03-24-2019, 10:00 AM
Here a thread to discuss Pareteum's business model. We'll start off with an introduction from Chairman Hal Turner from the June 2017 Letter to Shareholders:
In our business, we have three subscription-based offerings:
(1) the Managed Services Platform (i.e., serving customers such as Vodafone, Zain and the new customer in Brazil);
(2) the Global Mobility Cloud Services Platform (i.e., serving customers such as THYNGS); and,
(3) the App Exchange and Development Platform (i.e., serving customers such as Pronto Telecom)
For GAAP accounting purposes, revenue is earned when services are delivered, regardless of when cash is received. Therefore, it’s critical to understand the timing involved in the various steps of our business – the signing of an agreement; the implementation and delivery when service is established, and finally, billing which generates revenue. This is a multi-stage process that typically takes 90 days to complete and up to six months or more for very large Managed Services implementations as illustrated below:
![[Image: PathwaytoRevenue.jpg]](https://www.pareteum.com/wp-content/uploads/2017/07/PathwaytoRevenue.jpg)
Furthermore, in terms of inherent value and market multiples, these contracts also include a variety of customer commitments which generate a backlog of stable, predictable and guaranteed revenue for the Company. As of today, our contracted backlog currently stands at approximately $60 million, however, with a capitalization that is just 1/10th of our contracted backlog, it’s clear that our Company is not being fully valued by the market. This a disconnect that must and will change, as we begin to deliver the sequential revenue growth we expect to report over the remainder of 2017 and throughout 2018.
Total Contract Value is Only Part of the Story
In our MVNE model, the total contract value (TCV) is one way to measure a SaaS contract under GAAP. TCV is simply the sum of two elements – the upfront service implementation fee and the guaranteed minimum monthly recurring fees from managing individual devices. This, however, is only part of the story as our contracts contain additional important structures which can and do create significant “layers” of revenue for the Company.
Utilizing our Brazilian contract as an example, let me now answer some of the questions on our process from contract award to billing:
While newer contracts like Brazil reflects the general base structure of our MVNE SaaS contracts, it is important to note that established customers such as Vodafone have already surpassed their contract minimums, meaning they are generating MRR which we call “run rate revenue” and are contributing to our backlog. This contracted backlog has value not only because of its present value, but because of its stability and predictably as defined by a tiered per subscriber/device fee schedule.
To recap, there are four key drivers of revenue:
1) Upfront service establishment fees,
2) guaranteed minimum monthly recurring revenue (recorded as MRR),
3) an estimated scaled subscriber/device fee schedule based upon customer-provided estimates, and,
4) current MRR/run rate revenue generated from existing customers which today is our primary base of revenue. Each of these key revenue drivers has its own time frame for revenue recognition.
In our business, we have three subscription-based offerings:
(1) the Managed Services Platform (i.e., serving customers such as Vodafone, Zain and the new customer in Brazil);
(2) the Global Mobility Cloud Services Platform (i.e., serving customers such as THYNGS); and,
(3) the App Exchange and Development Platform (i.e., serving customers such as Pronto Telecom)
For GAAP accounting purposes, revenue is earned when services are delivered, regardless of when cash is received. Therefore, it’s critical to understand the timing involved in the various steps of our business – the signing of an agreement; the implementation and delivery when service is established, and finally, billing which generates revenue. This is a multi-stage process that typically takes 90 days to complete and up to six months or more for very large Managed Services implementations as illustrated below:
Furthermore, in terms of inherent value and market multiples, these contracts also include a variety of customer commitments which generate a backlog of stable, predictable and guaranteed revenue for the Company. As of today, our contracted backlog currently stands at approximately $60 million, however, with a capitalization that is just 1/10th of our contracted backlog, it’s clear that our Company is not being fully valued by the market. This a disconnect that must and will change, as we begin to deliver the sequential revenue growth we expect to report over the remainder of 2017 and throughout 2018.
Total Contract Value is Only Part of the Story
In our MVNE model, the total contract value (TCV) is one way to measure a SaaS contract under GAAP. TCV is simply the sum of two elements – the upfront service implementation fee and the guaranteed minimum monthly recurring fees from managing individual devices. This, however, is only part of the story as our contracts contain additional important structures which can and do create significant “layers” of revenue for the Company.
Utilizing our Brazilian contract as an example, let me now answer some of the questions on our process from contract award to billing:
- Our Company has been contracted for a seven-year MVNE services agreement. This agreement includes a service establishment fee valued at approximately $300,000 which is used to offset upfront costs including any hardware, software or service provisioning that may be required. This fee is recognized over the course of the implementation period which can take between three and six months based on the customer.
- The terms of this agreement also include a guaranteed “monthly minimum” flat rate fee which is recorded as MRR until the agreed per subscriber/device monthly support charges exceed specified levels. This layer of revenue is called the “ramping period” of the contract and begins immediately upon the onboarding of the first subscriber or device.
- Beyond the calculated TCV, the revenue potential of the Brazilian deal is also impacted by a “protective” scaled per subscriber/device fee schedule. This schedule includes pre-defined fee increases should the customer not reach their own projections. This is one of the contractual elements present in each of our MVNE services contracts that generates the sizable backlog I referenced earlier.
While newer contracts like Brazil reflects the general base structure of our MVNE SaaS contracts, it is important to note that established customers such as Vodafone have already surpassed their contract minimums, meaning they are generating MRR which we call “run rate revenue” and are contributing to our backlog. This contracted backlog has value not only because of its present value, but because of its stability and predictably as defined by a tiered per subscriber/device fee schedule.
To recap, there are four key drivers of revenue:
1) Upfront service establishment fees,
2) guaranteed minimum monthly recurring revenue (recorded as MRR),
3) an estimated scaled subscriber/device fee schedule based upon customer-provided estimates, and,
4) current MRR/run rate revenue generated from existing customers which today is our primary base of revenue. Each of these key revenue drivers has its own time frame for revenue recognition.