From the 2018 letter to shareholders:
Here are some explanatory comments to questions we have received regarding our 36 Month Contractual Revenue Backlog and how it converts into billed and collected revenue.
It works like this:
A new contractual sales win is announced (based upon service platform type) as:
-
Managed Services Platform (MSP): these are large Mobile Virtual Network Enabler (MVNE) agreements (i.e. Brazil or Eastern Europe); or,
-
Global Cloud Services Platform: these are small communication services providers (CSP's) (i.e. Mobile Virtual Network Operator (MVNO) providing worldwide service); or,
-
Application Exchange & Developers Platform: these are developers with applications that need connectivity (i.e. a developer is adding mobile services such as data, voice, SMS to a game, a home security company is adding wireless backup calling to their equipment);
Service Deployment and Implementation occurs on average over a 60 to 180 day period, dependent upon many factors such as number of connections and subscribers being migrated, complexity of the software integration with the customer's existing software and hardware, and the amount of custom tailored development work needed to satisfy the specific customer. Another variable is the availability of project and program managers, in country, to oversee the service initiation. Our targeted implementation times are shorter, ranging from 30 to 90 days, However, in some of the early agreements, the added element of customer readiness may have impacted the go live dates. These live deployments drive connections, which in turn generate monthly recurring revenue. In our recently released pre-announcement of the first quarter 2018, we disclosed that connections have ramped to 2,200,000, up 94% versus the end of the first quarter 2017 and 30% from the sequential fourth quarter of 2017.
Connections, as noted above, are a leading indicator of future revenue. As we convert backlog to live, in service connections, our revenue will increase. For every incremental dollar of revenue, we expect contribution to our bottom line, based upon our targeted gross margins and the high scalability of our software and systems that we use to drive our business and its growth;
One of the more popular comments TEUM has received since we recently provided our initial 2018 outlook of at least 50% revenue growth deals with the misunderstanding that monthly recurring revenue from the 3 year contracts signed is derived simply by dividing by 36 months. That is not the case. We often state, and, I will again reiterate, that our 36-month contractual revenue backlog does not convert equally at one-third per year over the three years. Our awarded contracts, depending on the type of contracted service, have a targeted range of 30-90 days for implementation, with our early experiences being longer by a factor of two (our planning financial model has adjusted for this). The connections (subscriptions) then ramp over time, based upon many factors in our customers businesses (noted above). So, let's use a hypothetical example of a $3 million, 3-year Cloud contract. The approximate revenue recognition of customer's 36 month agreement, most often occurs as follows:
-
Year 1 at approximately 15% coming from implementation and initial connection pricing;
-
Year 2 at approximately 30% monthly recurring revenues based upon number of connections;
-
Year 3 at approximately 55% monthly recurring revenues with a ramping of the number of connections;
These percentages also closely align with the overall 36 Month Contractual Revenue Backlog and how the connections are scheduled by the customers to be deployed and go into live revenue production. This gives us good visibility into the revenue that will derive from our 36 Month Contractual Revenue Backlog. In addition to the 3 year ramp that we have chosen to report on, our executed contracts also include multiple sales with five and seven year contractual terms. I would also point to our historical success in renewing major contracts with our customers. These continued renewals will strengthen our backlog over time. Pareteum's contractual agreements do have automatic renewal periods. At the time of either a negotiated renewal, or the automatic extension renewal, the existing connections that are live and billing revenues continue as monthly recurring revenue (MRR) and are recognized into our P&L accordingly. Overall, it has been our experience that satisfied customers that are receiving valuable services typically renew.
Additionally, regarding our clients, we are often asked about the specific names. As is customary in highly competitive growth markets, we, and our clients do not disclose specific names due to competitive reasons. In addition, many of our clients do not wish to be disclosed due to the nature of their business. Many of our partners and some clients are disclosed on our website and in our 10-K filing.
In this letter, I have recapped the great start we have made in 2018, including our affirmation of the outlook we have provided earlier. We have also, very transparently, addressed some of your detailed questions regarding the 36 Month Contractual Revenue Backlog and how that converts into billed, collected, and recognized revenues on our P&L. With this context, it is important to address "where have we come from, and, now, where are we going?"
Here is my summary of that for you:
November 2015 – December 2016: this was the period of survival and making the fundamental changes to enable the business to have a chance to grow. This was characterized by significant expense reductions; stabilization of our anchor customer and the services provided; prioritization of many regulatory and compliance matters; maintaining a constructive relationship with our secured lender and planning to pay them back; attracting survival capital in the most efficient manner, given the condition of the business; stabilizing our software and services platform; creating the vision and mission of the business and the plans for the future; attracting key talent willing to join me and turn the company around … by all stretches of the imagination, it was heavy lifting and virtually a 24X7 investment of time and available resources … we survived!
2017: this year was characterized by launching sales, raising capital, paying off $10.1 million of senior secured debt, concluding outstanding legal and regulatory matters, and igniting the fires of growth with expansion into several new territories validating our go-to market strategy.
