Kaleyra: Long-Term Thesis Fully Intact After Q3, But A Caution Flag For...

Kaleyra: Long-Term Thesis Fully Intact After Q3, But A Caution Flag For Q4 (NYSEMKT:KLR)

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In this article, I would like to provide a breakdown of Kaleyra’s (NYSEMKT:KLR) third-quarter results and parse through the positives and negatives in the report.

On September 1st, I was fortunate enough to introduce Kaleyra to the Seeking Alpha audience via the below linked article:

Twilio And Kaleyra- An American Beast And Substantially Undervalued Italian Cousin

As Kaleyra is only two quarters in as a public company and having made a large personal investment in the company, I was highly curious to see its progress in the Q3 report as I imagine you were as well if you are reading this article.

When the bulletin came flashing across my iPhone that the company reported a miss of .09c and a revenue beat of $1.78 million, honestly I was a bit disappointed in the results. The company has been telling everyone that its margins would drastically improve at the back half of the year and has been hinting at a large financial deal to close by the end of the year. On the surface, neither of those items appeared true.

But as I dug deeper and listened closely to the conference call, I was able to hear a few things that excited me.

Margins

First, margins were much stronger than I thought they were based on the headline number.

Source: The trusted CPaaS – Kaleyra

Q3 margins rebounded dramatically to 19.6% from a dreadful 14% in Q2. In the conference call, the CFO indicated that the key driver here is the voice segment rebounding. Voice has significantly higher margins than text and was and still is the most affected line of business due to the COVID-19 pandemic.

As to the EPS miss, the company clearly invested in the business in Q3 with a substantial increase in sales & marketing in the United States along with investing further in R&D/products. The company also gave away $5.2 million in stock-based compensation which while not ideal long term is not nearly as large as charges for other tech and CPaaS companies.

The company also has a proven, demonstrated ability to leverage via scale.

Source: The trusted CPaaS – Kaleyra

As I mentioned in my prior article, the company is pivoting towards the US for multiple reasons; however, a main driver is the much higher margins awarded here in the States. The company has already shown its ability to leverage scale and to grow EBITDA two times faster than revenue growth from 2016 to 2019, and I see no reason for this to slow down with much more business to be conducted in higher-margin countries in the future.

New Lines of Business

I was particularly pleased when the CEO mentioned and gave color on the recent Google (NASDAQ:GOOG) (NASDAQ:GOOGL) partnership and the verified calls feature. Basically Kaleyra has been chosen to work with Google to enable customers to not just see a random number calling them, but to see both the business that is calling and why they are calling you. This is a clever and very useful feature for Google to deliver a clear benefit over Apple (NASDAQ:AAPL) to reduce spam calls and also allow businesses to actually reach their customers.

Now the sense I have here is that the revenue and margins from this partnership may not be huge; however, the Google nameplate alone is worth the company’s full effort, as Kaleyra is truly just getting started in the US and having a marquee project like this gives the company instant credibility to market its services to all sorts of customers with greater margin paybacks in the future.

Another piece of business giving the company “street cred” in the US is the campaign registry project in which it has partnered with two of the three major US telecom companies to form a yellow pages of sorts to help weed out spam and unwanted messaging which as we all know is of growing importance unless you are truly in the market for an aftermarket car warranty.

Again, what excites me here is not that these two projects will provide Kaleyra with huge revenues and profits, but that it secures the company’s spot as a legitimate, trustworthy provider to the banks, online retail, travel and fintech companies it is targeting in the US, Latin America, and Canada.

The third piece of new info I picked up was the sudden inclusion of a telemedicine slide in the company’s presentation focused on India.

Source: The trusted CPaaS – Kaleyra

The issue was not discussed at all on the conference call; however, the fact that it was included in the presentation can provide a window into the company’s thinking.

India is a major pillar in Kaleyra’s future plans going forward, and the market is clearly going to be huge going forward. India is predominately a mobile phone centric economy and looks to continue to move aggressively on its technological development.

As India develops and looks for partners to build its capabilities, Kaleyra was there for the country during its time of need in the pandemic and has a leg-up for future opportunities such as telemedicine, which could be a huge market in India, as the population is dramatically underserved by the medical community, and efficiently treating a market of over 1 billion people is a herculean task.

No concrete news was given on its product for telemedicine, but I really like that the company is throwing this out there as a teaser of things to come.

Balance Sheet

The company followed through significantly on the promise to clean up its liabilities/warrants and simplify the balance sheet in Q3.

Source: The trusted CPaaS – Kaleyra

The company vowed to pay down its accounts payable in the quarter and settle forward share purchase agreements which it did in a big way. The company has now settled almost all of the liabilities from the business combination SPAC process and lowered liabilities by $38.6 million from the prior year.

Kaleyra still carries over $31 million in cash and looks to be fully funded for the future and now is on a secure financial footing with much more limited dilution from warrants and FSP agreements along with a manageable debt load.

The company also continues to be very heavily owned by insiders (43.8%), and I was grateful to see that did not change much at all from Q2.

Source: The trusted CPaaS – Kaleyra

Customer Breakdown

In the US, the business seems to be progressing nicely (while still in its infancy) with revenue growing at a 25% rate and although its first financial client in the US was not announced (to my frustration). The company has been hinting like crazy that it either already has a flagship financial/credit card customer signed or is VERY close to closing the deal. I continue to expect an announcement this fiscal year on its first of many closings with financial institutions.

However, until that announcement comes, the company is very well diversified both geographically and across financial, e-commerce, travel, retail and education.

Source: The trusted CPaaS – Kaleyra

Based on its customer base and geographical makeup, I continue to see this as a COVID-19 recovery play and was frankly surprised to see its share price languish with the announcement of vaccines by Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA). I expect as economies around the world eventually gain steam that Kaleyra will benefit proportionally more than other CPaaS companies.

It is certainly NOT a work-from-home play, as has been the market’s opinion of Twilio (NYSE:TWLO) however misguided that may be.

Source: The trusted CPaaS – Kaleyra

I was very pleased to see yet another quarter of zero customer churn, which I see as a huge vote of confidence not only in the underlying product but also in the customer service it provides.

Negatives

In the conference call and press release, the company increased its 2020 revenue guidance to $144.6 to $145.6. So why in the heck is this a negative? Because the caveat here is that this was assuming no acceleration of COVID-19 and no new lockdowns.

As we now know, the pandemic has RAPIDLY accelerated around the globe and has led to numerous shutdowns in just the last few weeks in Europe and the United States.

Unfortunately, for Kaleyra, as of the earnings call, this huge new wave was just starting to explode and I sincerely doubt it factored this into the guidance given. As such, I would not be surprised to see the company come up a bit short in Q4 due to new lockdowns and business closings.

I hope I am wrong and that Kaleyra can deliver here in the next quarter. If it does, then it will earn my full trust going forward, but I see this setting up badly for Q4.

Bottom Line

This quarter looked a bit “meh” on the surface, but in fact was in my opinion a fantastic quarter of foundation setting. The Google partnership is set, the registry is open for business, and the balance sheet is almost fully cleaned up. My long-term thesis on Kaleyra is fully intact and perhaps even strengthened, as I am increasingly confident on the company’s ability to close high-value business deals in the US.

I am a long-term investor and plan to hold my shares for quite some time so the potential of a Q4 disappointment does not bother me at all; however, if you are looking to put new money to work in this name, be aware that Q4 could perhaps throw you a curveball however short term that is.

If it does stumble in Q4 due to the renewed COVID-19 threat, I will be adding to my already sizable position.

The company by nearly all metrics is ridiculously cheap, trading at a rather unbelievable 1.66 EV/S multiple, and if you are not a short-term Q4 trader, the long-term value is very visible in this company. Eventually, the market will spot it.

Thank you for reading, and stay safe!

Disclosure: I am/we are long KLR, GOOG, TWLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a solicitation to buy or sell a specific security nor is it to be construed as investment advice, please contact your licensed financial and tax advisor for advice to your specific situation.



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