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spk03: Good afternoon, ladies and gentlemen, and welcome to the CORE Wireless Third Quarter 2021 Conference Call. Delivering today's prepared remarks are President and Chief Executive Officer, Ramil Bail, and Chief Financial Officer, Puneet Pomnani. Following their prepared remarks, the management team will open the call up for any questions. Before we go further, I would like to turn the call over to Vic Vijayverghia, CORE's Vice President of M&A, as he reads the company's Safe Harbor Statement that provides important cautions regarding forward-looking statements. Vic, please go ahead.
spk00: Thank you, Alex. On today's call, we will be referring to the press release filed this afternoon that details the company's third quarter 2021 results, which can be downloaded from the investor relations page at ir.corewireless.com, where you'll also find the latest earnings presentation that supplements the information discussed on today's call. Finally, a recording of the call will be available on the investor section of the company's website later today. Please note that this webcast includes forward-looking statements. Statements about the company's beliefs and expectations containing words such as may, will, could, believe, expect, anticipate, and similar expressions are forward-looking statements and are based on assumptions and beliefs as of today. The company encourages you to review the Safe Harbor statements, risk factors, and other disclaimers contained on this slide and in today's press release, as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this webcast. The company also notes that on this call, it will be discussing non-GAAP financial information. The company is providing that information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States, or GAAP. You can find a reconciliation of these metrics to the company's reported gap results in the reconciliation tables provided in today's earnings release and presentation. And now, I'll turn the call over to Romal Bell, the company's president and chief executive officer.
spk02: Romal? Thanks, Vic. Good afternoon, everyone. Thank you for joining us today for our very first earnings call as a public company. My name, as you've now heard a couple of times, is Romal Bell. I've been here with Core right at about four years. And with me is Punit Bhamnani, our CFO, who has been here over three and a half years. The objectives of our call today are to introduce our company to the public markets, discuss our Q3 earnings, and describe why we are so excited about the next five, 10, and yes, even 15 years. I know for many of you that sounds like an awfully long time, but that is the beauty of our opportunity. We are in the singular growth market of the Internet of Things, or IoT, which is poised to grow spectacularly and hence provide our company with excellent tailwinds as we hurdle towards becoming a truly connected planet. In this first call, therefore, I will take a little longer with my prepared remarks. To introduce our company, I will provide an overview of our services, which are powered by unparalleled technology and IP, provide an overview of our market and growth dynamics, our strategy and competitive positioning, and bring it to life with a customer use case example. Then, Puneet will cover our financial results, after which I will cover the five-year transformation plan we have put in place, and summarize our competitive moat and investment highlights. Looking at our third quarter, and as summarized here on page three for those of you following the webcast, We recorded strong total revenue of $67.9 million. Of note, we were aided by the timing acceleration of a significant project with our largest customer, which was to start in Q4 and go through the first half of next year, but has been accelerated into being delivered mostly this year itself. Our EBITDA results and strong connected health performance flow directly from this acceleration, given that our largest customer is in healthcare. Importantly, and since the timing acceleration is merely from 2022 into 2021, we are happy to confirm that we are confident we will exceed our revenue projection for this two-year period, i.e. 2021 and 2022 combined. While the acceleration of our customer's LTE transition project will make 2022 look relatively flat with 2021, we expect to beat our combined revenue projections over this two-year stack by a meaningful amount, which will further demonstrate our ability to execute our business and drive growth. Course two lines of business, as depicted on this page, are IoT connectivity and IoT solutions. First up is IoT connectivity, the largest part of which is IoT connectivity as a service, or what we refer to as CAS. We have been building our global value proposition in this space for almost 20 years, and it allows our customers to connect multiple device types using multiple types of networks in multiple countries and regions of the world. This is why we like to call our independent, world-leading IoT connectivity offering our multi, multi, multi service. And right until the time this leadership team arrived, this was near 100% of our revenue. To our core business of IoT CAS, where we charge by subscription and data usage, we have added connectivity enablement services, or CAs, where we can license our IP over multiple years to customers who are looking to control their own communications networks. Even as we have added CAs revenue into our overall IoT connectivity services, we are proud to say that our newer IoT solutions business grew to approximately 26% of overall revenue in 2020, and is trending towards, as it says there on the slide on the left, towards 32% of our revenue in 2021. The major categories of our IoT solutions business are depicted on the page as well, from IoT device management to our newer IoT analytics services, including Security Pro and our location-based services. Both of these are built to customers on a subscription basis, just like our CAS service. Further, we are hoping to accelerate the pace of our growth investments, including investments into preconfigured solutions and private networks. On then to the exciting market that we participate in. Largely in the three categories of connectivity, applications and platforms, and managed services, The IoT market is expanding from less than $400 billion in 2020 to $7 trillion in 2030. And it's then expected to double again to approximately $15 trillion by 2035, driven largely by the exciting use cases that 5G will bring to IoT. This market growth is best depicted by the growth in the number of IoT devices deployed, which will grow from roughly 12 billion at the end of 2020 to approximately 75 billion devices by 2030. This growth is marked by a significant shift in the mix of short-range to long-range devices. It is the long-range devices where our IoT connectivity services fit, while our IoT solution services actually apply across the entire spectrum of device and connectivity types. While this market growth seems very large, the fact is that there are several trends that deterministically underpin it. Chief amongst these, marked on the page, are eSIM, LPWA going into massive IoT, and of course 5G. But one could also look at edge computing and AIoT, where artificial intelligence meets IoT, as being the technology developments that can make this growth a reality. This leaves us two key questions from the standpoint of understanding our market opportunity. One, what really is IoT and does it only apply to highly sophisticated or mission critical applications? And two, why was the last decade generally disappointing and why did we not reach the predicted 20 billion IoT devices by 2020? Well, the answers to these two key questions are on this next page. First, on the left side, are depicted real IoT solutions that we support today. You will note several are everyday items, and they can be relatively simple sensors, but other use cases can be deceptively simple to look at, but making them work is highly complex. And that sort of leads to the right side of the page, which is a summary of the top seven challenges that have held IoT back the past decade. I could spend a lot of time speaking to each of these, starting with security as a foundational challenge at the bottom, all the way around, and then to the middle where we make the point of the fragmented ecosystem that our customers have to find a way to harness. They have to put the Lego blocks together themselves, and this is the root cause of the complexity in IoT. In the interest of time, I will just speak about this overall complexity. I remember reading two key statistics back when we were crafting our growth strategy. The fact that it takes the average enterprise 18 to 24 months to launch an end-to-end IoT solution, working with, on average, 18 partners to do so. And secondly, the fact that almost two-thirds of all IoT pilots and proof of concepts failed or stalled, especially in the early part of the last decade. It is this complexity that we fundamentally target as our growth strategy now, to provide a one-stop shop for IoT to help our customers adopt IoT with ease. So let's look at our growth strategy. What we do for our customers is help them deploy, manage, and scale their IoT applications, whatever those applications are, whatever the use cases are, if you prefer that term. We help them deploy successfully instead of stalling at the pilot stage or failing to expand to multiple regions and multiple carriers because the costs are exorbitant and the number of partners required are unmanageable. We help them manage their deployments with world-class support and a series of managed services they can outsource to us so they can focus on their own growth. And this, in turn, helps them scale confidently and securely. So if that is what we do, the how we do it is through connectivity, solutions, and analytics. Three simple words, and yet they represent a lifetime's worth of opportunity. As we transform and grow our product catalog, Core will grow. We have a billion dollars in revenue squarely in our sites, and we have confidence we can get there sooner than many might expect. Now clearly there is a lot of detail underneath these simple words, and I could peel the layers of the onion slowly describing our portfolio of services under each dimension. But in the interest of time, I'm going to go straight to a bit of a detailed framework we use with our customers. We call this our seven by seven framework, and it represents the seven big deliverables required under each of the seven stages it takes to launch an end-to-end IoT solution. It doesn't matter the complexity of the solution. It needs to go through each of these steps. This picture instantly explains to you why IoT is so complex and why one enterprise might need to have 18 partners to launch one end solution. And that's an average. In some cases, like in the case of our largest customer, you might need an order of magnitude more partners. So as customers hear about core and hear about our IoT in a box approach, we believe they will engage with us earlier in the process, not just when they need connectivity. And we will work with them to ensure they understand everything they need to map what they have sorted on this chart versus what we can help them with. And of course, we transparently tell them what we do ourselves, which is everything in green on the chart, including, of course, our core business in step three of core connectivity management plus device management plus data management, what we do with partners, which is everything in blue on the chart, and what we fully outsource to partners, the items in red. Customers can ask us to sort of prime their solution or give us some portion of these 49 steps. And our commitment to them is we will make it work and we will speed their time to market. This takes us to the picture on slide 10 that best tells our pure play IoT story. We are an enabler. The end solution, the part of the iceberg that's visible above the waterline, belongs to our customer. That is the value proposition they sell to their end customers, businesses or consumers, and that is what they should be singularly focused on themselves. The majority of the work that needs to be done, represented by the 90% of the iceberg under the surface, can be supported by us, and this represents a lot of growth. Further, it represents stickiness. And as our customers grow, we grow with them. And this makes us one of the best ways to play the growth of the connected world and the IoT market. Not a singular bet in any one use case or any one industry, but a diversified, pure play, enablement way to play IoT. So the last part of the company overview I want to provide you before we go into our customer use case is our go-to-market approach. Increasingly, we go to market by industry. When we were just an IoT connectivity player, we were inherently horizontal. But to holistically enable our customer solutions, we need to know their use case and speak their language. This is only possible with an industry orientation. And so just this year, we launched our first two industry practices, connected health and fleet management. Even as we anticipate these industries growing in the near term, we believe the next three verticals will grow even faster over the next few years as those segments adopt IoT solutions. One of the key levers of our growth strategy is launching and growing these industry practices organically and inorganically. Now to slide 12 for the use case, our number one customer. The customer is an instantly recognizable large med tech enterprise, and one of the use cases they participate in is cardiac rhythm monitoring, which is one of the early use cases in the exploding space of remote patient monitoring. This is an incredible story of enabling IoT adoption. Bottom line, this customer just sends us a PO every quarter with the number of devices they need for the following quarter, and then we go to work. The third party hardware manufacturer ships the devices to us. We take care of the configure, provision, test, label, record, pack, ship, and reverse logistics services that are needed. and help our customers ship to approximately 57 countries and actually gather data from over 150 countries on their behalf and make sure that data gets to the appropriate data cloud and then to the cardiologist and caregiver portals in a highly secure manner. The customer reached almost 1 million subscribers last year and will likely go over that number this year as they have been growing at roughly 20% each year. And to give some sense of why they are our largest customer, Let's go one further slide and overlay on the seven by seven chart that you just saw all of the services that we perform for customer number one. That then is the goal. Not that every customer will buy multiple services from us or even that there will be many that will buy so many of our seven by seven services. But getting more of our 3,600 plus customers buying more of our services is a key growth opportunity that we refer to as our cross-sell opportunity, and this is another key reason we are bullish about our future. With that, I will now hand the call over to Puneet to cover the financials in more detail. I will then conclude with further commentary on our business and our differentiators. Puneet?
spk01: Thank you, Romul. And good afternoon, everyone. This is Puneet Purnani, and I'm the CFO of Core Wireless. As Romul noted, we are pleased to report a strong third quarter, which exceeded our internal projections. Total revenue for the third quarter 2021 was $67.9 million, growing 22.8% compared to $55.3 million a year ago. $41.5 million of our total revenue was from IoT connectivity, representing 61% of our total revenue. IoT connectivity grew revenue 4.9% compared to $39.6 million a year ago. The remaining $26.3 million of our total revenue came from IoT solutions, which represented 39% of our total revenue. IoT solutions grew 68.2% compared to $15.7 million a year ago. Although, as Romal mentioned, we were aided by the timing acceleration of a significant LTE transition with our largest customer. For revenue growth drivers, we track and externally report two key metrics, total connections and DB and ER. Total connections represents all of IoT connectivity services connections, including both CS and CEAS connections, including the contribution of eSIMs. A growth in total connections clearly drives the growth of IoT connectivity services, which were 61% of our total revenue. So this is an important metric. However, not each connection is the same, and therefore IoT connectivity will not always grow in the same proportion as total connections. This is because the revenue generated per active connection can vary widely depending on the data plan that a connection is on. On a 1MB plan, the revenue can be 20 times lower or even less than on a 1GB plan. So higher bandwidth connections are clearly more valuable. In Q3, we ended the quarter at 13.6 million total connections, up 23.6% from a year ago. which is significantly higher growth than our IoT connectivity revenue growth in the same period, driven by several factors, including LTE transitions. Additionally, a few large customers have added a large number of non-revenue generating test SIMs in this time period. Some of these SIMs are likely to convert to revenue generating SIMs in the future and help our future growth. The other key metric we track is DBNER, or dollar-based net expansion rating. which tracks the combined effects of cross-sell and up-sell to our existing set of customers. We calculate this metric by dividing the revenue for a given time period from go-forward customer by the same revenue from customers a year prior. Further details on this metric are available in our public filings. For the 12 months ended September 30, 2021, DB and ER was 114% compared to 103% a year ago. We are pleased with this result. It indicates success in customer retention and growth. We do not, however, expect the growth of this ratio to be linear. In fact, it will vary. There will be quarters where it will be affected by large customer cleanups. However, our goal is to maintain this ratio above 100% and continue to grow this metric over the long run. As it happens, this was a good quarter for Debian here. Importantly, we are ahead of our publicly stated business plan 2021 September YTD. As Romal had mentioned, we expect to beat our combined 21 and 22 revenue plan as well. In IoT connectivity, our five-year business plan had us growing at 14% in the medium to long run, with total connections growing in the high teens and some erosion projected in the revenue per connection. This is less than 4.9% that you experienced this quarter compared to the same quarter a year ago. In 2021 and 2022, we expect and have previously communicated IoT connectivity revenue growth will be affected by the loss of one-time churned customers and the shutdown of 2G, 3G cellular networks at certain large carriers, notably AT&T, T-Mobile, Sprint, and Verizon. We had already factored these one-time churned customers and technology transitions in our business plans. and projected relatively muted IoT connectivity growth in 21 and 22. Some of our customers have been delayed in these technology transitions because of the device shortages, which are now prevalent. This has helped year-to-date 2021 IoT connectivity revenue, which is ahead of business plan. However, these network shutdown dates are locked down now, and we do not anticipate any further delays in these technology transitions in 2022. Once these technology transitions are over in 2022, we expect to ramp to our medium to long-term growth rate of 14% plus. In IoT solutions, we have a significant amount of cross-sell and growth potential, and in our business plan, we had expected to grow this area 30% plus growth rates. We continue to be optimistic, but we need to be cautious in interpreting the 68.2% growth in the third quarter of 2021. A significant portion of this growth is derived from our largest customer, which is in healthcare, This customer is transitioning a large number of 2G and 3G devices to LTE, and we are assisting in this journey by helping select and providing the LTE devices, configuring and testing these in our facilities in device management and in program managing this effort. Most of the additional revenue from this LTE transition was anticipated in 2022 in our business plan, but now most of it is expected in the third and fourth quarters of 2021 with some revenue carrying into Q1 2022. This acceleration is good news for both us and de-risks the customer-owned transition. However, we find it helpful to break this revenue out in order to look at the trend without it in terms of the largest customer. The other noteworthy factor in our growth story is the semiconductor and therefore IoT device shortage prevalent in the market. The large majority of our revenue in IoT solutions is proportional to the number of IoT devices deployed, configured, and sold. Therefore, this shortage is most certainly affecting our short-term growth in IoT solutions. The gross margin percentage in the third quarter was 48% compared to 54% in the year-ago quarter. This percentage decrease was largely a function of accelerated growth from IoT solutions revenue, which comes at a lower gross margin compared to IoT connectivity revenue. We also had a percentage gross margin decrease within IoT solutions, mostly because of the growth of our largest customer, which I had previously spoken about, which has lower than average gross margin. Despite some put and takes, IoT connectivity gross margins were relatively stable in the third quarter. Operating expenses in the third quarter increased to $38.4 million compared to $31 million in the year-ago quarter. The key factors in this increase were higher sales commissions and bonuses, which had returned to normal levels in 2022, the increases in salary and benefit items due to constrained job market conditions, and materially higher than expected public company costs. Finally, as reported, OPEX is also affected by adverse foreign currency movements, with certain countries where we have global or regional shared services centers experiencing a currency appreciation. For the third quarter 2021, we recorded a net loss of $4.5 million, an improvement compared to $5.6 million a year ago. Adjusted EBITDA in the third quarter was $15.9 million compared to $15.4 million. This increase was primarily a function of increased total revenue, increased gross margins, which I spoke about, balanced by higher operating expenses, which I had already previously mentioned. Now let's turn to the balance sheet. As of September 30, 2021, we had $73.1 million of cash and restricted cash. compared to $11.9 million in the year-ago quarter. The increase was primarily a function of net proceeds from the business combination and the previously announced backstop agreement. Core drew $93.4 million net of financing costs from the previously announced backstop agreement during the business combination. Subsequent to September 30, 2021, we drew an additional $25 million from the backstop agreement. We expect to use this additional liquidity provided by the business combination to accelerate capability development, both organically and inorganically. The business used $9.4 million in cash flow from operations here to date September 2021, mostly due to the ramp-up in accounts receivable, inventories, and prepaid expenses associated with the ramp-up of revenue at our largest customer. In the same time period, the business also used $9.8 million in cash flow from investing due to capital expenses required in maintaining and growing our business, notably our core one platform and the eSIM product. Year to date, September 30, 2021, cash flows from financing provided $81.8 million of cash from the proceeds of the business combination and backstop financing, balanced against the pay down of preferred equity and certain other items. In summary, We had a solid growth quarter. I have clarified there are some timing and acceleration issues that I have highlighted, which is expected to make Q3 the largest quarter of 2021. Additionally, we should see accelerated effects of 2G, 3G network shutdowns over the next 12 to 18 months. Despite this, we are confident that we'll exceed the combined revenue guidance for 21 and 22. Now, I will turn it back to Romu for some additional comments. Romu?
spk02: Thanks, Puneet. Again, a very solid set of results, and I will wrap up our prepared comments with just two more slides. The first depicts our transformation and the crystal clarity with which we view our five-year strategic plan. We have a three-phase plan in place, and as 2021 comes to a close, we are focused on closing out phase one. Even as phase two has already kicked off earlier this year, In phase one, we focused on strengthening our core IoT connectivity business and launched our newer services, which we now report under IoT Solutions. By all measures, this has been a highly successful phase, and we have leapfrogged the market with our technology and platform development. Earlier this year, and as a part of launching phase two, we launched two industry practices, Connected Health, as we call it, and Fleet Management. That leaves three industry sectors to launch, which we will both organically and inorganically over the coming period. The other priority in phase two is to take global leadership with eSIM or EUICC, and we are well on our way with this key enabler of IoT growth. The next phase will focus on 5G leadership and leading with analytics. Finally, We at Core have already built a distinct competitive moat. Rather than read each bullet, each differentiator to you, I will leave this chart up while we take your questions. And further, we wanted to summarize our top investment highlights on this slide. Starting with being the only pure play IoT company in the world, attacking one of the most exciting growth markets of all time, to having a world-class strategy and the IP to give us a solid foundation for execution. We have high recurring revenue and a large set of customers rounding out our platform for growth. And as our near-term headwinds dissipate with the 2G, 3G network sunsets getting closer, we believe our growth in the future will accelerate. So we're focused on continuing to execute on our clear strategy with our ambitious goals in place, and I am confident that we are well positioned for future growth and value creation. I want to take a moment to thank our entire global team of IoTers, as we call them, for their hard work and commitment to core. And with that, we'll take your questions. Alex?
spk03: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Mike Lattimore with Northland Capital Markets. Please proceed with your question.
spk07: All right. Thanks very much. Congratulations on being public and a strong start with your first quarter here.
spk02: Thanks, Mike.
spk07: Just a clarification on guidance. You talked about being able to beat your original 2021, 2022 guidance. You know, what is driving that confidence? Is it a vertical? Is it ARPU? Something else?
spk02: Yeah, I mean, it's, I guess you could argue it's a little bit of all of that, right? Because really what it is, is, you know, what we hope we can continue, right? A solid business executing well, and sort of a UPOD mindset, right, the sort of the under-promise, over-deliver sort of mindset, right? And I think that's what you're really seeing coming out in 2021 and 2022. Now, of course, we had this, you know, rather interesting year where we went public really just in time for the fourth quarter. But if you look at this two-year period together, which is the only sensible way to look at it given we're coming out so late this year, We feel really good, first of all, with the results we've already put out. We've revised the guidance, of course, for this year, as you saw, and we think if you put those two years together, the 2019 and the 2038 that we put out, the 457, we're very comfortable we will beat it given momentum and all the things you said, Mike. Our poos are stabilizing. Business volumes are good. If it wasn't for these supply chain issues, I'd be sitting here saying I'd be significantly beating the two-year period, but we have seen that slow us down here a little bit over these last few months.
spk07: Yeah, no, makes sense. And then in the past, you talked about, you know, getting kind of past the 3G to 4G ARPU headwind and the legacy churn headwind in 2023, you know, where you potentially see some acceleration. I guess, any more color on that dynamic and whether... you might even see some of the sequential benefits, let's say, of that in the second half of 2022.
spk02: Yeah, no, look, I think, first of all, I appreciate that you remember our two kind of near-term headwinds, we'll call them that. Look, those are certainly, you know, we're working through them. If anything, they've been a little bit delayed, right? So this supply chain phenomenon is impacting us. So as You know, as our customers have a harder time getting a hold of their devices, their transition to LTE, right, to 4G is slowed, right? They can't get the equipment to get there, right? And so that slows, if anything, it slowed down our transition. Now, as Puneet pointed out, the sunset dates are set. Those don't look like they're going to move, you know, any further. And so in that sense, we will get those behind us. largely by the end of next year, the North America sunsets. And then the other headwind that we've talked, and of course, that would bring to an end the ARPU pressure, right? The one-time churn issue, as you recall, was still, you know, we put out a one-time churn revenue number for this year and also for next year. You know, if anything, we might edge upwards a little bit on the number we put up next year. just again because people aren't transitioning as fast as we can. So we'll have that minor, you know, I'll say headwind going into 2023, but we should largely have the network stuff behind us. So then that just leaves this third phenomenon of is the supply chain going to open up and can we get at this sort of pent-up demand, which we know is out there. We just, you know, we just haven't been able to, well, our customers aren't able to serve their customers with that demand and And therefore, obviously, that's impacting us as well.
spk07: Got it, okay. And then just last, or I might have missed this more housekeeping question, but are you gonna give gross margin on IoT connectivity and solutions separately?
spk01: We already do, actually. It should be in our MD&A. So in our MD&A, on the face of our public, of our P&L, we actually have products and services, but in the MD&A, we actually both record both revenue and cost of services by IoT connectivity and IoT solutions.
spk07: Okay, perfect. Great. Thanks very much, and best of luck. Outstanding.
spk02: Thanks so much, Mike.
spk07: Thanks, Mike.
spk03: Our next question comes from the line of Lance Vitanza with Cowan. Please proceed with your question.
spk08: Hi, guys. Thanks for taking the question. I wanted to start with the customer case study that you walked through. Thanks for doing that. Just one question that comes to mind. As the customer goes from 1 million, I think you said 1 million installed devices growing 20%, so maybe there's 1.2 million devices installed next year. to what extent would Core participate in the revenue growth there? Is it linear? Are there breaking points? I guess another way to ask the question is, who captures the operating leverage, you or your customers in these types of arrangements?
spk02: Yeah, great question, Lance. And look, I mean, for most customers, I would say we benefit from operating leverage, including, of course, the cross-customer operating leverage to the degree that You know, these things are, you know, we get better and more automated at fulfilling this demand. We're moving to a new warehouse up in our Rochester area where we run our IoT solutions business. We're actually moving to a space that's like two and a half times larger and have plans to even further streamline the efficiency there, et cetera. So in general, it's a good news story for us. Now, with this particular customer, given how much extra volume they were giving us, And given how many, I'll say, gross margin dollars were available, we did agree, you know, a reduction in our price with them, right, which wouldn't be surprising to you. And so that's some of what's affecting us, as Puneet also said. You know, our IoT solutions margins are, if anything, under pressure because, A, we have some customer concentration there with the largest customer, and, B, we gave up a bit. But in general, operating leverage is a good thing for core.
spk08: So, right, so in terms of the pipeline for that, I guess what I'll call full suite business, like you're doing on that case study, could you talk about how that pipeline has developed over the past few months, whether with new customers or whether converting existing customers? I mean, what's the outlook look like? And anything you could share with us there would be helpful.
spk02: Yeah, so look, so A couple of things. I mean, I think the team had done a nice job through last year of getting, and I think we disclosed this in our documentation around coming public, that about 180 or so, 182 I think was the specific number of our customers last year that bought multiple services from us. So the typical, as you well understand, Lance, the typical customer is obviously a connectivity customer, right? And then One would hope that over some period of time, we are cross-selling them into other things, even as we're upselling them inside of IoT connectivity. So that number was up to 182 last year. We've increased that number. Obviously, the year's not done yet. This year, I wouldn't say that I'm sort of jumping up and down with joy in terms of how we're doing. It's certainly an area that we need to continue to focus on, which is improving our ability to bundle up and position our packages, our services, and to cross-sell more effectively into our existing customer base. Interestingly, newer customers, newer opportunities are a lot easier to have an expansive conversation, especially if they're relatively early in their deployments. And that's kind of an interesting phenomenon we're watching. And I can go into that in more detail if you'd like, but I want to just take a pause and make sure I'm answering your question and
spk08: Yeah, no, that's helpful. I guess the other topic that I wanted to get to was with respect to the LTE transition. Obviously, that had a big impact in the numbers in the quarter. You've been talking about that the past couple of months, so not a big surprise. But could you discuss what does that imply for connectivity volumes, the fact that you've now got many more 4G devices than you'd expected when you sort of set out six months ago. What are the implications for volumes? What are the implications for pricing and thus margin going forward as a result of the acceleration? I mean, I understand that the one-time revenue gets shifted forward, but is there any sort of impact on the business going forward from having these devices already converted?
spk02: Yeah, so let me try and parse down that response for you. So first of all, of course, you know, the large engagement that was supposed to actually officially was supposed to kick off here in October, you know, in the fourth quarter this year, and then go for about the first half of next year. Obviously, having that kind of execute largely this year, right, did, if you will, pull forward, to use your words, you know, some revenue and you know, orders of magnitude, you know, we thought we'd get about $5 million off of this project this year and we're going to get something closer to $20 million, right, when it's all said and done and I can't tell you exactly what it will be because I don't even know yet, right? It depends on when during the holidays we stop shipping and they stop accepting and all this sort of stuff, right? So that's a material pull forward. And the fact that we're as a team sort of remaining committed to, trying to still try and hit the number we put out next year despite that, right, shows you that we're certainly, you know, confident and want to try to get after that, right? But now let's go to the other implications. So, you know, it's sort of interesting, isn't it? When you have a 2G, 3G sunset and your customer goes into LTE land, you know, the first generation of that, of course, is 4G, you know, it's really just a negative thing for people in the IoT connectivity business, right? Because your ARPU is going down. Sometimes through those transition periods when a customer has to change out a device, they might look to RFP, you know, they might look to even change you out completely if you don't give them a really great price point. In general, it's not a good thing, right? These sunsets. That's why we can't wait for them to be done and get back to kind of our projected growth, right? It's kind of neat, though, as a much more diversified enablement, one-stop shop company to have the ability to actually turn these sunset transition type projects into a good thing, right? So this revenue that we're talking about, I mean, we can complain about a little bit of noise moving it from one quarter to another quarter, but it's really a good thing, right? It's a great thing for our customer that we've been able to one-stop shop them and give this to them. So, you know, in general, I view this as a high positive. I view this as a sign of our strengthening strategic relationship with this customer, et cetera. And then the final part of this is, yeah, I mean, sure, look, I mean, there is going to be you know, the ARPU implications, right? So, you know, I'm sure you've already noticed that, you know, connectivity here in Q3 was a smidge off of Q2 sequentially. There's a couple, three different factors in it, and those are the kinds of things that are happening when you go to LTE, right? So I think that's sort of how you unpack that, Lance. Is that helpful?
spk08: It is, and then maybe if I could squeeze one more question in on the EBITDA side. Sure. It was a nice performance. It was a little bit more even done than we were expecting. But my question is, I mean, this to me seems like the time that CORE wants to be investing for growth. And I think you mentioned that that was your view as well. But so presumably, I mean, I guess the outlook for margins going forward should be, you know, upside to the numbers from an EBITDA perspective, I guess is what I would say.
spk02: Yeah, no, I think that's certainly very fair. And, you know, Lance, we're obviously, you know, going to provide guidance when we come out with our fourth quarter results here in a few months. So, you know, we'll wait until all of the dust settles. But, you know, it's like you said, new public company wants to change. This is the brilliant news. My board of directors wants to engage in a positive conversation with about how to accelerate our top line growth, right? And so there's going to be a series of confirmations and plans put in place over the next few months as we finalize budgets and the like on how do we best get after that. And obviously that'll take up, right? I mean, that will take, you know, some of that profitability today that otherwise we had projected. There's also a series of other things, and Puneet's already pointed to those in his script, right? I mean, there's just public company costs coming in much higher than we thought they would and some FX stuff working against us that he's already talked to, and those aren't going to go away suddenly, right? And so for a combination of reasons, but the one that I'm most excited about is the one you pointed to, so I appreciate you doing that, which is how do we get this thing accelerated and going in the right direction? Okay, thanks for taking the questions. Thanks so much, Lance.
spk03: Our next question comes from the line of Matt Nicknam with Deutsche Bank. Please proceed with your question.
spk06: Hey, thanks for taking the question, and congrats on your first quarter as a public company. Maybe just to go back to the last question, you talked a little bit about EBITDA margins, but I also want to better understand some of the puts and takes on gross margins, because year-to-date, I know gross margins are down about 300 bps as well. I'm curious, A, if we could just clarify the drivers between any supply chain constraints, any sort of mixed shifts between solutions and connectivity, and then how to think about gross margins going forward. And then one other clarification, maybe for Puneet, you mentioned 3Q would be the largest quarter before 2G and 3G churn picks up. I assume that's in reference to absolute revenue, but I just want to see if I can get a clarification there. Thanks.
spk01: I'll start with the latter question. It did refer to absolute revenue for this year. It will be our largest revenue for this year. Now let's talk about the gross margins, right? So the first thing is, you know, a big chunk of our gross margin pool and obviously the largest chunk of the gross margin pool comes from connectivity. We don't see any pressure there. As I had mentioned in my prepared remarks as well, you know, it is kind of where we expected it to be, even mildly a little bit above, right? I think where we are seeing pressure is in IoT solutions. And then, you know, when you look at the gross margin pool as a whole, as measured as a percentage, it comes down, you know, because IoT solutions is a little bit bigger, right? So gross margin was 48.5% compared to 53.8%. It was mostly because of, you know, IoT solutions being materially higher. And when you look at a lot of the excess in IoT solutions coming from this LTE transition project, You know, this is also our largest customer, which has, even within IoT solutions, lower gross margin than the line average, right? So that's what's really driving it. And I'm glad you asked about the semiconductor shortage as well, because that's also partially affecting it in a percentage basis. So, you know, we have had price increases in the device cost on that particular project, and in some other cases. And, you know, we are passing it on dollar for dollar typically to customers, but When you get a dollar extra revenue, dollar extra cost, it pulls down your percentage, right? So it's all those factors.
spk06: Great. Thank you, and congrats again.
spk02: Thanks so much, man.
spk03: Our next question comes from Meadow Marshall with Morgan Stanley. Please proceed with your question.
spk04: Great. A couple of questions for me. As you look at your pipeline, are there certain verticals that you think are moving faster than expected versus verticals that are maybe taking a little bit more time, and are there any kind of trends to pull from there? And then just maybe a second question, you know, as you've kind of talked about contract negotiations with customers, just on pricing, just trying to get a sense of when those contract negotiations normally happen. Is it, you know, as they expand from a connectivity to an IoT solutions customer, is it when they go from generation to generation? Is it on kind of an annual cadence? It's just trying to figure out kind of when those negotiations take place or when to be mindful of kind of gross margin impacts or pricing impacts. Thanks.
spk02: Yeah, thanks, Meta. Good stuff. So, look, on the industries, you know, I guess there's a couple different ways I could address that question, right? I mean, but I'm going to take it on sort of, you know, on the area that I just want to make sure you know, we've all understood. As I showed the transformation, you know, and talked about phase two launching, I mean, we've literally only launched two industries, right? And so in terms of having individuals, whether they were, you know, here at the time we launched them or indeed we've hired them in as we've made those bets in those two industries, you know, there's only really two industries. So in other words, I really don't have staff of well-trained and right driven hunters and salespeople driving these other three industries for us right so I guess it wouldn't surprise you therefore to say hey you know the ones that are getting traction right now the ones we've launched and sure enough connected health is is the big one of the two that I would point to today you know that we're focused in we're also as we're launching, as we're investing in our pre-configured solutions, these are still enablement solutions. We don't compete with our customers, but are put together, I'll say, more pieces and parts together so that they can be even easier to adopt and enable your IoT solution type to market. I think, by the way, those pre-configured solutions will have, over the long run, a positive impact on our margins. Right now, they're a drag because I'm investing well ahead of well ahead of getting revenue for these preconfigured solutions. But why did I bring that up in this context? Because we're coming to market now with the first couple of those, one in the pure connectivity area with failover and cellular as a primary, and one actually in our connected health. We just announced at Mobile World Congress in LA our CHTS solution, connected health telemetry solution, which we're incredibly excited about. And so I think for a little while, We're just going to keep doubling down on connected health and take advantage of this explosion we're seeing with an RPM company coming to market every day. The United States alone launches a new remote patient monitoring company. So we're going to, you know, we're going to just keep going where the money is. And I've not forgotten your second question, haven't I? I think it was about... Just contract negotiations and just, yeah. So, look, you know... The classic core, the classic IoT connectivity business core, tends to not really, I mean, these contracts tend to not really be a very big, you know, dynamic part of what we do, right? Because what tends to happen is a customer shows up and says, hey, I want to get, you know, my business projections as I launch the solution are to get to whatever, 100,000 or some number of lines over some number of years. And based on that, right, we agree a contract and a contract term. you know, as they progress, if they're doing materially better than that, they may want to have a bit of a conversation with us about price points even before the contract time period is up. If, by the way, the reverse is true and a minimum payment is starting to occur, you know, there may be a different company. You know what I'm saying? So it has a lot more to do with the solution, the momentum of that solution, the deployment is kind of how the commercials go. And as you know, once we get a device out there, it's going to throw off revenue for five, seven, ten, sometimes longer number of years because, you know, it's really too expensive to go out and change that SIM, right? I think we've had that conversation. And so, look, it's really, you know, it's really, I guess what I'm trying to say is it's a volume-driven conversation, which is usually a good thing for us anyway because that means the customer's having success. I mean, I want to, I want to have those conversations because it means I've got more unicorns coming through the customer base. Got it. Congrats, guys. Thanks. Thanks so much, Matt. I appreciate that.
spk03: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Walter Pysik with LightShed. Please proceed with your question.
spk05: Thanks. Hey, Romal, can you just... comment on, I mean, I know this is the biggest customer. Could I assume that stuff like this will be a rare occurrence or should we expect some level of lumpiness as customers kind of move their or accelerate or slow down different deployments? And also if Puneet can perhaps give what that growth rate would look like in that segment if you just kind of pulled out this pull forward that occurred on the revenue.
spk02: Okay, so, yeah, look, I mean, certainly something of this scale, I don't know that it's going to repeat itself, Walt. I mean, I think you correctly gauged that one, right? I mean, look, first of all, the sunsets are done in the next, you know, 12 and 15 months largely, you know, and at least the North America ones. And so, you know, the chances that anything really, really that large could come are low, right? you know, and I wouldn't hold my breath, but equally if they do come because some customer really needs the help to try to get their transitions done, you know, come on over to the one-stop shop, maybe, because we would love to help. So anyway, so that's sort of my answer there is I don't think this kind of timing acceleration, you know, quote, lumpiness, as you call it, is a thing to stay at all. Preeti, do you want to take the second one?
spk01: We've already broken out the top customer revenue for you, right? We can provide you some more information off the top, total top customer revenue, Walt, of $18.9 million this three months. Maybe about 11-ish is from that transition project, which should help you calculate the number you're trying to calculate.
spk05: Yeah, I would have thought some of that 11 would have happened anyway, so I'm just looking for the incremental to get to what the growth would have otherwise been. So this is mostly hitting the third quarter. There's going to be some happening. I know you said Q3 was peak, but you're going to see some acceleration or pull forward helping the fourth quarter as well of 21?
spk02: Yeah. We saw some of it already in Q2 and I think we said that in our press release. To your point, there is a peak and there is a reducing number here in Q4 or But Q4 is going to be helped with that, yes, through this project, yes.
spk05: I mean, given the complexity of IoT solutions as you've described them, obviously this should hopefully be kind of a reference client if you get this shit done quickly for them. You got it. On the revenue for 22, I remember that slide that you have where you show so much a percentage of your revenue is already contracted. Um, so the flip side of that is like, how long is the lead cycle to layer on new organic revenue opportunities in 22? Um, is that, I mean, is that a heavy lift or, or is there still an opportunity to, you know, obviously you've got this revenue pulled into 21. Um, you've got all this other revenue already contracted for 22. How quickly can you, um, contract additional revenue to deliver even further upside?
spk02: Yeah. Well, and look, I mean, again, like I said earlier, our goal certainly is to, and we as a team have been working on, right, is, okay, so this big chunk, you know, got brought forward. What are we going to go do to, you know, to sort of fill around that next year? And we are trying various, we have various bets. that we're making for 22, some of which I think will pay off and will be helpful. But to answer your question specifically, how easy is it, how big a lift or heavy a lift is it? I mean, certainly connectivity tends to move slow, right? I mean, the fact is that we, you know, in our smaller customer, that very, very long tail of very small customers, right, Several just kind of meander and try to get their value proposition to work and sort of fall in and fall out almost. We don't even really think about them too much. And others come, and some of those will be successful, but it won't be next year. I mean, the fact is that new business revenue in the year from either the cohort of customers that we're selling this year, certainly from customers that we're selling next year, tends to be really slow unless there's a large deployment and a transfer of lines or something that, again, doesn't happen very often. So the answer really, Walt, is that we have to look at the IoT solutions line to find these kinds of efforts, right? And your point was exactly correct. The reference case, taking the learnings from that, sending that out in marketing campaigns to customers that are worrying through their transitions, using the supply chain delays to our benefit, if we can, to reach out and say, hey, When you get those devices, you're going to need help. You may not have the capacity to do this in-house. You may not have the expertise to do this in-house. Those are the kinds of ideas that we're thinking through. But our best bet to go do what we all want to do, which is still hit next year's number despite the pull forward, is IoT solutions.
spk05: And then my last question, I guess, is now you have this extra cash ahead of time, which is nice. And then you mentioned about pulling down another 25 post quarter. when I look at that seven by seven chart on, uh, page, whatever it is, nine, you know, what's the low hanging fruit for inorganic opportunities as you enter 2022 or what's at the top of your wishlist as you kind of continue to look, um, to fill in additional, um, opportunities or products and services, however you want to describe it.
spk02: Yeah, I think, I think, uh, I think these fleshing out these industries, um, Walt is my number one vector, right? Now, you can think about that a couple of different ways, right? You could say, hey, go, you know, do a sizable acquisition, put this cash to work, put this currency you now have as stock to work and go get yourself an industrial or an asset type of, you know, practice because you just acquired in there. The other thing that I'm quite intrigued about, and I've sort of shown my cards on already on this call, is doubling down on connected health. I mean, this thing is going places. We have a real competitive moat. We have real differentiators. I mean, could there be a better place to make a bet? I don't think so. Now, look, we still have to be responsible. We have to be accretive, and all of those things will apply in the end. But I'm actually relatively pleased, Walt, with the, I'll call it, reinvigoration of our M&A funnel over the last few months. And, you know, I think we will get a deal or two done next year, which we couldn't, unfortunately, this year, just given everything that was going on. And it will largely, again, be industry-focused. Look, could it be some tech or some 5G pieces or some AIoT pieces? Maybe. It's just not number one, and I think you asked me what my number one was.
spk05: Got it. Thank you.
spk01: Thank you. Walt, to follow through on your other question on how much of it is pulled through, we weren't expecting anywhere near the $11 million. It's closer to about $2 million. Great. Thanks.
spk02: Thanks, Walt.
spk03: Thank you. Currently, this concludes our question and answer session. I would now like to turn the call back over to Mr. Bale for closing remarks.
spk02: Hey, thank you, Alex. I do appreciate everyone taking the time to listen in to our very first earnings call. We hope everyone is staying safe and enjoying these fall months. We look forward to speaking with our investors and analysts again when we report Q4 early next year. Have a great evening, everyone. Happy holidays and see you soon in 2022. Thank you very much.
spk03: Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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