A growth story, not yet an earnings story

[admin]

While we believe that Pareteum's business model has considerable operational leverage, and stuff like adjusted EBITDA has improved a lot, this isn't yet an earnings story:

• The market is still in the very first innings in the move from on-premise to the cloud, so there is a bit of a land grab going on.
• Look at bigger brother Twilio (TWLO), it's hardly profitable either. That hasn't prevented the shares from exploding.
• With the coming impuls from 5G to the IoT market, the market Pareteum serves is going to become much bigger.

In any case, the last two quarters the company actually produced small positive earnings. It's not like they're bleeding losses.

[admin]

From the 2017 year- end report:

Our value proposition intersects with numerous applications and industries. It is our strong belief that no other company in the Communications-as-a-Service market offers similarly broad value in such a comprehensive way. An easily accessible open mobility system for the world is difficult to get started because it requires a “network effect”. The network effect is an observable condition that yields increased value to the “new easily accessible open mobility system for the world”, and all users of the system as more users come on board. The essence of this point is that every communication – a transaction – requires both a sender and recipient who are willing to access and use the new system. We aim to provide the marketplace exchange on which these transactions take place, and will attract new users.

That is, we're still in the land grab phase, creating connections and network effects..

[admin]

And, as a reminder (in red):

12/20 Pareteum initiated at Northland  Pareteum initiated with an Outperform at Northland. Northland analyst Michael Latimore initiated Pareteum with an Outperform rating and $7.50 price target, stating that mobile virtual network operators, or MVNOs, are increasingly looking to SaaS platforms, such as from Pareteum, to replace on-premises software. He believes 90% of the addressable market is still served by legacy on-premises software today, Latimore noted, adding that the company's "highly experienced management team" has orchestrated a material turnaround.

Breaking News: TEUM latest news. - The Fly

That is, it's very early days in the market still..

[admin]

Here is something to consider, from the Q3CC:

Revenue per employee is $492,000 at the end of the third quarter, an increase of over $277,000 from the same quarter last year. This does not yet include the impact of the Artilium acquisition. We expect to continue to exceed the expected industry average for average -- annualized average revenue employee per year, and on that basis, on a pro forma basis, our revenue per employee, including Artilium acquisition is roughly $359,000 per employee, and again, the benchmark for our industry would be in the low 200,000s.

This shows a large amount of operational leverage, although that picture is a bit blurred by the acquisitions. We won't go as far as to say that it's a matter of hooking the customers up (out of backlog) and then leaning back and collecting the rent (recurring revenues), but it's not that far off..

[Daxcoppinger]

Hi! First of all, congratulations for your work and good results.
I am new to the forum and got here researching TEUM. I have a couple of issues I'd like to share:
As TEUM model is similar to a Saas model, we can apply the same principles to this company.
To understand it's true value we have to model the earnings curve, since it costs a lot to add a new customer and then the payments follow through slowly, it is essential to model the economics of the unit.
That is, if TEUM earns money on each deal (future cash to be received (adjusted with dollar retention rate which is positive - great) minus money necessary to hook up that customer) we can model the earnings curve.

I haven't been able to find the cost of acquiring a customer (which is many times underestimated) in the 10K.

Does anybody have any thoughts on this?

[admin]

Hello Dax, welcome aboard!

Yea, we don't really have their customer acquisition cost but we do have the cost of their sales and marketing cost which was $3.1M a year (which is likely to increase with the inclusion of iPass).

[Daxcoppinger]

Thanks for answering, I think that is very narrow. These services normally require some adaptations to customer's needs and a first effort to integrate paretum's technology with that of their clients. I would include Product development (at least partly) $3M, most of the sales and marketing $3.16M, some of the general and administrative $17M, $7M increase. Cost of revenues are mainly recurring for the whole life of the deals.

For FY2018 I'd say almost $10M of newly incurred costs to get an unidentified amount of revenue. Revenue for this calculations is difficult to measure, as new backlog is not the right figure, nor increase in realised revenue. This is because the amount is something in the middle. The real revenue increase from those costs would be the revenue acquired (not in this year, but in future years too adjusted by churn) from converting the backlog PLUS the advancement in backlog conversion (which tipically takes 90-180 days. So If the company has advanced in backlog conversion in 2018 say 60 days and there's still 50 days of work left, 2018 costs are financing revenue from 2019 onwards. Again, difficult to measure.

To anyone interested I have this structure in mind:
https://www.slideshare.net/DavidSkok/the...nd-metrics

I've tried to lay out my thoughts, but it might not be clear enough, so I'll add any clarification if needed. These issues are only essential as we eventually expect this story to become an earnings story, however the foundations of that story are being set now.

For great 2019 stock performance we just need impressive revenue growth, I think it can be achieved. I am long.

[admin]

Well, there are these 75 engineers from iPass, but one is inclined to think that if the iPass business is revived because they are now more stable under Pareteum, they would not be lacking in work.

On the other hand, the company managed to double revenue last year and to my knowledge without adding large quantities of employees, as is witnessed in the large increase of revenue per employee through the year.

[Daxcoppinger]

Yes, those 75 employees were needed as per Hal's comments. That is good, the faster this company grows, the worse short term results will be. They need to spend today to get future cash flows.
It appears bears are in command today... Q1 Results we'll be key to understand in what part of the slope we are.