Kaleyra, Inc.

Thank you. Good afternoon and welcome to Kaleyra's first quarter fiscal 2021 conference call.

Kaleyra released unaudited financials for its first quarter ended March 31, 2021 after the market closed. The press release, as well as today's replay can be found on the investor section of the company's Web site at investors.kaleyra.com.

Joining us for today's call from the management is the Founder and Chief Executive Officer, Dario Calogero and the company’s Chief Financial Officer, Giacomo Dall'Aglio. Management is doing this call from different locations today so please bear with us as we transition between speakers and address your questions.

During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's annual report on Form 10-K for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements.

Kaleyra cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law.

Throughout today's press release and on our call today, we will refer to adjusted EBITDA. This metric is not determined in accordance with Generally Accepted Accounting Principles and therefore is subject to varying calculations.

A definition, calculation and reconciliation to the financial statements of adjusted EBITDA can be found in the tables included in our press release. We believe this non-GAAP measure of Kaleyra's financial results provides useful information regarding certain financial and business trends and results of our operations.

With that, let me turn the call over to Dario. Please go ahead.

Thank you, Marc. Thank you to everyone joining us on the call today.

As you are all aware, the effect of the global pandemic continue to pose challenges worldwide. But with certain geographies experiencing the continuous temporarily negative effects of government mandated lock downs.

While we see positive momentum building in the United States of America as the number of vaccinated citizens rise. Meanwhile, resilience in Europe as low as the modest recovery we have been seeing in Italy and most unfortunately, India is now experiencing the worst aspect of the pandemic as cases rise.

Moving on some financial highlights, reported quarterly revenues in Q1 of 39.7 million with an increase of 18% from the same period last year, demonstrating continued resilience in the recovery. We continue to experience growth in all of our major geographies with particular strength coming from regions and rest of world segment that has been less affected by -- from the pandemic.

The main drivers in the quarter, were an up tick in our ecommerce customers in India, broad based positive activity within our U.S. based enterprise customers and new customers in rest of the world.

In a seasonally challenging quarter, we're very pleased to see digital payments and transactions improve which grew messages up 2% on a year-over-year basis. On the voice side, costs continue to increase year-over-year and we're up 55% on that basis.

For the quarter we delivered 7 billion billable messages and connected 1.2 billion voice calls on behalf of our Kaleyra’s customers. Now I would like to touch on some of our key initiatives in the quarter.

Our k-lab initiative continues to gain momentum during the quarter we signed an agreement that covering the Latin America and the Caribbean region. As part of the agreement, k-lab will be creating communication solutions for Visa partners solving digital communication issues that range from three free lining KYC to timely reminders of reward benefits and messaging to avoid transaction declines.

The Visa agreement is in addition to the agreement we signed last quarter with MasterCard banking customers in Latin America and the Caribbean. As a reminder, we launched k-lab as a way to leverage our expertise in solutions development, digital innovation, and go to market strategies for the financial sector to build more impactful mobile customer experience solutions for both new and existing clients.

We continue to be excited by the pipeline for these new initiatives and believe our bespoke solution for the financial service sector will quickly build sustainable momentum. Another newly announced at k-lab agreement is with Trellance leading provider of data analytics, business intelligence and professional services for credit unions.

Together, we'll be creating communication solutions for credit unions powered by data from the Trellance and 360 platform. Using k-lab services [indiscernible] will now be able to bridge the gap between their data sources and their member message.

Member and transaction data from Trellance and 360 will be used by k-lab to integrate with the CPaaS platform of Kaleyra, which will result in a more contextually relevant way to communicate with members through multiple channels, including voice, SMS application to Person A to B, and more. The most exciting news of the quarter was our announcement of the planned closing of the mGage acquisition, which pending approval by our so called at the May 27.

stockholder meeting is set for June 1. We could not be more excited to work mGage is customers and the entire team to the Kaleyra family.

Kaleyra and mGage together are uniting two World Class enterprise cloud communication companies to create a top five Global CPaaS platform with a diversified and balanced product portfolio and geographical representation. As a reminder, mGage is a best of breed mobile messaging solution that focuses on the mobile engagement market and allows enterprise clients to effectively engage with their customers through all mobile channels for a variety of use cases such as customer care, service alerts and multi factor authentication.

Over the past few years, mGage has invested heavily to create two excellent solutions for their customers. The first is communicate cloud, our cloud based enterprise grade messaging platform that connects brands and their customers through all major mobile messaging channels.

The second solution connector is mGage enterprise grade API's that allows clients to seamlessly build on existing messaging progress without the need for extensive development. mGage as a diversified range of over 300 blue chip customers, some of which are associated with the world's most valuable brands and mGage top 10 clients have an average retainer of more than 10 years.

For these customers mGage is processing approximately 20 billion messages over 150 countries, more importantly, mGage client in the U.S. as one of four mobile messaging provider with direct connection to all four major U.S.

carriers. mGage offering is very complimentary to Kaleyra’s and this combination which will accelerate and the span Kaleyra’s has opportunity to serve the CPaaS market, which is expected to reach 26 billion in 2025 with a count compounded annual growth rate of 35% and the consolidated application to person enterprise messaging market which is expected to reach 78 billion in 2022.

In summary, we believe that Kaleyra is well positioned to execute on our initiatives with our broad product portfolio, global rich and unbelievable worldwide team. Let me now turn the call over to Kaleyra’s Chief Financial Officer, Giacomo Dall'Aglio, who will review our financials in more detail.

Giacomo, please go ahead.

Thanks, Dario. For the first quarter ended March 31, 2021, we reported total revenue of 39.7 million an increase of 18% year-over-year and demonstrate the continued momentum of the recovery.

The revenue in the quarter was slightly below our expectation as the economic recovery was not as robust in Europe as we anticipate because of spiking COVID cases. Additionally, which are not some extremely low margin and messaging routes, that the lower revenue but had a positive effect in our gross margins.

The main drivers in the quarter [indiscernible] in our ecommerce customers in India, broad based positive activity within our U.S. based enterprise customer and new customer in the rest of the world.

Our revenue base continues to move away from Italy with India, which grew 32% year-over-year, while U.S. grew 19% and the rest of the world segment was up 64%.

In the quarter we processed 7 billion billable messages up 2% from the prior year period, and we connect 1.2 billion voice calls in the quarter up 55% year-over-year. Gross profit first quarter of 2021 increased 34% to 6.3 million from 4.7 million in the year ago period.

Gross margin was 16% in the first quarter of 2021 approximately 200 basis points from the 14%, we report in the first quarter of 2020. The remaining drivers of gross margin expansion were revised mix an increasing trend towards higher margin premium service in voice calls in the journey of low margin routes.

Operating expenses were at 16.3 million in Q1 2021 compared with 14.3 million in Q1 2020, mainly driven by the increase in human capital. Lost from operation was 10 million for the first quarter of 2021 and include the 5.5 million of stock based compensation 2.5 million of transaction one of cost, it is compared with loss from operation of 9.6 million in the first quarter of 2020.

Net loss was 10.4 million or $0.34 per share for the first quarter 2021 compared to the net loss of 8.8 million or $0.44 per share for the first quarter of 2020. Adjusted EBITDA loss was 1.1 million in the first quarter of 2021 compared to a loss of 300,000 in the first quarter of 2020.

The decline in adjusted EBITDA is a tribute to the increases account predominantly in the engineering talent that has been hired to execute on our emerging growth opportunity to develop and deliver new products and services. Cash used in operating activities was 8.2 million in Q1 2021 mainly due to working capital changes and transaction costs compared with a cash use of 2.9 million in the same period of the prior year.

We have a very strong balance sheet with cash and cash equivalents and short-term investment of 39.8 million as of March 31, 2021. This cash position is after paying down the company's liability by 18.8 million during the first quarter, it will be eliminated any remaining obligation under the full water share purchase agreement, when compared with 37.8 million in the cash and cash equivalent a short-term investment as of December 31, 2020.

Before I discuss our financial outlook, I would like to highlight the strategic capital raise we are executing as part of the transaction with mGage. Kaleyra, we found the consideration to mGage shareholders and related transaction costs with a combination of 200 million senior unsecured convertible note due in 2026.

And the issuance of 10 million shares of common stock issuance at the price of under 125 million. Both of the convertible notes and common stock issuance will close immediately prior to the closing of mGage acquisition.

Now I'd like to expand our approach regarding our financial outlook. Kaleyra outlook doesn't -- not taking into consideration the mGage acquisition.

We are retiring annual revenue guidance in the range of 183 million to 185 million up approximately 25%, at the midpoint of the range. For q2, total revenue is expected to be in the range of 40 million to 41 million up approximately 30% at the midpoint of the range.

Thank you for taking the time to join us on our call today. And with that, we would be happy to take your question now.

Yes, just with regard to the guidance for the year, it implies some solid sequential growth in the second half of the year, I guess can you just go through a few of your assumptions there? Do you assume there's kind of a reopening in the third quarter again in India, Italy?

And maybe what are you thinking about in terms of campaign registry?

I will let Giacomo to answer to this question.

Related to revenue, I just want to underline that last year, we reported that in the second half 56% of the total revenue of the year. And thanks also to the reopening, we think we are in the track with the guidance.

Okay, got it. And then, that sounds like mGage is about to close here.

June 1, you said, any color on how mGage is performing? I know they have a bigger kind of U.S.

presence, and they're in some other regions. So any color you can give us on whether mGage tracking to those original expectations?

Well, Mike, I will like talk about mGage after closing and not before closing. So I will give more information and color, when we'll do the financial reporting for the second quarter at this point in time.

In general, what I would like to stress is that mGage is like the perfect thing for Kaleyra, because we ended up with past closing and past combination of consumer basis with about 1/3 of the revenues coming from the United States, which will definitely improve the financial performance profile of Kaleyra. And also, we will about another candidate from Europe were mGage very significant operations in the U.K.

And lastly, typically displayed between Asia Pacific and Latin America, Middle East and Africa. So what I can tell you about this combination is that mGage seems to be very, very promising.

And altogether Kaleyra and mGage is becoming a very relevant player in this space. And then, very, very glad that we like three weeks away from the closing.

Thank you.

Okay, got it. And then, just last on the campaign register, I think you had said that you wanted to see how the second quarter played out before you gave a little more color there.

That's still the plan on the campaign register?

Yes, that's exactly the plan because as I said before, we need to add some data points before we can guess about the financial performances of the unit. The unit is doing well is doing great.

The team is working very closely with the content service provider with the operators and the whole ecosystem seems to be, let me say supporting the approach of the campaign registry and the operator are starting to mandate registration of the campaign and the campaign service provider feel extensively testing but we start adding also some revenues income. So this is encouraging me in restating the information that after the second quarter, we'll have a better understanding of the volume, the revenues, and we can make a guess for the second half.

I wondered if you could talk about the traction you're seeing so far with voice in the U.S.? And what were some of the drivers behind the growth in voice volumes in the quarter?

Voice in the U.S. is at the very, very beginning so it's not yet relevant in terms of volume.

The increase in volumes, I would say mainly in India at the moment. And we have also launched the services in other geographies, but we are at the very beginning.

So, I would say that basically, ecommerce is the one that is taking the lead of the increase in volume and also some COVID related services like the one that we announced in India, which was called [Step One] [ph]. The CPaaS supported in triage system for COVID suspects, and this is going very well.

But ecommerce is definitely the service which is leading the increase in volume.

Got you. So, I wondered if you could quantify the impact from COVID and the impact on the low margin route you exited in the quarter?

The impact on COVID is captured in a way because it depends not on the pandemic itself, but on the reactions of the administration's and government calling for let me say very strict lockdown. So wherever there is a very strict lockdown in general the society, slow down and the economy behind the society slow down.

So the impact is scattered that is depending on where and when the government are doing the shutdowns. What I can tell you is that I start seeing a significant improvement in deficits in the United States.

But also in Europe, because there is a very significant ramp up in the supply of the vaccines in the world. In May, we are about to have roughly a couple of million of those to develop.

Getting to the route in general Kaleyra as a policy were -- is being a policy provider, is a policy that is not willing to work in routes and markets where the price competition becomes unsustainable, especially because of the gray routes policy that some supplier are applying on some routes in some geographies. And so for this reason, we start becoming more and more picky in deciding where we want to work and with whom we want to work.

And this is already happening with a number of large accounts, especially big digital giants, where we start seeing gross margin significantly improving that customer for this policy.

One other question, if I could, you referenced a industry study that suggested that this market would grow 35% compounded over the next handful of years, I wondered if you could just align that with what you anticipate your own organic growth opportunity should look like over that period?

Yes, well, the markets overall could be defined as the union of the strictly called the CPaaS market according to channel it's like Juniper reserves said that it's going between 7.1 billion in 2020, up to roughly 25 billion in 2025. But this is not the whole market because this is excluding the application professional messaging which is much larger and is going from 60 plus to 78 billion in 2024, if I remember one.

So let me say the two segments have different growth rates, the first one being emerging, it's growing faster. And it's the one that is considered to be growing at about 35%.

The other one is growing a little bit less if you blend the two markets together, I will say that the -- the duplicate because there are some duplications in the two segment, you can say that the market is growing roughly between 25% and 30% on a yearly basis.

Good afternoon. For the rest of world segment, what were the factors behind the year-over-year increase?

Mainly, it is new customers, because we have more new customers in new geographies. So the increase is pretty much related to new customers or new rounds for existing customers in new geographies, especially when you work with large digital giants that are global players.

Now you start having gone, fortunately basis a selection of new routes and new geographies where they need to serve this.

Okay, great. And then for India, India you did quite well.

I think your revenues were up like 32%. And you mentioned ecommerce and voice, but your guidance for the year?

I mean, what we're seeing from the outside seems to be that things are likely to get worse there rather than stable in at least next quarter or so. What are you assuming in your guidance?

Are you assuming that India is going to be under some pressure?

We are conservative in the guidance for Q2, because of the situation in India starting from April, and in May, is going a little worse than expected on the pandemic. So, we will see abroad, of course, because our guidance is 30% above Q2 last year, but we are conservative on India.

Great. I’m glad that mGage transaction seems like it's going to be very transformative to your company.

And so I just want to confirm my understanding that there's a shareholder vote, but the likelihood that this goes through seems to me quite high. Could you explain kind of the dynamics of that?

Well, the dynamics is in the filing first thing, if you look at the SBA recently but it's very simple there will be a special meeting on May the 27th where the shareholders will be called to vote and in the merger agreement already the existing shareholders on the buy side, on the Kaleyra side, as agreed to vote towards an approval. So we already know that we have X percent of the existing shareholders of Kaleyra voting in favor and again this is in the filings.

So I'm not saying anything, which is not in the public domain. So we expect this special meeting to go smoothly, it should be very easy.

So it kind of -- because basically we are issuing 10 million new shares. So these issuing is exceeding the threshold of 20%.

So we have to go through the special meeting under the current regulations.

And the closing is expected to be after the approval of the special meeting on June 1 to that.

Okay, great. I mean, the mGage is roughly around the same size and sales as you not exactly but significantly more profitable even before any potential synergies.

So it seems like this has the potential to be nicely a very accretive type of deal.

Indeed, it is financially, it's definitely very accretive. Strategically also, it's very accretive.

Zero overlapping customers, almost zero overlapping geographies. But India where we basically doubled the revenues, which is good because we become more relevant.

And this will potentially lead to significant savings in the sourcing of the termination with the mobile network operators and a lot of cross selling opportunities. Because Kaleyra is an omni-channel platform.

mGage is pretty much focusing on messaging on the two core technologies, which is the original SMS and this evolution into RCS. So we are looking very much forward towards working together with the team at mGage to explore the opportunities.

But yes, this is a very accretive combination. And also they enjoy a better profitability because of the geography that they serve, because they have the U.S.

and the U.S. is basically the highest gross margin messaging market in the world.

Fantastic. Congratulations.

Thank you.

Thank you, Allen. Thank you for your question and your continued support.

Thank you very much. So thank you, ladies and gentlemen, for staying with us during this call, and looking very much forward to talking to you again next time.

Thank you very much.

Bye-bye.