lance.

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

Hey, thanks very much and apologies again. I have no idea what happened to our line there. Appreciate, you guys hanging on for that and taking the time in general to listen to our earnings call. We look forward to updating you on our fourth quarter and year end results in March, 2023. Thank you very much. Bye-Bye.